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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 2011
OR
¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from to .
Commission file number: 000–33001
NATUS MEDICAL INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77–0154833
(I.R.S. Employer
Identification Number)
1501 Industrial Road, San Carlos, California 94070
(Address of principal executive offices, including zip code)
(650) 802–0400
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities Registered Pursuant to Section 12(g) of the Act: None
Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and
(2) has been subject to such requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Accelerated filer x
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of June 30, 2011, the last business day of Registrant’s most recently completed second fiscal quarter, there were 29,130,586 shares
of Registrant’s common stock outstanding, and the aggregate market value of such shares held by non-affiliates of Registrant (based upon
the closing sale price of such shares on the Nasdaq Global Select Market on June 30, 2011) was $330,253,865. Shares of Registrant’s
common stock held by each executive officer and director and by each entity that owns 5% or more of Registrant’s outstanding common
stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 7, 2012, the registrant had 29,444,772 shares of its common stock outstanding.
The Registrant has incorporated by reference, into Part III of this Form 10-K, portions of its Proxy Statement for the 2012 Annual
Meeting of Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
NATUS MEDICAL INCORPORATED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9A.
PART III
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33
34
Selected Financial Data
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Quantitative and Qualitative Disclosures About Market Risk
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Financial Statements and Supplementary Data
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Controls and Procedures
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
ITEM 15.
SIGNATURES
Exhibits and Financial Statement Schedules
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ITEM 1.
Business
PART I
This Annual Report on Form 10-K 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 Natus Medical Incorporated (“Natus,” “we,” “us,” or “our
Company”). These statements include, among other things, statements concerning our expectations, beliefs, plans, intentions, future
operations, financial condition and prospects, and business strategies. The words “may,” “will,” “continue,” “estimate,” “project,”
“intend,” “believe,” “expect,” “anticipate,” and other similar expressions generally identify forward-looking statements. Forward-
looking statements in this Item 1 include, but are not limited to, statements regarding the effectiveness and advantages of our products,
factors relating to demand for and economic advantages of our products, our plan to develop and acquire additional technologies,
products or businesses, our marketing, technology enhancement, and product development strategies, and our ability to complete all of our
backlog orders.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that
could cause the actual results to differ materially from those that we predicted in the forward-looking statements. Investors should
carefully review the information contained under the caption “Risk Factors” contained in Item 1A for a description of risks and
uncertainties that could cause actual results to differ from those that we predicted. 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, except as required by
Federal Securities laws.
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Natus , AABR , ABaer , ALGO , AOAE , AuDX , Balance Manager , Balance Master , Biliband , Bio-logic , Ceegraph , CHAMP ,
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Cochlea Scan , Cool Cap , Ear Couplers , Echo Screen , Embla , Embletta , Enterprise , EquiTest , Fischer-Zoth , Flexicoupler ,
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Gumdrop , Keypoint , Keypoint AU , Keypoint EU , Keypoint JP , MASTER , Medix , MedixI.C.S.A , Navigator , Neatnick , neoBLUE ,
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Neuromax , NeuroWorks , Oxydome , REMbrandt , REMlogic , Sandman , Sleeprite , Sleepscan , Smart Scale , Tootsweet , Traveler ,
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Warmette and VAC PAC , Xact Trace , are registered trademarks of Natus Medical Incorporated and its subsidiaries. Accuscreen™, Bili
Lite Pad™, Bili-Lite™, Biomark™, Circumstraint™, Coherence™, Deltamed™, inVision™, Medix MediLED™, MiniMuffs™, NATUS
NatalCare™, Neometrics™ and Smartpack™ are non-registered trademarks of Natus and its subsidiaries. Solutions for Newborn CareSM
is a non-registered service mark of Natus.
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Overview
Natus is a leading provider of healthcare products used for the screening, detection, treatment, monitoring and tracking of common
medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and balance and mobility
disorders. Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology,
as well as newborn care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, head-
cooling products for the treatment of brain injury in newborns, incubators to control the newborn’s environment, and software systems for
managing and tracking disorders and diseases for public health laboratories.
We have completed a number of acquisitions since 2003, consisting of either the purchase of a company, substantially all of the
assets of a company, or individual products or product lines. Our significant acquisitions are as follows: Neometrics in 2003; Fischer-Zoth
in 2004; Bio-logic, Deltamed, and Olympic in 2006; Xltek in 2007; Sonamed, Schwarzer Neurology, and Neurocom in 2008, Hawaii
Medical and Alpine Biomed in 2009, Medix in 2010, and Embla in 2011.
Product Families
We categorize our products into the following product families:
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Hearing—Includes products for newborn hearing screening and diagnostic hearing assessment.
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Neurology—Includes products for diagnostic electroencephalography (EEG), diagnostic sleep analysis, or polysomnography
(PSG), electromyography (EMG), intra-operative monitoring (IOM), newborn brain monitoring, and assessment of balance and
mobility disorders.
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Newborn Care—Includes thermoregulation devices and products for the treatment of brain injury and jaundice in newborns.
Our principal product offerings within these product families are presented in the table on the following page.
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Our Product Offerings
Hearing
Newborn Hearing Screening
Overview
Hearing impairment is the most common treatable chronic disorder in newborns, affecting as many as five babies out of every 1,000
newborns. It is estimated that 20,000 hearing-impaired babies are born in the United States (“U.S.”) every year, and as many as 60,000
more in the rest of the developed world. Until the introduction of universal newborn hearing screening programs, screening was generally
performed only on those newborns that had identifiable risk factors for hearing impairment. However, screening only those newborns with
risk factors for hearing impairment overlooks approximately half of newborns with some level of hearing impairment.
Early identification of hearing impairment and early intervention has been shown to improve language development significantly.
Undetected hearing impairment often results in the failure to learn, process spoken language, and speak. If hearing impairment is not
detected prior to discharge from the hospital it is often not detected until the child is 18 months of age or older. A 1997 study conducted at
the University of Colorado, Boulder evaluated the impact of hearing impairment on language and speech. All of the children evaluated in
the study were born with a hearing impairment but differed by the age at which the hearing impairment was detected. The study concluded
that those children whose hearing loss was detected early and who received appropriate treatment had significantly better language skills
and vocabularies than those children whose hearing loss was detected later.
Newborn Hearing Screening Techniques
The two traditional technologies used to screen newborns and infants for hearing impairment are auditory brainstem response and
otoacoustic emissions.
Auditory brainstem response (“ABR”). ABR technology is the most accurate and comprehensive method for screening and
diagnosing hearing impairment. ABR technology is based on detecting the brain’s electric impulses resulting from a specific auditory
stimulus. ABR screening devices, used for newborn hearing screening, detect and analyze the brainwave response resulting from audible
click stimuli presented to the infant’s ears. Automated Auditory Brainstem Response (“AABR”) devices were developed to automatically
analyze the ABR waveform resulting from the auditory stimuli with computerized detection algorithms and statistical analysis. These
devices can be used by any level of hospital personnel with a minimal amount of training and will deliver a clinically valid and accurate
screen. The detection algorithms indicate a PASS or REFER result that requires no interpretation, thereby reducing staffing requirements,
test times, and total hearing screening program costs. A REFER test result indicates that the patient should be referred to an Audiologist or
Ear, Nose and Throat Physician (“ENT”) for further diagnostic evaluation.
Otoacoustic emission (“OAE”). OAEs are sounds created by the active biomechanical processes within the sensory cells of the
cochlea. They occur both spontaneously and in response to acoustic stimuli. OAE screening uses a probe placed in the ear canal to deliver
auditory stimuli and to measure the response of the sensory cells with a sensitive microphone. OAE screening devices have technology that
allows them to discriminate between randomly occurring OAEs, OAEs created by interfering room noise present in the
test environment, and the OAEs that are a response to specific test stimuli. Automated OAE screening devices are capable of filtering non-
specific OAEs in order to detect and analyze the OAEs that lead to an accurate screen of the infant’s hearing. While a PASS test result
indicates a proper functioning cochlea, a REFER test result indicates that the OAEs are absent or small compared to normal data. A REFER
test result indicates that the patient should be referred to an Audiologist or ENT for further diagnostic evaluation. OAE technology is
unable to detect hearing disorders affecting the neural pathways, such as auditory neuropathy. Estimates of the incidence rate of auditory
neuropathy among hearing impaired newborns vary widely, but are thought to be in the range of 5% to 15%.
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Newborn Hearing Screening Product Lines
Our newborn hearing screening product lines consist of the ALGO, ABaer, AuDX, and Echo-Screen newborn hearing screeners.
These hearing screening products utilize proprietary signal detection technologies to provide accurate and non-invasive hearing screening
for newborns and are designed to detect hearing loss at 35 dB nHL or higher. Each of these devices is designed to generate a PASS or
REFER result.
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ALGO 5 and 3i Newborn Hearing Screeners. These AABR devices deliver thousands of soft audible clicks to the newborn’s
ears through sound cables and disposable earphones connected to the instrument. Each click elicits an identifiable brain wave,
which is detected by disposable electrodes placed on the head of the child and analyzed by the screening device. These devices
use our proprietary AABR signal detection algorithm.
ABaer Newborn Hearing Screener. The ABaer, which is a PC-based newborn hearing screening device, offers a combination
of AABR, OAE, and diagnostic ABR technologies in one system. The automatic ABR technology utilizes our patented Point
Optimized Variance Ratio (“POVR”) signal detection algorithm developed by the House Ear Institute. Like our ALGO newborn
hearing screeners, this device delivers thousands of soft audible clicks to the newborn’s ears through sound cables and disposable
earphones. Each click elicits an identifiable brain wave, which is detected by disposable electrodes placed on the head of the child
and analyzed by the screening device. The ABaer OAE software is the same technology used in our AuDX product and the
diagnostic ABR software is the same technology used in our Navigator diagnostic hearing assessment product.
AuDX and Echo-Screen. Our AuDX product is a hand-held OAE screening device that can be used for newborn hearing
screening, as well as for patients of all ages, from children through adults. Our Echo-Screen product is a hand-held combination
AABR and OAE device for newborn screening that can also used for children through adults in OAE-only mode. These devices
record and analyze OAEs generated by the cochlea through sound cables and disposable ear probes inserted into the patient’s ear
canal. OAE technology is unable to detect hearing disorders affecting the neural pathways, such as auditory neuropathy.
Hearing Screening Supply Products
For infection control, accuracy, and ease of use, the supply products used with our newborn hearing screening devices are designed as
single-use, disposable products. Each screening supply product is designed for a specific hearing screening technology.
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ABR Screening Supply Kits. Each ABR screen is carried out with single-use earphones and electrodes, which are alcohol and
latex-free. The adhesives used in these supply products are specially formulated for use on the sensitive skin of newborns. To
meet the needs of our customers we offer a variety of packaging options.
OAE Supply Products. Each OAE screen is carried out with single-use ear tips that are supplied in a variety of sizes and
packaging options.
Diagnostic Hearing Assessment
Overview
We design and manufacture a variety of products used to screen for or diagnose hearing loss, or to identify abnormalities affecting the
peripheral and central auditory nervous systems in patients of all ages. The technology used in most of these systems is either
electrodiagnostic in nature or measures a response from the cochlea known as an OAE.
Electrodiagnostic systems record electrical activity generated in the central nervous system. An electrodiagnostic testing device
delivers acoustic stimuli to the ears while electrodes placed on the scalp record the brain’s electrical response. The most common auditory
test performed with electrodiagnostic equipment is
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the ABR test. This test, which records brainwaves that correspond to responses from the inner ear and brainstem, is used to screen for and
define hearing loss characteristics, particularly for patients who cannot reliably respond to standard behavioral tests of hearing, either
verbally or through motor response. A technician with minimal training can operate an instrument that performs an automated ABR
screening test. More advanced ABR testing techniques that either define the nature of the hearing loss or that screen for other auditory
abnormalities such as an acoustic tumor, require the expertise of a trained clinician, usually an audiologist or an ENT physician, an
understanding of the technology being used, and the ability to interpret complex waveforms that represent the brain’s electrical activity.
In the follow up evaluation of newborns diagnosed with hearing impairment, the clinician can distinguish between hearing
impairments caused by mechanical or sensory dysfunction of the ear versus auditory neuropathy. Recent studies confirm the importance of
making this distinction, as appropriate treatments for these impairments differ. One study showed that for patients diagnosed with auditory
neuropathy, approximately 15% reported some benefit from hearing aids for language learning, while improvement in speech
comprehension and language acquisition was reported in 85% of patients who received cochlear implants.
Diagnostic Hearing Assessment Product Lines
Our diagnostic hearing assessment products consist of the Navigator Pro system, the Scout Sport portable diagnostic device, and the
AuDX PRO.
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Navigator PRO. Our Navigator PRO for hearing assessment consists of a base system that is augmented by discrete software
applications that are marketed as enhancements to the system. The Navigator Pro System is a PC-based, configurable device that
utilizes evoked potentials, which are electrical signals recorded from the central nervous system that appear in response to
repetitive stimuli, such as a clicking noise. The evoked potentials are used to record and display human physiological data
associated with auditory and hearing-related disorders. The Navigator Pro System can be used for patients of all ages, from
children to adults, including infants and geriatric patients. The device can be configured with additional proprietary software
programs for various applications. These additional software programs include: MASTER, AEP, ABaer, and Scout.
Scout SPORT. The Scout SPORT is a PC-based OAE system. The ultra-portable Scout Sport can be carried from one computer
to another to test in different locations. For office-based environments, the Scout Sport can be used with a dedicated notebook
computer to create an independent portable system.
AuDX PRO. The AuDX PRO is a hand-held OAE screening device with a large color display that can be used for patients of all
ages. The AuDX PRO records and analyzes OAEs generated by the cochlea through sound cables and disposable ear probes
inserted into the patient’s ear canal.
Diagnostic Hearing Supply Products
For infection control, accuracy, and ease of use, most supply products used with our diagnostic hearing devices and systems are
designed as single-use, disposable products. Each screening supply product is designed for a specific diagnostic hearing technology, and is
similar in nature to our previously described OAE supply products for use in newborn hearing screening.
Neurology
Our monitoring systems for neurology represent a comprehensive line of products that are used by physicians, nurses and medical
technologists to assist in the diagnosis and monitoring of neurological disorders of the central and peripheral nervous system and as an aid
in monitoring patients during surgery, while under sedation, or in post-operative care. Our product lines consist of the following:
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Electroencephalography or “EEG”—Equipment that monitors and visually displays the electrical activity generated by nerve
cells in the brain for both diagnosis and monitoring of neurological disorders in the hospital, laboratory, office or patient’s home.
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Electromyography or “EMG”—Equipment that measures electrical activity in nerves, muscles, and the spinal cord.
Polysomnography or “PSG”—Equipment that measures a variety of respiratory and neurological functions to assist in the
diagnosis and monitoring of sleep disorders, such as snoring and obstructive sleep apnea, a condition that causes a person to stop
breathing intermittently during sleep.
Intra-operative Monitoring or “IOM”—Products that assist surgeons in preserving the functional integrity of a patient’s nervous
system during and after complex surgical procedures.
Balance and Mobility—Systems to diagnose and assist in treating balance disorders in an evidence-based, multidisciplinary
approach.
Diagnostic EEG Monitoring
Overview
We design, manufacture, and market a full line of computerized instruments used to help diagnose the presence of seizure disorders
and epilepsy, look for causes of confusion, evaluate head injuries, tumors, infections, degenerative diseases, and metabolic disturbances that
affect the brain, and assist in surgical planning. This type of testing is also done to diagnose brain death in comatose patients. These systems
and instruments work by detecting, amplifying, and recording the brain’s electrical impulses (EEGs). Routine EEG recording is done by
placing electrodes on a patient’s scalp over various areas of the brain to record and detect patterns of activity and specific types of electrical
events. EEG technologists perform the tests, and neurologists review and interpret the results.
Routine outpatient EEG testing is performed in both hospital neurology laboratories and private physician offices, providing
physicians with a clinical assessment of a patient’s condition. For patients with seizures that do not respond to conventional therapeutic
approaches, long-term inpatient testing of EEGs and behavior is used to determine if surgical solutions are appropriate.
Diagnostic Electroencephalograph Monitoring Product Lines
Our diagnostic EEG monitoring product lines for neurology consist of devices operating with our proprietary software, augmented by
signal amplifiers. These products are typically used in concert, as part of an EEG “system” by the neurology department of a hospital to
assist in the diagnosis of assorted neurological conditions.
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NeuroWorks; Ceegraph; Coherence; Harmonie. Our computerized EEG Systems include a broad range of products, from
software licenses and ambulatory monitoring systems to advanced laboratory systems with multiple capabilities for EEG, ICU
monitoring, long-term epilepsy monitoring of up to 256 channels, and physician review stations with quantitative EEG analysis
capabilities.
Stellate/Gotman Spike and Seizure; GridView. Our proprietary Spike and Seizure detection algorithm detects, summarizes, and
reports EEG events that save health care professionals time by increasing the
speed and accuracy of interpretation. GridView is a tool that allows the clinician to correlate EEG patterns with electrode contacts
on a 3D view of the patient brain using magnetic resonance (MR) or computed tomography (CT) images, thus enabling the
visualization and annotation of the brain surface and internal structures involved in the diagnosis of epilepsy.
Proprietary Signal Amplifiers. Our proprietary signal amplifiers function as the interface between the patient and the computer,
and are also known as the headbox. The headbox connects electrodes attached to the patient’s head to our EEG monitoring
systems. Our proprietary headbox products are sold for a wide variety of applications under the following brand names: Xltek,
Trex, EEG32, EMU128, EMU40, Brain Monitor, and Schwarzer epas. Recent innovations in electronics technology and advanced
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internet-protocol data transmission enable certain of our amplifiers to record and transmit up to 32 channels of digital data using
Ethernet communication.
Several additional options are available to enhance our EEG products, including a digital video option, which provides synchronized
video recording of a patient’s behavior while recording electrical activity from the brain, our patented SmartPack software option, which is
an innovative data compression process that reduces the size of data files by as much as 60%, and our Universal Reader which is a
physician’s review station that permits fast and easy data analysis in a graphical format.
Diagnostic Electromyography Monitoring
Overview
Electromyography (“EMG”) involves the measurement of electrical activity of muscles both at rest and during contraction. Measuring
the electrical activity in muscles and nerves can help diagnose diseases of the peripheral nervous or musculature system. An
electromyogram is done to determine if there is any disease present that damages muscle tissue, nerves, or the junctions between nerve and
muscle (neuromuscular junctions). An electromyogram can also be used to diagnose the cause of weakness, paralysis, and muscle twitching
and is also used as a primary diagnosis for carpal tunnel syndrome, which is the most frequently encountered peripheral compressive
neuropathy.
Diagnostic EMG Product Lines
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Xltek NeuroMax. A dedicated EMG device focused entirely on signal quality and clinical efficiency. The device gathers
neurophysiological data that is saved to a fully customizable report, allowing physicians to care for patients with the most
informed advice.
Xltek XCalibur. An EMG system that uses advanced circuit design and digital signal processing to deliver clean signals, making
the process of acquiring patient data reliable and quick. The system provides enhanced data acquisition, reporting, and review
capabilities.
Dantec Keypoint. The Dantec Keypoint EMG and EP family of products feature superior amplifiers, stimulators, and
outstanding signal quality. The Keypoint is used for advanced neurodiagnostic applications such as single fiber EMG, visual and
auditory evoked potentials, and in routine nerve conduction studies. The Keypoint system is also available in a portable laptop
configuration.
Dantec Clavis. The Dantec Clavis device is a hand-held EMG and current stimulation (“STIM”) device that provides muscle
and nerve localization information to assist with botulinum toxin injections (i.e. Botox). In conjunction with the Bo-ject
hypodermic needle and electrodes, it delivers a precise dose of the agent.
Schwarzer Topas. The Topas system offers a wide range of sophisticated EMG and evoked potential (“EP”) examination
protocols, as well as an attractive and functional design. The Topas system can be configured as a two or four channel system, as
trolley-based or portable version, depending on the needs of the hospital or private practice.
Diagnostic Polysomnography Monitoring
Overview
Increasing public awareness of sleep disorders has made sleep medicine a rapidly growing specialty. Polysomnography (“PSG”),
which involves the analysis of respiratory patterns, brain electrical activity and other physiological data, has proven critical for the
diagnosis and treatment of sleep-related diseases such as apnea, insomnia, and narcolepsy. A sleep study entails whole-night recordings of
brain electrical activity, muscle movement, airflow, respiratory effort, oxygen levels, electrical activity of the heart (ECG or EKG), and
other parameters. These
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recordings typically result in over 1,000 pages of data that are reviewed, analyzed, and scored by a technician, and summarized in a report
for the physician. We market configured laboratory systems, portable systems, and ambulatory recorders for home monitoring.
Diagnostic PSG Monitoring Product Lines
Our diagnostic PSG monitoring products can be used individually or as part of a networked system for overnight sleep studies to
assist in the diagnosis of sleep disorders. These products include software licenses, ambulatory monitoring systems, and laboratory systems
that combine multiple capabilities, including EEG monitoring, physician review stations, and quantitative EEG analysis capabilities.
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Embla REMlogic, Sandman and REMbrandt; Sleepscan; SleepWorks; Coherence; Harmonie. Our diagnostic PSG systems
capture and store all data digitally and provide time-saving features and software for acquiring and analyzing the data. The
systems enable users to specify rules and personal preferences to be used during analysis, summarizing the results graphically and
incorporating them in detailed reports. Software packages include customized analysis, tools and interfaces with third party
equipment.
Proprietary Amplifiers. Our data acquisition systems incorporate recent developments in superior amplifiers for sleep analysis.
Sold under the brand names Embla N7000, S4500, SD32 and Embletta Gold, Xltek Trex and Connex, Schwarzer epas duo 44 and
comlab PSG, our amplifiers are used in both hospitals and stand-alone clinics. In addition to exceptional signal quality, headboxes
include various tools such as built-in oximeters, and controls to allow the user to start and stop a study or perform electrode
impedance testing either at the patient’s bedside or from the monitoring room.
Practice Management Software. Our Enterprise Practice Management Software provides a solution for institutions as well as
private labs and physicians to patient scheduling, inventory control, staff scheduling, data management, business reports and
billing interfaces. Enterprise may be used across the entire Natus PSG family of Software solutions.
We also market a broad line of disposable products and accessories for the PSG laboratory. The Airflow Pressure Transducer uses
pressure changes as an indicator of patient airflow levels, as contrasted to other monitoring devices that use temperature to indicate these
levels. This product detects shallow breathing in situations where temperature related transducers might remain substantially unchanged.
The Embla XactTrace RIP belts provide industry standard signal acquisition of respiration while its associated algorithm provides passive
backup to airflow acquisition devices. This reduces the number of unattended portable studies which have to be repeated due to the loss of
airflow signal.
Intra Operative Monitoring
Overview
Intra-operative monitoring (“IOM”) is the use of electrophysiological methods such as EMG and EEG to monitor the functional
integrity of neural structures (i.e. brain, nerves, spinal cord) during surgery. The most common applications are in neurosurgery such as
spinal surgery, some brain surgeries, ENT procedures, and peripheral nerve surgery. IOM is used to localize neural structures and test the
function of these structures for early detection of intra-operative injury, allowing for immediate corrective measures.
Intra-operative Monitoring Products
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Protektor. The Protector system is an IOM system that provides medical professionals with all information necessary to make
immediate and critical surgical decisions. The system combines flexibility with multi-modality allowing full coverage of IOM
techniques. The Protektor is available in a 16 or 32 channel configuration.
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Balance and Mobility
Overview
Balance disorders impact a large percentage of the population in all age ranges from children to adults. Common complaints include
dizziness, vertigo, or an inability to walk or drive a vehicle, which can all lead to the curtailment of daily life activities. These symptoms
are exacerbated in elderly patients and can result in falls, orthopedic injuries, and sometimes death.
Balance problems are difficult to diagnose and treat because they can be caused by a combination of diseases or movement
dysfunctions. Healthcare professionals who take a traditional clinical approach to the examination and treatment of balance problems
typically explore one component of the balance system at a time. This approach often requires patients to consult multiple specialists,
leading to patient dissatisfaction and increased health care costs, frequently without achieving an optimal outcome.
We believe the most effective strategy for diagnosing and treating balance disorders is an evidence-based, multidisciplinary approach
applying a broad range of patient information. Our Balance Manager systems are designed to facilitate the assessment and management of
complex balance problems in the context of the total patient to support this process. These systems are used in a broad spectrum of medical
disciplines including otolaryngology, neurology, physiatry, orthopedics/sports medicine, geriatrics, and physical rehabilitation.
Balance and Mobility Products
Our principal balance and mobility products are sold under the Neurocom brand:
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EquiTest. Proprietary protocols in the EquiTest family of devices objectively quantify and differentiate among sensory, motor,
and central adaptive impairments to balance control. This approach is commonly referred to as computerized dynamic
posturography (“CDP”). CDP is complementary to clinical tests designed to localize and categorize pathological mechanisms of
balance disorders in that it can identify and differentiate the functional impairments associated with the identified disorders.
Balance Master. A family of devices providing objective assessment and retraining of the sensory and voluntary motor control
of balance. With visual biofeedback on either a stable or dynamic support surface and in a stable or dynamic visual environment,
the clinician can both assess and retrain patients performing tasks ranging from essential daily living activities through high-level
athletic skills. The objective data captured by the device supports the design of effective treatment and/or training programs
focused on the specific sensory and motor components underlying a patient’s functional limitations.
inVision. Our inVision device incorporates a set of proprietary diagnostic tests that quantify a patient’s ability to maintain visual
acuity and stable gaze while actively moving the head. The objective information enables the clinician to assess the patient’s
ability to live and move safely in a dynamic world and to participate in daily-life functions such as driving, walking through a
grocery store, or actively engaging in family activities.
VSR and VSR Scout. The VSR provides objective assessment of sensory and voluntary motor control of balance with visual
biofeedback. The VSR system is ideal for use in the rehabilitation balance program model. The VSR SPORT is primarily used as
part of a concussion management program. It is portable, easy-to use and offers athletic trainers, sports medicine practitioners, and
other sport professionals the data they need to make objective return-to-play decisions without relying on subjective evaluation.
Newborn Care
Newborn Care Products
We manufacture a wide variety of products used in the medical care of newborns. These product lines include products to diagnose
and treat newborn brain injury, as well as phototherapy lights to treat newborn
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jaundice. We also sell a variety of newborn care products to meet the needs of clinicians in the nursery and the Neonatal Intensive Care
Unit (“NICU”). With our recent acquisition of Medix, we now offer a full range of thermoregulation devices use for the care of newborns.
Newborn Brain Injury
Overview
For many years, newborn infants admitted to the NICU of a hospital have routinely been monitored for heart activity, temperature,
respiration, oxygen saturation, and blood pressure. Only recently has it also been considered important to monitor brain activity using
continuous EEG. A cerebral function monitor, utilizing amplitude-integrated EEGs (“aEEGs”), is a device for monitoring background
neurological activity.
Neurological Assessment and Treatment Options
Early diagnosis of brain injury in newborns, when combined with early intervention, has been shown to reduce the severity of these
brain injuries and in some cases, save the patient’s life. These brain injuries, which can occur in as many as three out of every 1,000
newborns, are caused by conditions such as hypoxic ischemic encephalopathy (“HIE”), subclinical seizures, or neurological disorders.
Diagnosing these conditions shortly after birth is imperative, as patients who undergo therapy within six hours after birth show a greater
potential for improved outcomes. We believe that diagnoses utilizing aEEG technology can have a marked and positive impact upon the
outcomes of some newborns suffering from brain injury.
Newborn Brain Injury Diagnostic Products
Our newborn brain injury diagnostic products record and display parameters that the neonatologist uses to diagnose neurological
disorders or brain injury in the newborn. These devices continuously monitor and record brain activity, aiding in the detection and
treatment of HIE and seizures. The devices also monitor the effects of drugs and other therapies on brain activity and improve the accuracy
of newborn neurological assessments. They are used with electrodes attached to the head of the newborn to acquire an EEG signal that is
then filtered, compressed, and displayed graphically on the device or as a hardcopy printout. The monitors have touch screens for easy
navigation and onscreen keyboards for data entry at the bedside.
