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Kinetic Concepts Reports Second Quarter and First Half 2007 Financial Results; Increases Outlook for Remainder of 2007
SAN ANTONIO, Jul 20, 2007 (BUSINESS WIRE) -- Kinetic Concepts, Inc. (NYSE: KCI):

Second Quarter Highlights

- Net earnings increased 25% to $58.1 million

- Net earnings per diluted share increased 29% to $0.81

- Total revenue increased 20% to $396.7 million

- Research and development expenses increased 35% to $11.4 million

First Half Highlights

- Net earnings increased 17% to $111.6 million

- Net earnings per diluted share increased 21% to $1.57

- Total revenue increased 18% to $765.5 million

- Research and development expenses increased 34% to $21.2 million

Kinetic Concepts, Inc. (NYSE: KCI) today reported second quarter 2007 total revenue of $396.7 million, an increase of 20% from the second quarter of 2006. Total revenue for the first half of 2007 was $765.5 million, an 18% increase from the prior-year period. Foreign currency exchange movements favorably impacted total revenue for the second quarter and first six months of 2007 by 2% compared to the corresponding periods of the prior year.

Net earnings for the second quarter of 2007 were $58.1 million, up 25%, compared to $46.6 million for the same period one year ago. Net earnings per diluted share for the second quarter of 2007 increased 29% to $0.81, compared to $0.63 for the same period in the prior year.

For the first half of 2007, net earnings were $111.6 million, up 17% compared to $95.1 million from last year. Net earnings per diluted share for the first six months of 2007 were $1.57, an increase of 21% from the same period one year ago.

"We continue to execute on our 2007 initiatives which include further V.A.C.(R) penetration in established markets and increased investment in research and development," said Catherine Burzik, President and Chief Executive Officer of KCI. "At the same time, we are driving fiscal discipline and global alignment throughout the organization."

Revenue Recap - Second Quarter and First Half of 2007

Domestic revenue was $285.0 million for the second quarter and $552.6 million for the first six months of 2007, representing increases of 19% and 17%, respectively, from the prior year due primarily to increased rental and sales volumes for V.A.C. wound healing devices and related disposables. Domestic V.A.C. revenue of $236.2 million for the second quarter and $454.3 million for the first half of 2007 increased 22% and 20%, respectively, compared to the same periods of the prior year due primarily to higher unit volume. The year-to-year unit growth was broad-based, with increased unit volume across all care settings particularly in the home. Domestic revenue from therapeutic surfaces was $48.9 million for the second quarter of 2007, an 8% increase from the prior-year period due primarily to increased market penetration.

International revenue of $111.6 million for the second quarter and $212.9 million for the first half of 2007 increased 22% and 20%, respectively, compared to the prior year due primarily to increased V.A.C. revenue. International V.A.C. revenue of $81.1 million for the second quarter and $151.6 million for the first half of 2007 increased 29% and 27%, respectively, compared to the same periods of the prior year due primarily to higher unit volume. International surfaces revenue for the second quarter of 2007 of $30.5 million was up 6% compared to the prior year, while surfaces revenue of $61.3 million for the first half of 2007 increased 5% year-to-year. Foreign currency exchange movements favorably impacted total international revenue by 7% in both the second quarter and first six months of 2007 compared to the corresponding periods of the prior year.

Worldwide V.A.C. revenue was $317.3 million for the second quarter of 2007 and $605.9 million for the first half of 2007, representing increases of 24% and 21%, respectively, due primarily to increased rental and sales volumes for V.A.C. wound healing devices and related supplies. The growth in V.A.C. revenue stemmed from increased market penetration resulting in higher unit volume. Foreign currency exchange movements favorably impacted worldwide V.A.C. revenue by 2% compared to both the second quarter and first six months of the prior year.

Worldwide surfaces revenue was $79.3 million for the second quarter of 2007 and $159.6 million for the first six months of 2007, representing increases of 7% and 6%, respectively, from the corresponding periods of the prior year. Foreign currency exchange movements favorably impacted worldwide surfaces revenue by 2% for both the second quarter and first six months of 2007 compared to the same periods one year ago.

