Natus Medical Incorporated

is Jonathan Kennedy, Natus' President and Chief Executive Officer, and Drew Davies, Natus' Executive Vice President and Chief Financial Officer. Jonathan will begin today with a business overview of the second quarter 2021. Then Drew will discuss the second quarter financial performance. Finally, Drew will return the call to Jonathan for closing remarks. Today's call will include forward-looking statements within the meaning of the Private Security Litigation Reform Act. These statements include management beliefs and expectations about our future results. Actual results may differ materially from these forward-looking statements. A description of the relevant risks and uncertainties pertaining to our business, please see yesterday's press release and our periodic and annual reports filed with the SEC. Management's presentation of the financial results will be on a GAAP and non-GAAP basis. Results exclude amortization expenses, restructuring, and certain other charges and their related tax effects. Management believes that the presentation of these non-GAAP measures along with GAAP financial statements provide more thorough anise to our ongoing financial performance. You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in yesterday's earning release. I would now like to turn the conference over to Jonathan Kennedy, President and Chief Executive Officer of Natus Medical. Mr. Kennedy.

Thank you, Michelle. Good morning, everyone. During our call today, we will discuss our second quarter 2021 financial results, as well as our current business trends. Yesterday, we reported the results for the second quarter of 21. Revenue for the quarter achieved the high end of our guidance at $116 million. and non-GAAP earnings per share was 29 cents. We are pleased with the recovery in our overall revenues and earnings compared to the second quarter of last year, which was the most challenging quarter for Natus in 2020. Total revenues increased by 37%, led by Neuro, which increased 62%, and Hearing and Balance, which increased by 34%, compared to the second quarter of last year. We are optimistic in the pace of the revenue recovery in 21 compared to 2020, And we continue to focus on efforts to increase margins and execute strategic investments in new products that will drive long-term revenue growth and profitability. In a few minutes, Drew will discuss more financial details. But first, I'd like to provide some additional commentary on the quarter and each of our end markets. In neuro, Natus is the global leader in neurodiagnostic equipment solutions. Our products and services are used by the majority of hospitals and neurologists worldwide. We have the most comprehensive line of neurodiagnostic equipment offered by any global manufacturer today, offering a full line of EEG, EMG, and PSG sleep solutions. Overall, our neuro business recovered and grew by 62% year-over-year during the second quarter, led by neurodiagnostic hardware and supplies, which increased 76%, and that was offset by about a 5% decline in neurosurgery and other products in the neurocategories. Overall, our neuro hardware business recovered and grew over 85%, while sales of neuro supplies increased from the prior year by approximately 59%. For hearing imbalance, our hearing imbalance products include devices and supplies used by audiologists, hospitals, and ENTs to diagnose hearing disorders, assist in the fitting and tuning of hearing aids, and for the diagnosis of balance disorders. Revenue from the hearing imbalance returned to pre-pandemic levels during the quarter and recovered and grew 34% versus the second quarter of 2020. Natus' market-leading newborn care product family is used by hospitals worldwide. Major product categories in this family include our newborn hearing screening solutions, neonatal eye imaging and brain injury monitoring, video streaming services, and phototherapy solutions. Overall, newborn care revenue declined by 3% versus the second quarter of 2020. Revenue growth from the sales of our webcam imaging systems and growth in our newborn hearing screen was offset by declines in video streaming and other newborn products. And recall that our newborn care business remained somewhat steady throughout 2020 and was the least impacted by the pandemic. In summary, we're very pleased with the recovery and growth during the quarter. We remain focused on our strategy and investing to refresh our market-leading products and deliver new innovations, which we believe will drive growth and future financial performance. We experienced another quarter of very healthy cash flow from operations, and we ended the quarter with no debt. Now I'll turn the call over to Drew Davies, our Executive Vice President and Chief Financial Officer, for a deeper dive into our financial results. Drew?

