NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 - Basis of Presentation and Significant Accounting Policies
The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Recent Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires lease assets and lease liabilities arising from operating leases to be presented in the statement of financial position. Qualitative along with specific quantitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. In July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which affects narrow aspects of the guidance issued in the amendments in Update 2016-02. In July 2018, the FASB also issued ASU 2018-11, Targeted Improvements. The amendments in ASU 2018-11 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU 2016-02 and have the same effective and transition requirements as ASU 2016-02.
The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits an entity to not reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We have not elected the use-of-hindsight practical expedient or the practical expedient pertaining to land easements; the latter of which is not applicable to us. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. We will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.
The new standard became effective for us on January 1, 2019. We adopted the new standard using the modified retrospective transition method with the effective date as the date of initial application. Upon adoption, we recognized additional new lease assets of approximately $19.5 million and additional lease liabilities of approximately $22.3 million as of January 1, 2019. The standard did not materially affect consolidated net earnings. By electing the effective date as the date of initial application, financial performance has not been adjusted and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. See Significant Accounting Policies and Note 14 for additional discussion and disclosure.
The adoption of the new standard did not impact our liquidity or debt-covenant compliance under its current agreements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for our annual and any interim goodwill impairment tests performed on or after January 1, 2020. We elected to early adopt. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This update permits a company to reclassify its disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) on items within accumulated other comprehensive income (“AOCI”) to retained earnings (termed “stranded tax effects”). Only the stranded tax effects resulting from the 2017 Act are eligible for reclassification. The ASU was effective for us as of January 1, 2019. Upon adoption, we reclassified its stranded tax effects resulting from the 2017 Act of $1.3 million, resulting in a decrease to AOCI and an increase to retained earnings as of January 1, 2019.
Recent Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial assets. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. In May 2019, the FASB issued ASU 2019-05 which provides targeted transition relief guidance intended to increase comparability of financial statement information. The guidance for both of these is effective beginning January 1, 2020. We are evaluating the impact, if any, that these pronouncements will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This update amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosure. For calendar year-end entities, the update will be effective for annual periods beginning January 1, 2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. As the standard relates only to disclosures, we do not expect the adoption to have a material impact on our consolidated financial statements.
Significant Accounting Policies
Leases
We determine if an arrangement is a lease at inception of the lease. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit borrowing rate, generally we use an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the lease commencement date. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to exclude or terminate the lease when it is reasonably certain that they will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term.
Operating leases are included in operating lease ROU assets, accrued liabilities, and operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other liabilities in the consolidated balance sheet.
We have lease agreements with lease and non-lease components, which are generally accounted for based on the type of asset. For real estate and telecom leases, we account for these components separately. For equipment leases, such as office equipment and vehicles, we account for the lease and non-lease components as a single lease component.
Assets and Liabilities Held for Sale
We consider assets and liabilities to be held for sale when all of the following criteria are met:
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•
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Management approves and commits to a formal plan to sell the asset or disposal group;
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•
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The assets or disposal group is available for immediate sale in its present condition;
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•
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An active program to locate a buyer and other actions required to complete the sale have been initiated;
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•
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The sale of the asset or disposal group is expected to be completed within one year;
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•
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The asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to the current fair value; and
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•
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It is unlikely that significant changes will be made to the plan.
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Assets held for sale are not depreciated. Upon designation of the asset or disposal group as held for sale, we record the asset or disposal group at the lower of its carrying value or its estimated fair value, less estimated costs of sale. We consider deferrals accumulated in other comprehensive income, including cumulative currency translation adjustments, in the total carrying value of the disposal group in accordance with GAAP. Any loss resulting from this measurement is recognized on our income statement as a restructuring operating expense in the period in which the held for sale criteria are met and gains, if any are not recognized until the date of sale. We assess the fair value of assets held for sale less any costs to sell each reporting period it remains classified as held for sale and reports any reduction in fair value as an adjustment to the carrying value of the assets held for sale.
2 - Revenue
Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.
