Kinetic Tops EPS, Revs Matches - Analyst Blog

Kinetic Concepts (KCI) reported an EPS of $1.03 for the fourth quarter of fiscal 2010 compared to 93 cents in the year-ago quarter. However, adjusted EPS was $1.17, beating the Zacks Consensus Estimate of $1.15 and the year-ago quarter's earnings of $1.10. For fiscal 2010, adjusted EPS came in at $4.29, a penny above the Zacks Consensus Estimate and higher than the previous year's $3.99.

Kinetic's revenue of $527.5 million during the quarter is almost in line with the Zacks Consensus Estimate and the year-ago quarter's $527 million. Unfavorable foreign currency movements reduced total revenue by 1%. For 2010, revenue was $2.02 billion, in line with the Zacks Consensus Estimate and marginally ahead of the previous year's $1.99 billion. Earnings growth was attributable to a 17% increase in operating income ($132.4 million, excluding intangible asset amortization), a 19.5% decrease in interest expenses ($19.7 million) and a 490 basis points reduction in the effective tax rate to 28%.

Kinetic derived 55% of revenue from rental income during the quarter, which declined 5.5% year over year to $288.5 million. While revenue derived from the North American market increased 2.3%, the EMEA/APAC revenue recorded a 7.1% decline. Among the different product segments – Active Healing Solutions (AHS), Regenerative Medicine (LifeCell) and Therapeutic Support Systems (TSS)– Kinetic recorded sales of $367.1 million (unchanged from the year-ago quarter), $93.7 million (up 21.9%) and $66.6 million (down 19.4).

Within the AHS segment, revenue from the North American market increased 1.9% driven by improved rental and sales volume. However, sales in the region of EMEA/APAC declined 5.6% due to pricing pressure and lower sales volume in price-sensitive and highly-competitive markets driven by European austerity measures, partially offset by an increase in rental and sales volumes as a result of successful product launch in new geographies, especially Japan.

The strong growth of LifeCell business was influenced by strong sales from the reconstructive tissue matrix, Strattice, representing 43% of the segment's revenue. Moreover, increased penetration into EMEA markets (currently in 11 European countries) contributed 180 basis points to the overall growth of the segment.  

The TSS division's revenue from North America came in at $43.2 million, down 20.8% primarily due to decreased demand in critical care business resulting from less severe flu season. Moreover, sales from EMEA/APAC declined 16.8% to $23.4 million due to lower rental volume and average rental pricing.

Kinetic's gross profit in the fourth quarter declined 1.2% year over year to $301.3 million. Consequently, gross margin of Kinetic came down by almost 100 basis points to 57%. Higher investment in the AHS sales force during the second half of 2010, higher royalty expense, and lower TSS critical care rentals, partially offset by favorable margins in the LifeCell business contributed to the decline in margin. A reduction in both selling, general & administrative (0.9%) and research & development (4.7%) expenses during the quarter pulled up the operating income.

Outlook

Kinetic provided its outlook for fiscal 2011. The company expects adjusted EPS of $4.45-$4.61 (representing growth of 4%-7%) on revenue of $2.05-$2.09 billion (2%-4%). While the Zacks Consensus Estimate of $4.60 EPS is towards the upper end of the range, revenue estimate of $2.1 billion is higher than the company's outlook.

We are currently ‘Neutral' on the stock.