Thank you, Jonathan. As Jonathan stated, we reported second quarter 2021 revenue of $116 million. a 36.8% increase from the second quarter of 2020 as our business is recovering from the impact of COVID-19. Neuro and hearing imbalance drove the increase for the second quarter compared to last year, growing 62% and 34% respectively. Newborn care, which was not materially impacted by the pandemic, declined 2% compared to the second quarter last year. Looking back to the second quarter of 2019, Total revenue declined by 3% after adjusting for divestitures and discontinued products. Revenue from our Neuro end market was $70.5 million or 61% of total revenue during the second quarter of 2021 compared to $43.5 million or 51% of total revenue during the same quarter last year. Revenue from the Neuro business increased 62% compared to the same quarter last year The increase was mainly driven by the recovery of procedures and neurocapital purchases throughout our markets. Revenue from our newborn care and market decreased 2% to $26.3 million or 23% of total revenue during the second quarter of 2021 compared to $26.9 million or 32% of total revenue during the same quarter last year. The decrease was primarily attributable to the release of $2.5 million of NICVU backlog in the second quarter last year that did not repeat this year. Revenue from our hearing and balance end market was $19.2 million or 17% of total revenue during the second quarter of 2021 compared to $14.3 million or 17% of total revenue during the same quarter last year. The hearing and balance revenue recovered during the quarter but remains below 2019 levels as further recovery is needed in our international markets. Revenue from devices and systems contributed 74% of total revenue in the second quarter of 2021 compared to 72% in the 2020 period. Revenue from supplies and services was 26% of total revenue in the second quarter of 2021 compared to 28% in the 2020 period. Revenue from domestic sales was approximately 61% of total revenue and 39% from international in the second quarter of 2021, compared to 60 and 40% for the same period last year. On a non-GAAP basis, our gross margin increased by 8.6% in the second quarter of 2021, to 60.1% compared to 51.5% in the second quarter of 2020. The increase in gross margin is mainly attributable to improved operating leverage on the increase in revenues, lower material costs, and lower freight costs as compared to second quarter of 2020. GAAP gross margin increased 9.4% to 57.3% in the second quarter of 2021 compared to 47.8% in the same period last year. The increase in GAAP gross margin was also due to better operating leverage, lower materials, and freight costs. Compared to the same quarter in 2019, non-GAAP gross margin increased 100 basis points to 59.1%. The improvement was mainly due to reductions in operations overhead costs offset by higher material costs and higher freight costs as compared to the same quarter of 2019. Second quarter non-GAAP operating expense increased by $7.8 million compared to the same quarter last year. The increase in operating expense versus second quarter last year was driven primarily by increases in employee expenses for the sales and marketing team and travel. Also, all Natus employees were asked to take two weeks of vacation in the second quarter of 2020, and that did not repeat this year. Our non-GAAP operating margin increased by 17.2% compared to the same quarter last year on higher revenues and gross margin, an offset by increased operating expenses. Other expense was $100,000 in the second quarter driven by a loss on equity investments. Interest expense was $600,000 during the quarter, We expect interest expense for the third quarter of 2021 to be approximately $400,000 and for the full year of 2021 to be approximately $1.7 million. Our second quarter non-GAAP effective tax rate is 23.8%. We anticipate overall 2021 non-GAAP tax rate to be between 21% and 25%. On a GAAP basis, our second quarter 2021 net income was $3.5 million, or 10 cents per diluted share, compared to a net loss of $8.9 million the same quarter last year. Non-GAAP net income increased $14.3 million to $9.9 million compared to the same quarter last year. Non-GAAP earnings per diluted share was 29 cents. In the second quarter, we recorded $7.2 million of depreciation and amortization expense. Share-based compensation was $2.5 million during the second quarter. Now, let's look at some of the highlights from the balance sheet and the statement of cash flow. During the second quarter, we repaid the remaining balance on our outstanding debt of $37 million, and we ended the quarter with $62.5 million in cash. Cash flow provided by operations was $19.4 million during the quarter. Our day sales outstanding increased two days versus the same period in the prior year to 75 days. Non-GAAP diluted shares outstanding increased to 33.9 million shares compared to 33.8 million shares in the same period last year. Now turning to guidance. During the second quarter of 2021, we began to see or began to experience supply chain delays and constraints. Our guidance for the remainder of the year reflects similar impacts for the third quarter, but also does not factor in any possible further delays or constraints. With this in mind, we expect our revenues for the third quarter of 2021 to be between $113 million and $117 million. For the full year of 2021, we expect revenues between $468 million and $475 million. Gap net income is expected to be in the range of $3.3 million to $5.7 million for the third quarter of 2021 or 10 to 16 cents per diluted share. Non-gap net income is expected to be in the range of $8.8 million to $11 million or 26 to 32 cents per diluted share. We expect GAAP and non-GAAP earnings per share for the full year to be between 55 and 67 cents and between $1.13 and $1.25 respectively. And with that, we will now open it up for questions.