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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
 
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 77-0154833
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
6701 Koll Center Parkway, Suite 120, Pleasanton, CA 94566
(Address of principal executive offices) (Zip Code)
(925) 223-6700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareNTUSThe Nasdaq Stock Market LLC
(The Nasdaq Global Market)

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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer   Accelerated Filer 
Non-accelerated Filer 
  
  Smaller reporting company 
  Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of April 30, 2021 was 34,078,412.


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NATUS MEDICAL INCORPORATED
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PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
March 31, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$80,549 $82,082 
Accounts receivable, net of allowance for doubtful accounts of $6,085 in 2021 and $6,213 in 2020
91,326 93,133 
Inventories69,467 75,650 
Prepaid expenses and other current assets24,477 20,837 
Total current assets265,819 271,702 
Property and equipment, net23,282 24,516 
Operating lease right-of-use assets10,776 11,669 
Intangible assets, net85,001 92,741 
Goodwill149,761 151,299 
Deferred income tax26,321 27,563 
Other assets20,408 20,904 
Total assets$581,368 $600,394 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$24,486 $23,429 
Current portion of long-term debt36,523 50,000 
Accrued liabilities45,792 44,236 
Deferred revenue23,669 21,308 
Current portion of operating lease liabilities6,006 6,779 
Total current liabilities136,476 145,752 
Other liabilities17,864 18,451 
Operating lease liabilities8,181 8,959 
Long-term debt, net of current portion 5,840 
Deferred income tax9,915 10,298 
Total liabilities172,436 189,300 
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,096,895 in 2021 and 33,911,703 in 2020
344,696 342,828 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2021 and 2020
  
Retained earnings73,705 71,309 
Accumulated other comprehensive loss(9,469)(3,043)
Total stockholders’ equity408,932 411,094 
Total liabilities and stockholders’ equity$581,368 $600,394 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended
March 31,
 20212020
Revenue$114,927 $109,383 
Cost of revenue46,688 44,933 
Intangibles amortization1,751 1,668 
Gross profit66,488 62,782 
Operating expenses:
Marketing and selling28,971 30,730 
Research and development14,040 17,569 
General and administrative14,855 13,182 
Intangibles amortization3,897 3,661 
Restructuring205 871 
Total operating expenses61,968 66,013 
Income (loss) from operations4,520 (3,231)
Other expense, net(1,656)(1,494)
Income (loss) before benefit from income tax2,864 (4,725)
Provision for (benefit from) income taxes468 (1,128)
Net income (loss)$2,396 $(3,597)
Net income (loss) per share:
Basic$0.07 $(0.11)
Diluted$0.07 $(0.11)
Weighted average shares used in the calculation of net income (loss) per share:
Basic33,611 33,800 
Diluted33,782 33,800 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended
March 31,
 20212020
Net income (loss)$2,396 $(3,597)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment(6,494)(4,018)
Interest rate swap designated as a cash flow hedge68 (175)
Other comprehensive loss, net of tax(6,426)(4,193)
Comprehensive loss(4,030)(7,790)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands, except per share amounts)
 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 202033,911,703 $342,828 $71,309 $(3,043)$411,094 
Vesting of restricted stock units19,650 — — — — 
Net issuance of restricted stock awards222,899 — — — — 
Stock-based compensation expense— 3,018 — — 3,018 
Taxes paid related to net share settlement of equity awards(57,357)(1,150)— — (1,150)
Other comprehensive loss— — — (6,426)(6,426)
Net income— — 2,396 — 2,396 
Balances, March 31, 202134,096,895 $344,696 $73,705 $(9,469)$408,932 