Profit Margins

Gross profit for the second quarter and first six months of 2007 was $190.1 million and $361.3 million, respectively, representing increases of 25% and 19% from the same periods of the prior year. Gross profit margins improved 170 basis points in the 2007 second quarter, compared to the year-ago period, due primarily to increased market penetration and improved revenue realization levels. The year-to-year comparison also reflects the fact that the Company recorded additional homecare receivable reserves during the second quarter of the prior year which had the effect of reducing revenue in the prior period.

Operating profit for the second quarter and first six months of 2007 was $90.1 million and $173.3 million, respectively, representing increases of 26% and 18% from the same periods of the prior year. Research and development expenses for the second quarter and first half of 2007 increased 35% and 34%, respectively, compared to the same periods one year ago. Other selling, general and administrative expenses were higher in the second quarter of 2007 due primarily to management transition costs.

Share-Based Compensation

During the second quarter and first six months of 2007, the Company recorded share-based compensation expense totaling approximately $5.5 million and $11.3 million, respectively, before income taxes, or $0.06 and $0.12, respectively, per diluted share, under the provisions of Statement of Financial Accounting Standards No. 123R. Share-based compensation expense was recognized in the condensed consolidated statements of earnings as follows (dollars in thousands, except per share data):

                                     Three months    Six months ended
                                          ended
                                        June 30,         June 30,
                                    ---------------- -----------------

                                      2007    2006     2007     2006
                                    -------- ------- -------- --------
Rental expenses                       $1,248  $1,151   $2,830   $1,958
Cost of sales                            167     137      373      236
Selling, general and administrative
 expenses                              4,091   3,117    8,075    5,209
                                    -------- ------- -------- --------
Pre-tax share-based compensation
 expense                               5,506   4,405   11,278    7,403
Less: Income tax benefit             (1,532) (1,270)  (3,048)  (2,080)
                                      ______  ______   ______   ______
Total share-based compensation
 expense, net of tax                  $3,974  $3,135   $8,230   $5,323
                                      ______  ______   ______   ______

Diluted EPS impact                     $0.06   $0.04    $0.12    $0.07
                                      ______  ______   ______   ______

Income Tax Rate

The effective income tax rates for the second quarter and the first six months of 2007 were 33.5% and 33.4%, respectively, compared to 30.0% and 31.1% for the corresponding periods in 2006. The lower income tax rate for the prior-year periods resulted from the favorable resolution of tax contingencies. The effective tax rate for the full year of 2006 was 33.1%.

Refinancing

KCI has received lender commitments to fund a new $500 million revolving credit facility due July 2012. Upon closing, KCI intends to use a portion of the new credit facility to repay the outstanding balance of $114.1 million due on our existing senior credit facility due August 2010. In addition, after the required notice period, the Company intends to redeem the remaining $68.1 million due under our 7 3/8% senior subordinated notes due August 2013. The closing of the new credit facility is expected to occur on or about July 31, 2007, subject to a number of conditions. There can be no assurance, however, that these conditions will be satisfied.

The proposed new financing is designed to provide enhanced strategic and operational flexibility and capacity with fewer and less restrictive covenants and a lower overall cost of capital.

Outlook

The following guidance is based on current information and expectations as of July 20, 2007:

KCI is increasing its projections for 2007 total revenue to $1.56 - $1.59 billion based on continued demand for its V.A.C. negative pressure wound therapy devices and related supplies. The Company is also raising its projections for net earnings per diluted share for 2007 to $3.10 - $3.20 per share, based upon a weighted average diluted share estimate of 71.0 - 72.0 million shares. The 2007 guidance includes estimated charges associated with the debt refinancing transaction of approximately $7.5 million before income taxes.