The following table summarizes the changes in the unbilled AR and deferred revenue balances for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
Unbilled AR, December 31, 2018
|
$
|
3,012
|
|
|
Additions
|
235
|
|
|
Transferred to Trade Receivable
|
(687
|
)
|
|
Unbilled AR, September 30, 2019
|
$
|
2,560
|
|
|
|
|
|
|
|
|
|
Deferred Revenue, December 31, 2018
|
$
|
21,410
|
|
|
Additions
|
16,589
|
|
|
Revenue Recognized
|
(14,246
|
)
|
|
Deferred Revenue, September 30, 2019
|
$
|
23,753
|
|
At September 30, 2019, the short-term portion of deferred revenue of $19.2 million and the long-term portion of $4.5 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of September 30, 2019, we expect to recognize revenue associated with deferred revenue of approximately $7.2 million in 2019, $12.6 million in 2020, $1.9 million in 2021, $1.0 million in 2022,
and $1.0 million thereafter.
3 - Earnings Per Share
The components of basic and diluted EPS are as follows (in thousands, except per share amounts):
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
|
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2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income (loss)
|
$
|
8,461
|
|
|
$
|
(5,576
|
)
|
|
$
|
(17,352
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)
|
|
$
|
(11,301
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)
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|
Weighted average common shares
|
33,655
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|
|
33,321
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|
|
33,666
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|
|
32,982
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|
|
Dilutive effect of stock based awards
|
83
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|
|
—
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|
|
—
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|
|
—
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|
|
Diluted Shares
|
33,738
|
|
|
33,321
|
|
|
33,666
|
|
|
32,982
|
|
|
Basic income (loss) per share
|
$
|
0.25
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|
|
$
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(0.17
|
)
|
|
$
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(0.52
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)
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|
$
|
(0.34
|
)
|
|
Diluted income (loss) per share
|
$
|
0.25
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|
|
$
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(0.17
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.34
|
)
|
|
Shares excluded from calculation of diluted EPS
|
—
|
|
|
230
|
|
|
105
|
|
|
407
|
|
4 - Inventories
Inventories consist of the following (in thousands):
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September 30, 2019
|
|
December 31, 2018
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Raw materials and subassemblies
|
$
|
40,464
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|
|
$
|
31,459
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|
|
Work in process
|
2,629
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|
|
2,424
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|
|
Finished goods
|
54,857
|
|
|
63,932
|
|
|
Total inventories
|
97,950
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|
|
97,815
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|
|
Less: Non-current inventories
|
(22,843
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)
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|
(18,079
|
)
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Inventories, current
|
$
|
75,107
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|
|
$
|
79,736
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|
As of September 30, 2019 and December 31, 2018, we have classified $22.8 million and $18.1 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.
5 – Intangible Assets
The following table summarizes the components of gross and net intangible asset balances (in thousands):
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|
September 30, 2019
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|
December 31, 2018
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Gross
Carrying
Amount
|
|
Accumulated
Impairment
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Impairment
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Intangible assets with definite lives:
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|
|
|
|
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|
|
|
|
|
|
|
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|
|
Technology
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$
|
109,075
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|
|
$
|
(6,619
|
)
|
|
$
|
(54,404
|
)
|
|
$
|
48,052
|
|
|
$
|
111,198
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|
|
$
|
(6,768
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)
|
|
$
|
(50,046
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)
|
|
$
|
54,384
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|
|
Customer related
|
97,440
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|
|
(50
|
)
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|
(46,100
|
)
|
|
51,290
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|
|
99,440
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|
|
(1,961
|
)
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|
(38,574
|
)
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|
58,905
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|
|
Trade names
|
46,605
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|
|
(3,774
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)
|
|
(24,035
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)
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|
18,796
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|
|
47,217
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|
|
(4,397
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)
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|
(19,250
|
)
|
|
23,570
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|
|
Internally developed software
|
16,524
|
|
|
—
|
|
|
(15,780
|
)
|
|
744
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|
|
16,264
|
|
|
—
|
|
|
(14,164
|
)
|
|
2,100
|
|
|
Patents
|
2,664
|
|
|
(133
|
)
|
|
(2,531
|
)
|
|
—
|
|
|
2,718
|
|
|
(133
|
)
|
|
(2,524
|
)
|
|
61
|
|
|
Service Agreements
|
1,190
|
|
|
—
|
|
|
(1,064
|
)
|
|
126
|
|
|
1,190
|
|
|
—
|
|
|
(757
|
)
|
|
433
|
|
|
Definite-lived intangible assets
|
$
|
273,498
|
|
|
$
|
(10,576
|
)
|
|
$
|
(143,914
|
)
|
|
$
|
119,008
|
|
|
$
|
278,027
|
|
|
$
|
(13,259
|
)
|
|
$
|
(125,315
|
)
|
|
$
|
139,453
|
|
Finite-lived intangible assets are amortized over their weighted average lives, which are 14 years for technology, 10 years for customer related intangibles, 7 years for trade names, 6 years for internally developed software, 13 years for patents, 2 years for service agreements and 11 years weighted average in total.