 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 201934,148,700 $344,476 $87,922 $(16,275)$416,123 
Vesting of restricted stock units14,033 — — — — 
Net issuance of restricted stock awards162,212 — — — — 
Stock-based compensation expense— 2,198 — — 2,198 
Repurchase of company stock(465,117)(10,495)— — (10,495)
Taxes paid related to net share settlement of equity awards(57,695)(1,883)— — (1,883)
Other comprehensive loss— — — (4,193)(4,193)
Net loss— — (3,597)— (3,597)
Balances, March 31, 202033,802,133 $334,296 $84,325 $(20,468)$398,153 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Three Months Ended
March 31,
 20212020
Operating activities:
Net income (loss)$2,396 $(3,597)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable101 522 
Depreciation and amortization7,257 6,994 
Loss on disposal of property and equipment8 42 
Warranty reserve341 704 
Share-based compensation3,114 2,291 
Loss on commencement of sales-type leases6 295 
Loss on equity method investment136  
Changes in operating assets and liabilities:
Accounts receivable4,962 15,612 
Inventories4,139 (3,443)
Prepaid expenses and other assets(4,028)(1,060)
Accounts payable1,303 6,038 
Accrued liabilities1,172 (9,329)
Deferred revenue2,732 2,190 
Deferred income tax1,064 103 
Net cash provided by operating activities24,703 17,362 
Investing activities:
Purchase of property and equipment(731)(3,575)
Net cash used in investing activities(731)(3,575)
Financing activities:
Repurchase of common stock (10,495)
Taxes paid related to net share settlement of equity awards(1,150)(1,883)
Principal payments of financing lease liability(125)(133)
Proceeds from borrowings 60,000 
Payments on borrowings(20,000)(15,000)
Net cash provided by (used in) financing activities(21,275)32,489 
Exchange rate changes effect on cash and cash equivalents(4,230)(2,557)
Net increase (decrease) in cash and cash equivalents(1,533)43,719 
Cash and cash equivalents, beginning of period82,082 63,297 
Cash and cash equivalents, end of period$80,549 $107,016 
Supplemental disclosure of cash flow information:
Cash paid for interest$513 $637 
Cash paid for income taxes$(320)$3,492 
Non-cash investing activities:
Property and equipment included in accounts payable$39 $131 
Inventory transferred to property and equipment$94 $196 
Transfer of leased assets to sales-type leases$13 $663 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
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, 2020.
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, 2020 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, 2020.
Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Impact of COVID-19 on Our Financial Statements
The global spread and unprecedented impact of COVID-19 is complex and rapidly-evolving. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended extensive containment and mitigation measures worldwide. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, school closures, and social distancing requirements. The global spread of COVID-19 and actions taken in response to the virus have negatively affected workforces, customers, consumer confidence, financial markets, employment rates, consumer spending, credit markets and housing demand, caused significant economic and business disruption, volatility and financial uncertainty, and led to a significant economic downturn, including in the markets where we operate.
Various government programs have been established to provide financial relief for businesses affected by COVID-19 including the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. We received $2.9 million for payroll subsidies under CEWS during the three months ended March 31, 2021. Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the three months ended March 31, 2021 we recognized reductions of $0.4 million in cost of sales, $1.3 million in marketing and selling expense, and $1.2 million in research and development expense in the condensed consolidated statements of operations for these subsidies. No payroll subsidies were received or recognized under CEWS in prior periods. As of March 31, 2021 we have collected all amounts recorded and continue to seek additional relief as applicable.
We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. The accounting estimates and other matters we assessed include, but were not limited to, our allowance for doubtful accounts, inventory and warranty reserves, stock-based compensation, goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While based on our current assessment of these estimates there was not a material impact to our consolidated
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financial statements as of and for the three months ended March 31, 2021, as additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our consolidated financial statements in future reporting periods.

Recently Adopted Accounting Pronouncements
None.

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 three months ended March 31, 2021 (in thousands):
Unbilled AR, December 31, 2020$1,925 
Additions69 
Transferred to trade receivable(8)
Unbilled AR, March 31, 2021$1,986 
Deferred revenue, December 31, 2020$25,723 
Additions11,032 
Revenue recognized(8,332)
Deferred revenue, March 31, 2021$28,423 

    At March 31, 2021, the short-term portion of deferred revenue of $23.7 million and the long-term portion of $4.7 million are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of March 31, 2021, we expect to recognize revenue associated with deferred revenue of approximately $20.1 million in 2021, $5.5 million in 2022, $1.5 million in 2023, $0.9 million in 2024, and $0.4 million thereafter.