KCI 2007 Analyst Day Event

KCI plans to host an Analyst Day event on Monday, September 17, 2007 at the St. Regis Hotel in New York. The event will include presentations by key opinion leaders in the field of advanced wound care, as well as presentations by KCI leaders. To learn more about the event, go to KCI's Investor Relations web site at http://www.kci1.com/investor/index.asp and click on the Analyst Day link.

Earnings Release Conference Call

As previously announced, we have scheduled an earnings release conference call for 8:30 a.m. eastern daylight time today, Friday, July 20, 2007. The dial-in numbers for this conference call are as follows:

Domestic Dial-in Number:                                  800-299-9630
International Dial-in Number:                            +617-786-2904
Participant Code:                                             28933650

This call is being webcast by CCBN and can be accessed at the Kinetic Concepts, Inc. web site at http://www.kci1.com/investor/index.asp, and clicking on Webcast - Q2 2007 Kinetic Concepts, Inc. Earnings Conference Call. The webcast is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at www.fulldisclosure.com and institutional investors can access the call via CCBN's password-protected event management site, StreetEvents (www.streetevents.com). An archive of the webcast will be available at http://www.kci1.com/investor/index.asp until July 19, 2008.

KCI's business outlook as of today is expected to be available on KCI's Investor Relations web site. KCI does not currently expect to update this business outlook until the release of KCI's next quarterly earnings announcement, notwithstanding subsequent developments.

About KCI

Kinetic Concepts, Inc. is a global medical technology company with leadership positions in advanced wound care and therapeutic surfaces. We design, manufacture, market and service a wide range of proprietary products that can improve clinical outcomes and can help reduce the overall cost of patient care. Our advanced wound-care systems incorporate our proprietary Vacuum Assisted Closure(R), or V.A.C. Therapy technology, which has been demonstrated clinically to help promote wound healing through unique mechanisms of action and can help reduce the cost of treating patients with serious wounds. Our therapeutic surfaces, including specialty hospital beds, mattress replacement systems and overlays, are designed to address pulmonary complications associated with immobility, to prevent skin breakdown and assist caregivers in the safe and dignified handling of obese patients. We have an infrastructure designed to meet the specific needs of medical professionals and patients across all health care settings, including acute care hospitals, extended care organizations and patients' homes, both in the United States and abroad.

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, management's outlook, estimates of future performance, revenue, earnings per share, growth objectives and weighted average shares outstanding. These forward-looking statements contained herein are based on our current expectations and are subject to a number of risks and uncertainties that could cause us to fail to achieve our current financial projections and other expectations, such as changes in the demand for the V.A.C. resulting from increased competition, in payer reimbursement policies or in our ability to protect our intellectual property. All information set forth in this release and its attachments is as of July 20, 2007. We undertake no duty to update this information. More information about potential factors that could cause our results to differ or adversely affect our business and financial results is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, including, among other sections, under the captions, "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." This report is on file with the SEC and available at the SEC's website at www.sec.gov. Additional information will also be set forth in those sections in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, which will be filed with the SEC on or about August 1, 2007.

               KINETIC CONCEPTS, INC. AND SUBSIDIARIES
            Condensed Consolidated Statements of Earnings
                (in thousands, except per share data)
                             (unaudited)



                    Three months ended June    Six months ended June
                               30,                       30,
                    ------------------------  ------------------------
                                        %                         %
                      2007     2006   Change    2007     2006   Change
                    -------- -------- ------  -------- -------- ------
Revenue:
 Rental             $283,345 $236,789  19.7%  $549,029 $463,766  18.4%
 Sales               113,307   93,254   21.5   216,439  185,522   16.7
                     _______  _______          _______  _______
  Total revenue      396,652  330,043   20.2   765,468  649,288   17.9

Rental expenses      171,365  149,101   14.9   335,305  289,518   15.8
Cost of sales         35,156   28,336   24.1    68,847   56,968   20.9
                     _______  _______          _______  _______
  Gross profit       190,131  152,606   24.6   361,316  302,802   19.3