Internally developed software consists of $14.3 million relating to costs incurred for development of internal use computer software and $2.2 million for development of software to be sold.
Amortization expense related to intangible assets with definite lives was as follows (in thousands):
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|
|
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|
|
|
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|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Technology
|
$
|
1,719
|
|
|
$
|
2,028
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|
|
$
|
5,186
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|
|
$
|
6,405
|
|
|
Customer related
|
2,159
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|
|
2,596
|
|
|
6,509
|
|
|
7,779
|
|
|
Trade names
|
1,487
|
|
|
1,553
|
|
|
4,476
|
|
|
4,635
|
|
|
Internally developed software
|
359
|
|
|
545
|
|
|
1,369
|
|
|
1,603
|
|
|
Patents
|
20
|
|
|
20
|
|
|
60
|
|
|
64
|
|
|
Service Agreements
|
$
|
102
|
|
|
$
|
165
|
|
|
307
|
|
|
651
|
|
|
Total amortization
|
$
|
5,846
|
|
|
$
|
6,907
|
|
|
$
|
17,907
|
|
|
$
|
21,137
|
|
The amortization expense amounts shown above include internally developed software not held for sale of $0.2 million and $1.2 million for the three and nine months ended September 30, 2019, respectively which is recorded within our income statement as a general and administrative operating expense.
Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
Three months ending December 31, 2019
|
$
|
5,378
|
|
|
2020
|
21,455
|
|
|
2021
|
20,568
|
|
|
2022
|
17,134
|
|
|
2023
|
16,164
|
|
|
2024
|
14,300
|
|
|
Thereafter
|
24,009
|
|
|
Total expected amortization expense
|
$
|
119,008
|
|
6 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
147,644
|
|
|
Foreign currency translation
|
(1,500
|
)
|
|
September 30, 2019
|
$
|
146,144
|
|
7 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Land
|
$
|
1,718
|
|
|
$
|
1,828
|
|
|
Buildings
|
6,629
|
|
|
7,036
|
|
|
Leasehold improvements
|
8,479
|
|
|
4,649
|
|
|
Finance lease right-of-use assets
|
2,884
|
|
|
—
|
|
|
Equipment and furniture
|
22,820
|
|
|
23,487
|
|
|
Computer software and hardware
|
12,315
|
|
|
12,803
|
|
|
Demonstration and loaned equipment
|
12,074
|
|
|
12,843
|
|
|
|
66,919
|
|
|
62,646
|
|
|
Accumulated depreciation
|
(41,824
|
)
|
|
(39,733
|
)
|
|
Total
|
$
|
25,095
|
|
|
$
|
22,913
|
|
Depreciation expense of property and equipment was approximately $1.6 million and $4.9 million for the three and nine months ended September 30, 2019 and approximately $2.0 million and $4.4 million for the three and nine months ended September 30, 2018.
8 - Reserve for Product Warranties
We provide a warranty for products that is generally one year in length, but in some cases regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, we may incur additional repair and remediation costs. Service for domestic customers is provided by our service centers that perform all service, repair, and calibration services. Service for international customers is provided by a combination of our facilities, vendors on a contract basis, and distributors.
A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as servicing is performed to honor existing warranty and regulatory obligations.
As of September 30, 2019, we have accrued $7.4 million for product related warranties, which includes $2.4 million of estimated costs to bring certain products into regulatory compliance. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping.