•
•
•
Olympic Brainz Monitor. The Olympic Brainz Monitor (“OBM”) is our latest generation Cerebral Function Monitor (“CFM”).
The device can be used as a single channel, two-channel or three-channel device to continuously monitor and record brain
activity. The OBM displays up to three channels of both aEEG and EEG data. Sophisticated networking, archiving and viewing
functions facilitate consultation among medical professionals. Continuous impedance and corresponding EEG signals are also
displayed, aiding better clinical management of the newborn.
Brainz BRM3. The Brainz BRM3 is a bedside monitor that collects and measures electrical activity from both the right and left
hemispheres of the brain. The monitor presents a simplified 2-channel EEG display, along with the option to view three channels
of time-compressed amplified EEG’s (“aEEG”), providing practitioners with the ability to monitor infants with a wider variety of
neurological concerns when compared to single-channel EEG. Outside the U.S. the BRM3 is sold with an optional spike and event
detection algorithm called Recognize.
Olympic CFM-6000. The Olympic CFM-6000 is a single-channel aEEG/EEG system that allows the neonatologist to diagnose
neurological disorders or brain injury in the newborn. It helps determine the need for further neurological examination or
transport to a tertiary-care center.
Newborn Brain Injury Treatment
•
Olympic Cool-Cap System. The Olympic Cool-Cap is the only FDA-approved device for the treatment of moderate to
moderately-severe HIE. A four-year clinical trial for the Cool-Cap was
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completed in 2003, and the FDA approved the product in December 2006. The clinical trial validated the benefit of selective head
cooling as a means of reducing the temperature of the brain to diminish the severity of brain injury resulting from HIE in
newborns. The device conforms to the clinical trial protocol and is designed to assist the clinician in safely administering
treatment, thereby preventing or significantly reducing the severity of neurological injury associated with HIE. The Olympic
Cool-Cap brain cooling system uses a single-patient, disposable, cooling “cap” to continuously circulate sterile water to the
patient during the 72-hour treatment period.
Thermoregulation Products
Overview
Incubators offer a controlled, consistent microenvironment for thermoregulation and humidification within a closed system to
maintain skin integrity and body temperature. This controlled microenvironment reduces noise and light, supporting developmental care
while still providing access for clinical staff and family. Closed incubators are used for premature or sick babies who need a thermal and
developmental environment to thrive and grow in the NICU. Transport incubators are designed to offer a controlled environment during
transport either intra-hospital from one care area to another within a hospital building or inter-hospital between hospitals. Open infant
warmers are the preferred device for labor and delivery rooms and NICU admission.
We currently offer the following thermoregulation products:
•
•
•
Medix Incubators. Medix incubators provide high thermal performance with a double wall design. The NatalCare line of
incubators includes easy to use control panels and features such as improved weighing functionality with automatic centering and
an electronic tilting mechanism. The easy to clean, smooth design, and choice of options make these customizable incubators
appropriate for different use environments.
Medix Open Warmers. Medix open warmers include a full range of options including Apgar timers and resuscitation systems.
Available with an attached bed or in free-standing configurations, the warmers feature a microprocessor controlled display
module with easy to read display. The heater module has lateral movement capabilities to facilitate X-ray procedures while
maintaining heat delivery.
Medix Transport Incubators. Medix transport incubators are light in weight and easy to clean. They incorporate long lasting
batteries and a choice of carts to meet the needs of different care environments.
Jaundice Management
Overview
The American Academy of Pediatrics estimates that each year 60% of the approximately four million newborns in the U.S. become
jaundiced. According to the Journal of the American Medical Association, neonatal jaundice is the single largest cause for hospital
readmission of newborns in the U.S., and accounts for 50% of readmissions. Because of the serious consequences of hyperbilirubinemia,
the American Academy of Pediatrics recommends that all newborns be closely monitored for jaundice and has called for the physician to
determine the presence or absence of an abnormal rate of hemolysis to establish the appropriate treatment for the newborn.
In 2004, the American Academy of Pediatrics issued new guidelines for the treatment of jaundice in newborns. The guidelines
recommend phototherapy as the standard of care for the treatment of hyperbilirubinemia in infants born at 35 weeks or more of gestation.
The guidelines further highlight the need for “intense” phototherapy, and specifically recommend the use of the “blue” light treatment
incorporated into our neoBLUE products.
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Jaundice Management Products
•
•
•
neoBLUE Product Family. This product line consists of our neoBLUE, neoBLUE Mini, neoBLUE Cozy, and neoBLUE
blanket devices, which utilize light emitting diodes (“LEDs”) to generate a high-intensity, narrow spectrum of blue light that is
clinically proven to be most effective in the treatment of newborn jaundice. Our neoBLUE phototherapy devices emit
significantly less ultraviolet light and heat than conventional phototherapy devices, reducing the risk of skin damage and
dehydration for infants undergoing treatment. Because of the high intensity of these lights, the treatment time associated with
phototherapy is reduced.
Bili-Lite Product Family. These devices utilize fluorescent light bulbs for the treatment of hyperbilirubinemia. The Bili-
Bassinet provides intensive phototherapy from both under and over the baby for maximum surface area coverage. The Bili-Lite
pad is a product designed for both hospital and home-based phototherapy.
Medix MediLED™ Product Family. This product line from Medix includes a full-size, free-standing LED phototherapy system
and a MediLED mini light to be used on top of an incubator or attached to the Medix radiant warmer. The MediLED incorporates
an array of blue and white LEDs, while the mini system utilizes blue “super LEDs” that provide high intensity phototherapy.
Other Newborn Care Product Lines
Medical Devices. These products include devices such as: photometers, radiometers, patient warming lamps, neonatal heatshields,
pediatric scales, blanket warming cabinets, exam lights, oxygen hoods, restraining boards, and our newborn circumstraint.
•
•
•
Hawaii Medical Products. These single-use disposable products are sold into the NICU and nursery in hospitals. The Hawaii
Medical line includes Gumdrop pacifiers, TootSweet sucrose solution, and NeatNick heel lancets, among a range of positioning
devices, electrodes, and other newborn care products.
Disposable Supplies. These products include other disposable supplies such as neonatal noise attenuators, phototherapy eye
masks, and x-ray shields for reproductive organs.
Newborn Screening Data Management Product Line. Our suite of newborn screening data management products consists of
proprietary software that collects, tracks, manages, and reports newborn screening data to regional government health laboratories
and national disease control centers. While all states have laws and/or regulations requiring newborn screening for metabolic
disorders, the laws and regulations vary widely in the extent of screening required. Some states use tandem mass spectrometry in
their newborn metabolic screening programs, which increases the number of treatable disorders that can be detected. Revenue
from installation and upgrades of our newborn screening data management systems is classified as devices and systems revenue,
and revenue from maintenance contracts on the systems is classified as supplies and services revenue.
Segment and Geographic Information
We operate in one reportable segment in which we provide healthcare products used for the screening, detection, treatment,
monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep
disorders, and balance and mobility disorders.
Our end-user customer base includes hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies.
Most of our international sales are to distributors, who in turn, resell our products to end users or sub-distributors.
Information regarding our sales and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 16 – Segment,
Customer and Geographic Information of our consolidated financial statements included in this report and is incorporated in this section by
this reference.
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Revenue by Product Family and Product Category
For the years ended December 31, 2011, 2010 and 2009, revenue from our four product families as a percent of total revenue was
approximately as follows:
Neurology
Hearing
Newborn Care
Other
Total
Year Ended December 31,
2010
45%
32%
19%
4%
100%
2011
46%
26%
24%
4%
100%
2009
39%
40%
16%
5%
100%
We also look at revenue as either being generated from sales of Devices and Systems, which are generally non-recurring, or related
Supplies and Services, which are generally recurring. The products that are attributable to these categories are described above. Revenue
from Devices and Systems, and Supplies and Services, as a percent of total revenue for the years ending December 31, 2011, 2010 and 2009
is as follows:
Devices and Systems
Supplies and Services
Other
Total
Year Ended December 31,
2010
62%
37%
1%
100%
2011
64%
34%
2%
100%
2009
58%
40%
2%
100%
In 2011, 2010 and 2009, sales to no single end-user customer comprised more than 10% of our revenue, and revenue from services
was less than 10% of our revenue.
Backlog
As of December 31, 2011, our backlog was approximately $8.2 million, compared to $6.0 million at December 31, 2010 and $8.9
million at December 31, 2009.
Marketing and Sales
Marketing
Our marketing strategy differentiates our products by their level of quality, performance, and customer benefit. We educate customers
and potential customers worldwide about our products through several traditional methods, including, but not limited to:
•
•
•
•
•
•
Trade conference exhibits;
Direct presentations to healthcare professionals;
Publications in professional journals and trade magazines;
The Internet via our website, www.natus.com;
Print and direct mail advertising campaigns; and
Sponsorship of and participation in clinical education seminars and workshops.
Educational efforts directed at government agencies, physicians, and clinicians about the benefits of universal screening in terms of
patient outcomes and long-term treatment costs are a key element of our marketing strategy.
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Domestic Direct and Distributor Sales
We sell our products in the United States primarily through a direct sales organization. We believe this direct sales organization
allows us to maintain a higher level of customer service and satisfaction than would otherwise be possible by other distribution methods.
We also sell certain products under private label and distribution arrangements.
Domestic revenue as a percent of total revenue was 56%, 58%, and 66% in 2011, 2010 and 2009, respectively.
International Direct and Distributor Sales
We sell some of our products outside the U.S. through direct sales channels in Canada and in the French and German speaking regions
of Europe, in Denmark, and in parts of Latin America; we sell other products in those regions and into more than 100 other countries
through a distributor sales channel.
International revenue as a percent of total revenue was 44%, 42%, and 34% in 2011, 2010 and 2009, respectively.
We sell products to our distributors under substantially the same terms as sales through our direct sales channels. Terms of sales to
international distributors are generally EXW, reflecting that goods are shipped “ex works,” in which title and risk of loss are assumed by
the distributor at the shipping point. Distributors are generally given exclusive rights in their territories to purchase products from Natus
and resell to end users or sub distributors. Our distributors typically perform marketing, sales, and technical support functions in their
respective markets. Each distributor may sell Natus products to their customer directly, via other distributors or resellers, or both. We
actively train our distributors in product marketing, selling, and technical service techniques.
Seasonality in Revenue
We experience seasonality in our revenue. Our revenue typically drops from our fourth quarter to our first quarter. This seasonality
results from the purchasing habits of our hospital-based customers, whose purchases are often governed by calendar year budgets, and the
manner in which our direct sales force is compensated, as their compensation is based on annual sales plans that are tied to our December
year end.
Group Purchasing Organizations
More than 90% of the hospitals in the U.S. are members of group purchasing organizations (“GPO”s), which negotiate volume
purchase agreements for member hospitals, group practices, and other clinics. Direct purchases by GPO members accounted for
approximately 12%, 18% and 24% of our revenue in 2011, 2010 and 2009, respectively. Direct purchases by members of one GPO,
Novation, accounted for approximately 2%, 6% and 8% of our revenue in 2011, 2010 and 2009, respectively.
Third-Party Reimbursement
In the U.S., health care providers generally rely on third-party payors, including private health insurance plans, federal Medicare, state
Medicaid, and managed care organizations, to reimburse all or part of the cost of the procedures they perform. Third-party payors can
affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement these payors provide
for services utilizing our products. For this reason, we are not able to measure a reimbursement success rate for our products.
Customer Service and Support
We provide a one-year warranty on all medical device products. We also sell extended service agreements on our medical device
products. Service, repair, and calibration services for our domestic customers are provided
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by Company-owned service centers and our field service specialists. Service for our international customers is provided by a combination
of our Company-owned authorized service centers and third-party vendors on a contract basis.
Manufacturing
Other companies manufacture a significant portion of the components used in our products; however, we perform final assembly,
testing, and packaging of most of the devices ourselves to control quality and manufacturing efficiency. We also use contract vendors to
manufacture some of our disposable supply and medical device products. We perform regular quality audits of these vendors.
We purchase materials and components from qualified suppliers that are subject to our quality specifications and inspections. We
conduct quality audits of our key suppliers, several of which are experienced in the supply of components to manufacturers of finished
medical devices, or supplies for use with medical devices. Most of our purchased components are available from more than one supplier.
Our manufacturing, service, and repair facilities are subject to periodic inspection by federal, state, and foreign regulatory authorities.
Our quality assurance system is subject to regulation by the FDA and other state government agencies. We are required to conduct our
product design, testing, manufacturing, and control activities in conformance with the FDA’s quality system regulations and to maintain our
documentation of these activities in a prescribed manner. In addition, our production facilities have received ISO 13485 certification. ISO
13485 certification standards for quality operations have been developed to ensure that medical device companies meet the standards of
quality on a worldwide basis. We have also received the EC Certificate pursuant to the European Union Medical Device Directive
93/42/EEC, which allows us to place a CE mark on our products.
Research and Development
We are committed to introducing new products and supporting current product offerings in our markets through a combination of
internal as well as external efforts that are consistent with our corporate strategy.
Internal product development capabilities. We believe that product development capabilities are essential to provide our customers
with new product offerings. We plan to leverage our core technologies by introducing product line extensions as well as new product
offerings.
Partnerships that complement our expertise. We continue to seek strategic partners in order to develop products that may not
otherwise be available to us. By taking advantage of our core competencies, we believe that we can bring products to market in an efficient
manner and leverage our distribution channels.
New opportunities through technology acquisition. We continue to evaluate new, emerging, and complementary technologies in
order to identify new product opportunities. With our knowledge of our current markets we believe that we can effectively develop
technologies into successful new products.
Our research and development expenses were $25.6 million or 11% of total revenue in 2011, $21.3 million or 9.7% of total revenue in
2010, and $16.7 million or 10.0% of total revenue in 2009.
Proprietary Rights
We protect our intellectual property through a combination of patent, copyright, trade secret, and trademark laws. We attempt to
protect our intellectual property rights by filing patent applications for new features and products we develop. We enter into confidentiality
or license agreements with our employees, consultants, and corporate partners, and seek to control access to our intellectual property,
distribution channels, documentation, and other proprietary information. However, we believe that these measures afford only limited
protection.
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The intellectual rights to some of the original patents for technology incorporated into our products are now in the public domain.
However, we do not consider these patents, or any currently viable patent or related group of patents, to be of such importance that their
expiration or termination would materially affect our business.
We capitalize the cost of purchased technology and intellectual property, as well as certain costs incurred in obtaining patent rights,
and amortize these costs over the estimated economic lives of the related assets.
Competition
We sell our products in competitive and rapidly evolving markets. We face competition from other companies in all of our product
lines. Our competitors range from small privately-held companies to multinational corporations and their product offerings vary in scope
and breadth. We do not believe that any single competitor is dominant in any of our product lines.
We derive a significant portion of our revenue from the sale of disposable supplies that are used with our medical devices. In the
U.S., we sell our supply products in a mature market. Because these products can generate high margins, we expect that our products,
particularly our hearing screening supply products, could face increasing competition, including competitors offering lower prices, which
could have an adverse effect on our revenue and margins.
We believe the principal factors that will draw clinicians and other buyers to our products, include:
•
•
•
•
•
•
•
•
•
Level of specificity, sensitivity, and reliability of the product;
Time required to obtain results with the product, such as to test for or treat a clinical condition;
Relative ease of use of the product;
Depth and breadth of the products features;
Quality of customer support for the product;
Frequency of product updates;
Extent of third-party reimbursement of the cost of the product or procedure;
Extent to which the products conform to standard of care guidelines; and
Price of the product.
We believe that our primary competitive strength relates to the functionality and reliability of our products. Different competitors
may have competitive advantages in one or more of the categories listed above and they may be able to devote greater resources to the
development, promotion, and sale of their products.
Government Regulation
FDA’s Premarket Clearance and Approval Requirements
Unless an exemption applies, the medical devices we sell in the United States, with the exception of some disposable products, must
first receive one of the following types of FDA premarket review authorizations under the Food, Drug, and Cosmetics Act, as amended:
•
•
Clearance via Section 510(k); or
Premarket approval via Section 515 if the FDA has determined that the medical device in question poses a greater risk of injury.
The FDA’s 510(k) clearance process usually takes from three to 12 months, but can take longer. The process of obtaining premarket
approval via Section 515 is much more costly, lengthy, and uncertain. Premarket approval
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generally takes from one to three years, but can take longer. We cannot be sure that the FDA will ever grant either 510(k) clearance or
premarket approval for any product we propose to market in the United States.
The FDA decides whether a device must undergo either the 510(k) clearance or premarket approval process based upon statutory
criteria. These criteria include the level of risk that the Agency perceives to be associated with the device and a determination of whether
the product is a type of device that is substantially equivalent to devices that are already legally marketed. The FDA places devices deemed
to pose relatively less risk in either Class I or Class II, which requires the manufacturer to submit a premarket notification requesting 510(k)
clearance, unless an exemption applies. The premarket notification under Section 510(k) must demonstrate that the proposed device is
substantially equivalent in intended use and in safety and effectiveness to a previously cleared 510(k) device or a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications.
The FDA places devices deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices
deemed to be not substantially equivalent to a predicate device, in its Class III classification. The FDA requires these devices to undergo the
premarket approval process via Section 515 in which the manufacturer must prove the safety and effectiveness of the device. A premarket
approval application must provide extensive pre-clinical and clinical trial data.
The FDA may require results of clinical trials in support of a 510(k) submission and generally requires clinical trial results for a
premarket approval application. In order to conduct a clinical trial on a significant-risk device, the FDA requires manufacturers to apply for
and obtain, in advance, an investigational-device exemption. The investigational-device exemption application must be supported by
appropriate data, such as animal and laboratory testing results. If the FDA and the Institutional Review Boards at the clinical trial sites
approve the investigational-device exemption application for a significant-risk device, the manufacturer may begin the clinical trial. An
investigational-device exemption approval provides for a specified clinical protocol, including the number of patients and study sites. If the
manufacturer deems the product a non-significant risk device, the product will be eligible for more abbreviated investigational-device
exemption requirements. If the Institutional Review Boards at the clinical trial sites concur with the non-significant risk determination, the
manufacturer may begin the clinical trial.
We received approval for our Olympic Cool-Cap product as a Class III device from the FDA through the premarket approval process.
Most of our other products have been cleared by the FDA as Class II devices. Some of our disposable products and newborn care products,
such as our neonatal headshields and oxygen delivery systems, have received FDA clearance as Class I devices.
FDA Regulation
Numerous FDA regulatory requirements apply to our products. These requirements include:
•
•
•
FDA quality system regulations which require manufacturers to create, implement, and follow design, testing, control,
documentation, and other quality assurance procedures;
Medical device reporting regulations, which require that manufacturers report to the FDA certain types of adverse and other
events involving their products; and
FDA general prohibitions against promoting products for unapproved uses.
Class II and III devices may also be subject to special controls applied to them, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines that may not apply to Class I devices. We believe we are in compliance with applicable
FDA guidelines, but we could be required to change our compliance activities or be subject to other special controls if the FDA changes
existing regulations or adopts new requirements.
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We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA
finds that we have failed to adequately comply, the Agency can institute a wide variety of enforcement actions, including:
•
•
•
•
•
•
•
•
Issuance of a Form 483 citation;
Fines, injunctions, and civil penalties;
Recall or seizure of our products;
Issuance of public notices or warnings;
Imposition of operating restrictions, partial suspension, or total shutdown of production;
Refusal of our requests for 510(k) clearance or pre-market approval of new products;
Withdrawal of 510(k) clearance or pre-market approval already granted; or
Criminal prosecution.
The FDA also has the authority to require us to repair, replace, or refund the cost of any medical device manufactured or distributed
by us.
Other Regulations
We also must comply with numerous additional federal, state, and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, biohazards, fire hazard control, and hazardous substance disposal. We believe we are
currently in compliance with such regulations.
Countries outside of the U.S. regulate medical devices in a manner similar to that of the FDA. Our manufacturing facilities are subject
to audit and have been certified to be ISO 13485:2003, Medical Device Directive 93/42/EEC, and CMDCAS compliant, which allows us to
sell our products in Canada, Europe, and other territories around the world. Our manufacturing facilities in North America are subject to
ISO 13485 inspections by our notified body, British Standards Institution Management Systems, and by other notified bodies outside of
North America. We plan to seek approval to sell our products in additional countries, while maintaining our current approvals. The time
and cost of obtaining new, and maintaining existing, market authorizations from countries outside of North America, and the requirements
for licensing products in these countries may differ significantly from FDA requirements.
Employees
On December 31, 2011, we had approximately 835 full time employees worldwide. In Argentina, some of our production employees
are represented by labor unions; none of our other employees are so represented. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Executive Officers
The following table lists our executive officers and their ages as of March 1, 2011:
Name
James B. Hawkins
John T. Buhler
Steven J. Murphy
William L. Mince
Kenneth M. Traverso
D. Christopher Chung, M.D.
Age
Position(s)
56 Chief Executive Officer and Director
51 President and Chief Operating Officer
60 Vice President Finance and Chief Financial Officer
60 Vice President North American Operations
51 Vice President Marketing and Sales
48 Vice President Medical Affairs, Quality & Regulatory
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James B. Hawkins has served as Chief Executive Officer, and as a member of the Board of Directors, since joining Natus in April
2004, and formerly as President from April 2004 through January 2011. Mr. Hawkins has over 25 years of combined medical device and
financial management experience. Prior to joining Natus, he was President and Chief Executive Officer of Nasdaq-traded Invivo
Corporation for 19 years. Invivo Corporation, a maker of multi-parameter vital sign monitoring equipment used in hospitals, was acquired
in early 2004 by Intermagnetics General Corporation. He earned a Bachelor of Commerce degree, specialized in Management from Santa
Clara University and a Masters of Business Administration – Finance degree from San Francisco State University. Mr. Hawkins is a
Director of Iridex Corp.
John T. Buhler has served as President and Chief Operating Officer since February, 2011. Mr. Buhler was employed by Avantis
Medical Systems as President and Chief Executive officer from January 2011 to February 2011. He held various positions at SenoRx from
May 2008 through July 2010, including President and Chief Executive Officer from March 2010 through July 2010, President and Chief
Operating Officer from October 2009 to March 2010, Senior Vice President and Chief Commercial Officer from April 2009 to October
2009, Vice President of Global Sales and Business Development from October 2008 until April 2009, and Vice President of International
Sales and Business Development from May 2008 until October 2008. From August 2005 to May 2008, Mr. Buhler served as President and
Chief Executive Officer at Ultrasonix Medical Corporation, a privately held manufacturer of diagnostic ultrasound imaging equipment.
From 1998 to 2005, Mr. Buhler held various positions at General Electric, last serving as Vice President and General Manager of GE’s
Ultrasound Performance Technologies Division in Shanghai, China.
Steven J. Murphy has served as Chief Financial Officer since February 2006, Vice President Finance since June 2003, and joined
Natus in September 2002 as Director of Finance. From February 2002 through September 2002, Mr. Murphy was interim Controller at
Travel Nurse International, a temporary staffing firm that was acquired by Medical Staffing Network in December 2002. From October
1998 through January 2002, Mr. Murphy was Controller of AdvisorTech Corporation, an international software development company
providing IT-based solutions in the field of investments, where he was responsible for financial reporting of domestic, Asian and European
operations with significant reporting responsibilities to the board of directors and investor groups. From 1996 to 1998 he was Vice
President Finance of RWS Group, LLC, an international service company providing management of language-related projects. Mr. Murphy
holds a Bachelor of Science degree in Business Administration from California State University, Chico. Mr. Murphy is a certified public
accountant.
William L. Mince has served as our Vice President, North American Operations since September 2007 and joined Natus as Vice
President Operations in October 2002. From November 2000 to September 2002, Mr. Mince served as President and Founder of My Own
Jukebox, an Internet retail company. From July 1998 to October 2000, Mr. Mince was a consultant with the majority of his time spent as
Senior Vice President Network Solutions for Premier Retail Network, a media broadcasting company. From July 1997 to June 1998,
Mr. Mince served as President and Chief Operating Officer of Ophthalmic Imaging Systems, a publicly-held medical device company.
From July 1994 to June 1997, Mr. Mince was Vice President Operations with Premier Retail Network. From May 1988 to June 1994,
Mr. Mince was Director of Operations for Nellcor, a medical device company. Mr. Mince holds a Bachelor of Science degree in Business
Administration from the University of Redlands and a Masters of Business Administration degree from National University.
Kenneth M. Traverso has served as our Vice President Marketing and Sales since April 2002. From September 2000 to April 2002, he
served as our Vice President Sales. From October 1999 to July 2000, Mr. Traverso served as President of DinnerNow.com Inc., an internet
aggregator for the restaurant industry. From January 1998 to September 1999, Mr. Traverso served as Vice President Sales, Western Region
of Alere Medical, an outpatient chronic disease management company. From May 1995 to January 1998, Mr. Traverso served as Vice
President Marketing and Sales of AbTox, Inc., a low temperature sterilization company. From August 1990 to May 1995, Mr. Traverso
served in various capacities at Natus, including Vice President Sales. From September 1984 to July 1990 Mr. Traverso served various
positions at Nellcor, a medical device company, including Regional Sales Manager, Western Region. Mr. Traverso holds a Bachelor of
Science degree in Administration & Marketing from San Francisco State University.
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D. Christopher Chung, M.D., has served as our Vice President Medical Affairs, Quality and Regulatory since June 2011. From
February 2003 until June 2011, Dr. Chung also served as our Vice President R&D and Engineering. Dr. Chung served as our Medical
Director from October 2000 to February 2003. From 2000 to 2006, Dr. Chung served as a Pediatric Hospitalist at the California Pacific
Medical Center in San Francisco. From June 1997 to June 2000, Dr. Chung trained as a pediatric resident at Boston Children’s Hospital and
Harvard Medical School. From 1986 to 1993, Dr. Chung worked as an Engineer at Nellcor, a medical device company. Dr. Chung holds a
Bachelor of Arts degree in Computer Mathematics from the University of Pennsylvania and a Doctor of Medicine degree from the Medical
College of Pennsylvania-Hahnemann University School of Medicine. He is a Fellow of the American Academy of Pediatrics.
Other Information
Natus was incorporated in California in May 1987 and reincorporated in Delaware in August 2000.
We maintain corporate offices at 1501 Industrial Road, San Carlos, California 94070. Our telephone number is (650) 802-0400. We
maintain a corporate website at www.natus.com. References to our website address do not constitute incorporation by reference of the
information contained on the website, and the information contained on the website is not part of this document.
We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, Proxy Statements, and all amendments to these reports, as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act. We also show detail about stock trading by corporate insiders by providing access to SEC Forms 3, 4 and 5. This
information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov. Our common stock is traded on the
Nasdaq Stock Market under the symbol “BABY”.
ITEM 1A. Risk Factors
We have completed a number of acquisitions and expect to complete additional acquisitions in the future. There are numerous
risks associated with acquisitions and we may not achieve the expected benefit of any of our acquisitions
Our acquisitions of products, technology assets, or businesses may have a negative impact on our business if we fail to achieve the
anticipated financial, strategic, and other benefits of acquisitions or investments, and our operating results may suffer because of this.
Our significant acquisitions are as follows: Neometrics in 2003; Fischer-Zoth in 2004; Bio-logic, Deltamed, and Olympic in 2006;
Xltek in 2007; Sonamed, Schwarzer Neurology, and Neurocom in 2008; Hawaii Medical and Alpine Biomed in 2009, Medix in 2010, and
Embla in 2011.
We expect to continue to pursue opportunities to acquire other businesses in the future. The acquisitions that we have completed may
not result in improved operating results for us, or in our achieving a financial condition superior to that which we would have achieved had
we not completed them. Our results of operations may be adversely impacted by costs associated with our acquisitions, including one-time
charges associated with restructurings. Further, our acquisitions could fail to produce the benefits that we anticipate, or could have other
adverse effects that we currently do not foresee. In addition, some of the assumptions that we have relied upon, such as achievement of
operating synergies, may not be realized. In this event, one or more of the acquisitions could result in reduced earnings of Natus as
compared to the earnings that would have been achieved by Natus if the acquisition had not occurred.
