GlassHouse: Natus Medical Has 'Major Accounting Concerns'

Natus Medical Inc BABY traded lower after a short report accusing the company of deceptive accounting practices.

Accounting Tricks

GlassHouse alleges Natus has been using accounting tricks to conceal obsolete inventory from investors. At some point, GlassHouse said Natus will need to write off about $18 million in obsolete inventory, or roughly 30 percent of the company’s earnings. GlassHouse said it has never seen a company with as poor of an inventory situation as Natus.

In addition, GlassHouse said Natus investors will get a rude EPS awakening in 2019.

“Natus’ warranty/bad debt reserves and prepaid expenses accounts have all been depleted/manipulated over the last year to artificially increase EPS by $0.33 (or nearly 25% of earnings),” GlassHouse wrote in the report.

GlassHouse said Natus’ non-GAAP exclusions have drawn criticism from the SEC in the past, but the company has never been more aggressive with its exclusion accounting than it has in recent quarters.

Troubling Track Record

GlassHouse said Natus CEO Jonathan Kennedy and CFO Benjamin Davies both have a poor track record of creating and preserving value for investors. The share prices of the two previous companies at which Davies and Kennedy served as CFOs saw their share prices decline by more than 55 percent each before the pair left to come to Natus, GlassHouse said.

“Lowered guidance, impairments, write-offs, restatements and fines from the SEC are all on the table as Natus will need to deal with these major accounting concerns in 2019,” GlassHouse wrote.

GlassHouse said the best comparison to Natus in terms of accounting practices is Logitech International SA LOGI. In 2011, Logitech was forced to restate earnings, reduce guidance and pay a fine for fraud resulting in a 70 percent drop in the share price.

GlassHouse initiated coverage of Natus with a $9.80 price target, implying roughly 70 percent downside from recent levels.

Shares traded down 2.2 percent at $32.43 at time of publication.

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