The details of activity in the warranty reserve are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Balance, beginning of period
|
$
|
8,076
|
|
|
$
|
10,913
|
|
|
$
|
9,391
|
|
|
$
|
10,995
|
|
|
Additions charged to expense
|
911
|
|
|
792
|
|
|
3,159
|
|
|
3,127
|
|
|
Utilizations
|
(1,560
|
)
|
|
(945
|
)
|
|
(4,543
|
)
|
|
(2,003
|
)
|
|
Changes in estimate related to product remediation activities
|
—
|
|
|
(1,695
|
)
|
|
(571
|
)
|
|
(3,054
|
)
|
|
Divestiture adjustments
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
Balance, end of period
|
$
|
7,427
|
|
|
$
|
9,065
|
|
|
$
|
7,427
|
|
|
$
|
9,065
|
|
Our estimate of future product warranty costs may vary from actual product warranty costs, and any variance from estimates could impact our cost of sales, operating profits and results of operations.
9 - Share-Based Compensation
As of September 30, 2019, we have two active share-based compensation plans, the 2018 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan.
In January 2019, we granted market stock unit (“MSU”) awards to certain employees. These MSUs fully vest on December 31, 2021 and have separate market performance goals than the performance stock unit (“PSU”) awards we grant. Each MSU represents the right to one share of common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of our stock price over the vesting period. The maximum number of MSUs which will be eligible to vest are 200% of the MSUs initially granted. A Monte Carlo simulation model was used to estimate the fair value of the MSUs as of their grant date. This model simulates our stock price movements using certain assumptions, including our stock price.
The terms of all other awards granted during the nine months ended September 30, 2019 and the methods for determining grant-date fair value of the awards are consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Details of share-based compensation expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cost of revenue
|
$
|
37
|
|
|
$
|
42
|
|
|
$
|
193
|
|
|
$
|
181
|
|
|
Marketing and selling
|
161
|
|
|
207
|
|
|
600
|
|
|
603
|
|
|
Research and development
|
270
|
|
|
278
|
|
|
773
|
|
|
827
|
|
|
General and administrative
|
1,384
|
|
|
1,056
|
|
|
4,705
|
|
|
4,895
|
|
|
Restructuring
|
—
|
|
|
8,231
|
|
|
—
|
|
|
8,940
|
|
|
Total
|
$
|
1,852
|
|
|
$
|
9,814
|
|
|
$
|
6,271
|
|
|
$
|
15,446
|
|
As of September 30, 2019, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $12.3 million, which is expected to be recognized over a weighted average period of 2.1 years.
10 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest income
|
$
|
93
|
|
|
$
|
318
|
|
|
$
|
239
|
|
|
$
|
324
|
|
|
Interest expense
|
(1,172
|
)
|
|
(1,649
|
)
|
|
(4,167
|
)
|
|
(5,250
|
)
|
|
Foreign currency gain (loss)
|
(397
|
)
|
|
572
|
|
|
(860
|
)
|
|
337
|
|
|
Other expense
|
(133
|
)
|
|
33
|
|
|
(133
|
)
|
|
(355
|
)
|
|
Total other expense, net
|
$
|
(1,609
|
)
|
|
$
|
(726
|
)
|
|
$
|
(4,921
|
)
|
|
$
|
(4,944
|
)
|
11 - Income Taxes
Ours tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, we update the estimated annual effective tax rate which is subject to significant volatility due to several factors, including our ability to accurately predict the income (loss) before provision for income taxes in multiple jurisdictions, the effects of acquisitions, the integration of those acquisitions, and changes in tax law. In circumstances where we are unable to predict income (loss) in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.
We recorded a benefit from income tax of $2.0 million and $9.6 million for the three and nine months ended September 30, 2019, respectively. The effective tax rate was (30.6)% and 35.6% for the three and nine months ended September 30, 2019, respectively. Of the $9.6 million benefit from income tax recorded for the nine months ended September 30, 2019, $8.2 million relates to the tax accounting effects of the sale of Medix.
We recorded an expense for income tax of $1.9 million and a benefit from income tax of $3.1 million for the three and nine months ended September 30, 2018, respectively. The effective tax rate was (53.4)% and 21.4% for the three and nine months ended September 30, 2018, respectively.