3 - Earnings Per Share
The components of basic and diluted EPS, and shares excluded from the calculation of diluted loss per share because the effect would have been anti-dilutive, are as follows (in thousands, except per share amounts):
Three Months Ended
March 31,
20212020
Net income (loss)$2,396 $(3,597)
Weighted average common shares33,611 33,800 
Dilutive effect of stock based awards171  
Diluted shares33,782 33,800 
Basic earnings per share$0.07 $(0.11)
Diluted earnings per share$0.07 $(0.11)
Shares excluded from calculation of diluted EPS 85 

4 - Allowance for Doubtful Accounts
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We estimate the lifetime allowance for doubtful, potentially uncollectible, accounts receivable upon their inception based on historical collection experience within the markets in which we operate, customer-specific information such as bankruptcy filings or customer liquidity problems, current conditions, and reasonable and supportable forecasts about the future.
Our allowance for doubtful accounts is presented as a reduction to accounts receivable on our consolidated balance sheet. When all internal efforts have been exhausted to collect the receivable, it is written off and relieved from the reserve.
The details of activity in allowance for doubtful accounts are as follows (in thousands):
Three Months Ended
March 31,
20212020
Balance, beginning of period$6,213 $7,384 
Additions charged to expense101 522 
Write-offs charged against allowance(229)(614)
Balance, end of period$6,085 $7,292 

5 - Inventories
Inventories consist of the following (in thousands):
March 31, 2021December 31, 2020
Raw materials and subassemblies$18,874 $22,583 
Work in process3,327 2,294 
Finished goods61,977 65,695 
Total inventories84,178 90,572 
Less: Non-current inventories(14,711)(14,922)
Inventories, current$69,467 $75,650 
As of March 31, 2021 and December 31, 2020, we have classified $14.7 million and $14.9 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.

6 – Intangible Assets
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The following table summarizes the components of gross and net intangible asset balances (in thousands):
 March 31, 2021December 31, 2020
 Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Intangible assets with definite lives:
Technology$110,356 $(12,458)$(65,079)$32,819 $112,138 $(12,480)$(64,203)$35,455 
Customer related92,411 (50)(52,499)39,862 94,526 (50)(51,247)43,229 
Trade names46,481 (3,592)(33,047)9,842 47,058 (3,677)(31,890)11,491 
Internally developed software13,281  (12,895)386 13,281  (12,845)436 
Patents2,748 (133)(2,615) 2,810 (133)(2,677) 
Service agreements1,190  (1,129)61 1,190  (1,119)71 
Definite-lived intangible assets$266,467 $(16,233)$(167,264)$82,970 $271,003 $(16,340)$(163,981)$90,682 
Intangible assets with indefinite lives:
Intellectual Property$2,031 $ $— $2,031 $2,059 $ $— $2,059 
Total intangible assets$268,498 $(16,233)$(167,264)$85,001 $273,062 $(16,340)$(163,981)$92,741 

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 $11.1 million relating to costs incurred for development of internal use computer software and $2.2 million for development of software to be sold.
Amortization expense related to intangible assets with definite lives was as follows (in thousands):
 Three Months Ended
March 31,
 20212020
Technology$1,795 $1,712 
Customer related2,360 2,140 
Trade names1,483 1,466 
Internally developed software50 69 
Service agreements$10 $10 
Total amortization$5,698 $5,397 

The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and $24 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively, which is recorded within our income statement as a general and administrative operating expense. The amortization expense amounts shown above include internally developed software held for sale of $26 thousand and $45 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively, which is recorded within our income statement as cost of goods sold.
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Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):
Nine months ending December 31, 2021$16,276 
202217,940 
202315,169 
202413,233 
202512,619 
20262,422 
Thereafter5,311 
Total expected amortization expense$82,970 

7 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
December 31, 2020$151,299 
Foreign currency translation(1,538)
March 31, 2021$149,761 

8 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
March 31, 2021December 31, 2020
Land$1,786 $1,792 
Buildings7,144 7,365 
Leasehold improvements7,378 8,050 
Finance lease right-of-use assets2,512 2,555 
Equipment and furniture20,581 22,148 
Computer software and hardware10,257 10,246 
Demonstration and loaned equipment3,175 3,086 
52,833 55,242 
Accumulated depreciation(29,551)(30,726)
Total$23,282 $24,516 

Depreciation expense of property and equipment was approximately $1.6 million and $1.7 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

9 - Reserve for Product Warranties
We provide a warranty for products that is generally one year in length. 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, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.
We accrue estimated product warranty costs at the time of sale based on historical experience. A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
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As of March 31, 2021, we have accrued $4.8 million for product related warranties. 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):
 Three Months Ended
March 31,
 20212020
Balance, beginning of period$5,195 $6,404 
Additions charged to expense341 704 
Utilizations(740)(1,271)
Balance, end of period$4,796 $5,837 

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.