Selling, general
 and administrative
 expenses             88,621   72,785   21.8   166,834  140,625   18.6
Research and
 development
 expenses             11,397    8,471   34.5    21,204   15,882   33.5
                     _______  _______          _______  _______
  Operating
   earnings           90,113   71,350   26.3   173,278  146,295   18.4

Interest income and
 other                 1,516    1,145   32.4     2,880    2,127   35.4
Interest expense     (4,131)  (5,233) (21.1)   (8,222)  (9,974) (17.6)
Foreign currency
 loss                  (187)    (645) (71.0)     (452)    (378)   19.6
                     _______  _______          _______  _______
  Earnings before
   income taxes       87,311   66,617   31.1   167,484  138,070   21.3

Income taxes          29,239   19,986   46.3    55,856   42,922   30.1
                     _______  _______          _______  _______
  Net earnings       $58,072  $46,631  24.5%  $111,628  $95,148  17.3%
                     _______  _______          _______  _______
  Net earnings per
   share:
       Basic           $0.82    $0.65  26.2%     $1.58    $1.34  17.9%
                     _______  _______          _______  _______

       Diluted         $0.81    $0.63  28.6%     $1.57    $1.30  20.8%
                     _______  _______          _______  _______
  Weighted average
   shares
   outstanding:
       Basic          70,802   71,385           70,576   71,028
                     _______  _______          _______  _______

       Diluted        71,427   73,586           71,257   73,431
                     _______  _______          _______  _______

               KINETIC CONCEPTS, INC. AND SUBSIDIARIES
                Condensed Consolidated Balance Sheets
                            (in thousands)


                                               June 30,   December 31,
                                                 2007         2006
                                              ----------- ------------
                                              (unaudited)
Assets:
Current assets:
  Cash and cash equivalents                      $180,038     $107,146
  Short-term investments                           12,000            -
  Accounts receivable, net                        345,497      327,573
  Inventories, net                                 50,873       43,489
  Deferred income taxes                            37,740       35,978
  Prepaid expenses and other                       35,697       17,602
                                                  _______      _______
      Total current assets                        661,845      531,788

Net property, plant and equipment                 213,064      217,471
Debt issuance costs, less accumulated
 amortization of $16,201 at 2007 and $15,406
 at 2006                                            4,054        4,848
Deferred income taxes                               8,825        7,903
Goodwill                                           49,369       49,369
Other non-current assets, less accumulated
 amortization of $10,054 at 2007 and $9,757
 at 2006                                           23,526       31,063
                                                  _______      _______
                                                 $960,683     $842,442
                                                  _______      _______

Liabilities and Shareholders' Equity:
Current liabilities:
  Accounts payable                                $34,152      $38,543
  Accrued expenses and other                      193,239      189,801
  Current installments of long-term debt            1,189        1,446
  Income taxes payable                              1,007       21,058
                                                  _______      _______
      Total current liabilities                   229,587      250,848

Long-term debt, net of current installments       181,071      206,175
Non-current tax liabilities                        30,341            -
Deferred income taxes                              10,062       19,627
Other non-current liabilities                       8,342        9,579
                                                  _______      _______
                                                  459,403      486,229

Shareholders' equity:
  Common stock; authorized 225,000 at 2007
   and 2006; issued and outstanding 71,525 at
   2007 and 70,461 at 2006                             72           70
  Preferred stock; authorized 50,000 at 2007
   and 2006; issued and outstanding 0 at 2007
   and 2006                                             -            -
  Additional paid-in capital                      605,560      575,539
  Retained deficit                              (132,697)    (244,325)
  Accumulated other comprehensive income           28,345       24,929
                                                  _______      _______
      Shareholders' equity                        501,280      356,213
                                                  _______      _______
                                                 $960,683     $842,442
                                                  _______      _______

               KINETIC CONCEPTS, INC. AND SUBSIDIARIES
           Condensed Consolidated Statements of Cash Flows
                            (in thousands)
                             (unaudited)


