Medical devices maker Kensey Nash Corporation (KNSY) reported strong fourth-quarter fiscal 2010 (ended June 30) results with adjusted (excluding one-time items) earnings per share of 54 cents surpassing the Zacks Consensus Estimate of 51 cents and the year-ago earnings of 41 cents. For full-year fiscal 2010, adjusted earnings of $1.85 outstripped the Zacks Consensus Estimate of $1.71.
 
Net income (as reported) for the quarter surged 25.5% year over year to $5.9 million (or 60 cents a share), buoyed by healthy Orthopedic and Cardiovascular product sales. For fiscal 2010, net income dipped 3% year over year to $19.5 million (or $1.78 a share).
 
Revenues
 
Revenues for the quarter rose 7% year over year to $21.9 million, edging past the Zacks Consensus Estimate of $21 million, riding on solid sales from the company’s sports medicine business. Net sales (revenues excluding royalty income) climbed 12% year over year to $15.1 million, surpassing the company’s guidance of $14.5–$14.7 million.
 
Royalty income was down 2.7% to $6.8 million. This includes $5.3 million of Angio-Seal royalties from St. Jude Medical (STJ) and $1.4 million in royalties from Orthovita Inc (VITA). Kensey forged a new two-year supply deal for Angio-Seal with St. Jude in June 2010. For full year, revenues fell 1.7% to $80.6 million due to lower endovascular sales, mostly in line with the Zacks Consensus Estimate of $81 million.
 
Segment Analysis
 
By business segments, Biomaterials products sales jumped 20% year over year in the quarter to $14.9 million driven by healthy Orthopedic revenues, which soared 25% year over year to $8.7 million. The solid growth is attributable to strong revenues from sports medicines that spiked 58% to $5.1 million.
 
However, this was partly marred by a sluggish spine business with sales clipping 7% to $3.5 million, reflecting a general weakness in the spine market. General surgery product revenues grew 35% to $0.8 million, helped by the launch of XCM Biologic Tissue Matrix, the company’s first extracellular matrix (ECM) product. During the quarter, Kensey received FDA clearance for its second ECM product Meso BioMatrix.
 
Cardiovascular (primarily consists of the Angio-Seal vascular closure product components sold to St. Jude) sales leapt 14% year over year to $5.1 million, supported by a favorable ordering pattern of Angio-Seal components. Endovascular business generated $0.3 million of sales, down 77% year over year, on account of lower Safe-Cross and QuickCat product sales.
 
Margins
 
Gross margin increased to 73.6% in the quarter from 71.8% a year ago, supported by higher revenues. Research and development (R&D) expenses as a percentage of sales declined to 21% from 22% a year ago. Selling, general and administrative (SG&A) expenses (as a percentage of sales) fell to 11% from 12.6% in the corresponding quarter of fiscal 2009. Higher gross margin and lower SG&A spending helped improve operating margin to 42% from 37% a year ago.
 
Financial Condition
 
Kensey exited fiscal 2010 with cash and cash equivalents of $23.1 million, a roughly 53% year-over-year decline. Long-term debt trimmed 4% year over year to $31.4 million with debt-to-capital ratio declining to 0.13 from 0.14 a year ago. During the fiscal year, the company generated operating cash flows of $30.1 million, down 9% year over year. Kensey repurchased 1.8 million (roughly 16% of outstanding shares) shares during the year for $41.3 million, which materially reduced its cash position.  
 
Outlook
 
Kensey issued guidance for the first quarter and fiscal year 2011. For the first quarter, the company expects total revenues between $17.0 million and $17.3 million. Product sales are expected in the range of $10.8 million to $11.0 million while royalties are forecast between $6.2 million and $6.3 million. Earnings per share have been pegged at 41–43 cents.
 
The first quarter revenue guidance takes into account a sluggish spine market, anticipated decline in sports medicine product and Angio-Seal component sales due to variations in ordering patterns. However, revenues from these businesses are expected to rebound in the second quarter.
 
For fiscal 2011, the company expects revenues between $81.0 million and $83.0 million. Product sales are projected in the range of $54.0 million to $55.5 million and royalties are estimated in the range of $27.0 million to $27.5 million. Boosts from ECM and cartilage repair product launches are expected to be offset by lower Angio-Seal revenues.
 
Earnings per share for the year are expected between $1.86 and $1.90. Kensey expects to spend significantly on R&D (projected at $20 million) as it ramps up clinical activities in its cartilage and ECM technologies in the U.S. and Europe. Operating margin has been forecast in the range of 33%–35%.
 
Kensey is a medical devices company, which provides resorbable biomaterials used in a wide variety of medical procedures and endovascular devices. The company’s products are used in cardiovascular, sports medicine, spine, extremities and endovascular markets.
 
KENSEY NASH CP (KNSY): Free Stock Analysis Report
 
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
 
ORTHOVITA INC (VITA): Free Stock Analysis Report
 
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