Kensey Nash 2011 first quarter decreases 14% to $17.0 million

Oct 21 2010

Kensey Nash Corporation (Nasdaq: KNSY), a medical device company primarily focused on regenerative medicine for a wide range of medical procedures, today reported the results for its first quarter ended September 30, 2010.  

First Quarter Snapshot and Recent Developments

• Diluted EPS of $0.41, in line with the Company's previous guidance of $0.41-$0.43 and a decrease from the prior year comparable quarter of $0.43.
• Revenue of $17.0 million, in line with the Company's previous guidance of $17.0-$17.3 million and a decrease from the prior year comparable quarter of $19.7 million.
• Net sales of $10.9 million, in line with the Company's previous guidance of $10.8-$11.0 million and a decrease from the prior year comparable quarter of $13.4 million.
• Royalty income of $6.1 million, below the Company's previous guidance of $6.2-$6.3 million and a decrease from the prior year comparable quarter of $6.3 million.
• Operating margin of 36%.
• Operating cash flow of $7.2 million.
• EBITDA of $7.9 million.

President and CEO Commentary

"Our fiscal 2011 first quarter revenues reflect a decrease in sports medicine product sales and Angio-Seal collagen product sales due to variations in customer ordering patterns in the quarter as well as continued weakness in the overall spine market, which has negatively affected near term orders.  The ongoing negative economic climate has continued to impact the medical device industry.  High unemployment and a challenging health insurance environment appear to have reduced procedures in our markets. The current quarter was soft and our outlook for the second quarter is for continued weakness in our sales, primarily in sales of spine and sports medicine products.  Though we believe the spine and sports medicine sales will improve in the second half of fiscal 2011, we expect the rate of improvement will be lower than we anticipated in our earlier fiscal 2011 guidance," commented Joe Kaufmann, President and CEO of the Company.

Supplemental Sales Data.  Details of the Company's net sales for the first quarters of fiscal 2011 and 2010 are summarized below.  

First Quarter Ended September 30, 2010 (First Quarter Fiscal 2011) Results

Revenues: Sales and Royalties.  Total revenues for the quarter of $17.0 million decreased 14% from total revenues of $19.7 million in the prior year first quarter. Revenues for the quarter decreased 22% sequentially from $21.9 million in the fourth quarter of fiscal 2010.  

Net sales were in line with expectations at $10.9 million, which represents a decrease of 19% from $13.4 million in the prior fiscal year comparable period and a 28% decrease sequentially from $15.1 million in the fourth quarter of fiscal 2010.  Total biomaterials products sales were $10.4 million compared to $12.6 million in the comparable prior fiscal year period. Orthopaedic sales, consisting primarily of sports medicine and spine products, decreased from $6.4 million to $5.3 million. Sports medicine product sales decreased $0.9 million, or 26%, due to variations in ordering patterns in the quarter.  Spine product sales decreased $0.2 million to $2.5 million in the first quarter of fiscal 2011 from $2.7 million in the prior fiscal year comparable quarter, reflecting a continued overall weakness in the spine market. Cardiovascular sales of $4.3 million, consisting primarily of vascular closure product components to St. Jude Medical (NYSE: STJ), decreased from $4.9 million in the prior fiscal year period due to variations in ordering patterns in this quarter.  General surgery product sales decreased $0.6 million to $0.6 million in the first quarter of fiscal 2011 from $1.2 million in the prior year comparable quarter.  This was primarily due to first quarter fiscal 2011 general surgery sales consisting primarily of initial shipments to Synthes related to the U.S. launch of our new ECM product, the XCM Biologic™ Tissue Matrix products, being more than offset by unfavorable variations in ordering patterns from another customer.  Endovascular sales during the quarter were $0.5 million, a decrease of 47% compared to $0.9 million in the prior fiscal year first quarter.