                                             Six months ended June 30,
                                             -------------------------
                                                 2007         2006
                                             ------------ ------------
Cash flows from operating activities:
 Net earnings                                    $111,628      $95,148
 Adjustments to reconcile net earnings to
  net cash provided by operating activities:
      Depreciation and amortization                41,839       38,017
      Provision for bad debt                        3,107        5,865
      Amortization of deferred gain on sale
       of headquarters facility                     (535)        (535)
      Write-off of deferred debt issuance
       costs                                          292          734
      Share-based compensation expense             11,278        7,403
      Excess tax benefit from share-based
       payment arrangements                       (9,666)     (18,744)
      Change in assets and liabilities:
         Increase in accounts receivable,
          net                                    (17,975)     (19,812)
         Increase in inventories, net             (6,873)     (10,382)
         Increase in prepaid expenses and
          other                                  (10,066)      (7,992)
         Decrease in accounts payable             (4,035)      (1,587)
         Increase (decrease) in accrued
          expenses and other                        3,223     (15,337)
         Increase in tax liabilities, net          20,586       36,958
         Decrease in deferred income taxes,
          net                                    (12,268)      (6,860)
                                                  _______      _______
            Net cash provided by operating
             activities                           130,535      102,876
                                                  _______      _______
Cash flows from investing activities:
 Additions to property, plant and equipment      (28,042)     (33,709)
 Increase in inventory to be converted into
  equipment for short-term rental                (13,400)      (4,200)
 Dispositions of property, plant and
  equipment                                           773          918
 Purchase of investments                         (31,000)            -
 Maturities of investments                         19,000            -
 Increase in other non-current assets               (400)      (2,032)
                                                  _______      _______
            Net cash used by investing
             activities                          (53,069)     (39,023)
                                                  _______      _______
Cash flows from financing activities:
 Repayments of long-term debt, capital lease
  and other obligations                          (25,364)     (50,933)
 Excess tax benefit from share-based payment
  arrangements                                      9,666       18,744
 Proceeds from exercise of stock options            8,699        7,442
 Purchase of immature shares for minimum tax
  withholdings                                    (1,872)     (11,307)
 Proceeds from purchase of stock in ESPP and
  other                                             2,142        2,231
                                                  _______      _______
            Net cash used by financing
             activities                           (6,729)     (33,823)
                                                  _______      _______
Effect of exchange rate changes on cash and
 cash equivalents                                   2,155        3,590
                                                  _______      _______
Net increase in cash and cash equivalents          72,892       33,620
Cash and cash equivalents, beginning of
 period                                           107,146      123,383
                                                  _______      _______
Cash and cash equivalents, end of period         $180,038     $157,003
                                                  _______      _______

               KINETIC CONCEPTS, INC. AND SUBSIDIARIES
                      Supplemental Revenue Data
                            (in thousands)
                             (unaudited)


                                    Three months ended June 30,
                             -----------------------------------------
                                                       Variance
                                                 ---------------------
                               2007     2006          $          %
                             -------- ---------  ----------- ---------
Total Revenue:
----------------------------
  V.A.C.
    Rental                   $216,740  $174,747      $41,993     24.0%
    Sales                     100,567    81,388       19,179      23.6
                              _______   _______       ______
        Total V.A.C.          317,307   256,135       61,172      23.9

  Therapeutic surfaces/other
     Rental                    66,605    62,042        4,563       7.4
     Sales                     12,740    11,866          874       7.4
                              _______   _______       ______
        Total therapeutic
         surfaces/other        79,345    73,908        5,437       7.4

  Total rental revenue        283,345   236,789       46,556      19.7
  Total sales revenue         113,307    93,254       20,053      21.5
                              _______   _______       ______
      Total Revenue          $396,652  $330,043      $66,609     20.2%
                              _______   _______      _______



USA Revenue:
----------------------------
  V.A.C.
    Rental                   $176,454  $143,803      $32,651     22.7%
    Sales                      59,720    49,608       10,112      20.4
                              _______   _______       ______
        Total V.A.C.          236,174   193,411       42,763      22.1