The increase in the effective tax rate for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 is primarily attributable to changes in distribution of income among jurisdictions with varying tax rates. The increase in the effective tax rate for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is primarily attributable to the tax accounting effects of the sale of Medix. Our effective tax rate for the three months ended September 30, 2019 differed from the federal statutory rate of 21% primarily due to tax benefits from the reversal of uncertain tax positions and certain intra-entity transfers of assets. Our effective tax rate for the nine months ended September 30, 2019 differed from the federal statutory rate of 21% primarily due to the tax accounting effects of the sale of Medix and other tax benefits stated above. Other significant factors that impact the effective tax rate are Federal and California research and development credits, non-deductible executive compensation expenses, and inclusions related to global intangible low-taxed income.
We recorded $0.6 million of net tax benefit related to unrecognized tax benefits for the nine months ended September 30, 2019, primarily due to the lapse of the applicable statute of limitations. Within the next twelve months, it is possible that the uncertain tax benefit may change with a range of approximately zero to $0.4 million. Our tax returns remain open to examination as follows: U.S Federal, 2015 through 2018, U.S. states, 2015 through 2018, and significant foreign jurisdictions, generally 2014 through 2018.
12 - Debt and Credit Arrangements
We have a Credit Agreement with JP Morgan Chase Bank ("JP Morgan"), Citibank, NA (“Citibank”), and Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Agreement provides for an aggregate $225.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating
to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. We have no other significant credit facilities.
In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:
|
|
|
|
•
|
Leverage Ratio, as defined, to be no higher than 2.75 to 1.00.
|
|
|
|
|
•
|
Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
|
At September 30, 2019, we were in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.
At September 30, 2019, we had $70.0 million outstanding under the Credit Agreement.
Pursuant to the terms of the Credit Agreement, the outstanding principal balance will bear interest at either (a) a fluctuating rate per annum equal to the Applicable Rate, as defined in the Credit Agreement, depending on our leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate, which ranges between 1.75% to 2.75%. The effective interest rate during the nine months ended September 30, 2019 was 4.74%. The Credit Agreement matures on September 23, 2021, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. As of September 30, 2019, we have classified $35.0 million of the $70.0 million outstanding as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.
Long-term debt consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Revolving credit facility
|
$
|
70,000
|
|
|
$
|
105,000
|
|
|
Debt issuance costs
|
(382
|
)
|
|
(526
|
)
|
|
Less: current portion of long-term debt
|
35,000
|
|
|
35,000
|
|
|
Total long-term debt
|
$
|
34,618
|
|
|
$
|
69,474
|
|
Maturities of long-term debt as of September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
2019
|
$
|
—
|
|
|
$
|
—
|
|
|
2020
|
—
|
|
|
—
|
|
|
2021
|
70,000
|
|
|
105,000
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
Total
|
$
|
70,000
|
|
|
$
|
105,000
|
|
As of September 30, 2019, the carrying value of total debt approximated fair market value.
13 - Financial Instruments and Derivatives
We use interest rate swap derivative instruments to reduce earnings volatility and manage cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of
our expected LIBOR-indexed floating-rate borrowings. We held the following interest rate swaps as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Item
|
Current Notional Amount
|
Designation Date
|
Effective Date
|
Termination Date
|
Fixed Interest Rate
|
Floating Rate
|
Estimated Fair Value
|
|
1-month USD LIBOR Loan
|
$
|
25,000
|
|
May 31, 2018
|
June 1, 2018
|
September 23, 2021
|
2.611%
|
1-month USD LIBOR
|
$
|
389
|
|
|
Total interest rate derivatives designated as cash flow hedge
|
$
|
25,000
|
|
|
|
|
|
|
$
|
389
|
|
We have designated these derivative instruments as cash flow hedges. We assess the effectiveness of these derivative instruments and records the change in the fair value of a derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income (“AOCI”), net of tax. Once the hedged item affects earnings, the effective portion of any gain or loss will be reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, we will reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.
As of September 30, 2019, we estimate that approximately $154.0 thousand of losses associated with the cash flow hedge, net of tax, could be reclassified from AOCI into earnings within the next twelve months.
14 - Leases
We have operating and finance leases for offices, warehouses, and certain equipment. The leases have remaining lease terms of one to eight years, some of which include options to extend the leases for up to ten years. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by leases.