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We have assumed contingent obligations associated with earnout provisions in some of our acquisitions. We believe these provisions
help us to negotiate mutually agreeable purchase terms between us and the sellers. However, a disagreement between us and a seller about
the terms of an earnout provision could result in our paying more for an acquisition than we intended. For example, such disagreements
arose in connection with our acquisitions of Alpine Biomed and Schwarzer Neurology. Although we resolved these disputes under terms
that were not unfavorable to us, we cannot be assured of such outcomes in the future.
We have incurred indebtedness to fund some of our acquisitions. The use of debt to fund our acquisitions may have an adverse impact
on our liquidity and cause us to place more reliance on cash flow from operations for our liquidity. If our cash flow from operations is not
sufficient for our needs, our business could be adversely affected. If we are required to seek additional external financing to support our
need for cash to fund future acquisitions, we may not have access to financing on terms that are acceptable to us, or at all. Alternatively, we
may feel compelled to access additional financing on terms that are dilutive to existing holders of our common stock or that include
covenants that restrict our business, or both. If the recent lack of liquidity in credit markets persists into the future, our ability to obtain debt
financing for future acquisitions may be impaired.
If we fail to successfully manage the combined operations of Natus and the businesses we have acquired, we may not realize the
potential benefits of our acquisitions. Our corporate headquarters are located in San Carlos, California. We also have the following
operating divisions: Olympic in Washington; Neurocom in Oregon; Bio-logic in Illinois; Neometrics in New York; Xltek and Stellate in
Canada; Medix in Argentina; Alpine Biomed in Denmark; Fischer-Zoth, Schwarzer Neurology, IT-Med, and Alpine Biomed Germany
(collectively “Natus Europe”) in Germany; and Deltamed and Alpine Biomed France (collectively “Natus France”) in France. If we fail to
manage these disparate operations effectively, our results of operations could be harmed, employee morale could decline, key employees
could leave, and customers could cancel existing orders or choose not to place new ones. In addition, we may not achieve the synergies or
other benefits of these and future acquisitions that we anticipate. We may encounter the following additional difficulties and delays
involved in integrating and managing these operations, and the operations of companies we may acquire:
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Failure of customers to continue using the products and services of the combined company;
Failure to successfully develop the acquired technology into the desired products or enhancements;
Assumption of unknown liabilities;
Failure to understand products or technologies with which we have limited previous experience;
Failure to compete effectively in new markets;
Decreased liquidity, restrictive bank covenants, and incremental financing costs associated with debt we may incur to complete
future acquisitions; and
Diversion of the attention of management from other ongoing business concerns.
Our reported operating results may suffer because of impairment charges incurred to write down the carrying amount of intangible
assets, including goodwill, generated as a result of the acquisitions.
Our growth in recent years has depended substantially on the completion of acquisitions and we may not be able to complete
acquisitions of this nature or of a relative size in the future to support a similar level of growth
The acquisitions that we have completed have been the primary source of our growth in revenue in recent years. We expend
considerable effort in seeking to identify attractive acquisition candidates and, upon doing so, to convince the potential target to consider a
sale to us and, ultimately, to negotiate mutually agreeable acquisition terms. If we are not successful in these efforts in the future, our
growth rate will not increase at a rate corresponding to that which we have achieved in recent years. Further, as we grow larger it will be
necessary to
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complete the acquisition of larger companies and product lines to support a growth similar to that which we have achieved in the past. The
market for attractive acquisitions is competitive and others with greater financial resources than we have may be better positioned than we
are to acquire desirable targets. Further, we may not be able to negotiate acquisition terms with target companies that will allow us to
achieve positive financial returns from the transaction.
Adverse economic conditions in markets in which we operate may harm our business
Unfavorable changes in U.S. and international economic environments may adversely affect our business and financial results.
Economic conditions in the countries in which we operate and sell products worsened and global financial markets subsequently
experienced significant volatility and declines throughout much of 2009. Although these conditions improved somewhat in 2010,
unfavorable conditions continue to impact the U.S. and European economies. We are unable to foresee when, or if, these factors might
return to historical levels. During challenging economic times, and in tight credit markets, our customers may delay or reduce capital
expenditures. This could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable,
slower adoption of new technologies, and increased price competition, all of which could impact our results of operations and financial
condition. In addition, we expect these factors will cause us to be more cautious in evaluating potential acquisition opportunities, which
could hinder our ability to grow through acquisition while these conditions persist.
We have initiated changes to our information systems that could disrupt our business and our financial results.
We plan to continuously improve our information systems to support the form, functionality, and scale of our business. These types of
transitions frequently prove disruptive to the underlying business of an enterprise and may cause us to incur higher costs than we anticipate.
Failure to manage a smooth transition to the new systems and the ongoing operations and support of the new systems could materially harm
our business operations.
For example, we are currently in the process of implementing the rollout of world-wide, single-platform enterprise resource planning
(“ERP”) solution including customer relationship management, product lifecycle management, demand management, and business
intelligence. Until we have completed this world-wide implementation, we will be dependent on multiple platforms. We may experience
difficulties in implementing the ERP and we may fail to gain the efficiencies the implementation is designed to produce. The
implementation could also be disruptive to our operations, including the ability to timely ship and track product orders to customers, project
inventory requirements, manage our supply chain and otherwise adequately service our customers.
Future changes in technology or market conditions could result in adjustments to our recorded asset balance for intangible assets,
including goodwill, resulting in additional charges that could significantly impact our operating results
Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of
related estimated useful lives and whether these assets are impaired involves significant judgment. Our ability to accurately predict future
cash flows related to these intangible assets might be hindered by events over which we have no control. Due to the highly competitive
nature of the medical device industry, new technologies could impair the value of our intangible assets if they create market conditions that
adversely affect the competitiveness of our products. Further, declines in our market capitalization may be an indicator that our intangible
assets or goodwill carrying values exceed their fair values which could lead to potential impairment charges that could impact our
operating results. For example, in 2011 we recorded a $20 million goodwill impairment charge related to our European reporting unit.
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We may not be able to preserve the value of our intellectual property because we may not be able to protect access to it or we may
lose our intellectual property rights due to expiration of our licenses or patents
If we fail to protect our intellectual property rights or if our intellectual property rights do not adequately cover the technology we
employ, other medical device companies could sell products with features similar to ours, and this could reduce demand for our products.
We protect our intellectual property through a combination of patent, copyright, trade secret and trademark laws. Despite our efforts to
protect our proprietary rights, others may attempt to copy or otherwise improperly obtain and use our products or technology. Policing
unauthorized use of our technology is difficult and expensive, and we cannot be certain that the steps we have taken will prevent
misappropriation. Our means of protecting our proprietary rights may be inadequate. Enforcing our intellectual property rights could be
costly and time consuming and may divert our management’s attention and resources. Failing to enforce our intellectual property rights
could also result in the loss of those rights.
If health care providers are not adequately reimbursed for procedures conducted with our devices or supplies, or if reimbursement
policies change adversely, we may not be successful marketing and selling our products or technologies
Clinicians, hospitals, and government agencies are unlikely to purchase our products if they are not adequately reimbursed for the
procedures conducted with our devices or supplies. Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products
has been published, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement.
Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or hospitals. Some third-party
payors may impose restrictions on the procedures for which they will provide reimbursement. If health care providers cannot obtain
sufficient reimbursement from third-party payors for our products or the screenings conducted with our products, we may not achieve
significant market acceptance of our products. Acceptance of our products in international markets will depend upon the availability of
adequate reimbursement or funding within prevailing healthcare payment systems. Reimbursement, funding, and healthcare payment
systems vary significantly by country. We may not obtain approvals for reimbursement in a timely manner or at all.
Adverse changes in reimbursement policies in general could harm our business. We are unable to predict changes in the
reimbursement methods used by third-party health care payors, particularly those in countries and regions outside the U.S. For example,
some payors are moving toward a managed care system in which providers contract to provide comprehensive health care for a fixed cost
per person. In a managed care system, the cost of our products may not be incorporated into the overall payment for patient care or there
may not be adequate reimbursement for our products separate from reimbursement for other procedures.
Healthcare reforms, changes in healthcare policies, and changes to third-party reimbursements for our products may affect
demand for our products
In March 2010 the U. S. government signed into law the Patient Protection and Affordable Care Act and the Health Care &
Education Reconciliation Act. These laws are intended to, among other things, curb rising healthcare costs, including those that could
significantly affect reimbursement for our products. The policies supporting these laws include: basing reimbursement policies and rates on
clinical outcomes; the comparative effectiveness and costs of different treatment technologies and modalities; imposing price controls; and
other measures. Future significant changes in the healthcare systems in the United States or elsewhere could also have a negative impact on
the demand for our current and future products. These include changes that may reduce reimbursement rates for our products and changes
that may be proposed or implemented by the U.S. Presidential administration or Congress.
There are numerous steps required to implement these laws. Because of the unsettled nature of these reforms, we cannot predict what
additional healthcare reforms will be implemented at the federal or state level, or the effect that any future legislation or regulation will
have on our business. There is also considerable uncertainty of the impact of these reforms on the medical device market as a whole. If we
fail to effectively react
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to the implementation of health care reform, our business may be adversely affected. In addition, if the excise tax on the sale of medical
devices is imposed as enacted, this could increase our costs and have an adverse effect on our results of operations, financial position, and
cash flows.
If we fail in our efforts to educate clinicians, government agency personnel, and third-party payors on the effectiveness of our
products, we may not achieve future sales growth
It is critical to the success of our sales efforts that we educate a sufficient number of clinicians, hospital administrators, and
government agencies about our products and the costs and benefits of their use. The commercial success of our products depends upon
clinician, government agency, and other third-party payer confidence in the economic and clinical benefits of our products as well as their
comfort with the efficacy, reliability, sensitivity and specificity of our products. We believe that clinicians will not use our products unless
they determine, based on published peer-reviewed journal articles and experience, that our products provide an accurate and cost-effective
alternative to other means of testing or treatment. Our customers may choose to use competitive products, which may be less expensive or
may provide faster results than our devices. Clinicians are traditionally slow to adopt new products, testing practices and clinical
treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement. If clinicians, government agencies
and hospital administrators do not adopt our products, we may not maintain profitability. Factors that may adversely affect the medical
community’s acceptance of our products include:
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Publication of clinical study results that demonstrate a lack of efficacy or cost-effectiveness of our products;
Changing governmental and physician group guidelines;
Actual or perceived performance, quality, price, and total cost of ownership deficiencies of our products relative to other
competitive products;
Our ability to maintain and enhance our existing relationships and to form new relationships with leading physicians, physician
organizations, hospitals, state laboratory personnel, and third-party payers;
Changes in state and third-party payer reimbursement policies for our products; and
Repeal of laws requiring universal newborn hearing screening and metabolic screening.
Sales through group purchasing organizations and sales to high volume purchasers may reduce our average selling prices, which
could reduce our operating margins
We have entered, and expect in the future to enter into agreements with customers who purchase high volumes of our products. Our
agreements with these customers may contain discounts from our normal selling prices and other special pricing considerations, which
could cause our operating margins to decline. In addition, we have entered into agreements to sell our products to members of GPOs, which
negotiate volume purchase prices for medical devices and supplies for member hospitals, group practices and other clinics. While we make
sales directly to GPO members, the GPO members receive volume discounts from our normal selling price and may receive other special
pricing considerations from us. Sales to members of all GPOs accounted for approximately 12%, 18% and 24% of our total revenue during
2011, 2010 and 2009, respectively, and sales to members of one GPO, Novation, accounted for approximately 2%, 6% and 8% of our total
revenue in 2011, 2010 and 2009, respectively. Other of our existing customers may be members of GPOs with which we do not have
agreements. Our sales efforts through GPOs may conflict with our direct sales efforts to our existing customers. If we enter into agreements
with new GPOs and some of our existing customers begin purchasing our products through those GPOs, our operating margins could
decline.
Demand for some of our products depends on the capital spending policies of our customers, and changes in these policies could
harm our business
A majority of customers for our products are hospitals, physician offices, and clinics. Many factors, including public policy spending
provisions, available resources, and economic cycles have a significant effect
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on the capital spending policies of these entities and therefore the amount that they can spend on our equipment products. If budget
resources limit the capital spending of our customers, they will be unlikely to either purchase any new equipment from us or upgrade to any
of our newer equipment products. Lack of liquidity in credit markets and uncertainty about future economic conditions can have an adverse
effect on the spending patterns of our customers. These factors can have a significant adverse effect on the demand for our products.
Our markets are very competitive and in the United States we sell certain of our products in a mature market
We face competition from other companies in all of our product lines. Our competitors range from small privately held companies to
multinational corporations and their product offerings vary in scope and breadth. We do not believe that any single competitor is dominant
in any of our product lines.
The markets for certain of our products in the U.S., including the newborn hearing screening and EEG monitoring markets, are mature
and we are unlikely to see significant growth for such products in the U.S. In the U.S. we derive a significant portion of our revenue from
the sale of disposable supplies that are used with our hearing screening devices. Because these disposable supply products can generate
high margins, we expect that our products, particularly our hearing screening disposable supply products, could face increasing
competition, including competitors offering lower prices, which could have an adverse effect on our revenue and margins.
Our competitors may have certain competitive advantages, which include the ability to devote greater resources to the development,
promotion, and sale of their products. Consequently, we may need to increase our efforts, and related expenses for research and
development, marketing, and selling to maintain or improve our position.
We expect recurring sales to our existing customers to generate a majority of our revenue in the future, and if our existing customers
do not continue to purchase products from us, our revenue may decline.
Our operating results may decline if we do not succeed in developing, acquiring, and marketing additional products or improving
our existing products
We intend to develop additional products and technologies, including enhancements of existing products, for the screening, detection,
treatment, monitoring and tracking of common medical ailments. Developing new products and improving our existing products to meet the
needs of current and future customers requires significant investments in research and development. If we fail to successfully sell new
products, update our existing products, or timely react to changes in technology, our operating results may decline as our existing products
reach the end of their commercial life cycles.
Our plan to expand our international operations will result in increased costs and is subject to numerous risks; if our efforts are
not successful, this could harm our business
We have expanded our international operations through acquisitions and plan to expand our international sales and marketing efforts
to increase sales of our products in foreign countries. We may not realize corresponding growth in revenue from growth in international
unit sales, due to the lower average selling prices we receive on sales outside of the U.S. Even if we are able to successfully expand our
international selling efforts, we cannot be certain that we will be able to create or increase demand for our products outside of the U.S. Our
international operations are subject to other risks, which include:
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Impact of possible recessions in economies outside the U.S.;
Political and economic instability, including instability related to war and terrorist attacks;
Contractual provisions governed by foreign law, such as local law rights to sales commissions by terminated distributors;
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Decreased healthcare spending by foreign governments that would reduce international demand for our products;
Continued strengthening of the U.S. dollar relative to foreign currencies that could make our products less competitive because
approximately half of our international sales are denominated in U.S. dollars;
Greater difficulty in accounts receivable collection and longer collection periods;
Difficulties of staffing and managing foreign operations;
Reduced protection for intellectual property rights in some countries and potentially conflicting intellectual property rights of third
parties under the laws of various foreign jurisdictions;
Difficulty in obtaining and maintaining foreign regulatory approval;
Attitudes by clinicians, and cost reimbursement policies, towards use of disposable supplies that are potentially unfavorable to our
business.
Complying with U.S. regulations that apply to international operations, including trade laws, the U.S. Foreign Corrupt Practices
Act, and anti-boycott laws, as well as international laws such as the U.K. Bribery Act;
Loss of business through government tenders that are held annually in many cases; and
Potentially negative consequences from changes in tax laws, including legislative changes concerning taxation of income earned
outside of the U.S.
In particular, our international sales could be adversely affected by a strengthening of the U.S. dollar relative to other foreign
currencies, which makes our products more costly to international customers for sales denominated in U.S. dollars.
Our operating results may suffer because of our exposure to foreign currency exchange rate fluctuations
Substantially all of our sales contracts with our U.S. based customers provide for payment in U.S. dollars. With the exception of our
Canadian operations, substantially all of the revenue and expenses of our foreign subsidiaries are denominated in the applicable foreign
currency. To date we have executed only limited foreign currency contracts to hedge these currency risks. Our future revenue and expenses
may be subject to volatility due to exchange rate fluctuations that could result in foreign exchange gains and losses associated with foreign
currency transactions and the translation of assets and liabilities denominated in foreign currencies.
Substantially all our sales from our U.S. operations to our international distributors provide for payment in U.S. dollars. A
strengthening of the U.S. dollar relative to other foreign currencies could increase the effective cost of our products to our international
distributors as their functional currency is typically not the U.S. dollar. This could have a potential adverse effect on our ability to increase
or maintain average selling prices of our products to our foreign-based customers.
If guidelines mandating universal newborn hearing screening do not continue to develop in foreign countries and governments do
not mandate testing of all newborns as we anticipate, or if those guidelines have a long phase-in period, our sales of newborn
hearing screening products may not achieve the revenue growth we have achieved in the past
We estimate that approximately 95% of the children born in the U.S. are currently being tested for hearing impairment prior to
discharge from the hospital. To date, there has been only limited adoption of newborn hearing screening prior to hospital discharge by
foreign governments, and when newborn hearing screening programs are enacted by foreign governments there can be a phase-in period
spanning several years. The widespread adoption of guidelines depends, in part, on our ability to educate foreign government agencies,
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neonatologists, pediatricians, third-party payors, and hospital administrators about the benefits of universal newborn hearing screening as
well as the use of our products to perform the screening and monitoring. Our revenue from our newborn hearing screening product lines
may not grow if foreign governments do not require universal newborn hearing screening prior to hospital discharge, if physicians or
hospitals are slow to comply with those guidelines, or if governments provide for a lengthy phase-in period for compliance.
Because we rely on distributors or sub-distributors to sell our products in most of our markets outside of the U.S., our revenue
could decline if our existing distributors reduce the volume of purchases from us, or if our relationship with any of these
distributors is terminated
We currently rely on our distributors or sub-distributors for a majority of our sales outside the U.S. Some distributors also assist us
with regulatory approvals and education of clinicians and government agencies. We intend to continue our efforts to increase our sales in
Europe, Japan, and other developed countries. If we fail to sell our products through our international distributors, we would experience a
decline in revenues unless we begin to sell our products directly in those markets. We cannot be certain that we will be able to attract new
international distributors to market our products effectively or provide timely and cost-effective customer support and service. Even if we
are successful in selling our products through new distributors, the rate of growth of our revenue could be harmed if our existing
distributors do not continue to sell a large dollar volume of our products. None of our existing distributors are obligated to continue selling
our products.
We may be subject to foreign laws governing our relationships with our international distributors. These laws may require us to make
payments to our distributors if we terminate our relationship for any reason, including for cause. Some countries require termination
payments under local law or legislation that may supersede our contractual relationship with the distributor. Any required payments would
adversely affect our operating results.
If we lose our relationship with any supplier of key product components or our relationship with a supplier deteriorates or key
components are not available in sufficient quantities, our manufacturing could be delayed and our business could suffer
We contract with third parties for the supply of some of the components used in our products and the production of our disposable
products. Some of our suppliers are not obligated to continue to supply us. We have relatively few sources of supply for some of the
components used in our products and in some cases we rely entirely on sole-source suppliers. In addition, the lead-time involved in the
manufacturing of some of these components can be lengthy and unpredictable. If our suppliers become unwilling or unable to supply us
with components meeting our requirements, it might be difficult to establish additional or replacement suppliers in a timely manner, or at
all. This would cause our product sales to be disrupted and our revenue and operating results to suffer.
Replacement or alternative sources might not be readily obtainable due to regulatory requirements and other factors applicable to our
manufacturing operations. Incorporation of components from a new supplier into our products may require a new or supplemental filing
with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. This process may take a
substantial period of time, and we may not be able to obtain the necessary regulatory clearance or approval. This could create supply
disruptions that would harm our product sales and operating results.
We depend upon key employees in a competitive market for skilled personnel, and, without additional employees, we cannot grow
or maintain profitability
Our products and technologies are complex, and we depend substantially on the continued service of our senior management team.
The loss of any of our key employees could adversely affect our business and slow our product development process. Our future success
also will depend, in part, on the continued service of our key management personnel, software engineers, and other research and
development employees, and our ability to identify, hire, and retain additional personnel, including customer service, marketing, and sales
staff. Demand for
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these skilled employees in our industry is very competitive due to the limited number of people available with the necessary technical skills
and understanding of our product technologies. We may be unable to attract and retain personnel necessary for the development of our
business.
Our ability to market and sell products depends upon receipt of domestic and foreign regulatory approval of our products and
manufacturing operations. Our failure to obtain or maintain regulatory approvals and compliance could negatively affect our
business
Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar
regulatory agencies in other countries. Our products are classified as medical devices. Medical devices are subject to extensive regulation
by the FDA pursuant to regulations that are wide ranging and govern, among other things: design and development; manufacturing and
testing; labeling; storage and record keeping; advertising, promotion, marketing, sales distribution and export; and surveillance and
reporting of deaths or serious injuries.
Unless an exemption applies, each medical device that we propose to market in the U.S. must first receive one of the following types
of FDA premarket review authorizations:
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Clearance via Section 510(k) of the Food, Drug, and Cosmetics Act of 1938, as amended; or
Premarket approval via Section 515 of the Food, Drug, and Cosmetics Act if the FDA has determined that the medical device in
question poses a greater risk of injury.
The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is
substantially equivalent to other 510(k)-cleared products. The premarket approval application process is much more costly, lengthy and
uncertain than the 510(k) process, and must be supported by extensive data from preclinical studies and human clinical trials. The FDA
may not grant either 510(k) clearance or premarket approval for any product we propose to market. Further, any modification to a 510(k)-
cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design
or manufacture, requires a new 510(k) clearance or, possibly, approval of a premarket approval application. The FDA requires every
manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. If the FDA requires us
to seek 510(k) clearance or premarket approval for modification of a previously cleared product for which we have concluded that new
clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance
or approval, and we may be subject to significant regulatory fines or penalties. Further, our products could be subject to recall if the FDA
determines, for any reason, that our products are not safe or effective.
Delays in receipt of, or failure to receive, clearances or approvals, the loss of previously received clearances or approvals, or the
failure to comply with existing or future regulatory requirements could adversely impact our operating results. If the FDA finds that we
have failed to comply with these requirements, the Agency can institute a wide variety of enforcement actions, ranging from a public
warning letter to more severe sanctions such as:
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Fines, injunctions and civil penalties;
Recall or seizure of our products;
Issuance of public notices or warnings;
Imposition of operating restrictions, partial suspension, or total shutdown of production;
Refusal of our requests for Section 510(k) clearance or premarket approval of new products;
Withdrawal of Section 510(k) clearance or premarket approvals already granted; or
Criminal prosecution.
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Domestic regulation of our products and manufacturing operations, other than that which is administered by the FDA, includes the
Environmental Protection Act, the Occupational Safety and Health Act, and state and local counterparts to these Acts.
Our business would be harmed if the FDA determines that we have failed to comply with applicable regulations governing the
manufacture of our products and/or we do not pass an inspection
We and our suppliers are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation. The Quality
System Regulation sets forth the FDA’s requirements for good manufacturing practices of medical devices and includes requirements for,
among other things, the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of such
products. In addition, we and our suppliers must engage in extensive recordkeeping and reporting and must make available our
manufacturing facility and records for periodic unscheduled inspections by federal, state and foreign agencies, including the FDA. We
cannot assure you that we and our suppliers are or will continue to be in full compliance with the Quality System Regulation, and that we
will not encounter any manufacturing difficulties.
Failure of our third party suppliers and manufacturers or us to comply with applicable regulations could result in sanctions being
imposed on us, including, among other things, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing
approval of our products, delays, suspension or withdrawal of approvals, seizures or recalls of products and manufacturing restrictions, any
of which could harm our business.
Our Olympic Cool-Cap product is subject to greater products liability exposure and FDA regulation
The FDA classifies medical devices into one of three classes depending on the degree of risk associated with each medical device and
the extent of controls that are needed to ensure safety and effectiveness. Devices deemed to pose lower risk are placed in either Class I or
Class II. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life supporting or implantable devices, or a device
deemed to not be substantially equivalent to a previously cleared 510(k) device are placed in class III, and generally require premarket
approval from the FDA before they may be marketed.
Our Olympic Cool-Cap is a Class III minimally invasive medical device, and as such we may be subject to an increased product
liability risk relative to our other Class I and Class II non-invasive products. In addition, this type of product is subject to greater FDA
oversight than our other products and there is greater risk that sales of the product could be interrupted due to the premarket approval
processes of the FDA and other regulatory bodies.
Our business may suffer if we are required to revise our labeling or promotional materials, or if the FDA takes an enforcement
action against us for off-label uses
We are prohibited by the FDA from promoting or advertising our medical device products for uses not within the scope of our
clearances or approvals, or from making unsupported promotional claims about the benefits of our products. If the FDA determines that our
claims are outside the scope of our clearances, or are unsupported, it could require us to revise our promotional claims or take enforcement
action against us. If we were subject to such an action by the FDA, our sales could be delayed, our revenue could decline, and our
reputation among clinicians could be harmed. Likewise, if we acquire new products, either through the purchase of products, technology
assets, or businesses, that are subsequently deemed to have inadequate supporting data, we may be required to (i) obtain adequate data,
which could be costly and impede our ability to market these products, or (ii) modify the labeling on these products, which could impair
their marketability, as described above.
If we deliver products with defects, we may incur costs to repair and, possibly, recall that product and market acceptance of our
products may decrease.
The manufacturing and marketing of our products involve an inherent risk of our delivering a defective product or products that do
not otherwise perform as we expect. We may incur substantial expense to repair any
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such products and may determine to recall such a product, even if not required to do so under applicable regulations. Any such recall would
be time consuming and expensive. Product defects or recalls may adversely affect our customers’ acceptance of the recalled and other of
our products. As an example, in the second quarter of 2010 we discontinued selling the Sonamed Clarity newborn hearing screening
product line and incurred costs associated with sales concessions awarded customers who traded in a Clarity device for one of our existing
newborn hearing screening devices and the write-down of inventory. We also recorded an impairment charge to write-off the carrying
value of the Sonamed and Clarity tradenames.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial
condition could be adversely affected.
We do not provide healthcare services, control the referral of patients for healthcare services, nor bill Medicare, Medicaid or other
third-party payors; however, due to the breadth of many healthcare laws and regulations, we could be subject to healthcare fraud regulation
and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to
operate include: (i) the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and
willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an
individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare
programs such as Medicare or Medicaid, (ii) federal false claims laws which prohibit, among other things, individuals or entities from
knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or
fraudulent, and which may apply to entities like us which provide coding and billing advice to customers, and/or (iii) state law equivalents
of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any
third-party payor, including commercial insurers, many of which differ from their federal counterparts in significant ways, thus
complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to
us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our
operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our
business and our financial results. The risk of our being found in violation of these laws is increased by the fact that their provisions are
open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Our operating results would suffer if we were subject to a protracted infringement claim
The medical technology industry is characterized by a substantial amount of litigation and related administrative proceedings
regarding patents and intellectual property rights. We expect that medical screening and diagnostic products may become increasingly
subject to third-party infringement claims as the number of competitors in our industry grows and the functionality of products overlap.
Third parties such as individuals, educational institutions, or other medical device companies may claim that we infringe their intellectual
property rights. Any claims, with or without merit, could have any of the following negative consequences:
•
•
•
•
Result in costly litigation and damage awards;
Divert our management’s attention and resources;
Cause product shipment delays or suspensions; or
Require us to seek to enter into royalty or licensing agreements.
A successful claim of infringement against us could result in a substantial damage award and materially harm our financial condition.
Our failure or inability to license the infringed or similar technology, or design and build non-infringing products, could prevent us from
selling our products and adversely affect our business and financial results.
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We may also find it necessary to bring infringement actions against third parties to seek to protect our intellectual property rights.
Litigation of this nature, even if successful, is often expensive and disruptive of our management’s attention, and in any event may not lead
to a successful result relative to the resources dedicated to any such litigation.