10 - Share-Based Compensation
As of March 31, 2021, we have two active share-based compensation plans, the 2018 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan.
The terms of all awards granted during the three months ended March 31, 2021 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, 2020.
Details of share-based compensation expense are as follows (in thousands):
 Three Months Ended
March 31,
 20212020
Cost of revenue$100 $75 
Marketing and selling640 469 
Research and development355 254 
General and administrative1,923 1,400 
Total$3,018 $2,198 

As of March 31, 2021, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $20.2 million, which is expected to be recognized over a weighted average period of 2.6 years.

11 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
 Three Months Ended
March 31,
 20212020
Interest income$3 $24 
Interest expense(766)(717)
Foreign currency loss(731)(801)
Other expense(162) 
Total other (expense), net$(1,656)$(1,494)

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12 - Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, we update the estimated annual effective tax rate which is subject to significant volatility due to several factors, including our ability to accurately predict the income (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 income tax expense of $0.5 million and income tax benefit of $1.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The effective tax rate was 16.4% and 23.9% for the three months ended March 31, 2021 and March 31, 2020, respectively. The decrease in the effective tax rate for the three months ended March 31, 2021 compared with the three months ended March 31, 2020, is primarily attributable to changes in mix of income among jurisdictions with varying tax rates and discrete items. Other significant factors impacting the current period effective tax rate included Federal and California research and development credits and non-deductible executive compensation expenses.
We recorded no changes related to unrecognized tax benefits for the three months ended March 31, 2021. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to $0.2 million. Our tax returns remain open to examination as follows: U.S Federal, 2017 through 2020, U.S. states, 2016 through 2020, and significant foreign jurisdictions, generally 2016 through 2020.

13 - 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”). During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity date of the original agreement, reduce the aggregate value of the revolving facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of 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 3.25 to 1.00.
Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
    At March 31, 2021, we were in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.
    During the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty of which $43.0 million was repaid by December 31, 2020. During the first quarter of 2021, we repaid $20.0 million of our outstanding debt and at March 31, 2021, we had $37.0 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 2.25% to 3.50%. The effective interest rate during the three
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months ended March 31, 2021 was 3.05%. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. As of March 31, 2021, we have classified the full outstanding debt balance of $37.0 million 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):
 March 31, 2021December 31, 2020
Revolving credit facility$37,000 $57,000 
Debt issuance costs(477)(1,160)
Less: current portion of long-term debt36,523 50,000 
Total long-term debt$ $5,840 

Maturities of long-term debt as of March 31, 2021 are as follows (in thousands):
 March 31, 2021December 31, 2020
2021$ $ 
2022  
202337,000 57,000 
Thereafter  
Total$37,000 $57,000 
    
As of March 31, 2021, the carrying value of total debt approximated fair market value.

14 - 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 March 31, 2021 (in thousands):
Hedged ItemCurrent Notional AmountDesignation DateEffective DateTermination DateFixed Interest RateFloating RateEstimated Fair Value
1-month USD LIBOR Loan$15,000 May 31, 2018June 1, 2018September 23, 20212.611%1-month USD LIBOR$187 
Total interest rate derivatives designated as cash flow hedge$15,000 $187 

    We have designated these derivative instruments as cash flow hedges. We assess the effectiveness of these derivative instruments and record 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 March 31, 2021, we estimate that approximately $142.0 thousand of losses associated with the cash flow hedge, net of tax, could be reclassified from AOCI into earnings within the next twelve months.