Components of lease cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2019
|
|
Operating lease cost
|
$
|
1,719
|
|
|
$
|
5,144
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets (principal payments)
|
115
|
|
|
380
|
|
|
Interest on lease liabilities
|
13
|
|
|
49
|
|
|
Short-term lease cost
|
—
|
|
|
51
|
|
|
Variable lease cost
|
922
|
|
|
2,162
|
|
|
Sublease income
|
(46
|
)
|
|
(135
|
)
|
|
Total lease cost
|
$
|
2,723
|
|
|
$
|
7,651
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
3,455
|
|
|
$
|
10,212
|
|
|
Operating cash flows from finance leases
|
38
|
|
|
104
|
|
|
Financing cash flows from finance leases
|
138
|
|
|
404
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
Operating leases
|
774
|
|
|
2,494
|
|
|
Finance leases
|
123
|
|
|
228
|
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Operating Leases
|
|
|
|
Operating lease right-of-use assets
|
$
|
16,059
|
|
|
Current portion of operating lease liabilities
|
$
|
5,901
|
|
|
Operating lease liabilities
|
13,112
|
|
|
Total operating lease liabilities
|
$
|
19,013
|
|
|
|
|
|
Finance Leases
|
|
|
Property and equipment, gross
|
$
|
2,884
|
|
|
Accumulated amortization
|
1,706
|
|
|
Property and equipment, net
|
$
|
1,178
|
|
|
Accrued liabilities
|
$
|
445
|
|
|
Other liabilities
|
779
|
|
|
Total finance lease liabilities
|
$
|
1,224
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
3.9 years
|
|
|
Finance leases
|
3.1 years
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
5.3
|
%
|
|
Finance leases
|
5.1
|
%
|
As of September 30, 2019, future minimum lease payments included in the measurement of lease liabilities on the consolidated balance sheet, for the following five fiscal years and thereafter, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
Operating Leases
|
|
Finance Leases
|
|
2019
|
$
|
6,614
|
|
|
$
|
394
|
|
|
2020
|
5,322
|
|
|
329
|
|
|
2021
|
3,929
|
|
|
221
|
|
|
2022
|
2,607
|
|
|
122
|
|
|
2023
|
1,645
|
|
|
7
|
|
|
Thereafter
|
1,057
|
|
|
—
|
|
|
Total lease payments
|
21,174
|
|
|
1,073
|
|
|
Less imputed interest
|
(2,161
|
)
|
|
151
|
|
|
Total
|
$
|
19,013
|
|
|
$
|
1,224
|
|
As we elected to apply the provisions of Topic 842 on a prospective basis, the following comparative period disclosure is being presented in accordance with Topic 840. The future minimum commitments under our leases as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
Year ending December 31,
|
Operating Leases
|
|
2019
|
$
|
8,092
|
|
|
2020
|
6,951
|
|
|
2021
|
5,290
|
|
|
2022
|
3,423
|
|
|
2023
|
2,426
|
|
|
Thereafter
|
1,365
|
|
|
Total minimum lease payments
|
$
|
27,547
|
|
15 - Segment, Customer and Geographic Information
We operate in one reportable segment in which we provide medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
End-user customer base includes hospitals, clinics, laboratories, physicians, audiologists, and governmental agencies. Most of our international sales are to distributors who resell products to end users or sub-distributors.