We license intellectual property rights from third parties and would be adversely affected if our licensors do not appropriately
defend their proprietary rights or if we breach any of the agreements under which we license commercialization rights to products
or technology from others
We license rights from third parties for products and technology that are important to our business. If our licensors are unsuccessful in
asserting and defending their proprietary rights, including patent rights and trade secrets, we may lose the competitive advantages we have
through selling products that we license from third parties. Additionally, if it is found that our licensors infringe on the proprietary rights of
others, we may be prohibited from marketing our existing products that incorporate those proprietary rights. Under our licenses, we are
subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these
requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the
exclusive nature of the license.
Product liability suits against us could result in expensive and time consuming litigation, payment of substantial damages, and an
increase in our insurance rates
The sale and use of our products could lead to the filing of a product liability claim by someone claiming to have been injured using
one of our products or claiming that one of our products failed to perform properly. A product liability claim could result in substantial
damages and be costly and time consuming to defend, either of which could materially harm our business reputation or financial condition.
Our product liability insurance may not protect our assets from the financial impact of defending a product liability claim. Any product
liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any
coverage in the future.
We have experienced seasonality in the sale of our products
We experience seasonality in our revenue. For example, our sales typically decline from our fourth fiscal quarter to our first fiscal
quarter, due to patterns in the capital budgeting and purchasing cycles of our customers, many of which are government agencies, and the
compensation arrangements of our direct sales employees, as those arrangements are tied to calendar-year sales plans. We may also
experience declining sales in the third fiscal quarter due to summer holiday and vacation schedules. We anticipate that we will continue to
experience these seasonal fluctuations, which may lead to fluctuations in our quarterly operating results. We believe that you should not
rely on our results of operations for interim periods as an indication of our expected results in any future period.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2.
Properties
Our corporate headquarters are located in San Carlos, California, in facilities covering 26,300 square feet pursuant to a lease that
expires in June 2015.
We also utilize the following properties:
Company-owned Facilities:
•
44,900 square feet in Oakville, Ontario, Canada, utilized substantially for the operations of Xltek;
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•
•
26,000 square feet in Mundelein, Illinois, utilized substantially for the operations of Bio-logic;
116,000 square feet in Buenos Aires, Argentina, utilized substantially for the operations of Medix.
Leased Facilities:
•
•
•
•
•
•
•
•
•
•
65,000 square feet in Seattle, Washington, pursuant to a lease that expires in December 2014, that is utilized substantially for the
operations of Olympic Medical;
12,000 square feet in Clackamas, Oregon, pursuant to a lease that expires in April 2014, that is utilized substantially for the
operations of Neurocom;
10,600 square feet in Denver, Colorado, pursuant to a lease that expires in March 2014, that is utilized for the operations of
Embla;
4,500 square feet in Hauppauge, New York, pursuant to a lease that expires in March 2017, that is utilized substantially for the
operations of Neometrics;
11,075 square feet and 10,200 square feet, both in Buffalo, New York, pursuant to leases that expire in February, 2018 and
February 2012, respectively, that are utilized for warehousing;
7,500 square feet in Ottawa, Canada, pursuant to a lease that expires in February 2016, that is utilized substantially for neurology
research and development;
6,500 square feet in Amsterdam, Netherlands, pursuant to a lease that expires in September 2014 that is utilized substantially for
the European warehousing operations of Embla;
48,000 square feet in Skovlunde, Denmark, pursuant to a lease that expires with six-month notice that is utilized for the operations
of Alpine Biomed;
43,000 square feet in Planegg and 27,000 square feet in Munich, both in Germany , pursuant to leases that expire in December
2021 and March 2012, respectively, that are utilized substantially for the operations of Fischer-Zoth, Schwarzer Neurology, and
Alpine Biomed sales; and
1,000 square feet in Paris and 7,500 square feet in Bordeaux, both in France, pursuant to leases that expire in July 2013, and
March 2012, respectively, that are utilized substantially for the operations of Deltamed and Alpine Biomed sales
ITEM 3.
Legal Proceedings
We may from time to time become a party to various legal proceedings or claims that arise in the ordinary course of business. We are
not currently involved in any legal or administrative proceedings that we believe are likely to have a material effect on our business,
financial condition, or results of operations, although we cannot be assured of the outcome of such matters.
ITEM 4. Mine Safety Disclosures
The disclosure required by this item is not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the Nasdaq Global Select Market under the symbol “BABY”. The following table sets forth, for the
periods indicated, the high and low sale price per share of our common stock, as reported on the Nasdaq Global Select Market.
Fiscal Year Ended December 31, 2011:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended December 31, 2010:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$ 9.89
15.80
17.50
17.00
$15.18
16.58
17.93
15.91
$ 7.43
9.05
14.90
13.12
$12.91
11.75
15.41
12.82
As of March 7, 2012, there were 29,444,772 shares of our common stock issued and outstanding and held by approximately 42
stockholders of record. We estimate that there are approximately 7,400 beneficial owners of our common stock.
Dividends
We have never declared or paid cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Based on the terms
of our Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, we are prevented from paying dividends
without the prior approval of the bank.
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Stock Performance Graph
The following information of Part II Item 5 is being furnished and shall not be deemed to be “soliciting material” or to be “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor will it
be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, except to the extent that we specifically incorporate such information by reference thereto.
The following graph shows a comparison, from January 1, 2006 through December 31, 2011, of cumulative total return for our
common stock, the Nasdaq Composite Index and the Standard & Poor’s 500 Health Care Equipment Index. Such returns are based on
historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Standard & Poor’s 500
Health Care Equipment Index assumes reinvestment of dividends.
Natus Medical Inc.
NASDAQ Composite-Total Returns
S&P 500 Health Care Equipment Index
ITEM 6.
Selected Financial Data
2006
Return %
Cum $
Return %
Cum $
Return %
Cum $
$100.00
$100.00
$100.00
2007
16.49
116.49
10.65
110.65
5.15
105.15
2008
(33.08)
77.96
(39.98)
66.42
(27.63)
76.09
2009
14.21
89.04
45.36
96.54
28.75
97.97
2010
(4.12)
85.37
18.15
114.06
(2.70)
95.32
2011
(33.50)
56.77
(0.79)
113.16
(0.76)
94.60
The following tables set forth certain selected consolidated financial data as of December 31, 2011, 2010, 2009, 2008 and 2007 and
for each of the years in the five-year period ended December 31, 2011, and is derived from the consolidated financial statements of Natus
Medical Incorporated and its subsidiaries. The consolidated financial statements as of December 31, 2011 and 2010 and for each of the
years in the three-year period ended December 31, 2011 are included elsewhere in this report. The selected consolidated balance sheet data
as of December 31, 2009, 2008 and 2007 and the consolidated statements of operations data for the years ended
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December 31, 2008 and 2007 are derived from our consolidated financial statements, which are not included in this report. The selected
consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included
elsewhere in this report.
Consolidated Statement of Operations
Data (a):
Revenue
Cost of Revenue
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Goodwill impairment charge (b)
Acquired in-process research and
development (c)
Total operating expense
Income (loss) from operations
Other income (expense), net
Income (loss) before provision for income
taxes
Provision for income tax expense (d)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares used in the calculation of
earnings (loss) per share:
2011
2010
2009
2008
2007
(in thousands, except per share data)
Year ended December 31,
$232,652
101,776
130,876
$218,665
88,698
129,957
62,989
25,562
32,880
20,000
—
141,431
(10,555)
(230)
54,857
21,283
35,986
—
—
112,126
17,831
(118)
(10,785)
912
$ (11,697)
17,713
5,794
$ 11,919
$
$
(0.41)
(0.41)
$
$
0.42
0.41
$166,425
66,077
100,348
45,304
16,732
22,979
—
—
85,015
15,333
1,750
17,083
5,701
$ 11,382
$
$
0.41
0.40
$161,831
61,332
100,499
39,998
15,520
19,808
—
—
75,326
25,173
2,142
27,315
9,223(d)
$ 18,092(d)
$118,269
42,704
75,565
28,024
15,645
15,214
—
300
59,183
16,382
101
16,483
6,417
$ 10,066
$
$
0.72(d)
0.68(d)
$
$
0.47
0.44
Basic
Diluted
28,565
28,565
28,092
29,217
27,651
28,476
25,278
26,557
21,600
22,815
2011
2010
Balance Sheet Data:
Cash, cash equivalents, and short-term investments
Working capital
Total assets
Long-term debt (including current portion)
Total stockholders’ equity
$ 32,816
90,516
314,315
898
257,728
$ 29,388
84,732(d)
331,047
893
264,065(d)
December 31,
2009
(in thousands)
$ 33,551
75,207(d)
292,090
1,109
244,367(d)
2008
2007
$ 56,915
97,593(d)
258,158
1,228
227,122(d)
$ 11,916
19,448
190,353
36,816
116,007
(a)
Results of operations and financial position of the businesses we have acquired are included from their acquisition dates
as follows: Xltek in November 2007, Sonamed in May 2008, Schwarzer Neurology in July 2008, Neurocom in October
2008, Hawaii Medical in July 2009, Alpine Biomed in September 2009, Medix in October 2010, and Embla in September
2011.
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(b)
(c)
(d)
The $20 million goodwill impairment charge is related to our European reporting unit.
Acquired in-process research and development charges in 2007 are associated with our acquisition of Xltek.
Includes the effect of correction of the provision for income taxes and taxes payable of $810,000 in 2008. Refer to Note
14, Income Taxes in our Consolidated Financial Statements contained herein.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read
in conjunction with our financial statements and the accompanying footnotes. MD&A includes the following sections:
•
•
•
•
•
•
•
•
•
Our Business. A general description of our business.
Year 2011 Overview. A summary of key information concerning the financial results for 2011 and changes from 2010.
Application of Critical Accounting Policies . A discussion of the accounting policies that are most important to the portrayal
of our financial condition and results of operations and that require critical judgments and estimates.
Results of Operations. An analysis of our results of operations for the three years presented in the financial statements.
Liquidity and Capital Resources. An analysis of capital resources, sources and uses of cash, investing and financing activities,
and contractual obligations.
Quantitative and Qualitative Disclosures about Market Risk. A summary of currency exchange issues and interest rate
hedging.
Off-Balance Sheet Arrangements. An analysis of off-balance sheet arrangements.
Recent Accounting Pronouncements. A recap of recently issued accounting pronouncements that may have an impact on our
results of operations, financial position or cash flows.
Cautionary Information Regarding Forward-Looking Statements . Cautionary information about forward-looking
statements.
Business
Natus is a leading provider of healthcare products used for the screening, detection, treatment, monitoring and tracking of common
medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and balance and mobility
disorders. Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology,
as well as newborn care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, head-
cooling products for the treatment of brain injury in newborns, incubators to control the newborn’s environment, and software systems for
managing and tracking disorders and diseases for public health laboratories.
We have completed a number of acquisitions since 2003, consisting of either the purchase of a company, substantially all of the
assets of a company, or individual products or product lines. Our significant acquisitions are as follows: Neometrics in 2003, Fischer-Zoth
in 2004, Bio-logic, Deltamed, and Olympic in 2006, Xltek in 2007, Sonamed, Schwarzer Neurology, and Neurocom in 2008, Hawaii
Medical and Alpine Biomed in 2009, Medix in 2010, and Embla in 2011. We expect to continue to pursue opportunities to acquire other
businesses in the future.
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Year 2011 Overview
We dealt with a number of challenges in 2011 that impacted our operating results. Our operations and financial performance depend
significantly on economic conditions in the United States and Europe. The U.S. economy is experiencing a slow economic recovery from
recessionary economic conditions and we believe that concerns about the viability of the recovery impact hospital spending. The European
Union continues to struggle with an unprecedented sovereign debt crisis that has impacted healthcare spending by ministries of health
within the Union.
Our consolidated revenue increased $14.0 million for the year ended December 31, 2011 compared to 2010. Embla, acquired in 2011,
and Medix, acquired in 2010, contributed $26.3 million of incremental revenue in 2011. We experienced revenue declines across other
business units in the United States, Europe, and Canada in 2011.
We spent $2.8 million on restructuring activities to improve efficiencies in operations and eliminate redundant costs from our recent
acquisitions.
We acquired Embla in September 2011 for $16.6 million in cash. Embla, based in Denver, Colorado, develops, manufactures and sells
devices focused on diagnostic sleep analysis (Polysomnography or PSG) with products sold into hospitals and dedicated sleep labs as well
as home testing devices.
We recorded a $20 million goodwill impairment charge as of the October 1, 2011 measurement date. Our impairment analysis was
impacted primarily by the significant decrease in the market capitalization of the Company as of the measurement date and the continuing
deterioration of economic conditions in the fourth quarter 2011 within member states of the European Union.
We do not believe that our markets have yet returned to the level of activity that prevailed prior to the commencement of the credit
crisis in the third quarter of 2008 that precipitated the global economic crisis. As a result of cost containment and other measures we have
implemented, and our recent acquisitions, we believe that we continue to be well-positioned to capitalize on improving markets when and if
economic conditions improve.
Application of Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). In so doing, we must often make estimates and use assumptions that can be subjective and, consequently, our actual results
could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or
assumptions that are reasonable.
We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments. 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.
Revenue recognition
Revenue, net of discounts, is recognized from sales of medical devices and supplies, including sales to distributors, when the
following conditions have been met: a purchase order has been received, title has transferred, the selling price is fixed or determinable, and
collection of the resulting receivable is reasonably assured. Terms of sale for most domestic sales are FOB origin, reflecting that title and
risk of loss are assumed by the purchaser at the shipping point; however, terms of sale for some neurology, sleep-diagnostic, and head
cooling systems are FOB destination, reflecting that title and risk of loss are assumed by the purchaser upon delivery. Terms of sales to
international distributors are generally EXW, reflecting that goods are shipped “ex works,” in which title and risk of loss are assumed by
the distributor at the shipping point.
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We have historically applied the software revenue recognition rules as prescribed by Accounting Standards Codification (“ASC”)
Subtopic 985-605 to sales of certain of our diagnostic neurology and hearing systems (“products containing embedded software”). In
October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2009-14, Certain
Revenue Arrangements That Include Software Elements, which amended ASC Subtopic 985-605, and we prospectively adopted the
provisions of ASU 2009-14 on January 1, 2010. This ASU removes tangible products containing software components and non-software
components that function together to deliver the product’s essential functionality from the scope of the software revenue recognition rules.
In the case of the Company’s products containing embedded software, we have determined that the hardware and software components
function together to deliver the products’ essential functionality, and therefore, the revenue from the sale of these products no longer falls
within the scope of the software revenue recognition rules. Our revenue recognition policies for sales of these products are now
substantially the same as for our other tangible products.
Revenue from sales of certain of our products that remain within the scope of the software revenue recognition rules under ASC
Subtopic 985-605 is not significant.
We previously accounted for arrangements with multiple deliverables under ASC Topic 605, where revenue was allocated to the
deliverables based on vendor specific objective evidence (“VSOE”). In October 2009 the FASB issued ASU 2009-13, Multiple Deliverable
Revenue Arrangements, which amends ASC Topic 605, and we prospectively adopted the provisions of ASU 2009-13 on January 1, 2010.
Under the revenue recognition rules for tangible products as amended by ASU 2009-13, we now allocate revenue from arrangements with
multiple deliverables to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. A
deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone
basis. The principal deliverables in our multiple deliverable arrangements that qualify as separate units of accounting consist of (i) sales of
medical devices and supplies, (ii) installation services, (iii) extended service and maintenance agreements, and (iv) upgrades to embedded
software.
The new rules establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows:
(i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of
the selling price (“ESP”). VSOE of fair value is defined as the price charged when the same element is sold separately, or if the element
has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that
the price will not change before the introduction of the element into the marketplace. VSOE generally exists only when we sell the
deliverable separately and is the price actually charged for that deliverable. We have previously established VSOE for substantially all of
the deliverables in our multiple element arrangements; however, in the future we may rely on ESPs, reflecting our best estimates of what
the selling prices of elements would be if they were sold regularly on a stand-alone basis, to establish the amount of revenue to allocate to
the deliverable. TPE generally does not exist for our products because of their uniqueness.
For products shipped under FOB origin or EXW terms, delivery is generally considered to have occurred when shipped. Undelivered
elements in our sales arrangements, which are not considered to be essential to the functionality of a product, generally include installation
or training services that are performed after the related products have been delivered. Revenue related to undelivered installation services is
deferred until such time as installation is complete at the customer’s site. Revenue related to training services is recognized when the
service is provided. Fair value for installation or training services is based on the price charged when the service is sold separately. The fair
value of installation and training services is based upon billable hourly rates and the estimated time to complete the service.
Revenue from extended service and maintenance agreements, for both medical devices and data management systems, is recognized
ratably over the service period. Freight charges billed to customers are included in revenue and freight-related expenses are charged to cost
of revenue. Advance payments from customers are recorded as deferred revenue and recognized as revenue as otherwise described above.
We
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generally do not provide rights of return on products. We accept trade-ins of our own and competitive medical devices. Trade-ins are
recorded as a reduction of the replacement medical device sale. Provisions are made for initial standard warranty obligations that are
generally one year in length.
Inventory is carried at the lower of cost or market value
We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or being held in
quantities that exceed anticipated usage. These factors include, but are not limited to: technological changes in our markets, competitive
pressures in products and prices, and our own introduction of new product lines.
We regularly evaluate our ability to realize the value of our inventory based on a combination of factors, including historical usage
rates, forecasted sales, product life cycles, and market acceptance of new products. When we identify inventory that is obsolete or in excess
of anticipated usage we write it down to realizable salvage value. The estimates we use in projecting future product demand may prove to
be incorrect. Any future determination that our inventory is overvalued could result in increases to our cost of sales and decreases to our
operating margins and results of operations.
Carrying value of intangible assets and goodwill
We amortize intangible assets with finite lives over their useful lives; any future changes that would limit their useful lives or any
determination that these assets are carried at amounts greater than their estimated fair value could result in additional charges. We carry
goodwill and any other intangible assets with indefinite lives at original cost but do not amortize them. Any future determination that these
assets are carried at amounts greater than their estimated fair value could result in additional charges, which could significantly impact our
operating results.
We test our definite-lived intangible assets for impairment whenever changes in circumstances indicate the carrying value of these
assets may be impaired. Impairment indicators include, but are not limited to, net book value as compared to market capitalization,
significant negative industry and economic trends, and significant underperformance relative to historical and projected future operating
results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset are less than its
carrying value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product
acceptance and lifecycle, competition, appropriate discount rates, and operating margins.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually as of October 1st; this assessment is also
performed whenever there is a change in circumstances that indicates the carrying value of these assets may be impaired. The
determination of whether any potential impairment of goodwill exists is based upon a two-step process. In the first analysis, the fair value
of the reporting unit is compared to the unit’s carrying value, including goodwill, to determine if there is a potential impairment. If the fair
value exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and no further analysis or action is
required. If the first analysis indicates that the carrying value exceeds the fair value, a second analysis is performed to determine the
amount of the goodwill impairment loss, if any.
In step two of the impairment test, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that
goodwill. The implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination is determined. That is, the fair value of a reporting unit is allocated to all the assets and liabilities of that reporting unit,
including unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the
reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of that goodwill.
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To determine the estimated fair value of reporting units, three valuation methodologies are utilized: (i) discounted cash flow analyses,
(ii) market multiples, and (iii) comparative transactions. The valuations indicated by these three methodologies are averaged, with the
greatest weight placed on discounted cash flow analyses. Discounted cash flow analyses are dependent upon a number of quantitative and
qualitative factors including estimates of forecasted revenue, profitability, earnings before interest, taxes, depreciation and amortization
(i.e. EBITDA) and terminal values. The discount rates applied in the discounted cash flow analyses also have an impact on the estimates of
fair value, as use of a higher rate will result in a lower estimate of fair value. The estimated total fair value of reporting units is reconciled
to the Company’s market capitalization.
For the test as of the October 1, 2011 measurement date we determined that the carrying amount of our European reporting unit
exceeded its fair value, indicating a potential goodwill impairment existed. Having determined the goodwill of the European reporting unit
was potentially impaired, we performed step two of the goodwill impairment analysis which involved calculating the implied fair value of
its goodwill by allocating the fair value of the reporting unit to its assets and liabilities other than goodwill and comparing the residual
value to the carrying amount of goodwill. As a result, during the fourth quarter of 2011, we recorded an impairment charge of $20.0 million
related to the European reporting unit.
Key assumptions used to determine the fair value of each reporting unit as of the annual testing date of October 1 were: (i) expected
cash flow for the period from October 1, 2011 to December 31, 2021; and (ii) discount rates for its business units ranging from 12% to
15%, which were based on management’s best estimate of the after-tax weighted average cost of capital for each reporting unit.
As of October 1, 2011, if forecasted earnings before interest, taxes, depreciation and amortization within the discounted cash flow
analysis had been 10% lower than estimated for each reporting unit except the European reporting unit and all other assumptions were held
constant, the goodwill impairment test would have resulted in the same conclusion. As of October 1, 2011, if the discount rates applied in
the Company’s analysis had been 100 basis points higher than estimated for each reporting unit and all other assumptions were held
constant, the goodwill impairment test would have resulted in the same conclusion.
As of October 1, 2011, the fair value of our South America reporting unit was 16% higher than its carrying value under step one of
the goodwill impairment analysis. Goodwill allocated to this reporting unit is $4.4 million. A future decline in the market capitalization of
Natus and/or a decline in the present value of the projected discounted cash flows of the reporting unit under revised inputs could result in
an impairment charge in the future. Such impairment may be difficult to measure in interim reporting periods because of the nature of the
South America reporting unit’s business cycles.
Future changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future
cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units and could result in
additional impairment of goodwill.
Liability for product warranties
Our medical device products are covered by standard one-year product warranty plans. A liability has been established for the
expected cost of servicing our medical device products during these service periods. We base the liability on actual warranty costs incurred
to service those products. On new products, additions to the reserve are based on a combination of factors including the percentage of
service department labor applied to warranty repairs, as well as actual service department costs and other judgments, such as the degree to
which the product incorporates new technology applied to the number of units sold. As warranty costs are incurred, the reserve is reduced.
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.
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Share-based compensation
We record the fair value of share-based compensation awards as expenses in the consolidated statement of operations. In order to
determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in this model are
assumptions related to expected dividend yield, risk-free interest rate, expected stock-price volatility, expected term, and forfeiture rate.
While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public
sources, expected stock-price volatility, expected life, and forfeiture rate assumptions require a greater level of judgment which makes them
critical accounting estimates. If we used different assumptions, we would have recorded different amounts of share-based compensation.
Results of Operations
The following table sets forth for the periods indicated selected consolidated statement of operations data as a percentage of total
revenue. Our historical operating results are not necessarily indicative of the results for any future period.
Revenue
Cost of revenue
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Goodwill impairment charge
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before provision for income tax
Income tax provision
Net income (loss)
Acquisitions
Percent of Revenue
Years Ended December 31,
2010
100.0 %
40.6
59.4
2011
100.0 %
43.7
56.3
2009
100.0 %
39.7
60.3
27.1
11.0
14.1
8.6
60.8
(4.5)
(0.1)
(4.6)
0.4
(5.0)%
25.1
9.7
16.5
—
51.3
8.1
(0.1)
8.0
2.6
5.4%
27.2
10.0
13.8
—
51.0
9.3
1.0
10.3
3.4
6.9%
We completed four significant acquisitions during 2011, 2010 and 2009, and the timing of these acquisitions had an impact on the
comparison of our results of operations for the years ended December 31, 2011, 2010 and 2009.
•
•
•
•
Embla—Completed on September 15, 2011. Embla reported revenue of approximately $29.7 million during its last completed
fiscal year prior to the acquisition.
Medix—Completed on October 12, 2010. Medix reported revenue of approximately $25.2 million during its last completed fiscal
year prior to the acquisition
Alpine Biomed—Completed on September 14, 2009. Alpine Biomed reported revenue from its neurology business of
approximately $38.1 million during its last completed fiscal year prior to the acquisition.
Hawaii Medical—Completed on July 2, 2009. Hawaii Medical reported revenue of approximately $3.2 million during its last
completed fiscal year prior to the acquisition.
The pre-acquisition revenue of our acquired companies may not be indicative of their contribution to revenue in the future.
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Comparison of 2011 and 2010
Operating Results
Because our acquisitions have been significant, we measure the contribution to consolidated revenue of the businesses we acquire.
We also analyze our revenue as coming from two sources: devices and systems, and supplies and services. We report freight revenue
separate from these two sources.
For the year ended December 31, 2011, our consolidated revenue increased by $14.0 million, to $232.7 million, compared to $218.7
million for the year ended December 31, 2010. The increase was attributable to our recent acquisitions. Embla, acquired in September
2011, contributed $10.9 million of revenue in 2011. Medix, acquired in September 2010, contributed $22.6 million of revenue in 2011,
compared to $7.2 million of revenue in 2010, or an increase of $15.4 million. Together, Embla and Medix contributed to $26.3 million of
incremental revenue for the year ended December 31, 2011. Revenue from our products other than Embla and Medix decreased by $12.3
million in 2011, compared to 2010.
Revenue from our neurology products increased $9.5 million to $107.4 million in the year ended December 31, 2011, compared to
$97.9 million in 2010. Revenue from our neurology products, other than Embla products, decreased by $1.4 million in the year ended
December 31, 2011 compared to the year ended December 31, 2010. This decline in revenue was primarily attributable to weak economic
conditions in Europe. Revenue from our newborn care products increased by $13.5 million to $56.1 million in 2011, compared to $42.6
million in 2010. Revenue from our newborn care products, other than Medix products, decreased by $1.9 million in 2011, compared to
2010. During 2010 we received two large orders for our newborn care products from the ministries of health in Saudi Arabia and Iraq
totaling $2.8 million; we received no similar orders in 2011. Revenue from our hearing products declined $9.4 million to $60.4 million in
the year ended December 31, 2011, compared to $69.8 million in 2010. During 2010, we received three large orders for our newborn
hearing screening products from the ministries of health in Saudi Arabia, Australia, and Canada totaling $5.5 million, and several large
orders of lesser magnitude from three countries in Europe; we received no similar orders in 2011. In addition, early in 2011 a private-label
customer of our newborn hearing screening products discontinued sales of this product line on our behalf.
Revenue from devices and systems was $148.8 million in 2011, representing an increase of 10% or $14.0 million, from $134.8
million reported in 2010. Revenue from supplies and services was $80.1 million in both 2011 and 2010.
Revenue from devices and systems was 64% of consolidated revenue in 2011 compared to 62% of total revenue in 2010, and revenue
from supplies and services was 34% of total revenue in 2011 compared to 37% of revenue in 2010. Freight revenue of $3.8 million in 2011
and $3.6 million in 2010 represented 2% of total revenue in both 2011 and 2010.
No single customer accounted for more than 10% of our revenue in either 2011 or 2010. Revenue from domestic sales increased 3%
to $131.1 million in 2011, from $126.9 million in 2010. Revenue from international sales increased 11% to $101.6 million in 2011,
compared to $92.0 million in 2010. Revenue from domestic sales was 56% of total revenue in 2011, compared to 58% in 2010, and revenue
from international sales was 44% of total revenue in 2011 compared to 42% of revenue in 2010. The changes in the percentages from 2011
to 2010 resulted primarily from the contributions of Medix whose sales are primarily in South America and related international markets
and Embla with significant business in Europe.
Our cost of revenue increased $13.1 million, or 15%, to $101.8 million in 2011, from $88.7 million in 2010. The increase was due
mainly to our increased sales. Gross profit increased $919,000, or 1%, to $130.9 million in 2011 from $130.0 million in 2010. Gross profit
as a percentage of revenue was 56% in 2011 compared with 59% in 2010, reflecting higher trade materials and manufacturing overhead
costs coupled with lower gross profit margins of our Medix division, which we owned for only three months in 2010. Medix realized a
gross profit much lower than our consolidated average during 2011 because 44% of its revenue was generated through products that it sells
in Argentina as a distributor for other companies.