  Therapeutic surfaces/other
    Rental                     41,797    38,602        3,195       8.3
    Sales                       7,074     6,630          444       6.7
                              _______   _______       ______
        Total therapeutic
         surfaces/other        48,871    45,232        3,639       8.0

  Total USA rental            218,251   182,405       35,846      19.7
  Total USA sales              66,794    56,238       10,556      18.8
                              _______   _______       ______
      Total - USA Revenue    $285,045  $238,643      $46,402     19.4%
                              _______   _______      _______



International Revenue:
----------------------------
  V.A.C.
    Rental                    $40,286   $30,944       $9,342     30.2%
    Sales                      40,847    31,780        9,067      28.5
                              _______   _______       ______
        Total V.A.C.           81,133    62,724       18,409      29.3

  Therapeutic surfaces/other
    Rental                     24,808    23,440        1,368       5.8
    Sales                       5,666     5,236          430       8.2
                              _______   _______       ______
        Total therapeutic
         surfaces/other        30,474    28,676        1,798       6.3

  Total International rental   65,094    54,384       10,710      19.7
  Total International sales    46,513    37,016        9,497      25.7
                              _______   _______       ______
      Total - International
       Revenue               $111,607   $91,400      $20,207     22.1%
                              _______   _______      _______

               KINETIC CONCEPTS, INC. AND SUBSIDIARIES
                      Supplemental Revenue Data
                            (in thousands)
                             (unaudited)


                                     Six months ended June 30,
                             -----------------------------------------
                                                       Variance
                                                ----------------------
                               2007     2006        $           %
                             -------- --------  ---------- -----------
Total Revenue:
----------------------------
  V.A.C.
    Rental                   $415,599 $340,179     $75,420       22.2%
    Sales                     190,271  158,910      31,361        19.7
                              _______  _______      ______
        Total V.A.C.          605,870  499,089     106,781        21.4

  Therapeutic surfaces/other
    Rental                    133,430  123,587       9,843         8.0
    Sales                      26,168   26,612       (444)       (1.7)
                              _______  _______      ______
        Total therapeutic
         surfaces/other       159,598  150,199       9,399         6.3

  Total rental revenue        549,029  463,766      85,263        18.4
  Total sales revenue         216,439  185,522      30,917        16.7
                              _______  _______      ______
      Total Revenue          $765,468 $649,288    $116,180       17.9%
                              _______  _______     _______



USA Revenue:
----------------------------
  V.A.C.
    Rental                   $339,817 $282,545     $57,272       20.3%
    Sales                     114,435   96,953      17,482        18.0
                              _______  _______      ______
        Total V.A.C.          454,252  379,498      74,754        19.7

  Therapeutic surfaces/other
    Rental                     84,862   78,195       6,667         8.5
    Sales                      13,484   13,600       (116)       (0.9)
                              _______  _______      ______
        Total therapeutic
         surfaces/other        98,346   91,795       6,551         7.1

  Total USA rental            424,679  360,740      63,939        17.7
  Total USA sales             127,919  110,553      17,366        15.7
                              _______  _______      ______
      Total - USA Revenue    $552,598 $471,293     $81,305       17.3%
                              _______  _______     _______



International Revenue:
----------------------------
  V.A.C.
    Rental                    $75,782  $57,634     $18,148       31.5%
    Sales                      75,836   61,957      13,879        22.4
                              _______  _______      ______
        Total V.A.C.          151,618  119,591      32,027        26.8

  Therapeutic surfaces/other
    Rental                     48,568   45,392       3,176         7.0
    Sales                      12,684   13,012       (328)       (2.5)
                              _______  _______      ______
        Total therapeutic
         surfaces/other        61,252   58,404       2,848         4.9

  Total International rental  124,350  103,026      21,324        20.7
  Total International sales    88,520   74,969      13,551        18.1
                              _______  _______      ______
      Total - International
       Revenue               $212,870 $177,995     $34,875       19.6%
                              _______  _______     _______

SOURCE:
Kinetic Concepts, Inc.

KCI
David Holmes, 210-255-6892
david.holmes@kci1.com

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