Revenue and long-lived asset information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Consolidated Revenue:
|
|
|
|
|
|
|
|
|
United States
|
$
|
73,553
|
|
|
$
|
77,980
|
|
|
$
|
213,055
|
|
|
$
|
222,135
|
|
|
International
|
49,910
|
|
|
52,658
|
|
|
150,704
|
|
|
167,765
|
|
|
Totals
|
$
|
123,463
|
|
|
$
|
130,638
|
|
|
$
|
363,759
|
|
|
$
|
389,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue by End Market:
|
|
|
|
|
|
|
|
|
Neurology Products
|
|
|
|
|
|
|
|
|
Devices and Systems
|
$
|
55,460
|
|
|
$
|
50,635
|
|
|
$
|
155,726
|
|
|
$
|
146,991
|
|
|
Supplies
|
16,732
|
|
|
16,405
|
|
|
49,582
|
|
|
50,108
|
|
|
Services
|
—
|
|
|
2,722
|
|
|
871
|
|
|
9,025
|
|
|
Total Neurology Revenue
|
72,192
|
|
|
69,762
|
|
|
206,179
|
|
|
206,124
|
|
|
Newborn Care Products
|
|
|
|
|
|
|
|
|
Devices and Systems
|
12,487
|
|
|
17,876
|
|
|
39,747
|
|
|
52,326
|
|
|
Supplies
|
9,864
|
|
|
11,289
|
|
|
28,844
|
|
|
30,436
|
|
|
Services
|
4,654
|
|
|
5,055
|
|
|
14,514
|
|
|
15,935
|
|
|
Total Newborn Care Revenue
|
27,005
|
|
|
34,220
|
|
|
83,105
|
|
|
98,697
|
|
|
Hearing & Balance Products
|
|
|
|
|
|
|
|
|
Devices and Systems
|
23,092
|
|
|
25,352
|
|
|
70,795
|
|
|
79,824
|
|
|
Supplies
|
1,174
|
|
|
1,304
|
|
|
3,680
|
|
|
5,255
|
|
|
Total Hearing & Balance Revenue
|
24,266
|
|
|
26,656
|
|
|
74,475
|
|
|
85,079
|
|
|
Total Revenue
|
$
|
123,463
|
|
|
$
|
130,638
|
|
|
$
|
363,759
|
|
|
$
|
389,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Property and equipment, net:
|
|
|
|
|
United States
|
$
|
12,365
|
|
|
$
|
10,019
|
|
|
Ireland
|
5,603
|
|
|
5,083
|
|
|
Canada
|
4,256
|
|
|
4,504
|
|
|
Denmark
|
1,753
|
|
|
1,371
|
|
|
Argentina
|
—
|
|
|
999
|
|
|
Other countries
|
1,118
|
|
|
937
|
|
|
Totals
|
$
|
25,095
|
|
|
$
|
22,913
|
|
During the three and nine months ended September 30, 2019 and 2018, no single customer or country outside the United States contributed more than 10% of our consolidated revenue.
16 - Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
On April 1, 2019, as part of the sale of our Argentinian subsidiary, Medix, we provided a loan to Medix for $2.2 million. This asset was measured at fair value less costs to sell as of September 30, 2019 and is classified as Level 3 asset. The loan is classified within other assets on our condensed consolidated balance sheet. Subsequent changes in the fair value of the loan receivable are recorded within our income statement as an operating expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Additions
|
|
Receipts
|
|
Adjustments
|
|
September 30, 2019
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
Loan receivable
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
—
|
|
|
$
|
(294
|
)
|
|
$
|
1,906
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
—
|
|
|
$
|
(294
|
)
|
|
$
|
1,906
|
|
The derivative financial instruments described in Note 13 are measured at fair value on a recurring basis and are presented on the consolidated balance sheets at fair value. We estimate the fair value of the interest rate swaps by calculating the present value of the expected future cash flows of each swap. The calculation incorporates the contractual terms of the derivatives, observable market interest rates which are considered to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterpart's as well as our nonperformance risk. As of September 30, 2019, there have been no events of default under the interest rate swap agreement. The table below presents the fair value of the derivative financial instruments as well as the classification on the consolidated balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Additions
|
|
Payments
|
|
Adjustments
|
|
September 30, 2019
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
312
|
|
|
$
|
389
|
|
|
Total
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
312
|
|
|
$
|
389
|
|
The following financial instruments are not measured at fair value on our consolidated balance sheet as of September 30, 2019 and December 31, 2018 but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.
17 - Sale of Certain Subsidiary
We divested our wholly owned subsidiary, Medix SA, on April 2, 2019 via a stock sale. In exchange for the stock, we received $2.5 thousand in cash and provided Medix with a $2.2 million limited-recourse loan. The loan is secured by a real estate asset of Medix and repayment is conditional upon the sale of the real estate asset.
The held for sale criteria under GAAP was met in the first quarter of 2019. As such, we completed an asset impairment analysis which resulted in the full impairment of all assets held for sale. We recognized an impairment loss of $24.6 million which included an accrual for the anticipated realization of deferred foreign currency related
translation adjustments in accumulated other comprehensive income of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. Included in the nine months ended September 30, 2019 is the sale of Medix, which was completed as of June 30, 2019, and the deferred foreign currency related translation adjustments previously in accumulated other comprehensive income have been released from the balance sheet along with the held for sale accrual.