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Total operating costs increased $29.3 million, or 26%, to $141.4 million in 2011, from $112.1 million in 2010. We recorded a $20.0
million goodwill impairment charge related to our European reporting unit, representing 68% of the increase in total operating costs. The
operations of Embla and Medix contributed to a $12.8 million increase in operating costs, offset by a reduction in the fair value of a
contingent liability associated with the acquisition of Medix and a decrease in incentive compensation associated with lower earnings.
Our marketing and selling expenses increased $8.1 million, or 15%, to $63.0 million in 2011, from $54.9 million in 2010. The
operations of Embla and Medix contributed to $6.0 million of the increase and the remainder of the increase was primarily related to higher
sales commission and sales related costs associated with the increase in our revenue and a $700,000 impairment charge relating to
tradenames in 2011 compared with a $300,000 impairment of tradenames in 2010. Marketing and selling expenses as a percent of total
revenue increased to 27 % in 2011, from 25% in 2010.
Our research and development expenses increased $4.3 million, or 20%, to $25.6 million in 2011 from $21.3 million in 2010. The
operations of Embla and Medix contributed to $2.9 million of research and development expense coupled with costs in sustaining
engineering to improve existing products. Research and development expenses as a percent of total revenue increased to 11% in 2011 from
10% in 2010.
Our general and administrative expenses decreased $3.1 million, or 9%, to $32.9 million in 2011 from $36.0 million in 2010. General
and administrative expenses as a percent of revenue decreased from 16.5% in 2010 to 14.1% in 2011. The operations of Embla and Medix
contributed to $4.0 million of general and administrative expenses offset by a reduction in the fair market value of a contingent liability
associated with the acquisition of Medix in the amount of $2.0 million, lower restructuring and severance related costs of $544,000 in 2011
compared to 2010 and the remainder attributed to lower incentive compensation associated with lower earnings in 2011 compared to 2010.
Other income (expense), net consists of investment income, interest expense, net currency exchange gains and losses, and other
miscellaneous income and expense. We reported other income (expense), net of $(230,000) in 2011, compared to $(118,000) in 2010.
Investment income of $28,000 in 2011 was $8,000 less than the amount reported for 2010 reflecting lower interest rates. We reported
$141,000 of foreign currency exchange losses in 2011 versus $521,000 of foreign exchange losses in 2010 due primarily to the dollar
strengthening against the euro. Interest expense was $268,000 in 2011 compared to$128,000 in 2010 due primarily to short-term
borrowings at Medix.
We recorded income tax expense of $912,000 in 2011 even though we reported a pre-tax loss of approximately $10.8 million,
because only $1.6 million of the $20 million goodwill impairment charge is expected to be deductible for tax purposes. We reported $5.8
million of income tax expense in 2010, representing an effective tax rate of approximately 33%.
Comparison of 2010 and 2009
Operating Results
Our consolidated revenue increased $52.2 million for the year ended December 31, 2010 compared to 2009, primarily as a result of
improving economic conditions. Revenue increased across all of our business units. The companies that were acquired in 2009, Alpine
Biomed and Hawaii Medical, contributed to $22.7 of incremental revenue in 2010, while Medix, that was acquired in 2010, contributed to
$7.1 million of revenue in 2010. Revenue from our hearing products increased $3.4 million, while revenue from our existing neurology and
newborn care products increased by $19.0 million.
Revenue from devices and systems was $134.8 million in 2010, representing an increase of 40% or $38.6 million, from $96.2 million
reported in 2009. Alpine Biomed contributed to $13.0 million of incremental devices
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and systems revenue in 2010, while Medix contributed to $4.1 million of devices and systems revenue in 2010. Revenue from our hearing
products increased $5.1 million, to $30.3 million, while revenue from our existing neurology and newborn care products increased by $17.8
million to $62.1 million, offset by a $1.4 million decrease in balance monitoring products.
Revenue from supplies and services was $80.3 million in 2010, representing an increase of 20%, or $13.2 million from $67.1 million
in 2009. Alpine Biomed, Medix and Hawaii Medical contributed to $6.8 million, $3.0 million and $2.7 million, respectively, of incremental
revenue from supplies and services. Supplies and service revenue from our existing products increased by $700,000 to $67.8 million.
Revenue from devices and systems was 62% of consolidated revenue in 2010 compared to 58% of total revenue in 2009, and revenue
from supplies and services was 37% of total revenue in 2010 compared to 40% of revenue in 2009. Freight revenue of $3.6 million in 2010
and $3.2 million in 2009 represented 1% and 2% of total revenue in 2010 and 2009, respectively.
No customer accounted for more than 10% of our revenue in either 2010 or 2009. Revenue from domestic sales increased 15% to
$126.9 million in 2010, from $109.7 million in 2009. Revenue from international sales increased 62% to $91.8 million in 2010, compared
to $56.8 million in 2009. Revenue from domestic sales was 58% of total revenue in 2010, compared to 66% in 2009, and revenue from
international sales was 42% of total revenue in 2010 compared to 34% of revenue in 2009. The changes in the percentages from 2010 to
2009 resulted primarily from the contribution of Alpine Biomed and Medix, whose sales are primarily in Europe and South America and
related international markets, respectively.
Our cost of revenue increased $22.6 million, or 34%, to $88.7 million in 2010, from $66.1 million in 2009. The increase was due
mainly to our increased sales. In addition, our discontinuance of the Sonamed Clarity hearing screening line resulted in a non-recurring
charge totaling $1.1 million or 1.2% to our cost of revenue. Gross profit increased $29.6 million, or 30%, to $130.0 million in 2010 from
$100.3 million in 2009. Gross profit as a percentage of revenue was 59% in 2010 compared with 60% in 2009.
Total operating costs increased $27.1 million, or 32%, to $112.1 million in 2010, from $85.0 million in 2009. The operations of
Alpine Biomed and Medix contributed to $11.7 million of the increase in operating costs. We also recorded a restructuring charge of $3.1
million and other severance related costs of $842,000 for which there was no comparable cost in 2009. The remainder of the increase in
operating costs was proportionate to our increased sales as our operating costs as a percentage of revenue was 51% in 2010 and 2009.
Our marketing and selling expenses increased $9.6 million, or 21%, to $54.9 million in 2010, from $45.3 million in 2009. The
operations of Alpine Biomed and Medix contributed to $5.0 million of the increase and the remainder of the increase was primarily related
to higher sales commission and sales related costs associated with the increase in our revenue. Marketing and selling expenses as a percent
of total revenue decreased to 25.1 % in 2010 from 27.2% in 2009.
Our research and development expenses increased $4.6 million, or 27%, to $21.3 million in 2010 from $16.7 million in 2009. The
operations of Alpine Biomed and Medix contributed to $3.1 million of research and development expense. Research and development
expenses as a percent of total revenue decreased to 9.7% in 2010 from 10.0% in 2009.
Our general and administrative expenses increased $13.0 million, or 57%, to $36.0 million in 2010 from $23.0 million in 2009.
General and administrative expenses as a percent of revenue increased from 13.8% in 2009 to 16.5% in 2010. $3.5 million of the increase in
general and administrative expenses was attributable to the operations of Alpine Biomed and Medix. We recorded a restructuring charge of
$3.1 million and other severance related costs of $842,000 for which there were no comparable costs in 2009. Other expenses exclusive of
those associated with Alpine Biomed, Medix, restructuring and severance related costs were $5.6 million higher in 2010 compared to 2009,
which resulted primarily from increased payroll and related benefit costs, professional fees, travel and outside consulting costs.
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Other income (expense), net consists of investment income, interest expense, net currency exchange gains and losses, and other
miscellaneous income and expense. We reported other income (expense), net of $(118,000) in 2010, compared to $1.7 million in 2009.
Investment income of $36,000 in 2010 was $192,000 less than the amount reported for 2009 reflecting lower interest rates. We reported
$521,000 of foreign currency exchange losses in 2010 versus $520,000 of foreign exchange gains in 2009. Interest expense was marginally
lower in 2010 compared to 2009 due primarily to lower outstanding balances on our credit facilities.
We recorded income tax expense of $5.8 million in 2010, compared to $5.7 million recorded in 2009. Our effective tax rate for 2010
decreased to 32.7 % from 33.4% in 2009 because more of our income was taxed in foreign jurisdictions with tax rates lower than in the
U.S. At December 31, 2010, we had federal net operating loss carryforwards of approximately $4.6 million available to offset future taxable
income. Income tax expense related to our international operations is based on the statutory rates in those jurisdictions.
Liquidity and Capital Resources
Comparison of 2011 and 2010
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered
separately from capital resources that consist of our current funds and the potential to increase those funds in the future. We plan to use
these resources in meeting our commitments and in achieving our business objectives.
As of December 31, 2011, we had cash and cash equivalents of $32.8 million, stockholders’ equity of $257.7 million, and working
capital of $90.5 million, compared with cash, cash equivalents and short-term investments of $29.4 million, stockholders’ equity of $264.1
million, and working capital of $84.7 million as of December 31, 2010.
As of December 31, 2011, we had cash and cash equivalents outside the U.S. in certain of our foreign operations of approximately
$24.3 million. We currently intend to permanently reinvest the cash held by our foreign subsidiaries. If, however, a portion of these funds
were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign
withholding taxes. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where
the funds are repatriated.
We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing
operating and capital requirements for the foreseeable future. We completed the acquisition of Embla at the end of the third quarter of
2011, one acquisition in 2010, two acquisitions in 2009, four acquisitions in 2008, one in 2007, and three in 2006. We intend to continue to
acquire additional technologies, products, or businesses and these acquisitions could be significant. These actions would likely affect our
future capital requirements and the adequacy of our available funds. In order to finance future acquisitions, we may be required to raise
additional funds through public or private financings, strategic relationships or other arrangements. Any equity financing may be dilutive to
stockholders and debt financing, if available, may involve restrictive covenants and increase our cost of capital.
We have a $50 million revolving credit facility with Wells Fargo Bank, National Association (“Wells Fargo”). The revolving credit
facility contains covenants, including covenants relating to liquidity and other financial measurements, and provides for events of default,
including failure to pay any interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence
of a material adverse effect, and restricts our ability to pay dividends. We have granted Wells Fargo a security interest in substantially all of
our assets. We did not draw on the facility during 2011 and there was no balance outstanding under the facility at December 31, 2011. We
have no other significant credit facilities.
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Cash provided by operations increased by $11.1 million for the year ended December 31, 2011 to $22.6 million, compared to $11.5
million in 2010. The sum of our net income (loss) and certain non-cash expense items, such as reserves, depreciation and amortization,
goodwill and intangible asset impairment charges, and share based compensation was approximately $29.0 million in 2011, compared to
$27.6 million in 2010. The aggregate impact of changes in certain operating assets and liabilities was a cash outflow of $6.4 million in
2011 compared to a cash outflow of $16.1 million in 2010, in particular accounts receivable, inventories and accounts payable and accrued
expenses.
Cash used in investing activities was $19.4 million for the year ended December 31, 2011, compared to $17.9 million in 2010. We
used $4.2 million of cash each year to acquire property and equipment, during the years ended December 31, 2011 and 2010, respectively.
We used $15.1 million of cash to acquire businesses during the year ended December 31, 2011 compared with $13.4 million during the
year ended December 31, 2010. During the year ended December 31, 2011 we capitalized $666,000 of internal use software development
costs compared with $344,000 in 2010. In addition, we sold $1.0 million of marketable securities in 2011 and purchased and sold $975,000
of marketable securities during the year ended December 31, 2010.
Cash provided by financing activities was $1.7 million in the years ended December 31, 2011 and 2010. We received cash from sales
of our stock pursuant to our stock awards plans and our employee stock purchase plan in the amount of $2.3 million and $2.5 million in the
years ended December 31, 2011 and 2010, respectively. In 2011 our after-tax cost of stock-based compensation was $160,000 more than
the tax benefit we received from those arrangements, compared with an excess tax benefit of $551,000 in 2010 on the exercise of employee
stock options. These amounts were recorded as a decrease to stockholders’ equity in 2011 and as an increase to stockholders’ equity in
2010. We repaid $3.0 million and $1.4 million under term loan agreements in the years ended December 31, 2011 and 2010, respectively.
Comparison of 2010 and 2009
As of December 31, 2010, we had cash, cash equivalents, and short-term investments of $29.4 million, stockholders’ equity of $263.3
million, and working capital of $83.9 million, compared with cash and cash equivalents of $33.6 million, stockholders’ equity of $243.6
million, and working capital of $75.2 million as of December 31, 2009.
We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing
operating and capital requirements for the foreseeable future. We completed the acquisition of Medix at the beginning of the fourth quarter
of 2010, two acquisitions in 2009, four acquisitions in 2008, one in 2007, and three in 2006. We intend to continue to acquire additional
technologies, products, or businesses and these acquisitions could be significant. These actions would likely affect our future capital
requirements and the adequacy of our available funds. In order to finance future acquisitions, we may be required to raise additional funds
through public or private financings, strategic relationships or other arrangements. Any equity financing may be dilutive to stockholders
and debt financing, if available, may involve restrictive covenants and increase our cost of capital.
We have a $50 million revolving credit facility with Wells Fargo Bank, National Association (“Wells Fargo”). The revolving credit
facility contains covenants, including covenants relating to liquidity and other financial measurements, and provides for events of default,
including failure to pay any interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence
of a material adverse effect. We have granted Wells Fargo a security interest in substantially all of our assets. We did not draw on the
facility during 2010. We have no other significant credit facilities.
Global capital markets have been, and may continue to be, disrupted and volatile. The cost and availability of equity and debt funding
has been and may continue to be adversely affected by illiquid capital and credit markets. Some lenders have reduced or, in some cases,
ceased to provide funding to borrowers. We believe that we have adequate liquidity to meet our present needs. Continued turbulence in the
United States and international financial markets, however, could adversely affect the cost and availability of financing to us in the future
and limit our ability to acquire products, other assets, or businesses.
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Cash provided by operations decreased by $15.0 million for the year ended December 31, 2010 to $11.5 million, compared to $26.6
million in 2009. The sum of our net income and certain non-cash expense items, such as reserves, depreciation and amortization, and share
based compensation was approximately $27.6 million in 2010, compared to $24.7 million in 2009. The aggregate impact of changes in
certain operating assets and liabilities was a cash outflow of $16.1 million in 2010 compared to a cash inflow of $1.9 million in 2009, in
particular accounts receivable, inventories and accounts payable.
Cash used in investing activities was $17.9 million for the year ended December 31, 2010, compared to $51.8 million in 2009. We
used $4.2 million and $2.6 million of cash to acquire property and equipment, during the years ended December 31, 2010 and 2009,
respectively. We used $13.4 million of cash to acquire businesses during the year ended December 31, 2010 compared with $47.2 million
during the year ended December 31, 2009. During the year ended December 31, 2010 we capitalized $344,000 of internal use software
development costs compared with $1.0 million in 2009. In addition, we purchased and sold $975,000 of marketable securities in 2010 and
purchased $965,000 of marketable securities during the year ended December 31, 2009.
Cash provided by financing activities was $1.7 million in the year ended December 31, 2010, compared to $489,000 in 2009. We
received cash from sales of our stock pursuant to our stock awards plans and our employee stock purchase plan in the amount of $2.5
million and $1.1 million in the year ended December 31, 2010 and 2009, respectively. In 2010, we realized an excess tax benefit of
$551,000 on the exercise of employee stock options that was recorded as an increase to stockholders’ equity. In 2009 our after-tax cost of
stock-based compensation was $159,000 more than the tax benefit we received from those arrangements which was recorded as a decrease
to stockholders’ equity. We repaid $1.4 million and $429,000 under term loan agreements in the years ended December 31, 2010 and 2009,
respectively.
Future Liquidity
Our future liquidity and capital requirements will depend on numerous factors, including the:
•
•
•
•
•
•
Amount and timing of revenue;
Extent to which our existing and new products gain market acceptance;
Extent to which we make acquisitions;
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 firm, noncancellable purchase orders placed with contract vendors that manufacture some of the
components used in our medical devices and related disposable supply products, as well as commitments for leased office equipment and
term loans. The following table summarizes our contractual obligations and commercial commitments as of December 31, 2011 (in
thousands):
Unconditional purchase obligations
Operating lease obligations
Long-term debt (including current portion and interest)
Total
Payments Due by Period
Total
$17,663
213
957
$18,833
Less than
1 Year
$16,299
96
220
$16,615
1-3 Years
728
$
115
737
$ 1,580
4-5 Years
286
$
2
—
288
$
More than
5 Years
350
$
—
—
350
$
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Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the
purchase obligations category above are obligations related to purchase orders for inventory purchases under our standard terms and
conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase
obligations. The purchase obligation amounts do not represent all anticipated purchases in the future, but represent only those items for
which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in
the ordinary course of business.
We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under ASC 740, Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 . As a result, the preceding table excludes any potential future
payments related to our ASC 740 liability for uncertain tax positions. See Note 14 of our consolidated financial statements for further
discussion on income taxes.
Quantitative and Qualitative Disclosures about Market Risk
We develop products in the U.S, Canada, Argentina, and Europe and sell those products into more than 100 countries throughout the
world. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Most of our sales in Europe and Asia are denominated in U.S. Dollars and Euros and with the acquisitions of
Xltek in November 2007 and Medix in 2010, a small portion of our sales are now denominated in Canadian dollars and Argentine pesos. As
our sales in currencies other than the U.S. dollar increase, our exposure to foreign currency fluctuations may increase.
In addition, changes in exchange rates also may affect the end-user prices of our products compared to those of our foreign
competitors, who may be selling their products based on local currency pricing. These factors may make our products less competitive in
some countries.
If the U.S. Dollar uniformly increased or decreased in strength by 10% relative to the currencies in which our sales were denominated,
our net income would have correspondingly increased or decreased by an immaterial amount for the year ended December 31, 2011. Our
interest income is sensitive to changes in the general level of interest rates in the U.S. However, because current market conditions have
resulted in historically low rates of return on our investments, a hypothetical decrease of 10% in market interest rates would not result in a
material decrease in interest income earned on investments held at December 31, 2011.
When able, we invest excess cash in bank money-market funds or discrete short-term investments. The fair value of our short-term
investments and cash equivalents (“investments”) is sensitive to changes in the general level of interest rates in the U.S., and the fair value
of these investments will fall if market interest rates increase. However, since we generally have the ability to hold the investments to
maturity, these declines in fair value may never be realized. If market interest rates were to increase by 10% from levels at December 31,
2011, the fair value of our investments would decline by an immaterial amount.
All of the potential changes noted above are based on sensitivity analyses performed on our financial position as of December 31,
2011. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of
securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and
changes in the relationship between short-term and long-term interest rates.
Off-Balance Sheet Arrangements
Under our bylaws, we have agreed to indemnify our officers and directors for certain events or occurrences arising as a result of the
officer or director’s serving in such capacity. We have a directors and officers liability insurance policy that limits our exposure and enables
us to recover a portion of any future amounts paid resulting from the indemnification of our officers and directors. In addition, we enter
into indemnification agreements with
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other parties in the ordinary course of business. In some cases we have obtained liability insurance providing coverage that limits our
exposure for these other indemnified matters. We have not incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. We believe the estimated fair value of these indemnification agreements is minimal and have not recorded a
liability for these agreements as of December 31, 2011. We had no other off-balance sheet arrangements during any of fiscal 2011, 2010 or
2009 that had, or are reasonably likely to have, a material effect on our consolidated financial condition, results of operations, or liquidity.
Recent Accounting Pronouncements
See Note 1—Organization and Significant Accounting Policies to the Consolidated Financial Statements contained herein for a full
description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of our
operations and financial condition.
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 Natus Medical Incorporated. These statements include, among other things, statements
concerning our expectations, beliefs, plans, intentions, future operations, financial condition and prospects, and business strategies. The
words “may,” “will,” “continue,” “estimate,” “project,” “intend,” “believe,” “expect,” “anticipate,” and other similar expressions
generally identify forward-looking statements. Forward-looking statements in this Item 7 include, but are not limited to, statements
regarding the following: our ability to capitalize on improving market conditions, the sufficiency of our current cash, cash equivalents and
short-term investment balances, and any cash generated from operations to meet our ongoing operating and capital requirements for the
foreseeable future, 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” contained in 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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set forth in the section entitled Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk, and is incorporated by reference in this
section.
ITEM 8.
Financial Statements and Supplementary Data
The Consolidated Financial Statements and Supplementary Data required by this Item are set forth where indicated in Item 15 of this
report.
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Table of Contents
Selected Quarterly Financial Data (Unaudited)
The following table presents our operating results for each of the eight quarters in the period ending December 31, 2011. The
information for each of these quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing
elsewhere in this report. In the opinion of our management, all necessary adjustments, consisting only of normal recurring adjustments,
other than the correction discussed in the preceding paragraph, have been included to present fairly the unaudited quarterly results when
read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this report. These
operating results are not necessarily indicative of the results of any future period.
Quarters Ended
Dec. 31,
2011
Sept. 30,
2011
June 30,
2011
March 31,
2011
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
March 31,
2010
$ 64,111
28,611
35,500
$51,338
23,765
27,573
$58,095
25,028
33,067
(in thousands, except per share)
$63,170
$59,108
25,998
24,372
37,172
34,736
$53,179
21,757
31,422
$53,031
21,532
31,499
$49,275
19,411
29,864
55.4%
53.7%
56.9%
58.8%
58.8%
59.1%
59.4%
60.6%
Revenue
Cost of revenue
Gross profit
Gross profit percentage
Operating expenses:
Marketing and selling
Research and development
General and administrative
Goodwill impairment
18,171
6,985
8,053
14,688
6,119
7,809
15,754
6,171
7,986
14,376
6,287
9,032
14,523
6,095
9,111
12,817
4,820
8,074
13,553
5,238
7,791
13,964
5,130
11,010
charge
20,000
—
—
—
—
—
—
—
Total operating
expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before provision
(benefit) for income tax
Provision (benefit) for income tax
Net income (loss)
53,209
(17,709)
(202)
28,616
(1,043)
186
29,911
3,156
(69)
29,695
5,041
(145)
29,729
7,443
(127)
25,711
5,711
(176)
26,582
4,917
240
30,104
(240)
(55)
(17,911)
(595)
$(17,316)
(857)
(1,011)
154
$
3,087
726
$ 2,361
4,896
1,792
$ 3,104
7,316
2,067
$ 5,249
5,335
1,898
$ 3,637
5,157
1,793
$ 3,364
(295)
36
$ (331)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares used in
the calculation of net earnings
(loss) per share:
$
$
(0.61)
(0.61)
$
$
0.01
0.01
$
$
0.08
0.08
$
$
0.11
0.11
$
$
0.19
0.18
$
$
0.12
0.12
$
$
0.12
0.12
$ (0.01)
$ (0.01)
Basic
Diluted
28,565
28,565
28,643
29,387
28,439
29,739
28,346
29,513
28,303
29,297
28,212
29,261
27,809
29,110
27,829
27,829
We acquired Embla in September 2011 and Medix in October 2010. Results of operations of each of the acquired entities are included
in the above table from the date of acquisition forward.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the rules of the Securities and Exchange Commission, “disclosure controls and procedures” are controls and other procedures
that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
50
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information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2011. Our chief executive officer and chief financial officer determined that
as of December 31, 2011 our disclosure controls and procedures were effective for the purpose set forth above.
Internal Control Over Financial Reporting
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule
13a-15-(f) promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management,
including our principal executive officer and our principal financial officer, we assessed the effectiveness of our internal control over
financial reporting as of December 31, 2011. In making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework. Our management has
concluded that, as of December 31, 2011, our internal control over financial reporting is effective based on these criteria.
We excluded from our assessment the internal control over financial reporting at Embla Systems LLC (“Embla”), which was acquired
on September 15, 2011, whose financial statements constitute 7% of total assets and 5% of total revenues of the consolidated financial
statement amounts as of and for the year ended December 31, 2011.
Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements and
financial statement schedule included in this annual report. They also audited the effectiveness of our internal control over financial
reporting as of December 31, 2011 as stated in their report included in this annual report.
(b) Attestation Report of the Independent Registered Public Accounting Firm
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Natus Medical Incorporated
San Carlos, California
We have audited the internal control over financial reporting of Natus Medical Incorporated and subsidiaries (the “Company”) as of
December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting,
management excluded from its assessment the internal control over financial reporting at Embla Systems LLC (“Embla”) which was
acquired on September 15, 2011, whose financial statements constitute 7% of total assets and 5% of total revenues of the consolidated
financial statement amounts as of and for the year ended December 31, 2011. Accordingly, our audit did not include the internal control
over financial reporting at Embla. The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and the financial statement schedule at Item 15(a)(2) of this annual report as of and for the year ended
December 31, 2011 of the Company and our report dated March 14, 2012 expressed an unqualified opinion on those financial statements
and the financial statement schedule and included an explanatory paragraph relating to the adoption of new accounting guidance issued by
the Financial Accounting Standards Board related to the presentation of comprehensive income.
/s/ DELOITTE & TOUCHE LLP
San Francisco, CA
March 14, 2012
52
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(c) Changes in Internal Control over Financial Reporting
There was no change in internal control over financial reporting that occurred during the fourth quarter of 2011 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART III
This Part incorporates certain information from our definitive Proxy Statement for our 2012 Annual Meeting of Stockholders that is to
be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year covered by this Report on
Form 10-K.
ITEM 10. Directors, Executive Officers, and Corporate Governance
The information required by this Item concerning our directors is incorporated by reference to our Proxy Statement including but not
necessarily limited to the section entitled Election of Directors. Certain information required by this item concerning executive officers is
set forth in Part I of this Report in Business—Executive Officers . The information required by this item concerning compliance with
Section 16(a) of the Exchange Act of 1934, as amended (the “Exchange Act”), is incorporated by reference to the Proxy Statement
including but not necessarily limited to the section entitled Section 16(a) Beneficial Ownership Reporting Compliance.
Audit Committee and Audit Committee Financial Expert
The members of the Audit Committee of our Board of Directors are Ken Ludlum, Robert A. Gunst, and Mark D. Michael. Our Board
of Directors has determined that Ken Ludlum is an audit committee financial expert as defined in Item 407(d) of Regulation S-K. All of the
members of our audit committee are considered “independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
Code of Conduct and Ethics
We have a code of conduct and ethics that applies to all of our employees, including our principal executive officer, principal
financial officer, and principal accounting officer or controller. This code of conduct and ethics is posted on our internet website. The
internet address for our website is www.natus.com, and the code of conduct and ethics may be found in the “Governance” section of our
“Investor” webpage.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding certain amendments to, or waivers from,
provisions of this code of conduct and ethics by posting such information on our website, at the address and location specified above, or as
otherwise required by The Nasdaq Stock Market.
The information required by this Item concerning our corporate governance is incorporated by reference to our Proxy Statement
including but not necessarily limited to the section entitled Corporate Governance.
ITEM 11.
Executive Compensation
The information required by this Item is incorporated by reference to our 2012 Proxy Statement including but not necessarily limited
to the section entitled Executive Compensation.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information about the number of shares of common stock that can be issued under our 2011 Stock
Awards Plan and our 2011 Employee Stock Purchase Plan as of December 31, 2011.
54
Table of Contents
Equity compensation plans approved by
Plan Category
security holders
Equity compensation plans not approved by
security holders
Total
Number of Securities
to be Issued upon
Exercise of
Outstanding
Options, Warrants,
Awards and Rights
3,846,391
—
3,846,391
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
Awards and Rights
$
$
11.57
—
11.57
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(excluding securities
reflected in the first column)
4,389,326
—
4,389,326
Additional information required by this Item concerning ownership of our securities by certain beneficial owners and management is
incorporated by reference to our 2012 Proxy Statement including but not necessarily limited to the section entitled Beneficial Ownership of
Common Stock. Information concerning securities authorized for issuance under equity compensation plans is incorporated by reference to
our 2012 Proxy Statement including but not necessarily limited to the section entitled Equity Compensation Plan Information.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to the 2012 Proxy Statement including but not necessarily limited
to the section entitled Corporate Governance Principles and Board Matters—Certain Relationships and Policies on Related Party
Transactions.
ITEM 14.
Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to the 2012 Proxy Statement including but not necessarily limited
to the section entitled Audit Fees.