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.
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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.
The following tables present revenue by end market and geographic region and long-lived asset information by geographic region. Revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):
 Three Months Ended
March 31,
 20212020
Consolidated Revenue:
United States$67,772 $68,338 
International47,155 41,045 
Total$114,927 $109,383 
 Three Months Ended
March 31,
 20212020
Revenue by End Market:
Neuro Products
Devices and Systems$53,341 $49,426 
Supplies15,714 15,924 
Total Neuro Revenue69,055 65,350 
Newborn Care Products
Devices and Systems13,772 11,124 
Supplies8,403 9,691 
Services3,764 3,417 
Total Newborn Care Revenue25,939 24,232 
Hearing & Balance Products
Devices and Systems18,771 18,560 
Supplies1,162 1,241 
Total Hearing & Balance Revenue19,933 19,801 
Total Revenue$114,927 $109,383 
March 31, 2021December 31, 2020
Property and equipment, net:
United States$10,115 $10,998 
Ireland6,647 6,716 
Canada3,713 3,775 
Denmark1,613 1,787 
Other countries1,194 1,240 
Total$23,282 $24,516 

During the three months ended March 31, 2021 and 2020, no single customer and no 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
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or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The derivative financial instruments described in Note 14 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 March 31, 2021, 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, 2020AdditionsPaymentsAdjustmentsMarch 31, 2021
Liabilities:
Interest rate swap$277 $ $ $(90)$187 
Total$277 $ $ $(90)$187 
    
The following financial instruments are not measured at fair value on our consolidated balance sheet as of March 31, 2021 and December 31, 2020 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.

ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) supplements the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2020. MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the risk factors referred to in Part II, Item 1A of this report, our Annual Report filed on Form 10-K for the year ended December 31, 2020 and the cautionary information regarding forward-looking statements at the end of this section.
Our Business
We are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
End Markets
Our products address the below end markets:
Neuro - Includes products and services that provide diagnostic, therapeutic and surgical solutions in neurodiagnostics, neurocritical care and neurosurgery. Neuro's comprehensive neurodiagnostic solutions include electroencephalography and long-term monitoring, Intensive Care Unit monitoring, electromyography, sleep analysis or polysomnography, and intraoperative monitoring. These solutions enhance the diagnosis of neurological conditions such as epilepsy, sleep disorders and neuromuscular diseases. Our neurocritical care solutions include management of traumatic brain injury by continuous
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monitoring of intracranial pressure and cerebrospinal fluid drainage, as well as cranial access kits for entry into the cranium. Our neurosurgical solutions include items such as valves, shunts and related treatment solutions for procedures involving hydrocephalus.
Newborn Care - Includes products and services for newborn care including hearing screening, brain monitoring, eye imaging, jaundice management, and various disposable newborn care supplies.
Hearing & Balance - The Hearing portfolio includes products for hearing assessment and diagnostics, and hearing aid fitting, including computer-based audiological, otoneurologic and vestibular instrumentation for hearing care professionals. Our Balance portfolio provides diagnosis and assessment of vestibular and balance disorders. These solutions have a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets.
Segment and Geographic Information
We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not asses the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end markets and geographic regions to provide the reader of the financial statements transparency into our operations.
Information regarding our revenues and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 15 – Segment, Customer and Geographic Information of our condensed consolidated financial statements included in this report and is incorporated in this section by reference.
Revenue by Product Category
We generate our revenue from sales of Devices and Systems, which are generally non-recurring, and from related Supplies and Services, which are generally recurring. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2020. Revenue from Devices and Systems, Supplies, and Services, as a percent of total revenue for the three months ended March 31, 2021 and 2020, is as follows:
 Three Months Ended
March 31,
 20212020
Devices and Systems75 %72 %
Supplies22 %25 %
Services%%
Total100 %100 %
2021 First Quarter Overview
Our business and operating results are driven in part by worldwide economic conditions. Our revenue is significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health outside the United States.
We experienced an increase in demand, particularly in Asia Pacific and Europe, during the first quarter compared to the same period in the prior year as recovery from the COVID-19 pandemic continues. Our consolidated revenue for the first quarter ended March 31, 2021 was $114.9 million compared to $109.4 million in the first quarter of the previous year, an increase of $5.5 million.
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Our net income was $2.4 million or $0.07 per diluted share in the three months ended March 31, 2021, compared with net loss of $3.6 million or $0.11 per share in the same period in 2020. The increase in net income was the result of higher revenue due to the recovery from impact of COVID-19, in particular in international markets for Neuro products, and lower expenses compared to the prior year, driven by the timing of engineering project spend and the benefit of COVID-19 payroll relief received in Canada.
COVID-19 Update
Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue our business operations.
We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. We have taken actions to reduce costs, including reducing travel and discretionary expenses. We will continue to prioritize spending to allow continued investment in products and services that are key elements of our stated strategy for profitable growth in the years ahead.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and supply our finished products. We have made strategic investments in inventory to help mitigate potential supply chain disruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. To date, we have not incurred any significant supply disruptions and we believe our suppliers are positioned well to provide us with the materials we need to meet our demand. Supply appears to be stable, which could allow for the reduction of inventory levels in future quarters. The health and safety of our suppliers is also a priority for us and we have transitioned collaboration with our suppliers to online technology so that we can continue our business operations.
Liquidity
In the first quarter of 2020 we drew $60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty of which $43.0 million was repaid by December 31, 2020. During the third quarter of 2020 we amended our Credit Agreement which extended the maturity date of the original agreement from September 23, 2021 to September 25, 2023, reduced the aggregate revolving credit facility from $225.0 million to $150.0 million, and amended certain covenants. During the three months ended Mach 31, 2021, we repaid $20.0 million in debt, reducing the amount outstanding under the Credit Agreement to $37.0 million, and continued to maintain a strong cash position ending the period with $80.5 million in cash.
As a result of the COVID-19 pandemic, some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during this uncertain time. We have seen revenues and margins improve since the onset of the pandemic. We continue to see our customers adapting to the COVID environment, which we believe will result in increased capital spending and continue to improve our business in 2021.
While we believe that we have sufficient liquidity to operate the Company for the foreseeable future should negative economic conditions persist for an extended period of time, we are evaluating additional measures we could take to further enhance our liquidity position.
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Government Grants
Various government programs have been announced to provide financial relief for businesses affected by COVID-19 including the CEWS under the COVID-19 Economic Response Plan in Canada. We received $2.9 million for payroll subsidies under CEWS during the three months ended March 31, 2021. Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the three months ended March 31, 2021 we recognized reductions of $0.4 million of cost of sales, $1.3 million of marketing and selling expense, and $1.2 million of research and development expense in the condensed consolidated statements of operations for these subsidies. No payroll subsidies were received or recognized under CEWS in prior periods. As of March 31, 2021 we have collected all amounts recorded and continue to seek additional relief as applicable.
