Why Natus Medical Inc Slipped Today

GN Otometrics' MADSEN Astera.Image source: GN Otometrics.

What happened

Natus Medical (NASDAQ: BABY) is down almost 10% at 1:13 p.m. EDT Monday after announcing it was purchasing the GN Store Nord's Otometrics business and updated its third-quarter revenue guidance.

So what

It's definitely the latter that's causing the decline, but let's take care of the better news first.

Natus is buying GN Otometrics for $145 million, which will add $110 million in revenue from the company's hearing diagnostics and balance assessment equipment, disposables and software. The companies are competitors in infant hearing screening, although they offer different solutions that may work better for different customers. But the addition of GN Otometrics opens up the larger hearing market to all ages -- from diagnostics to hearing aid fitting -- as well as the balance diagnostic market. Increasing its product offerings could make cross-selling to hospitals easier for Natus.

Since GN Otometrics is a foreign company, Natus can make the acquisition with cash held abroad, avoiding U.S. taxes on that cash, and keeping GN Otometrics abroad will lower Natus' tax rate for the combined company.

The bad news came from management's disclosure that the company is going to miss its third-quarter revenue guidance and now expects revenue of $89 million to $91 million compared to previous guidance of $97 million to $98 million.

A majority of the shortfall comes from the company's decision to stop shipping some products from its manufacturing plant in Seattle while it takes care of "deficiencies in its engineering and manufacturing quality processes."

Most of the products affected are in its neoBLUE product line to treat infants with jaundice. Natus will still take orders and plans to resume shipping in the fourth quarter and into the first quarter of 2017, so some of the revenue shortfall will just be delayed, although some might be lost to competitors if customers need the equipment quickly.

The remainder of the guidance shortfall comes from a lower international demand than Natus' management was expecting. European hospitals have been limiting capital expenses and the stronger dollar has made it harder for Natus compete on price. The GN Otometrics business should help with the latter since its costs will be in foreign currencies.

Now what

The (hopefully) short-term bad news beat out the (potentially) long-term good news today.

To regain investors' confidence, Natus needs to clear up the shipping hold quickly and get its international sales growing again. The addition of sales to the Venezuelan government starting in the fourth quarter should help with the latter.

Longer term, Natus will need to integrate GN Otometrics and exploit the synergies to increase margins. Fortunately that's something the company has lots of experience doing.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Natus Medical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.