55
Table of Contents
ITEM 15.
Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The following consolidated financial statements are filed as part of this Report:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2011, 2010 and 2009
(in thousands)
Page
F-2
F-3
F-4
F-5
F-6
F-7
Year ended December 31, 2011
Allowance for doubtful accounts
Accrued warranty costs
Year ended December 31, 2010
Allowance for doubtful accounts
Accrued warranty costs
Year ended December 31, 2009
Allowance for doubtful accounts
Accrued warranty costs
(a)(3) Exhibits
Balance at
Beginning
of Period
Assumed
Through
Additions
Charged to
Acquisitions
Expense
Deductions
$ 1,643
696
$
$ —
1,244
$
$ —
$ 1,468
$
(702)
$ (1,251)
$ 1,515
694
$
$ —
43
$
$
$
592
331
$ 1,056
$ 1,076
$ —
44
$
$ 1,207
542
$
$
$
$
$
(464)
(372)
(748)
(968)
Balance
at End
of Period
$ 941
$ 2,157
$ 1,643
$ 696
$ 1,515
$ 694
Exhibit No.
3.1
Exhibit
Natus Medical Incorporated Amended and Restated Certificate of
Incorporation
Incorporated By Reference
Filing
S-1
Exhibit No.
3.1.1
File No.
333-44138
File Date
08/18/2000
3.2
3.3
Natus Medical Incorporated Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating Preferred Stock
8-A
3.1.2
000-33001
09/06/2002
Bylaws of Natus Medical Incorporated
8-K
3.1
000-33001
06/18/2008
56
Table of Contents
Exhibit No.
4.1
4.2
4.3
4.4
4.5
10.1
10.2*
10.2.1*
10.3*
10.3.1*
10.3.2*
10.3.3*
Exhibit
Amended and Restated Preferred Stock Rights Agreement, dated as
of October 8, 2002, between Natus Medical Incorporated and
Equiserve Trust Company, N.A., including the form of Rights
Certificate and Summary of Rights attached thereto as Exhibits B
and C, respectively
Amendment No. 1 to the Amended and Restated Preferred Stock
Rights Agreement dated as of February 14, 2003 between Natus
Medical Incorporated and Equiserve Trust Company, N.A.
Amendment No. 2 to the Amended and Restated Preferred Stock
Rights Agreement dated as of March 15, 2005 between Natus
Medical Incorporated and Equiserve Trust Company, N.A.
Amendment No. 3 to the Amended and Restated Preferred Stock
Rights Agreement dated as of August 17, 2006 between Natus
Medical Incorporated and Wells Fargo Bank, National Association
Registration Rights Agreement dated as of April 9, 2008 by and
among Natus Medical Incorporated and D3 Family Funds
Form of Indemnification Agreement between Natus Medical
Incorporated and each of its directors and officers
Natus Medical Incorporated Amended and Restated 1991 Stock
Option Plan
Form of Option Agreement under the Amended and Restated 1991
Stock Option Plan
Natus Medical Incorporated Amended and Restated 2000 Stock
Awards Plan
Form of Option Agreement under the Amended and Restated 2000
Stock Awards Plan
Form of Restricted Stock Purchase Agreement under the Amended
and Restated 2000 Stock Awards Plan
Form of Restricted Stock Unit Agreement under the Amended and
Restated 2000 Stock Awards Plan
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
8-A
4.1
000-33001
10/08/2002
8-A
4.2
000-33001
02/25/2003
8-K
99.1
000-33001
03/15/2005
8-K
99.01
000-33001
08/17/2006
8-K
4.01
000-33001
04/09/2008
S-1
10.1
333-44138
08/18/2000
S-1
10.2
333-44138
08/18/2000
S-1
10.2.1
333-44138
08/18/2000
8-K
10.1
000-33001
01/04/2006
S-1
10.3.1
333-44138
08/18/2000
10-Q
10.2
000-33001
08/09/2006
10-K
10.3.3
000-33001
03/14/2008
10.4*
Natus Medical Incorporated 2000 Director Option Plan
10-Q
10.02
000-33001
05/09/2008
10.4.1*
Form of Option Agreement under the 2000 Director Option Plan
S-1
10.4.1
333-44138
08/18/2000
10.5*
Natus Medical Incorporated 2000 Supplemental Stock Option Plan
S-1
10.15
333-44138
08/18/2000
10.5.1*
Form of Option Agreement for 2000 Supplemental Stock Option
Plan
S-1
10.15.1
333-44138
08/18/2000
57
Table of Contents
Exhibit No.
10.6*
Exhibit
Natus Medical Incorporated 2000 Employee Stock Purchase Plan
and form of subscription agreement thereunder
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
8-K
10.2
000-33001
01/04/2006
10.7*
2011 Stock Awards Plan
14-A —
000-33001
04/20/2011
10.7.1*
Form of Stock Option Award Agreement under the 2011 Stock Plan
10-Q
10.1
000-33001
11/07/2011
10.7.2*
Form of Restricted Stock Award Purchase Agreement
10-Q
10.2
000-33001
11/07/2011
10.7.3*
Form of Restricted Stock Unit Agreement
10-Q
10.3
000-33001
11/07/2011
10.8*
2011 Employee Stock Purchase Plan
14-A —
000-33001
04/20/2011
10.8.1*
2011 Employee Stock Purchase Plan Subscription Agreement
14-A —
000-33001
04/20/2011
10-K
10.1
000-33001
03/10/2009
8-K
99.1
000-33001
04/29/2008
10-Q
10.1
000-33001
05/06/2011
8-K
10.1
000-33001
04/27/2010
10.10*
10.11*
10.12*
10.22
21.1
23.1
24.1
31.1
31.2
32.1
Form of Employment Agreement between Natus Medical
Incorporated and each of its executive officers
Amended Employment Agreement between Natus Medical
Incorporated and James B. Hawkins dated April 25, 2008
Form of Employment Agreement between Natus Medical
Incorporated and John T. Buhler dated February 14, 2011
Second Amended and Restated Credit Agreement dated as of April
22, 2010 between Natus Medical Incorporated and Wells Fargo
Bank, National Association
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
58
Table of Contents
* Indicates a management contract or compensatory plan or arrangement
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
59
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
NATUS MEDICAL INCORPORATED
By
By
/s/ James B. Hawkins
James B. Hawkins
President and Chief Executive Officer
/s/ Steven J. Murphy
Steven J. Murphy
Vice President Finance and Chief Financial Officer
Dated: March 14, 2012
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints
James B. Hawkins and Steven J. Murphy and each of them acting individually, as his or her attorney-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the
following persons on behalf of the registrant and in the capacity and dates indicated:
Signature
Title
Date
/s/ James B. Hawkins
(James B. Hawkins)
/s/ Steven J. Murphy
(Steven J. Murphy)
/s/ Robert A. Gunst
(Robert A. Gunst)
/s/ Doris Engibous
(Doris Engibous)
/s/ Ken Ludlum
(Ken Ludlum)
/s/ Mark D. Michael
(Mark D. Michael)
/s/ William M. Moore
(William M. Moore)
Chief Executive Officer and Director (Principal
Executive Officer)
March 14, 2012
Vice President Finance & Chief Financial
Officer(Principal Financial and Accounting
Officer)
March 14, 2012
Chairman of the Board of Directors
March 14, 2012
Director
Director
Director
Director
60
March 14, 2012
March 14, 2012
March 14, 2012
March 14, 2012
Table of Contents
NATUS MEDICAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
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F-6
F-7
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Natus Medical Incorporated
San Carlos, California
We have audited the accompanying consolidated balance sheets of Natus Medical Incorporated and subsidiaries (the “Company”) as
of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement
schedule listed in the Index at Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Natus Medical
Incorporated and subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company has retrospectively adopted new accounting guidance
issued by the Financial Accounting Standards Board related to the presentation of comprehensive income (loss).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14,
2012, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
San Francisco, CA
March 14, 2012
F-2
Table of Contents
ASSETS
Current assets:
NATUS MEDICAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $941 and $1,643
Inventories
Prepaid expenses and other current assets
Deferred income tax
Total current assets
Property and equipment, net
Intangible assets
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Current portion of long-term debt
Accrued liabilities
Deferred revenue
Total current liabilities
Long-term liabilities
Other liabilities
Long-term debt
Deferred income tax
Total liabilities
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, $0.001 par value; 120,000,000 shares authorized; shares issued and outstanding:
29,439,272 in 2011 and 28,922,667 in 2010
Retained earnings
Accumulated other comprehensive (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F-3
December 31,
2011
2010
$ 32,816
—
55,260
33,389
4,743
5,025
131,233
25,350
70,411
80,375
6,946
$314,315
$ 16,365
188
16,560
7,604
40,717
7,658
710
7,502
56,587
$ 28,383
1,005
54,782
37,627
4,954
2,192
128,943
23,408
69,428
96,819
12,449
$331,047
$ 21,684
156
17,627
4,744
44,211
8,076
737
13,958
66,982
267,499
7,170
(16,941)
257,728
$314,315
258,872
18,867
(13,674)
264,065
$331,047
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
NATUS MEDICAL INCORPORATED
Revenue
Cost of revenue
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Goodwill impairment charge
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before provision for income tax
Provision for income tax
Net income (loss)
Foreign currency translation adjustment
Comprehensive income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average shares used in the calculation of net income (loss) per share:
Basic
Diluted
2011
$232,652
101,776
130,876
Years Ended December 31,
2010
$218,655
88,698
129,957
2009
$166,425
66,077
100,348
62,989
25,562
32,880
20,000
141,431
(10,555)
(230)
(10,785)
912
$ (11,697)
(3,267)
$ (14,964)
54,857
21,283
35,986
—
112,126
17,831
(118)
17,713
5,794
$ 11,919
(719)
$ 11,200
45,304
16,732
22,979
—
85,015
15,333
1,750
17,083
5,701
$ 11,382
685
$ 12,067
$
$
(0.41)
(0.41)
$
$
0.42
0.41
$
$
0.41
0.40
28,565
28,565
28,092
29,217
27,651
28,476
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Balances, December 31, 2008, as reported
Prior period adjustment (See Note 14)
Balances, December 31, 2008, as corrected
Tax expense of option exercises
Issuance of restricted stock
Employee stock purchase plan
Compensation expense for stock options
Exercise of stock options
Foreign currency translation adjustment
Net income
Balances, December 31, 2009
Tax expense of options exercises
Vesting of restricted stock units
Issuance of restricted stock
Employee stock purchase plan
Compensation expense for stock options
Exercise of stock options
Foreign currency translation adjustment
Net income
Balances, December 31, 2010
Tax expense of options exercises
Vesting of restricted stock units
Issuance of restricted stock
Employee stock purchase plan
Compensation expense for stock options
Exercise of stock options
Foreign currency translation adjustment
Net income (loss)
Balances, December 31, 2011
Retained
Earnings /
(Accumulated
Deficit)
$
(5,244)
810
(4,434)
Accumulated
Other
Comprehensive
Income (Loss)
$
(13,640)
(13,640)
11,382
6,948
685
(12,955)
11,919
18,867
(719)
(13,674)
Common Stock
Shares
27,993,181
Amount
$245,196
27,993,181
245,196
(159)
305,200
81,624
34,224
729
4,260
348
28,414,229
8,750
209,600
68,050
222,038
250,374
551
31
866
5,399
1,651
28,922,667
258,872
(160)
21,375
216,162
84,414
194,654
859
6,468
1,460
29,439,272
$267,499
$
(11,697)
7,170
(3,267)
$
(16,941)
Stockholders’
Equity
$ 226,312
810
227,122
(159)
729
4,260
348
685
11,382
244,367
551
31
866
5,399
1,651
(719)
11,919
264,065
(160)
859
6,468
1,460
(3,267)
(11,697)
$ 257,728
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable
Excess tax (benefit)/expense on the exercise of stock options
Depreciation and amortization
Goodwill impairment charge
Impairment of intangible assets
(Gain)/loss on disposal of property and equipment
Warranty reserve
Change in fair value of contingent obligation
Share-based compensation
Changes in operating assets and liabilities, net of assets and liabilities acquired in
acquisitions:
Accounts receivable
Inventories
Other assets
Accounts payable
Accrued liabilities
Deferred revenue
Deferred taxes
Investing activities:
Net cash provided by operating activities
Acquisition of businesses, net of cash acquired
Acquisition of property and equipment
Acquisition of intangible assets Acquisition of intangibles
Purchases of long-term investments
Purchases of short-term investments
Sales of short-term investments
Net cash used in investing activities
Financing activities:
Proceeds from stock option exercises and ESPP
Excess tax benefit (expense) on the exercise of stock options
Proceeds from short term borrowings
Payments on borrowings
Net cash provided by financing activities
Exchange rate effect on cash and cash equivalents
Net increase (decrease) in cash and equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing activities:
Contingent earnout obligations classified as liabilities
Fixed assets included in accounts payable
Year Ended December 31,
2010
2009
2011
$(11,697)
$ 11,919
$ 11,382
(358)
160
10,021
20,000
700
267
1,468
2,000
6,468
3,605
3,958
714
(7,062)
(7,411)
2,112
(2,350)
22,595
(15,072)
(4,180)
(825)
(300)
—
1,005
(19,372)
2,319
(160)
2,553
(3,013)
1,699
(489)
4,433
28,383
$ 32,816
592
(551)
9,156
—
300
452
331
—
5,399
(3,231)
(8,181)
(1,161)
(5,478)
(448)
723
1,704
11,526
(13,415)
(4,152)
(344)
—
(975)
975
(17,911)
2,548
551
—
(1,403)
1,696
486
(4,203)
32,586
$ 28,383
1,137
159
7,884
—
—
(29)
542
(600)
4,260
683
25
(34)
457
380
(153)
495
26,588
(47,222)
(2,609)
(1,003)
—
(965)
—
(51,799)
1,077
(159)
—
(429)
489
393
(24,329)
56,915
$ 32,586
$
114
$ 1,878
$
130
$ 5,050
$
$
153
957
$ —
174
$
$ 2,000
$ —
$ —
$ —
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2011, 2010 and 2009
1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Natus Medical Incorporated (“Natus”, the “Company”, “we”, “our”) was incorporated in California in May 1987 and reincorporated
in Delaware in August 2000. Natus is a leading provider of healthcare products used for the screening, detection, treatment, monitoring and
tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and
include computerized neurodiagnostic systems for audiology, neurology,
balance and mobility disorders. Product offerings
polysomnography, and neonatology, as well as newborn care products such as hearing screening systems, phototherapy devices for the
treatment of newborn jaundice, head-cooling products for the treatment of brain injury in newborns, incubators to control the newborn’s
environment, and software systems for managing and tracking disorders and diseases for public health laboratories. The Company’s
headquarters are in San Carlos, California.
We have completed a number of acquisitions since 2003, consisting of either the purchase of a company, substantially all of the
assets of a company or individual products or product lines. Our significant acquisitions are as follows: Neometrics in 2003; Fischer-Zoth
in 2004; Bio-logic, Deltamed, and Olympic in 2006; Xltek in 2007; Sonamed, Schwarzer Neurology, and Neurocom in 2008; Hawaii
Medical and Alpine Biomed in 2009; Medix in 2010 and Embla in 2011.
Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of
inventory, intangible assets, goodwill, share-based compensation, deferred income taxes, reserves for warranty obligations, and the
provision for income taxes. Actual results could differ from those estimates.
Revenue Recognition—Revenue, net of discounts, is recognized from sales of medical devices and supplies, including sales to
distributors, when the following conditions have been met: a purchase order has been received, title has transferred, the selling price is
fixed or determinable, and collection of the resulting receivable is reasonably assured. Terms of sale for most domestic sales are FOB
origin, reflecting that title and risk of loss are assumed by the purchaser at the shipping point; however, terms of sale for some neurology,
sleep-diagnostic, and head cooling systems are FOB destination, reflecting that title and risk of loss are assumed by the purchaser upon
delivery. Terms of sales to international distributors are generally EXW, reflecting that goods are shipped “ex works,” in which title and
risk of loss are assumed by the distributor at the shipping point.
We have historically applied the software revenue recognition rules as prescribed by Accounting Standards Codification (“ASC”)
Subtopic 985-605 to sales of certain of our diagnostic neurology and hearing systems (“products containing embedded software”). In
October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2009-14, Certain
Revenue Arrangements That Include Software Elements, which amended ASC Subtopic 985-605. This ASU removes tangible products
containing software components and non-software components that function together to deliver the product’s essential functionality from
the scope of the software revenue recognition rules. We adopted the provisions of
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Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
ASU 2009-14 prospectively on January 1, 2010 for new or significantly modified revenue arrangements. The adoption did not have a
significant impact on our revenue or results of operations for the year ended December 31, 2010. In the case of the Company’s products
containing embedded software, we have determined that the hardware and software components function together to deliver the products’
essential functionality, and therefore, the revenue from the sale of these products no longer falls within the scope of the software revenue
recognition rules. Our revenue recognition policies for sales of these products are now substantially the same as for our other tangible
products.
Revenue from sales of certain of our products that remain within the scope of the software revenue recognition rules under ASC
Subtopic 985-605 is not significant.
We previously accounted for arrangements with multiple deliverables under ASC Topic 605, where revenue was allocated to the
deliverables based on vendor specific objective evidence (“VSOE”). In October 2009 the FASB issued ASU 2009-13, Multiple Deliverable
Revenue Arrangements, which amends ASC Topic 605. We adopted the provisions of ASU 2009-13 prospectively on January 1, 2010 for
new or significantly modified revenue arrangements. The adoption did not have a significant impact on our revenue or results of operations
for the year ended December 31, 2010. Under the revenue recognition rules for tangible products as amended by ASU 2009-13, we now
allocate revenue from arrangements with multiple deliverables to each of the deliverables based upon their relative selling prices as
determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has
value to the customer on a stand-alone basis. The principal deliverables in our multiple deliverable arrangements that qualify as separate
units of accounting consist of (i) sales of medical devices and supplies, (ii) installation services, (iii) extended service and maintenance
agreements, and (iv) upgrades to embedded software.
The new rules establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows:
(i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of
the selling price (“ESP”). VSOE of fair value is defined as the price charged when the same element is sold separately, or if the element
has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that
the price will not change before the introduction of the element into the marketplace. VSOE generally exists only when we sell the
deliverable separately and is the price actually charged for that deliverable. We have previously established VSOE for substantially all of
the deliverables in our multiple element arrangements; however, in the future we may rely on ESPs, reflecting our best estimates of what
the selling prices of elements would be if they were sold regularly on a stand-alone basis, to establish the amount of revenue to allocate to
the deliverable. TPE generally does not exist for our products because of their uniqueness.
For products shipped under FOB origin or EXW terms, delivery is generally considered to have occurred when shipped. Undelivered
elements in our sales arrangements, which are not considered to be essential to the functionality of a product, generally include installation
or training services that are performed after the related products have been delivered. Revenue related to undelivered installation services is
deferred until such time as installation is complete at the customer’s site. Revenue related to training services is recognized when the
service is provided. Fair value for installation or training services is based on the price charged when the service is sold separately. The fair
value of installation and training services is based upon billable hourly rates and the estimated time to complete the service.
Revenue from extended service and maintenance agreements, for both medical devices and data management systems, is recognized
ratably over the service period. Freight charges billed to customers are
F-8
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
included in revenue and freight-related expenses are charged to cost of revenue. Advance payments from customers are recorded as
deferred revenue and recognized as revenue as otherwise described above. We generally do not provide rights of return on products. We
accept trade-ins of our own and competitive medical devices. Trade-ins are recorded as a reduction of the replacement medical device sale.
Provisions are made for initial standard warranty obligations that are generally one year in length.
Group Purchasing Organizations (“GPO”s), negotiate volume purchase prices for member hospitals, group practices, and other
clinics. Our agreements with GPOs typically contain preferential terms for the GPO and its members, including provisions for some, if not
all, of the following:
•
•
•
•
•
Negotiated pricing for all group members;
Volume discounts and other preferential terms on their member’s direct purchases from us;
Promotion of Natus’ products by the GPO to its members;
Payment of marketing fees by Natus to the GPO, usually based on purchasing experience of group members; and
Non-recourse cancellation provisions.
We do not sell products to GPOs. Hospitals, group practices, and other clinics that are members of a GPO purchase products directly
from the Company under the terms negotiated by the GPO. Negotiated pricing and discounts are recognized as a reduction of the selling
price of products at the time of the sale. Revenue from sales to members of GPOs is otherwise consistent with general revenue recognition
policies as previously described.
Cash Equivalents—All highly liquid instruments purchased with an original maturity of three months or less are classified as cash
equivalents.
Short-Term Investments—Fixed-rate guaranteed investment contracts with a commercial bank with a maturity of one year, valued
at cost plus accrued interest that approximates fair value, are classified as short-term investments.
Allowance for Doubtful Accounts—We assess the sufficiency of the allowance for estimated uncollectible accounts receivable.
Estimates are based on historical collection experience within the markets in which we operate and other customer-specific information,
such as bankruptcy filings or liquidity problems of customers. When it is determined that an account receivable is uncollectible, it is
written off and relieved from the reserve. Any future determination that the allowance for estimated uncollectible accounts receivable is not
properly stated could result in changes in operating expense and results of operations.
Fair Value of Financial Instruments —Financial instruments include cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt. Cash and cash equivalents are reported at their respective fair values on the balance sheet
dates. The recorded carrying amount of accounts receivable and accounts payable approximates their fair value due to their short-term
maturities. The carrying amount of long-term debt approximates fair value as determined by reference to market rates available to us for
debt with similar terms and conditions.
Inventories—Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or
market. We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of
anticipated usage. These factors include, but are not limited to, technological changes, competitive pressures in products and prices, and the
introduction of new product
F-9
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
lines. We regularly evaluate our ability to realize the value of inventory based on a combination of factors, including historical usage rates,
forecasted sales, product life cycles, and market acceptance of new products. When inventory that is obsolete or in excess of anticipated
usage is identified, it is written down to realizable salvage value or an inventory valuation reserve is established.
Investments—Investments that do not have readily determinable fair value are stated at cost and are reported in other assets.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is
computed using the straight-line method over estimated useful lives of the respective assets, which are three to five years for office
furniture and equipment, three to five years for computer software and hardware, three to six years for demonstration and loaned
equipment, and 40 years for buildings. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful
life. Land is not depreciated. Costs associated with acquiring and installing software to be used for internal purposes are capitalized.
Long-Lived Assets and Goodwill—Intangible assets with finite lives are amortized over their useful lives; any future changes that
would limit their useful lives or any determination that these assets are carried at amounts greater than their estimated fair value could
result in impairment charges. Goodwill and any other intangible assets with indefinite lives are recorded at original cost and are not
amortized. Any future determination that these assets are carried at amounts greater than their estimated fair value could result in
additional charges, which could impact operating results.
Definite-lived intangible assets are tested for impairment whenever changes in circumstances indicate the carrying value of these
assets may be impaired. Impairment indicators include, but are not limited to, net book value as compared to market capitalization,
significant negative industry and economic trends, and significant underperformance relative to historical and projected future operating
results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset are less than its
carrying value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product
acceptance and lifecycle, competition, appropriate discount rates, and operating margins.
Intangible assets with definite lives are amortizing using the straight-line and graded methods over periods ranging from five to 20
years.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually as of October 1st; this assessment is also
performed whenever there is a change in circumstances that indicates the carrying value of these assets may be impaired. The
determination of whether any potential impairment of goodwill exists is based upon a two-step process. In the first analysis, the fair value
of the reporting unit is compared to the unit’s carrying value, including goodwill, to determine if there is a potential impairment. If the fair
value exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and no further analysis or action is
required. If the first analysis indicates that the carrying value exceeds the fair value, a second analysis is performed to determine the
amount of the goodwill impairment loss, if any.
In step two of the impairment test, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that
goodwill. The implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination is determined. That is, the fair value of a reporting unit is allocated to all the assets and liabilities of that reporting unit,
including unrecognized intangible assets as if the
F-10
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the
reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair
value of that goodwill.
To determine the estimated fair value of reporting units, three valuation methodologies are utilized: (i) discounted cash flow analyses,
(ii) market multiples, and (iii) comparative transactions. The valuations indicated by these three methodologies are averaged, with the
greatest weight placed on discounted cash flow analyses. Discounted cash flow analyses are dependent upon a number of quantitative and
qualitative factors including estimates of forecasted revenue, profitability, earnings before interest, taxes, depreciation and amortization
(i.e. EBITDA) and exit values. The discount rates applied in the discounted cash flow analyses also have an impact on the estimates of fair
value, as use of a higher rate will result in a lower estimate of fair value. The estimated total fair value of reporting units is reconciled to the
Company’s market capitalization.
Research & Development and Capitalized Software Development Costs—Costs incurred in research and development are charged
to operations as incurred. Some of our products include imbedded software which is essential to the product’s functionality. In accordance
with FASB ASC 985-20, Costs of Software to be Sold, Leased or Marketed, costs incurred in the research and development of new software
components and enhancements to existing software components are expensed as incurred until technological feasibility has been
established. We capitalize software development costs when the project reaches technological feasibility and cease capitalization when the
project is ready for release. Software development costs are amortized on a straight-line basis over the estimated useful life of the product.
Amortization begins when the product is available for general release to the customer.
Internal Use Software Development Costs—We account for internal use software development costs in accordance with ASC 350-
40-15, Internal Use Software. In accordance with ASC 350-40-15, costs to develop internal use computer software during the application
development stage are capitalized and reported as a component of intangible assets and amortized on a straight-line basis over the estimated
useful lives of the related software applications.
Share-Based Compensation—We recognize share-based compensation expense associated with employee stock options under the
single-option straight line method over the requisite service period, which is generally a four-year vesting period pursuant to ASC Topic
718, Compensation-Stock Compensation. See Note 11.
For employee stock options, the value of each option is estimated on the date of grant using the Black-Scholes option pricing model,
which was developed for use in estimating the value of freely traded options. Our employee stock options have characteristics significantly
different from those of traded options. Similar to other option pricing models, the Black-Scholes method requires the input of highly
subjective assumptions, including stock price volatility. Changes in the subjective input assumptions can materially affect the estimated fair
value of our employee stock options.
Forfeitures of employee stock options are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from initial estimates. Share-based compensation expense is recorded net of estimated forfeitures, such that expense is
recorded only for those share-based awards that are expected to vest.
The cash flow resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) is classified as a cash inflow from financing activities and a cash outflow from operating activities in our
Statements of Cash Flows. We treat tax deductions from certain stock option exercises as being realized when they reduce taxes payable in
accordance with relevant tax law.
F-11
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
We also recognize share-based compensation associated with Restricted Stock Awards and Restricted Stock Units in accordance with
ASC Topic 718, Compensation-Stock Compensation.
Uncertain Tax Positions—We recognize the tax benefit of uncertain tax positions in the financial statements in accordance with
ASC Topic 740, Income Tax. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of
tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement, in accordance with ASC 740-10-05.
Foreign Currency—The functional currency of our foreign subsidiaries is generally the local currency of the country where the
subsidiary is located. Accordingly, foreign currency translation exchange adjustments relating to the translation of foreign subsidiary
financial statements are included as a component of accumulated other comprehensive income (loss). We recorded $(3.3) million,
$(719,000), and $685,000 of foreign currency translation adjustments for the years ended December 31, 2011, 2010 and 2009, respectively.
We changed the functional currency of Xltek from the Canadian dollar to the U.S. Dollar on January 1, 2009.
Gains and losses from transactions denominated in currencies other than the functional currencies of the Company and its subsidiaries
are included in other income and expense. In 2011, 2010 and 2009, net foreign currency transactions gains and (losses) were $(141,000),
$(521,000), and $520,000, respectively. Foreign currency gains and losses result primarily from fluctuations in the exchange rate between
the US Dollar, Canadian Dollar, Euro, Argentine Peso and Danish Kroner.
Comprehensive Income—We report by major components and as a single total the change in our net assets during the period from
non-owner sources in accordance with ASC Topic 220, Comprehensive Income. The consolidated statement of comprehensive income
(loss) has been included with the consolidated statements of operations. Accumulated other comprehensive income (loss) consists of
translation gains and losses on foreign subsidiary financial statements.
