KCI Kinetic Concepts

Recently, Kinetic Concepts, Inc. (KCI) announced its preliminary un-audited financial results for the third quarter of fiscal 2011. Kinetic expects to reported revenues in the range of $529–$533 million, up 4%–5% year over year. Foreign exchange movement favorably impacted revenues by approximately 2%.

Net income is projected in the range of $89–$93 million, an increase of 17%–23% from the year-ago quarter. Excluding certain acquisition-related costs associated with the company’s LifeCell acquisition in 2008, restructuring charges in the third quarter of 2011 and the proposed merger, preliminary net earnings were $104.1–$108.1 million, up 21%–25% year over year. In the third quarter of fiscal 2010, Kinetic reported net income of $75.8 million or $1.06 per share, on revenues of $506.7 million.

Earlier, during second quarter 2011 earnings call, 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%). Kinetic expects to officially report its third-quarter 2011 earnings on October 21.

Apax Partners along with two Canadian pension funds decided to acquire Kinetic in July 2011. The deal, including Kinetic's outstanding debt, is valued at approximately $6.3 billion. Per the agreement terms, Kinetic shareholders will receive $68.50 in cash for each share of the company. However, following the announcement, some of the company’s shareholders initiated legal actions challenging the merger. However, in order to resolve the problem, Kinetic has called for shareholders meeting, to be held on October 28. We expect this shareholder voting on the deal to decide the fate of the proposed merger.

We are concerned about the uncertainty related to the regulatory approvals associated with the merger as delay or termination of the deal will be a huge setback for Kinetic. Other major headwinds for the company are patent litigation with Smith & Nephew (SNN), challenging economic environment and competitive landscape. If any of the key patent claims go against Kinetic, the company’s market share in the V.A.C. therapy would be reduced.

However, despite all the recent headwinds, Kinetic appears to be a lucrative acquisition target due to its steady financials. The company witnessed continuous expansion in its top line and is gradually expanding its Regenerative business in the EMEA region. Moreover, the AHS business is gradually streamlining its position globally based on the continuous product launches under the V.A.C. therapy system.

During the second quarter of fiscal 2011, the company witnessed gradual improvement in Active Healing Solutions (AHS) business attributable to higher unit volumes in the U.S., resulting from the increased usage of traditional V.A.C. Therapy products and new negative pressure-based therapies. Moreover, the company is gradually gaining strong foothold in Japan and Europe, which should further boost the top line. Kinetic presently retains a short-term Zacks #1 Rank (Strong Buy). However, based on its limited upside potential, we remain ‘Neutral’ on Kinetic over the long term.

Kinetic Concepts (NYSE:KCI)
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