Medical devices maker Kensey Nash Corporation’s (KNSY) first-quarter fiscal 2011 (ended September 30) earnings per share of 41 cents came in a penny short of the Zacks Consensus Estimate and below the year-ago earnings of 43 cents. Net income dipped 21% year-over-year to $3.8 million, hit by lower sales. The Pennsylvania-based company pruned its guidance for fiscal 2011.
Revenues clipped 14% year-over-year to $17 million, in line with the Zacks Consensus Estimate. Net sales (revenues excluding royalty income) slid 19% year-over-year to $10.9 million. Sales were hurt by declines across all major business lines. Both revenue and net sales dovetail the company’s guidance.
Royalty income was down 3% to $6.1 million. This includes $4.6 million of Angio-Seal royalties from St. Jude Medical (STJ) and $1.4 million in royalties from Orthovita Inc (VITA). Lower Angio-Seal royalties (down 5% year-over-year) caused the annualized decline in royalty income.
Segment Analysis
By business segments, Biomaterials products sales fell 17% year-over-year to $10.4 million on account of lower sales from core Orthopedic and Cardiovascular sub-segments. Orthopedic revenues tumbled 18% year-over-year to $5.3 million, hit by declines across key sports medicine and spine businesses due to economic softness.
Sports medicine product sales plummeted 26% year-over-year to $2.7 million due to fluctuation in ordering patterns. A general weakness in the spine market continues to hurt Kensey’s spine business with sales falling 8% to $2.5 million. General surgery product revenues plunged 48% to $0.6 million as sales from the launch of the company’s first extracellular matrix (ECM) product XCM Biologic Tissue Matrix were more than offset by unfavorable ordering trends.
Cardiovascular (primarily consists of the Angio-Seal vascular closure product components sold to St. Jude) were down 14% year over year at $4.3 million, impacted by an unfavorable ordering pattern of Angio-Seal components. Revenues from Endovascular division sank 47% to $0.5 million.
Gross margin increased to 75.1% from 71.9% a year ago, as lower revenues were more than offset by the decline in cost of sales. Operating margin shrunk to 36.4% from 39.2% a year ago on account of top line erosion and higher SG&A spending.
Financial Condition
Kensey exited the quarter with cash and cash equivalents and investments of $49.5 million, a roughly 43% year-over-year decline. Long-term debt trimmed 4.5% year-over-year to $29.6 million with the debt-to-capital ratio remaining relatively flat year-over-year at 0.12. During the quarter, the company generated operating cash flows of $7.2 million, down 16% year-over-year.
Kensey repurchased 1.03 million (roughly 12% of outstanding shares) shares during the quarter for $25.8 million, which reduced its cash position. The company had $4.2 million remaining (as of September 30) under its $30 million repurchase authorization.
Outlook
Kensey has chopped its revenue and earnings guidance for fiscal 2011 citing the unfavorable impact of a soft economy on its core businesses. The company now expects revenues between $75 million and $78 million (versus the earlier guidance of between $81 million and $83 million). Product sales and royalties forecast has been trimmed to a new range of $48.3 million to $51 million (from $54 million to $55.5 million) and $26.7 million to $27 million (from $27 million to $27.5 million), respectively.
Earnings per share for fiscal 2011 have been cut down to between $1.75 and $1.80 (from $1.86 and $1.90). Kensey expects to spend significantly on R&D (projected at $19 million) as it ramps up clinical activities in its cartilage and ECM technologies in the U.S. and Europe. Operating margin target has also been narrowed to 33% (versus prior forecast of 33%-35%). Operating cash flows for the full year has been pegged at $25 million.
For the second quarter, the company expects total revenues between $17 million and $17.8 million. Product sales are expected in the range of $10.3 million to $11 million while royalties are forecasted between $6.7 million and $6.8 million.
Earnings per share for the quarter have been estimated at 37-40 cents. Kensey expects sales from its sports medicine and spine products to rebound in second-half fiscal 2011. The current Zacks Consensus Estimate for second quarter and fiscal 2011 earnings per share are 38 cents and $1.76, respectively.
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.
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