Basic and Diluted Net Income per Share—We compute net income per share in accordance with ASC Topic 260, Earnings per
Share. Basic net income per share is based upon the weighted average number of common shares outstanding during the period. Diluted net
income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents
outstanding during the period. Common stock equivalents are options granted and shares of restricted stock issued under our stock awards
plans and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options and restricted stock
are excluded from the computation when there is a loss as their effect is anti-dilutive, or if the exercise price of such options is greater than
the average market price of the stock for the period.
For the year ended December 31, 2011, common stock equivalents of 959,159 shares were not used to calculate diluted net loss per
share because of their anti-dilutive effect. For the year ended December 31, 2010, common stock equivalents of 1,125,006 were included in
the weighted average shares outstanding used to calculate diluted income per share, while 1,090,401 shares were excluded from the
calculation because of their anti-dilutive effect. For the year ended December 31, 2009, common stock equivalents of 824,516 were
included in the weighted average shares outstanding used to calculate diluted income per share, while 1,168,704 shares were excluded from
the calculation because of their anti-dilutive effect.
Certain Significant Risks and Uncertainties—Financial instruments that potentially subject us to credit risk consist principally of
cash and cash equivalents, accounts receivable, and long-term debt. Cash and cash equivalents consist primarily of cash in bank accounts
and investments in money market funds. To minimize our exposure to credit risk, our short-term investments consists exclusively of highly
liquid, investment-grade financial instruments.
F-12
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
We sell our products primarily to hospitals and medical institutions. Customers are generally not required to provide collateral or
other security to support accounts receivable. Allowances for estimated potential bad debt losses are maintained. No single customer or
distributor accounted for more than 10% of accounts receivable at December 31, 2011, 2010 or 2009.
Recent Accounting Pronouncements
Intangibles Goodwill and Other In September 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance
related to Intangibles—Goodwill and Other: Testing Goodwill for Impairment. The amendment is intended to simplify how entities test
goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is “more likely than
not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This
amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
Adoption of this standard is not expected to have an impact on our financial position, results of operations, or cash flows.
Intangibles—Goodwill and Other In December 2010, the FASB issued amended guidance related to Intangibles – Goodwill and
Other. The amendments modify step one of the goodwill impairment test for reporting units with zero or negative carrying amounts. For
those reporting units, an entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether
there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public
entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The
adoption of this standard did not have an impact on our financial position, results of operations, or cash flows.
Comprehensive Income In June 2011, the FASB issued amended guidance related to Comprehensive Income. This amendment
allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In
both choices, an entity is required to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendment
eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.
The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. In December 2011, the FASB deferred indefinitely the requirement regarding the presentation of
reclassification adjustments out of accumulated other comprehensive income. The new guidance is effective for fiscal years beginning after
December 15, 2011. We adopted the disclosure provisions of this standard early on a retrospective basis. This adoption did not have an
impact on our results of operations or financial position, but resulted in the presentation of single, continuous Statements of Consolidated
Operations and Other Comprehensive Income (Loss).
Fair Value Measurements In May 2011, the FASB issued amended guidance related to Fair Value Measurements. This amendment
represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement.
The collective efforts of the Boards and
F-13
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
their staffs, reflected in this amendment, have resulted in common requirements for measuring fair value and for disclosing information
about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common
requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in
accordance with U.S. GAAP and IFRS. The amendments are to be applied prospectively. The amendments are effective during interim and
annual periods beginning after December 15, 2011. The Company adopted the new disclosure requirements for its annual report for the
year ended December 31, 2011. The adoption of this standard did not have an impact on our financial position, results of operations, or
cash flows.
2— BUSINESS COMBINATIONS
Common
The assets acquired and liabilities assumed at the date of acquisition are recorded in the 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 determination of estimated fair value of acquired assets and liabilities requires management to make significant estimates and
assumptions. We determine the fair value by applying established valuation techniques, based on information that management believes to
be relevant to this determination. The Company also utilizes independent third parties to assist in the valuation of goodwill, intangible
assets, and real estate.
The results of operations of our acquisitions are included in the consolidated financial statements from the date of the acquisition.
Embla Systems LLC
We acquired Embla Systems LLC (“Embla”) on September 15, 2011 pursuant to an Equity Purchase Agreement. Embla, with
corporate headquarters in Denver, Colorado develops, manufactures, and sells devices focused on diagnostic sleep analysis
(Polysomnography or PSG) with products sold into the hospital and dedicated sleep lab as well as home sleep testing devices. The
acquisition broadened our existing PSG product offerings and allows us to further leverage our existing sales channels both in the United
States and internationally.
The Company acquired all of the capital stock of Embla for $16.1 million in cash at closing, excluding direct costs of the acquisition.
The Company paid an additional $472,000 of purchase consideration in October 2011 pursuant to a purchase price adjustment clause in the
purchase agreement tied to Embla cash as of the purchase date. A total of $315,000 of direct costs associated with the acquisition was
expensed as incurred and reported as a component of general and administrative expenses.
F-14
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities assumed at the
date of acquisition, as adjusted (in thousands):
Cash
Accounts receivable
Inventories
Prepaid and other assets
Deferred income tax
Identifiable intangible assets:
Core Technology
Developed Technology
Customer-related
Tradenames
In-Process Research and Development
Property and equipment
Goodwill
Accounts payable
Accrued expenses
Deferred income tax
Deferred revenue
Total purchase price
$
887
4,393
4,180
544
534
600
1,200
2,900
3,500
100
101
3,838
(2,396)
(2,658)
(134)
(1,017)
$16,572
Valuing certain components of the acquisition, including primarily accounts receivable, inventory, deferred taxes, accrued warranty
costs, accounts payable, other accrued expenses and deferred revenue required us to make estimates that may be adjusted in the future;
consequently the purchase price allocation is considered preliminary. Final determination of these estimates could result in an adjustment
to the preliminary purchase price allocation, with an offsetting adjustment to Goodwill.
Identifiable intangible assets. Intangible assets included in the purchase price allocation consist of: (i) technology of $1.8 million
assigned an average economic life of 18 years being amortized on the straight line method, (ii) customer-related intangible assets of $2.9
million assigned an economic life of 14 years being amortized on the straight line method, and (iii) tradenames of $3.5 million that have an
indefinite life and are not being amortized.
I P R & D . A portion of the purchase price was allocated to in-process research and development (“IPR&D”) in the amount of
$100,000. The fair value of the IPR&D was determined through estimates and valuation techniques through an analysis of data provided by
Embla concerning developmental products, their stage of development, the time and resources needed to complete them, their expected
income generating ability and associated risks. IPR&D is accounted for as an indefinite-lived intangible asset until completion or
abandonment of the associated research and development efforts. IPR&D will be tested for impairment annually or when impairment
indicators are present.
Goodwill. Approximately $3.8 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the
fair value of the underlying net tangible and intangible assets. This goodwill is expected to be non-deductible for tax purposes. Goodwill
will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the
event that management determines that the value of goodwill has become impaired, we will incur an accounting charge for the amount of
the impairment during the quarter in which the determination is made.
F-15
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Deferred income tax. A preliminary estimate of $534,000 has been allocated to non-current deferred tax assets and $134,000 has
been allocated to non-current deferred tax liabilities, which results primarily from investment tax credits and a portion of customer-related
intangible assets.
Proforma financial information
The following unaudited proforma combined results of operations of the Company for the twelve months ended December 31, 2011
and 2010 are presented as if the acquisition of Embla had occurred on January 1, 2010:
Unaudited Proforma Financial Information
(in thousands)
Revenue
Income (loss) from operations
December 31,
2011
$252,754
$ (9,806)
2010
$248,327
$ 17,834
The unaudited proforma financial information is provided for comparative purposes only and is not necessarily indicative of what
actual results would have been had the acquisitions occurred on the dates indicated, nor do they give effect to synergies, cost savings, and
other changes expected to result from the acquisitions. Accordingly, the proforma financial results do not purport to be indicative of results
of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period.
Embla’s revenue of $10.9 million and income from operations of $2.0 million are included in our Consolidated Statement of
Operations and Comprehensive Income (Loss) for the period from September 15, 2011 (acquisition date) to December 31, 2011.
For purposes of preparing the unaudited proforma financial information for the year ended December 31, 2011, Embla’s
Consolidated Statement of Income for the period January, 1, 2011 through September 15, 2011 was combined with the Company’s
Consolidated Statement of Operations and Comprehensive Income (Loss) for the period January 1, 2011 through December 31, 2011 which
included the results of Embla from the date of acquisition. For purposes of preparing the unaudited proforma financial information for the
year ended December 31, 2010, Embla’s Statement of Income for the year ended December 31, 2010 was combined with the Company’s
Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2010.
The unaudited proforma consolidated results reflect the historical information of Natus and Embla in 2011 and 2010, adjusted for the
following pre-tax amounts:
•
•
•
Elimination of Embla’s historical intangible asset amortization expense (approximately $148,000 through December 31, 2011 and
$210,000 in 2010).
Additional amortization expense related to Embla (approximately $225,000 through December 31, 2011 and $317,000 in 2010)
related to the fair value of identifiable intangible assets acquired.
Decrease of Embla’s depreciation expense (approximately $279,000 through December 31, 2011 and $393,000 in 2010) related to
the fair value adjustment to property and equipment acquired.
F-16
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
•
•
Actual 2011 Embla acquisition related transaction costs of $315,000 were excluded from the 2011 proforma results above and
included in the 2010 proforma as if these costs were incurred during the 2010 period.
Fair value adjustment relating to inventory of $163,000, of which $77,000 was sold from the acquisition date to December 31,
2011 and thus excluded from the 2011 proforma results above. The 2010 proforma included the entire $163,000 as if the
inventory as of the acquisition date was entirely sold in the 2010 period.
Medix Industrial y Commercial S.A.
We acquired Medix Industrial y Commercial S.A. (“Medix”) on October 12, 2010 for $14.1 million in cash pursuant to an Agreement
and Plan of Merger. Medix develops, manufactures, and sells devices for newborn care, primarily in Latin America. Medix, based in
Argentina, manufactures incubators for use in hospital nurseries and NICU’s, transport incubators for use in ambulances and other
emergency vehicles, infant warmers, and LED based phototherapy devices. Medix also acts as a distributor in Latin America for products of
other companies. The acquisition broadened our product offerings, as we did not previously have an incubator product, and allows us to
further leverage our existing sales channels both in the United States and internationally.
The Company is obligated to pay additional purchase consideration to the former shareholders of Medix related to revenue targets for
the two twelve-month periods ending October 31, 2011 and 2012. At the time of the acquisition the Company recorded an estimate of the
fair value of the contingent earnout obligation in the amount of $2.0 million based on future revenue projections of the Medix business
under various potential scenarios applying weighted probability assumptions of their outcomes. As of December 31, 2011, the original
estimate has been adjusted to zero as no payments are anticipated to be made against the contingent earnout obligation.
The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities assumed at the
date of acquisition, as adjusted (in thousands):
Cash
Accounts receivable
Inventories
Prepaid and other assets
Deferred income tax
Identifiable intangible assets:
Technology
Customer-related
Tradenames
Land and building
Other property and equipment
Goodwill
Accounts payable
Accrued expenses
Other liabilities
Contingent earnout obligation-short-term
Deferred income tax
Contingent earnout obligation-long-term
Total purchase price
F-17
$
700
9,104
8,190
128
152
1,600
2,300
1,000
7,160
359
4,846
(13,485)
(1,725)
(1,791)
(1,252)
(2,446)
(748)
$ 14,092
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Identifiable intangible assets. Intangible assets included in the purchase price allocation consist of: (i) technology of $1.6 million
assigned an average economic life of 20 years being amortized on the straight line method, (ii) customer-related intangible assets of $2.3
million assigned an economic life of nine years being amortized on the straight line method, and (iii) tradenames of $1.0 million that have
an indefinite life and are not being amortized.
Goodwill. Approximately $4.8 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the
fair value of the underlying net tangible and intangible assets. This goodwill is expected to be non-deductible for tax purposes. In
accordance with ASC 350-20, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if
certain indicators are present). In the event that management determines that the value of goodwill has become impaired, we will incur an
accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
Deferred income tax. Approximately $152,000 has been allocated to non-current deferred tax assets and $2.4 million has been
allocated to non-current deferred tax liabilities, which results primarily from the fair market value assigned to various assets including
intangibles, land, and building.
Proforma financial information
The following unaudited proforma combined results of operations of the Company for the twelve months ended December 31, 2010
and 2009 are presented as if the acquisition of Medix had occurred on January 1, 2009:
Unaudited Proforma Financial Information
(in thousands)
Revenue
Income from operations
December 31,
2010
$236,452
$ 20,436
2009
$205,032
$ 18,624
The unaudited proforma financial information is provided for comparative purposes only and is not necessarily indicative of what
actual results would have been had the acquisitions occurred on the dates indicated, nor do they give effect to synergies, cost savings, and
other changes expected to result from the acquisitions. Accordingly, the proforma financial results do not purport to be indicative of results
of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period.
For purposes of preparing the unaudited proforma financial information for the year ended December 31, 2010, Medix’s Statement of
Income for the period January 1, 2010 through October 11, 2010 was combined with the Company’s Consolidated Statement of Operations
and Comprehensive Income (Loss) for the year ended December 31, 2010 which included the results of Medix from the date of acquisition.
For purposes of preparing the unaudited proforma financial information for the year ended December 31, 2009, Medix’s Statement of
Income for the year ended December 31, 2009 was combined with the Company’s Consolidated Statement of Operations and
Comprehensive Income (Loss) for the year ended December 31, 2009.
The unaudited proforma consolidated results reflect the historical information of Natus and Medix in 2010 and 2009, adjusted for
additional amortization expense (approximately $294,000 through December 31, 2010 and $336,000 in 2009) related to the fair value of
identifiable intangible assets acquired.
F-18
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Alpine Biomed Holdings Corp.
We acquired Alpine Biomed Holdings Corp. (“Alpine Biomed”) on September 14, 2009 for $43.2 million in cash pursuant to an
Agreement and Plan of Merger. Alpine Biomed is a leader in the development, manufacturing, and sales of devices for the diagnosis of
neurological disorders. Alpine Biomed’s broad range of products includes advanced electromyography systems for the diagnoses of
peripheral nervous system dysfunctions as well as devices for routine EEG and long term epilepsy monitoring. The acquisition broadened
our product offerings, primarily in electromyography and allows us to further leverage our existing sales channels both in the United States
and internationally.
The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities assumed at the
date of acquisition, as adjusted (in thousands):
Cash
Accounts receivable
Inventories
Prepaid and other assets
Identifiable intangible assets:
Technology
Customer-related
Tradenames
Property and equipment
Goodwill
Deferred income tax
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Deferred income tax
Other long-term liabilities
Total purchase price
$
1
8, 555
1,928
973
6,500
5,300
4,000
285
28,614
2,805
(4,038)
(6,170)
(916)
(3,040)
(1,632)
$43,165
Identifiable intangible assets. Intangible assets included in the purchase price allocation consist of: (i) technology of $6.5 million
assigned an average economic life of between 15 and 18 years being amortized on the straight line method, (ii) customer-related intangible
assets of $5.3 million assigned an economic life of 15 years being amortized on the straight line method, and (iii) tradenames of $4.0
million that have an indefinite life and are not being amortized.
Goodwill. Approximately $28.6 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over
the fair value of the underlying net tangible and intangible assets. This goodwill is expected to be non-deductible for tax purposes. In
accordance with ASC 350-20, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if
certain indicators are present). In the event that management determines that the value of goodwill has become impaired, we will incur an
accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
Deferred tax assets (liabilities) / valuation allowance. Approximately $2.8 million has been allocated to non-current deferred tax
assets, and $3.0 million has been allocated to non-current deferred tax liabilities, which result primarily from amortizable intangible assets.
F-19
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Proforma financial information
The following unaudited proforma combined results of operations of the Company for the twelve months ended December 31, 2009
is presented as if the acquisition of Alpine had occurred on the first day of the period presented for 2009:
Unaudited Proforma Financial Information
(in thousands)
Revenue
Income from operations
December 31,
2009
$ 189,116
12,194
$
The unaudited proforma financial information is provided for comparative purposes only and is not necessarily indicative of what
actual results would have been had the acquisitions occurred on the dates indicated, nor do they give effect to synergies, cost savings, and
other changes expected to result from the acquisitions. Accordingly, the proforma financial results do not purport to be indicative of results
of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period.
For purposes of preparing the unaudited proforma financial information for the year ended December 31, 2009, Alpine’s neurology
business unaudited Statement of Sales and Direct Operating Expenses for the period January 1, 2009 through September 13, 2009 was
combined with the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31,
2009, which includes the results of Alpine from the date of the acquisition.
The unaudited proforma consolidated results reflect the historical information of Natus and Alpine in 2009, adjusted for the following
pre-tax amounts:
•
•
Additional amortization expense of $443,000 related to the fair value of identifiable intangible assets acquired.
Elimination of Alpine’s historical intangible asset amortization expense of $1.2 million through December 31, 2009.
Hawaii Medical, LLC
We acquired Hawaii Medical, LLC (“Hawaii Medical”) on July 2, 2009 for $2.9 million in cash pursuant to an Agreement and Plan of
Merger. Massachusetts based Hawaii Medical manufactures and markets single-use disposable products sold into the NICU and nursery in
hospitals. During the third quarter 2009 we transitioned substantially all of the operations of Hawaii Medical to our Olympic facility in
Seattle, Washington.
In addition to the purchase price paid at closing, an earnout provision of the purchase agreement may result in additional cash
consideration depending upon the achievement of certain revenue targets over the three twelve-month periods ending July 31, 2012.
Although there is no limit to the additional consideration that will be paid if the revenue targets are exceeded, no contingent obligation has
been recorded as the revenue targets for 2010 and 2011 were not met and there is significant uncertainty that the revenue target for 2012
will be achieved.
F-20
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
3— INVENTORIES
Inventories consist of (in thousands):
Raw materials and subassemblies
Finished goods
Total Inventories
Less: Non-current Inventories
Inventories
December 31,
2011
$11,550
26,368
37,918
(4,529)
$33,389
2010
$14,924
26,375
41,299
(3,672)
$37,627
At December 31, 2011, the Company has classified $4.5 million of inventories as non-current. This inventory consists primarily of
service components used to repair products held by our customers pursuant to warranty obligations and extended service contracts,
including service components for products we are not currently selling. Management believes that these inventories will be utilized for their
intended purpose.
Work in process represents an immaterial amount in all periods presented.
4— PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
Land
Buildings
Leasehold improvements
Office furniture and equipment
Computer software and hardware
Demonstration and loaned equipment
Accumulated depreciation
Total
December 31,
2011
$ 4,420
10,864
2,815
10,410
7,541
10,646
46,696
(21,346)
$ 25,350
2010
$ 4,903
10,904
2,523
9,067
6,084
7,571
41,052
(17,644)
$ 23,408
Depreciation expense of property and equipment was $4.0 million, $3.7 million and $3.1 million in the years ending December 31,
2011, 2010 and 2009, respectively.
F-21
Table of Contents
5—GOODWILL
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
The carrying amount of goodwill and the changes in those balances are as follows (in thousands):
Balance, January 1, 2010
Goodwill as a result of acquisitions
Purchase accounting adjustments
Foreign currency translation
Balance, December 31, 2010
Goodwill as a result of acquisitions
Goodwill impairment charge
Purchase accounting adjustments
Foreign currency translation
Balance, December 31, 2011
$ 92,258
4,834
(14)
(259)
96,819
2,874
(20,000)
972
(290)
$ 80,375
Goodwill is tested for impairment at least annually as of October 1 of each year; this assessment is also performed whenever there is
st
a change in circumstances that indicates the carrying value of these assets may be impaired. The determination of whether any potential
impairment of goodwill exists is based upon a two-step process. In step one of the analysis, the fair value of the reporting unit is compared
to the unit’s carrying value, including goodwill, to determine if there is a potential impairment. If the fair value exceeds the carrying
amount, the goodwill of the reporting unit is considered not impaired and no further analysis or action is required. If the analysis in step
one indicates that the carrying value exceeds the fair value, step two of the test is performed to determine the amount of the goodwill
impairment loss, if any.
In step two of the test, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The
implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is
determined. That is, the fair value of a reporting unit is allocated to all the assets and liabilities of that reporting unit, including
unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit
was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of that goodwill.
To determine the estimated fair value of reporting units, three valuation methodologies are utilized: (i) discounted cash flow analyses,
(ii) market multiples, and (iii) comparative transactions. The valuations indicated by these three methodologies are averaged, with the
greatest weight placed on discounted cash flow analyses. Discounted cash flow analyses are dependent upon a number of quantitative and
qualitative factors including estimates of forecasted revenue, profitability, earnings before interest, taxes, depreciation and amortization
(i.e. EBITDA), and terminal values. The discount rates applied in the discounted cash flow analyses also have an impact on the estimates
of fair value, as use of a higher rate will result in a lower estimate of fair value. The estimated total fair value of reporting units is
reconciled to the Company’s market capitalization.
For the test as of the October 1, 2011 measurement date we determined that the carrying amount of our European reporting unit
exceeded its fair value, indicating a potential goodwill impairment existed. Having determined the goodwill of the European reporting unit
was potentially impaired, we performed step two and as a result, during the fourth quarter of 2011 we recorded an impairment charge of
$20.0 million related to the European reporting unit. The outcome of the test was impacted primarily by a significant decrease in our
market
F-22
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
capitalization as of the measurement date and the continuing deterioration of economic conditions in the fourth quarter 2011 within
member states of the European Union. Accumulated goodwill impairment as of December 31, 2011 is $20.0 million.
Key assumptions used to determine the fair values of our European and other reporting units as of the annual testing date of
October 1, 2011 included expected cash flow for the period from October 1, 2011 to December 31, 2021 and associated discount rates
ranging from 12% to 15%, which were based on management’s best estimate of the after-tax weighted average cost of capital for each
reporting unit.
If forecasted earnings before interest, taxes, depreciation and amortization within the discounted cash flow analysis had been 10%
lower than estimated for each reporting unit except the European reporting unit and all other assumptions were held constant, the goodwill
impairment test would have resulted in the same conclusion. If the discount rates applied in our analysis had been 100 basis points higher
than estimated for each reporting unit and all other assumptions were held constant, the goodwill impairment test would have resulted in
the same conclusion.
We recognized an income tax benefit of $352,000 associated with the 2011 goodwill impairment related to the tax deductible portion
of the goodwill impairment.
6—INTANGIBLE ASSETS
The following table summarizes the components of gross and net intangible asset balances (in thousands):
Intangible assets with definite lives:
Technology
Customer related
Internally developed software
Patents
Definite lived intangible
assets
Intangible assets with indefinite lives:
Tradenames
Total intangibles assets
Gross
Carrying
Amount
$51,245
18,296
4,414
2,757
December 31, 2011
December 31, 2010
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
— $ (17,610) $33,635 $50,301
15,299
—
3,831
—
2,571
—
13,694
1,920
808
(4,602)
(2,494)
(1,949)
— $ (14,520) $35,781
12,283
(3,016)
—
2,439
(1,392)
—
825
(1,746)
—
76,712
—
(26,655)
50,057
72,002
—
(20,674)
51,328
21,354
$98,066 $
(1,000)
(1,000) $ (26,655) $70,411 $90,402 $
18,400
20,354
—
(300)
18,100
(300) $ (20,674) $69,428
—
F-23
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Definite lived intangible assets are amortized over their weighted average lives of 14 years for patents, 15 years for technology, 12
years for customer-related intangibles, and 4 years for internally developed software. Intangible assets with indefinite lives are not subject
to amortization.
Internally developed software consists of approximately $3.5 million relating to costs incurred for development of internal use
computer software and $943,000 for development of software to be sold.
During the years ended December 31, 2011 and 2010 the Company recorded charges of $700,000 and $300,000, respectively, related
to the impairment of certain tradenames of its U.S. and European business units.
Amortization expense related to intangible assets with definite lives was as follows (in thousands):
Technology
Customer Related
Software
Patents
Total amortization
Years Ended December 31,
2011
$3,090
1,586
1,102
203
$5,981
2010
$3,550
926
827
151
$5,454
2009
$3,382
631
474
280
$4,767
Expected annual amortization expense related to amortizable intangible assets is as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Total expected annual amortization expense
7— ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
Compensation and related benefits
Accrued contingent consideration
Accrued federal, state, and local taxes
Warranty reserve
Accrued professional fees
Other
Total
F-24
$ 6,403
5,133
4,834
4,501
3,722
25,464
$50,057
December 31,
2011
$ 7,452
—
1,562
2,157
608
4,781
$16,560
2010
$ 8,530
1,252
887
696
272
5,990
$17,627
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
8— LONG-TERM OTHER LIABILITIES
Long-term other liabilities consist of (in thousands):
Contingent tax obligations
Non-current deferred revenue
Accrued contingent consideration
Total
December 31,
2011
$6,441
1,217
—
$7,658
2010
$6,383
945
748
$8,076
9— RESERVE FOR PRODUCT WARRANTIES
We provide a warranty on all medical device products that is generally one year in length. We also sell extended service agreements
on our medical device products. 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 third-
party vendors on a contract basis.
We have accrued a warranty reserve, included in accrued liabilities on the accompanying balance sheets, for the expected future costs
of servicing products during the initial warranty period. We base the liability on actual warranty costs incurred to service those products.
On new products, additions to the reserve are based on a combination of factors including the percentage of service department labor
applied to warranty repairs, as well as actual service department costs, and other judgments, such as the degree to which the product
incorporates new technology. The reserve is reduced as costs are incurred to honor existing warranty obligations or when current facts
indicate that the original estimates of expected future costs of servicing products were overstated.
Detail of activity in product warranty reserve is as follows, (in thousands):
December 31, 2011
December 31, 2010
December 31, 2009
Balance at
Beginning
of Period
696
$
694
$
$ 1,076
Assumed
Through
Acquisitions
1,244
$
43
$
44
$
Additions
Charged to
Expense
$ 1,468
331
$
542
$
Reductions
$ (1,251)
(372)
$
(968)
$
Balance
at End
of Period
$ 2,157
$ 696
$ 694
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— STOCKHOLDERS’ EQUITY
Common Stock—We have 120,000,000 shares of common stock authorized at a par value or $0.001 per share.
Preferred Stock—We have 10,000,000 shares of preferred stock authorized at a par value of $0.001 per share. In accordance with
the terms of the amended and restated certificate of incorporation, the Board of Directors is authorized to provide for the issuance of one or
more series of preferred stock, including increases or decreases to the series. The Board of Directors has the authority to set the rights,
preferences, and terms of such shares. As of December 31, 2011, no shares of preferred stock were issued and outstanding.
F-25
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Stockholder Rights Plan—We adopted a Stockholder Rights Plan in September 2002 (the “Rights Plan”) that was amended most
recently in September 2006. Pursuant to the Rights Plan, we declared a dividend of one Preferred Stock Purchase Right per share of
common stock (the “Rights”) and each such Right has an exercise price of $23.00. The Rights become exercisable, unless redeemed by the
Company, upon the occurrence of certain events, including the announcement of a tender offer or exchange offer for our common stock or
the acquisition of a specified percentage of the our common stock by a third party.
11— SHARE-BASED COMPENSATION
Share-Based Compensation Expense—We account for share-based compensation in accordance with ASC Topic 718,
Compensation—Stock Compensation. Share-based compensation was recognized as follows in the consolidated statement of operations, (in
thousands, except per share):
Cost of revenue
Marketing and sales
Research and development
General and administrative
Total expense
Income tax effect
Decrease in net income
2011
$ 298
1,503
526
4,141
6,468
(548)
$5,920
December 31,
2010
$
177
1,432
425
3,365
5,399
(1,776)
$ 3,623
2009
$
331
1,103
314
2,512
4,260
(1,423)
$ 2,837
As of December 31, 2011, unrecognized compensation related to the unvested portion of our stock options and other stock awards
was approximately $10.1 million, which is expected to be recognized over a weighted average period of 2.4 years.
