Kinetic Concepts Inc. (KCI) reported second quarter 2011 EPS of $1.09, up 45% from 75 cents posted in the year-ago quarter. However, adjusted EPS (excluding non-cash acquisition-related items and expenses associated with portfolio rationalization and Global Business Transformation during the quarter) was $1.23, which missed the Zacks Consensus Estimate by a penny but 21.8% higher than the year-ago quarter earnings.
Revenues of $519.8 million increased 4% year over year and also exceeded the Zacks Consensus Estimate of $515 million. Foreign currency exchange movements favourably impacted total revenues by 3% in the quarter.
Rental income (53.7% of revenues) during the quarter declined marginally to $279.3 million. Revenue derived from the North American market increased 3.1% to $793.7 million while EMEA/APAC revenues increased 6.3% to $227.2 million.
The company’s product segments, namely, Active Healing Solutions (AHS), Regenerative Medicine (LifeCell) and Therapeutic Support Systems (TSS) reported sales of $358.0 million (unchanged at CER), $96.3 million (up 14.6%) and $65.5 million (down 6.2%), respectively.
Within the AHS segment, favourable foreign currency movement, higher volumes from new markets and recent product launches were partially offset by lower rental revenues from established markets. Sales in EMEA region declined 8% at CER due to austerity measures in Europe combined with continued pricing pressure, partially offset by volume growth for V.A.C.Via.
However, AHS revenues from APAC surged 54% at CER primarily due to higher unit volumes in Japan and improved average pricing, resulting from favourable product mix.
The company’s LifeCell business witnessed strong growth mainly due to increased penetration into EMEA markets. During the quarter, the company reported sales of $3.1 million compared with $1.6 million in the prior-year quarter based on the successful introduction of LifeCell products across new geographical regions.
The TSS division reported revenues of $41.0 million in North America, down 8.1% while sales from EMEA/APAC increased 13.4% to $24.5 million. The overall TSS revenue declined due to lower rental volume of wound care and bariatric care surfaces as hospitals shifted toward capital purchases.
Kinetic’s gross profit in the reported quarter increased 12% year over year to $313.1 million with a 400 basis points expansion of gross margin to 60%. This was driven by lower royalty expenses associated with Kinetic’s license agreement with Wake Forest University, higher gross margins associated with LifeCell business and lower rental fleet depreciation, partially offset by the additional investment in AHS sales force.
Despite a 3% rise in selling, general & administrative expenses, operating income during the quarter benefited from an 8% decline in research & development expenses. The company had incurred higher research & development expenses in the year-ago quarter due to increased headcount following the formation of the company’s Center for Advanced Research and Technology (ART).
Outlook
Kinetic reaffirmed its revenue and adjusted EPS guidance for fiscal 2011. The company expects adjusted EPS in the range of $4.96-$5.08(up 16-18%) on revenue of $2.05-$2.09 billion (2%-4%).
Earlier in July, Apax Partners along with two Canadian pension funds decided to acquire Kinetic. The deal, including Kinetic's outstanding debt, is valued at approximately $6.3 billion. As per the terms of the agreement, Kinetic’s shareholders will receive $68.50 in cash for each share of the company.
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