Impact to fair-value of intangible assets
We have reviewed the assets on our balance sheet, particularly goodwill and significant intangible assets for indications of impairment related to COVID-19 and determined that there are no indicators of impairment at this time. The values of these assets are particularly sensitive to our market cap and the long-term value of their cash flows. If these conditions change significantly, we may need to record an impairment to their value. However, any impairment charges would not require the use of cash and are excluded from the calculation of our debt covenants and, therefore, would not affect our ability to borrow under our existing credit line.
Impact to our financial systems and internal controls
To date, the COVID-19 pandemic has not had a material impact to our ability to operate our accounting and financial functions. We are staffed with approximately 150 dedicated finance, accounting and IT professionals. Our accounting and IT systems are maintained with third party support agreements and we have documented disaster recovery plans in place. Our finance, accounting and IT professionals are performing their normal functions while working from home with little to no physical presence and with no changes to our internal controls. We are confident that we can operate in this manner for an extended period of time without disruption and without significant impact to our internal controls.
Travel restrictions and use of online technology
The global Natus team is geographically diverse with multiple small locations and hundreds of employees that typically work from home in normal circumstances. We use the latest collaboration technology and have been able to transition to a company-wide work from home model without major interruption. Our manufacturing, distribution and field service operations require physical presence of certain employees as their work requires them to handle our products. In these cases, we have made adjustments to shift size and schedule and limited access to these groups by non-related employees. Our field service technicians are following our customers' requirements for distancing practices but continue to provide service where needed.
Travel restrictions have forced most customer and external partner collaboration to online technology. Using this technology has enabled us to continue operations without incident. However, in-person customer engagement as well as physical presence in laboratory settings is required for the long-term success of our company and eventually, we will need to return to traditional forms of interaction.
Application of Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. 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:
Revenue recognition
Inventory valuation
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Income Taxes
The use of different estimates, assumptions, or judgments could have a material effect on the reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period. These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2020, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The following table sets forth selected consolidated statement of operations data as a percentage of total revenue for the periods indicated:
 Three Months Ended
March 31,
 20212020
Revenue100.0 %100.0 %
Cost of revenue40.6 %41.1 %
Intangibles amortization1.5 %1.5 %
Gross profit57.9 %57.4 %
Operating expenses:
Marketing and selling25.2 %28.1 %
Research and development12.2 %16.1 %
General and administrative12.9 %12.1 %
Intangibles amortization3.4 %3.3 %
Restructuring0.2 %0.8 %
Total operating expenses53.9 %60.4 %
Income (loss) from operations4.0 %(3.0)%
Other expense, net(1.4)%(1.4)%
Income (loss) before provision for income tax2.6 %(4.4)%
Provision for (benefit from) income taxes0.4 %(1.0)%
Net income (loss)2.2 %(3.4)%
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Revenues
The following table shows revenue by products during the three months ended March 31, 2021 and March 31, 2020 (in thousands):
 Three Months Ended
March 31,
 20212020Change
Neuro Products
Devices and Systems$53,341 $49,426 %
Supplies15,714 15,924 (1)%
Total Neuro Revenue69,055 65,350 %
Newborn Care Products
Devices and Systems13,772 11,124 24 %
Supplies8,403 9,691 (13)%
Services3,764 3,417 10 %
Total Newborn Care Revenue25,939 24,232 %
Hearing & Balance Products
Devices and Systems18,771 18,560 %
Supplies1,162 1,241 (6)%
Total Hearing & Balance Revenue19,933 19,801 %
Total Revenue$114,927 $109,383 %
For the three months ended March 31, 2021, Neuro revenue increased by 6% compared to the same period last year driven by higher sales of Neuro devices in our international markets combined with strength in backlog from 2020. Revenue from Neuro supplies was down slightly from the same period last year due to lower shipments of Neurocritical Care products.
For the three months ended March 31, 2021, Newborn Care revenue increased by 6% compared to the same period last year due mainly to the sale of NICVIEW devices, which had been on ship hold during the same period last year, higher Hearing Screening device sales, and higher services revenue from our agreement with Pediatrix. These increases were partly offset by decreases in Hearing Screening supplies and Phototherapy devices due to lower births.
For the three months ended March 31, 2021, Hearing & Balance revenue remained flat compared to the same period last year with an increase in device sales partly offset by a slight decline in supplies revenue.
Revenue from domestic sales decreased to $67.8 million for the three months ended March 31, 2021 compared to $68.3 million in the three months ended March 31, 2020. The decrease in domestic revenue was mainly due to the impact of the COVID-19 pandemic on demand for supplies.
Revenue from international sales increased to $47.2 million for the three months ended March 31, 2021 compared to $41.0 million for the three months ended March 31, 2020. The increase was driven by recovery in demand, mainly for our Neuro products, following the impact of the COVID-19 pandemic in the same period last year.
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Table of Contents
Cost of Revenue and Gross Profit
Cost of revenue and gross profit consists of (in thousands):
 Three Months Ended
March 31,
 20212020
Revenue$114,927 $109,383 
Cost of revenue46,688 44,933 
Intangibles amortization1,751 1,668 
Gross profit66,488 62,782 
Gross profit percentage57.9 %57.4 %
For the three months ended March 31, 2021, gross profit as a percentage of revenue increased 0.5% compared to the same period in the prior year. The increase was due to higher revenue and lower operations overhead spend partly offset by higher costs for freight and contract manufacturer fees.
Operating Costs
Operating costs consist of (in thousands):
 Three Months Ended
March 31,
 20212020
Marketing and selling$28,971 $30,730 
Percentage of revenue25.2 %28.1 %
Research and development$14,040 $17,569 
Percentage of revenue12.2 %16.1 %
General and administrative$14,855 $13,182 
Percentage of revenue12.9 %12.1 %
Intangibles amortization$3,897 $3,661 
Percentage of revenue3.4 %3.3 %
Restructuring$205 $871 
Percentage of revenue0.2 %0.8 %

Marketing and Selling
Marketing and selling expenses decreased for the three months ended March 31, 2021. The reduction was primarily driven by lower travel and tradeshow expenses due to the impact of COVID-19 restrictions partly offset by an increase in commissions expense related to higher revenue in the current quarter.
Research and Development
Research and development expenses decreased during the three