Stock Awards Plans—Our 2011 Stock Awards Plan (the “Plan”) provides for the granting of the following:
•
•
•
•
•
Incentive stock options to employees;
Non-statutory stock options to employees, directors and consultants;
Restricted stock awards and restricted stock units;
Stock bonuses; and
Stock appreciation rights.
As of December 31, 2011, there were 3,941,500 shares available for future awards under the plan.
Under the Plan, stock options may be issued at not less than the fair market value of the common stock on the date of grant, as
determined by the Board of Directors. Options issued under the Plan become exercisable as determined by the Board of Directors and
expire no more than six years after the date of grant. Most options vest ratably over four years. Since 2005, our option awards have
consisted solely of non-statutory stock options. Stock awards are typically granted to existing employees once a year at the time of the
Company’s annual shareholder meeting.
F-26
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Stock Option Activity—Stock option activity under our stock awards plans for the year ended December 31, 2011 is summarized as
follows:
Outstanding, December 31, 2009 (2,494,821 shares exercisable at a weighted average exercise price of
$8.70 per share)
Granted (weighted average fair value of $5.49 per share)
Exercised
Cancelled
Outstanding, December 31, 2010 (2,683,816 shares exercisable at a weighted average exercise price of
$9.66 per share)
Granted (weighted average fair value of $5.67 per share)
Exercised
Cancelled
Outstanding, December 31, 2011 (2,836,938 shares exercisable at a weighted average exercise price of
$10.46 per share)
Number of
Shares
3,435,394
484,100
(222,038)
(58,499)
3,638,957
580,350
(194,654)
(234,787)
3,789,866
Weighted
Average
Exercise Price
$
$
$
$
$
$
$
$
$
10.00
16.48
7.44
14.75
10.94
15.64
7.50
15.14
11.57
The following table summarizes information concerning outstanding and exercisable options outstanding at December 31, 2011:
Range of Exercise Price
$3.15 - $4.07
$4.11 - $7.80
$7.86 - $9.67
$10.03 - $10.03
$10.73 - $10.73
$10.78 - $15.08
$15.14 - $16.26
$16.38 - $16.38
$16.78 - $16.78
$16.89 - $20.09
$3.15 - $20.09
Options Outstanding
Options Exercisable
Number
Outstanding
as of
12/31/11
553,590
400,446
50,771
416,250
519,316
462,820
303,760
386,075
383,984
312,854
3,789,866
Weighted
Average
Exercise
Price
$ 3.82
$ 4.91
$ 9.13
$ 10.03
$ 10.73
$ 12.50
$ 15.79
$ 16.38
$ 16.78
$ 19.90
$ 11.57
Weighted
Average
Remaining
Contractual
Life
(Years)
1.75
2.14
5.16
3.43
3.35
2.07
1.85
5.27
4.20
2.36
2.94
Number
Exercisable
as of
12/31/11
553,590
400,446
8,563
416,250
328,516
336,472
295,510
58,269
161,052
278,270
2,836,938
Weighted
Average
Exercise
Price
$ 3.82
$ 4.91
$ 8.34
$ 10.03
$ 10.73
$ 11.75
$ 15.79
$ 16.38
$ 16.78
$ 19.90
$ 10.46
The intrinsic value of options exercised, representing the difference between the closing stock price of Company’s common stock on
the date of the exercise and the exercise price, in the years ended December 31, 2011, 2010 and 2009, was $394,000, $1.5 million, and
$165,000, respectively.
As of December 31, 2011, there were: (i) 3,686,657 options vested and expected to vest with a weighted average exercise price of
$11.48, an intrinsic value of $5.0 million, and a weighted average remaining contractual term of 2.9 years; (ii) of the 3,686,657 options
vested and expected to vest, there are 2,836,938 options exercisable with a weighted average exercise price of $10.46, an intrinsic value of
$5.0 million, and a weighted average remaining contractual term of 2.4 years.
F-27
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Cash received from option exercises for the years ended December 31, 2011 and 2010 was $1.5 and $1.7 million, respectively.
Black-Scholes Inputs—The fair value of option grants was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
Expected life in years
Risk-free interest rate
Expected volatility
Expected forfeiture rate
Dividend yield
Years Ended December 31,
2010
4.2
1.5%
38%
11.5%
None
2011
5.0
1.5%
38%
8.6%
None
2009
4.2
2.2%
40%
13.2%
None
The expected life of options is based primarily on historical share option exercise experience of our employees for options granted by
the Company. All options are treated as a single group in the determination of expected life, as we do not currently expect substantially
different exercise or post-vesting termination behavior among our employee population. The risk-free interest rate is based on the U.S.
Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. Expected volatility is based primarily
on historical volatility data of our common stock. We have no history or expectation of paying dividends on our common stock.
Share-based compensation expense associated with options is based on awards ultimately expected to vest. At the time of an option
grant, we estimate the expected future rate of forfeitures based on historical experience. These estimates are revised, if necessary, in
subsequent periods if actual forfeiture rates differ from those estimates. If the actual forfeiture rate is lower than estimated we will record
additional expense and if the actual forfeiture is higher than estimated we will record a recovery of prior expense.
Restricted Stock Awards Activity —The following table summarizes the activity for restricted stock awards during the years ended
December 31, 2011 and 2010:
Unvested at December 31, 2009
Forfeited
Vested
Granted
Unvested at December 31, 2010
Forfeited
Vested
Granted
Unvested at December 31, 2011
Shares
547,784
(4,250)
(165,584)
212,100
590,050
(39,963)
(221,655)
260,375
588,807
Weighted
Average Grant
Date Fair Value
13.87
$
13.34
$
15.96
$
16.68
$
14.30
$
14.67
$
13.58
$
16.17
$
15.37
$
The fair market value of outstanding restricted stock awards at December 31, 2011 was $5.6 million. The weighted average
remaining recognition period for unvested restricted stock awards at December 31, 2011 was 2.5 years.
F-28
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Restricted Stock Units Activity —The following table summarizes restricted stock units activity for the years ended December 31,
2011 and 2010:
Beginning outstanding balance
Awarded
Released
Forfeited
Ending outstanding balance
2011
71,300
42,300
(21,375)
(35,700)
56,525
2010
66,500
32,450
(8,750)
(18,900)
71,300
The aggregate intrinsic value of outstanding restricted stock units at December 31, 2011 was $538,000. The weighted average
remaining recognition period for unvested restricted stock units at December 31, 2011 was 1.9 years.
Employee Stock Purchase Plan—Under our 2011 Employee Stock Purchase Plan (the “ESPP”), our U.S. employees can elect to
have salary withholdings of up to 15% of their eligible compensation to a maximum of $12,500 per offering period, to purchase shares of
common stock on April 30 and October 31 of each year. The purchase price for shares acquired under the ESPP is 85% of the fair market
value on the last day of the offering period. As of December 31, 2011, there were 447,826 shares reserved for future issuance under the
ESPP.
Because the ESPP does not have a “look back” feature, the compensation expense associated with the Plan is not measured by the use
of the Black-Scholes pricing model, but rather by measuring the difference between the fair market value of our common stock on the last
day of the offering period and the purchase price for the offering period, which is 85% of the fair market value. Compensation expense
associated with the ESPP for the years ended December 31, 2011, 2010 and 2009, respectively, was $122,000, $133,000, and $108,000.
Cash received from purchases under the ESPP for the years ended December 31, 2011, 2010 and 2009, respectively, was
approximately $859,000, $866,000, and $729,000.
12— RESTRUCTURING RESERVE
In January 2011, we adopted a reorganization plan that was designed to improve efficiencies in the operations of Medix, which we
acquired in October 2010. During the three months ended September 30, 2011 we also initiated similar restructuring activities in our North
American and European operations. These restructuring activities were substantially completed in the fourth quarter of 2011.
In January 2010, we adopted a reorganization plan that was designed to eliminate redundant costs resulting from our acquisition of
Alpine Biomed (“Alpine”) and to improve efficiencies in operations. Under the plan, which was substantially completed in the first half of
2010, Alpine operations in Montreal, Canada were transitioned to our existing Xltek facility in Oakville, Ontario, Canada, and Alpine’s
sales organization was merged into our global sales organization.
F-29
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
The balance of the reserve is included in accrued liabilities on the accompanying balance sheets. Detail of activity in the restructuring
reserve is as follows, (in thousands):
Balance, beginning of period
Employee termination benefits expensed
Lease termination fee
Amounts paid
Accrual reversal
Balance, end of period
$
Year Ended December 31,
2010
2011
$ —
3,030
300
(2,975)
(268)
87
87
2,786
—
(2,093)
(6)
774
$
$
The costs associated with the reorganization plan were recorded as a component of general and administrative expense.
13— OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of (in thousands):
Investment income (expense)
Interest expense (income)
Foreign currency exchange gain (loss)
Change in fair value of contingent obligation
Other
Total other income (expense), net
14— INCOME TAXES
Years Ended December 31,
2010
$ 36
(128)
(521)
—
495
$(118)
2011
$ 28
(268)
(141)
—
151
$(230)
2009
$ 228
(153)
520
600
555
$1,750
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such
determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that
we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an
adjustment to the valuation allowance which would reduce the provision for income taxes.
F-30
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Income (loss) before provision (benefit) for income tax (in thousands):
U.S.
Foreign
Total income (loss)
Years Ended December 31,
2010
$ 4,012
13,701
$17,713
2011
$ (9,928)
(857)
$(10,785)
2009
$ 8,902
8,181
$17,083
The components of our income tax expense for the years ended December 31, 2011, 2010 and 2009 consisted of the following (in
thousands):
Current
U.S. Federal
U.S. State and local
Non-U.S.
Total current tax expense
Deferred
U.S. Federal
U.S. State and local
Non-U.S.
Total deferred tax expense (benefit)
Total income tax expense
Years Ended December 31,
2011
2010
2009
$ 3,388
486
900
4,774
(1,410)
(23)
(2,429)
(3,862)
912
$
$1,997
779
1,366
4,142
(574)
(89)
2,315
1,652
$5,794
$3,284
543
640
4,467
(896)
(141)
2,271
1,234
$5,701
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and
liabilities as of December 31, 2011 and 2010 are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Credit carryforwards
Accruals deductible in different periods
Employee benefits
Total deferred tax assets
Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Foreign earnings to be repatriated
Basis difference in fixed and intangible assets
Total deferred tax liabilities
Total net deferred tax liabilities
F-31
December 31,
2011
2010
$ 4,438
5,823
8,445
3,510
22,216
(3,190)
$ 19,026
$ —
(19,717)
(19,717)
(691)
$
$ 6,016
3,966
8,414
2,838
21,234
(5,739)
$ 15,495
$
(369)
(18,479)
(18,848)
$ (3,353)
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
The income tax expense (benefit) in the accompanying statements of operations differs from the provision calculated by applying the
U.S. federal statutory income tax rate of 35% (34% in 2009) to income before taxes due to the following:
Federal statutory tax expense (benefit)
State tax expense
Foreign taxes at rates less than U.S. rates
Stock compensation expense on incentive stock options
Contingent earnout adjustment
Goodwill impairment charge
U.S. tax credit
Other
Total expense
Years Ended December 31,
2011
$(3,667)
187
(788)
167
(666)
6,448
(290)
(479)
912
$
2010
$6,022
532
(875)
123
—
—
(194)
186
$5,794
2009
$5,979
299
(473)
176
—
—
258
(538)
$5,701
At December 31, 2011 we had total U.S. federal net operating loss carryforwards of approximately $1.9 million, state net operating
loss carryforwards of approximately $2.0 million and $837,000 of foreign tax credits, available to reduce future taxable income. The
federal and state net operating loss carryforwards, if not utilized to offset taxable income in future periods, will expire in various amounts
beginning in 2021 and 2015, respectively.
At December 31, 2011, certain of our foreign subsidiaries had tax net operating loss carryforwards as follows: $7.9 million in Canada,
$4.9 million in France, $3.5 million in Germany, and $2.9 million in Argentina. These foreign net operating loss carryforwards, if not
utilized to offset taxable income in future periods, will expire in various amounts beginning in 2028. In addition, we had foreign investment
tax credits of $3.0 million in Canada, $561,000 in the U.S., and $328,000 in Argentina that will expire in various amounts from 2012
through 2022. The extent to which these operating loss and tax credit carryforwards can be used to offset future taxable income may be
limited depending on the extent of ownership changes within any three-year period, as provided in the Tax Reform Act of 1986 and other
foreign statutes. Such a limitation could result in the expiration of the carryforwards before they are utilized.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Accordingly, valuation allowances of $3.2 million and $5.7 million were recorded during the years ended December 31, 2011 and
2010, respectively. The decrease of $2.5 million of valuation allowance was the result of the liquidation of a wholly owned U.S. subsidiary
of Xltek that had a valuation allowance recorded against all of its U.S. tax attributes. In 2011, we determined that none of the tax attributes
were recoverable.
We receive tax deductions from the gains realized by employees on the exercise of certain non-qualified stock options for which the
benefit is recognized as a component of stockholders’ equity. In 2011 we recorded approximately $352,000 of additional paid in capital
related to exercises of non-qualified stock options by employees.
We have not provided for U.S. federal income and foreign withholding taxes on the majority of undistributed earnings from non-U.S.
operations as of December 31, 2010 because such earnings are intended to be reinvested indefinitely. As of December 31, 2011, the amount
of undistributed earnings from non-U.S. operations has not been estimated as the determination is not practicable.
F-32
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2010, the Company identified
that income taxes payable was overstated by $810,000 as of December 31, 2008, 2009 and 2010 as a result of a bookkeeping error that
arose in 2008. Accordingly, the Company recorded a prior period adjustment as of December 31, 2008, which resulted in a decrease of
income taxes payable of $810,000 and a decrease in accumulated deficit by the same amount. These corrections do not impact the
Company’s consolidated statements of operations for the year ended December 31, 2010 or 2009.
Uncertain Tax Positions—We account for uncertain tax positions in accordance with ASC 740-10-05, Accounting for Income Taxes
– an interpretation of FASB Statement 109 . This interpretation establishes the criteria that must be met prior to recognition of the financial
statement benefit of a position taken in a tax return and is based on a benefit-recognition model. Provided that the tax position is deemed
more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being
ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in
thousands):
Balance at January 1, 2009
Additions for tax positions related to the current year
Lapse of statutes of limitations
Balance at January 1, 2010
Additions for tax positions related to the current year
Lapse of statutes of limitations
Balance at January 1, 2011
Additions for tax positions related to the current year
Lapse of statutes of limitations
Balance at December 31, 2011
$ 4,329
1,109
(48)
5,390
241
(145)
5,486
208
(417)
$ 5,277
The unrecognized tax benefits of $5.3 million include $2.5 million of uncertain tax positions that would impact our effective tax rate
if recognized.
At December 31, 2011 and 2010, we had cumulatively accrued approximately $1.2 million and $932,000 for estimated interest and
penalties related to uncertain tax positions. We record interest and penalties related to unrecognized tax positions as a component of income
tax expense, which totaled approximately $275,000 and $285,000 for the years ended December 31, 2011 and 2010, respectively.
We are currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other
material deviation in this estimate over the next 12 months.
Our tax returns remain open to examination as follows: U.S. federal, 2007 through 2011; U.S. states, generally 2006 through 2010;
significant foreign jurisdictions, generally 2007 through 2010.
15— EMPLOYEE BENEFIT PLAN
We have a 401(k) tax-deferred savings plan under which eligible U.S. employees may elect to have a portion of their salary deferred
and contributed to the plan. Employer matching contributions are determined by
F-33
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
management and are discretionary. Employer matching contributions were approximately $541,000, $492,000 and $455,000, respectively,
in the years ended December 31, 2011, 2010, and 2009. For new hires, employer contributions vest ratably over the first two years of
employment.
16— SEGMENT, CUSTOMER, AND GEOGRAPHIC INFORMATION
We operate in one reportable segment in which we provide healthcare products used for the screening, detection, treatment,
monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep
disorders, and balance and mobility disorders.
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 by geographic region is as follows (in thousands):
Years Ended December 31,
2010
2009
2011
Revenue:
United States
Foreign countries
Long-lived assets:
United States
Foreign countries
$131,079 $126,680 $109,721
56,704
$232,652 $218,655 $166,425
101,573
91,975
$
9,428 $
6,297
7,769
$ 25,350 $ 23,408 $ 14,066
15,546
15,922
7,862 $
Long-lived assets consist principally of property and equipment (net). During the years ended December 31, 2011, 2010 and 2009, no
single customer or foreign country contributed to more than 10% of revenue, and revenue from services was less than 10% of revenue.
During the years ended December 31, 2011, 2010 and 2009, respectively, revenue from devices and systems was $148.7 million,
$134.8 million and $96.2 million, while revenue from supplies and services was $84.0 million, $80.1 million and $67.1 million,
respectively.
17— DEBT AND CREDIT ARRANGEMENTS
Long-term borrowings are composed of the following (2011 and 2010 columns in thousands):
Term loan $2.9 million Canadian (“CAD”), interest at cost of funds plus 2.5%, due September 15,
2014 with principle repayable in monthly installments of $16,000 until August 15, 2014, and
one final payment of $404,000 collateralized by a first lien on the land and building owned by
Xltek
Total long-term debt (including current portion)
Less: current portion of long-term debt
Total long-term debt
F-34
December 31,
2011
2010
$ 898
898
(188)
$ 710
$ 893
893
(156)
$ 737
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
On March 2, 2012 we executed a renewal of our $50 million revolving credit facility with Wells Fargo Bank, National Association
(“Wells Fargo”) for a three year term. The revolving credit facility contains covenants, including covenants relating to liquidity and other
financial measurements; provides for events of default, including failure to pay any interest when due, failure to perform or observe
covenants, bankruptcy or insolvency events, and the occurrence of a material adverse effect; and restricts our ability to pay dividends. We
have granted Wells Fargo a security interest in all of the assets of the Company. We did not draw on the facility during 2011. We have no
other significant credit facilities.
18— COMMITMENTS AND CONTINGENCIES
Leases – We have entered into noncancelable operating leases for some of our facilities located in the U.S. and Europe through 2021.
Minimum lease payments under noncancelable operating leases as of December 31, 2011 are as follows (in thousands):
Year Ending December 31,
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
Operating
Leases
$ 2,815
2,451
2,184
1,351
896
3,490
$13,187
Rent expense, which is recorded on the straight-line method from commencement over the period of the lease, totaled $2.7 million,
$2.3 million, and $2.1million in 2011, 2010, and 2009, respectively.
Purchase commitments—We had various firm purchase commitments for inventory totaling $17.7 million at December 31, 2011.
Indemnifications—Under our bylaws, we have agreed to indemnify our officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such capacity. We have a director and officer liability insurance policy that limits our
exposure under these indemnifications and enables us to recover a portion of any future loss arising out of them. In addition, we enter into
indemnification agreements with other parties in the ordinary course of business. We have determined that these agreements fall within the
scope of ASC 460, Guarantees. In some cases we have obtained liability insurance providing coverage that limits its exposure for these
other indemnified matters. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification
agreements. We believe the estimated fair value of these indemnification agreements is minimal and have not recorded a liability for these
agreements as of December 31, 2011.
Legal matters—We may from time to time become a party to various legal proceedings or claims that arise in the ordinary course of
business. We do not believe that any current legal or administrative proceedings are likely to have a material effect on our business,
financial condition, or results of operations.
F-35
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009
19— FAIR VALUE MEASUREMENTS
The fair value of our assets and liabilities subject to fair value measurements are as follows (in thousands):
Bank money market investments
Total
Bank money market investments
Fixed rate term deposits
Total
Fair Value
as of
12/31/11
$ 1,148
$ 1,148
Fair Value
as of
12/31/10
$ 3,146
1,005
$ 4,151
Fair Value Measurements as of
12/31/11 Using Fair Value Hierarchy
Level 2
$ 1,148
$ 1,148
Level 1
—
—
Level 3
—
—
Fair Value Measurements as of
12/31/10 Using Fair Value Hierarchy
Level 2
$ 3,146
1,005
$ 4,151
Level 1
—
—
—
Level 3
—
—
—
In accordance with ASC Topic 820, Fair Value Measurements and Disclosures , Level 1 evaluations are based on quoted prices in
active markets for identical assets or liabilities that the Company has the ability to access. Level 2 valuations are based on quoted prices in
markets that are not active or for which all significant inputs are observable, either directly or indirectly. Bank money market accounts have
a net asset value of $1.00 per share and consist principally of commercial paper with a rating of A-1/A-1+. Level 3 valuations are based on
inputs that are not unobservable and significant to the overall fair value measurement.
For the year ending December 31, 2011, we recorded a loss of $20 million related to a goodwill impairment of our European
reporting unit (see Note 5), and for the years ending December 31, 2011 and 2010, losses of $700,000 and $300,000, respectively, related to
impairment of tradenames. We measure these non-financial assets at fair value on a nonrecurring basis subsequent to their initial
recognition. The fair value of these non-financial assets was measured using Level 3 inputs.
F-36
Table of Contents
Exhibit No.
Exhibit
EXHIBIT INDEX
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
10.1
10.2*
10.2.1*
10.3*
10.3.1*
10.3.2*
10.3.3*
Natus Medical Incorporated Amended and Restated Certificate of
Incorporation
Natus Medical Incorporated Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating Preferred Stock
Bylaws of Natus Medical Incorporated
Amended and Restated Preferred Stock Rights Agreement, dated as
of October 8, 2002, between Natus Medical Incorporated and
Equiserve Trust Company, N.A., including the form of Rights
Certificate and Summary of Rights attached thereto as Exhibits B
and C, respectively
Amendment No. 1 to the Amended and Restated Preferred Stock
Rights Agreement dated as of February 14, 2003 between Natus
Medical Incorporated and Equiserve Trust Company, N.A.
Amendment No. 2 to the Amended and Restated Preferred Stock
Rights Agreement dated as of March 15, 2005 between Natus
Medical Incorporated and Equiserve Trust Company, N.A.
Amendment No. 3 to the Amended and Restated Preferred Stock
Rights Agreement dated as of August 17, 2006 between Natus
Medical Incorporated and Wells Fargo Bank, National Association
Registration Rights Agreement dated as of April 9, 2008 by and
among Natus Medical Incorporated and D3 Family Funds
Form of Indemnification Agreement between Natus Medical
Incorporated and each of its directors and officers
Natus Medical Incorporated Amended and Restated 1991 Stock
Option Plan
Form of Option Agreement under the Amended and Restated 1991
Stock Option Plan
Natus Medical Incorporated Amended and Restated 2000 Stock
Awards Plan
Form of Option Agreement under the Amended and Restated 2000
Stock Awards Plan
Form of Restricted Stock Purchase Agreement under the Amended
and Restated 2000 Stock Awards Plan
Form of Restricted Stock Unit Agreement under the Amended and
Restated 2000 Stock Awards Plan
Incorporated By Reference
Filing
Exhibit No.
File No.
File Date
S-1
3.1.1
333-44138
08/18/2000
8-A
3.1.2
000-33001
09/06/2002
8-K
8-A
3.1
4.1
000-33001
06/18/2008
000-33001
10/08/2002
8-A
4.2
000-33001
02/25/2003
8-K
99.1
000-33001
03/15/2005
8-K
99.01
000-33001
08/17/2006
8-K
4.01
000-33001
04/09/2008
S-1
10.1
333-44138
08/18/2000
S-1
10.2
333-44138
08/18/2000
S-1
10.2.1
333-44138
08/18/2000
8-K
10.1
000-33001
01/04/2006
S-1
10.3.1
333-44138
08/18/2000
10-Q
10.2
000-33001
08/09/2006
10-K
10.3.3
000-33001
03/14/2008
Table of Contents
Exhibit No.
Exhibit
Filing
Incorporated By Reference
File No.
Exhibit No.
File Date
10.4*
Natus Medical Incorporated 2000 Director Option Plan
10-Q
10.02
000-33001
05/09/2008
10.4.1*
Form of Option Agreement under the 2000 Director Option Plan
S-1
10.4.1
333-44138
08/18/2000
10.5*
Natus Medical Incorporated 2000 Supplemental Stock Option Plan
S-1
10.15
333-44138
08/18/2000
10.5.1*
10.6*
Form of Option Agreement for 2000 Supplemental Stock Option
Plan
Natus Medical Incorporated 2000 Employee Stock Purchase Plan
and form of subscription agreement thereunder
S-1
10.15.1
333-44138
08/18/2000
8-K
10.2
000-33001
01/04/2006
10.7*
2011 Stock Awards Plan
14-A —
000-33001
04/20/2011
10.7.1*
Form of Stock Option Award Agreement under the 2011 Stock Plan
10-Q
10.1
000-33001
11/07/2011
10.7.2*
Form of Restricted Stock Award Purchase Agreement
10-Q
10.2
000-33001
11/07/2011
10.7.3*
Form of Restricted Stock Unit Agreement
10-Q
10.3
000-33001
11/07/2011
10.8*
2011 Employee Stock Purchase Plan
14-A —
000-33001
04/20/2011
10.8.1*
2011 Employee Stock Purchase Plan Subscription Agreement
14-A —
000-33001
04/20/2011
10.10*
10.11*
10.12*
10.22
21.1
23.1
24.1
31.1
Form of Employment Agreement between Natus Medical
Incorporated and each of its executive officers
Amended Employment Agreement between Natus Medical
Incorporated and James B. Hawkins dated April 25, 2008
Form of Employment Agreement between Natus Medical
Incorporated and John T. Buhler dated February 14, 2011
Second Amended and Restated Credit Agreement dated as of April
22, 2010 between Natus Medical Incorporated and Wells Fargo
Bank, National Association
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
10-K
10.1
000-33001
03/10/2009
8-K
99.1
000-33001
04/29/2008
10-Q
10.1
000-33001
05/06/2011
8-K
10.1
000-33001
04/27/2010
Table of Contents
Exhibit No.
Exhibit
Filing
Incorporated By Reference
File No.
Exhibit No.
File Date
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Certification of Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase
Document
*
Indicates a management contract or compensatory plan or arrangement
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
Natus Medical Incorporated
Deltamed S.A.
Excel Tech Ltd. (Xltek)
Natus Europe Gmbh (dba Fischer-Zoth Diagnosesysteme & Schwarzer
Neurology)
Alpine ApS
Medix I.C.S.A.
Embla Systems LLC
STATE or JURISDICTION
of INCORPORATION
PERCENT of
OWNERSHIP
Delaware
France
Canada
Germany
Denmark
Argentina
Delaware
100%
100%
100%
100%
100%
100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 333-65584, 333-174702 and 333-133657 on Form S-8
and Registration Statements Nos. 333-133480 and 333-150503 on Form S-3 of our report dated March 14, 2012, relating to the
consolidated financial statements and financial statement schedule of Natus Medical Incorporated and subsidiaries, which report expresses
an unqualified opinion and includes an explanatory paragraph relating to the adoption of new accounting guidance issued by the Financial
Accounting Standards Board related to the presentation of comprehensive income, and of our report dated March 14, 2012, relating to the
effectiveness of Natus Medical Incorporated and subsidiaries internal control over financial reporting, appearing in this Annual Report on
Form 10-K of Natus Medical Incorporated for the year ended December 31, 2011.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
San Francisco, CA
March 14, 2012
EXHIBIT 31.1
I, James B. Hawkins, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Natus Medical Incorporated, (the “Registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: March 14, 2012
/s/ James B. Hawkins
James B. Hawkins
President and Chief Executive Officer
EXHIBIT 31.2
I, Steven J. Murphy, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Natus Medical Incorporated, (the “Registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: March 14, 2012
/s/ Steven J. Murphy
Steven J. Murphy
Vice President Finance and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natus Medical Incorporated (the “Company”) on Form 10-K for the year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James B. Hawkins,
President and Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ James B. Hawkins
Print Name: James B. Hawkins
Title: President and Chief Executive Officer
Date: March 14, 2012
In connection with the Annual Report of Natus Medical Incorporated (the “Company”) on Form 10-K for the year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven J. Murphy, Vice
President Finance and Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ Steven J. Murphy
Print Name: Steven J. Murphy
Title:
Vice President Finance and Chief Financial
Officer
Date: March 14, 2012