Royalty income for the first quarter of fiscal 2011 was $6.1 million, compared to $6.3 million in the comparable prior fiscal year period. Royalty income in the first quarter of fiscal 2011 included $4.6 million in Angio-Seal™ royalties and $1.4 million in royalties from Orthovita, Inc. (Nasdaq: VITA). Angio-Seal™ royalties decreased by approximately 5% or $0.3 million in the first quarter of fiscal 2011 over the prior fiscal year comparable quarter. Royalties from Orthovita were flat compared to the prior fiscal year period.

Earnings Per Share.  First quarter diluted earnings per share were $0.41, compared to diluted earnings per share of $0.43 for the same period of fiscal 2010. Positively affecting the first quarter fiscal 2011 diluted earnings per share when compared to the prior year was significantly lower weighted average common shares outstanding due to the Company's stock repurchase programs.

During the first quarter of fiscal 2011, the Company's total tax-effected equity compensation expense was $0.8 million, an increase of approximately $0.4 million from $0.4 million in the prior year comparable period. First quarter fiscal 2011 equity compensation expense was higher than the comparable prior year period primarily because fiscal 2011 expense included amortized expense related to three years of equity grants, while first quarter fiscal 2010 equity compensation expense primarily included amortized expense for only two years of equity grants.

During the quarter ended September 30, 2010, the Company generated cash from operations of $7.2 million and, at September 30, 2010, had $49.5 million of cash and investment balances and total debt of $31.0 million.

Fiscal 2011 Guidance

The Company is now updating its fiscal 2011 guidance, reducing its revenue range by approximately 6%-7% from previous guidance.  The Company currently expects total revenues for fiscal year 2011 will be in the range of $75.0 to $78.0 million.  Net sales and royalties are expected to be in the ranges of $48.3 to $51.0 million and $26.7 to $27.0 million, respectively.  Previously provided guidance for fiscal 2011 total revenues was a range of $81.0 to $83.0 million, including net sales and royalties estimated to be in the ranges of $54.0 to $55.5 million and $27.0 to $27.5 million, respectively. This reduction in guidance is due to the overall negative economic climate and the impact it is having on the medical device industry and the Company in particular.

The Company currently expects diluted earnings per share for fiscal 2011 will be in the range of $1.75 to $1.80.  Fiscal 2011 will include a significant investment in research and development, with total research and development spending for fiscal 2011 estimated to be approximately $19 million.  The Company plans to increase its clinical activities in its ECM and cartilage technologies both in the US and in Europe. Positively affecting the fiscal 2011 diluted earnings per share will be lower weighted average common shares outstanding due to the Company's stock repurchase programs, including prior purchases and future purchases, if any, made under such programs.

The Company currently expects that its operating margin will be approximately 33% in fiscal 2011 and its balance sheet will continue to be strengthened by adding cash from operations for the full fiscal year of approximately $25.0 million.

The Company is currently estimating that second quarter fiscal 2011 total revenues will be in the range of $17.0 to $17.8 million. Net sales are expected to be in the range of $10.3 to $11.0 million and royalties are expected to be in the range of $6.7 to $6.8 million.  The Company expects second quarter fiscal 2011 diluted earnings per share of $0.37 to $0.40.

Stock Repurchase Update. During the first quarter ended September 30, 2010, the Company repurchased 1,035,769 shares of Common Stock, at a total cost of approximately $25.8 million, or an average market price of $24.96 per share, using available cash.  Under the current $30 million repurchase program, there was approximately $4.2 million remaining to repurchase shares of Common Stock as of September 30, 2010. The Company had 8,625,460 shares of Common Stock outstanding as of September 30, 2010.  

Income taxes.  The Company currently estimates that its fiscal 2011 effective tax rate will be between 32% and 33%.  In the course of estimating the Company's annual effective tax rate and recording its quarterly income tax provision, the Company considers many factors, including its expected earnings, state income tax apportionment, estimated manufacturing and research and development tax credits, non-taxable interest income and other estimates. The Company's fiscal 2011 guidance assumes that the Federal research and development credit will be reinstated. Material changes in, or differences from, these estimates could have a significant impact on the Company's effective tax rate.

SOURCE Kensey Nash Corporation