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Kinetic Concepts Reports First Quarter 2008 Financial Results

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SAN ANTONIO, Apr 22, 2008 (BUSINESS WIRE) -- Kinetic Concepts, Inc. (NYSE: KCI):

First Quarter Highlights

  • Net earnings were $68.0 million, an increase of 27% from $53.6 million in the prior-year period
  • Net earnings per diluted share were $0.94, an increase of 25% from $0.75 in the prior-year period
  • Total revenue increased 14% to $420.0 million from $368.8 million in the prior-year period

Kinetic Concepts, Inc. (NYSE: KCI) today reported first quarter 2008 total revenue of $420.0 million, an increase of 14% from the first quarter of 2007. Foreign currency exchange movements favorably impacted total revenue for the first quarter of 2008 by 4% compared to the corresponding period of the prior year.

Net earnings for the first quarter of 2008 were $68.0 million, up 27%, compared to $53.6 million for the same period one year ago. Net earnings per diluted share for the first quarter of 2008 increased 25% to $0.94 compared to $0.75 for the same period in the prior year.

During the first quarter, we made progress on a number of initiatives we have planned for 2008, said Catherine Burzik, President and Chief Executive Officer of KCI. We realigned our domestic sales force, improving both focus and customer service levels, submitted our application for regulatory approval of V.A.C.(R) in Japan and completed due diligence related to a major acquisition. On top of these development activities, we delivered higher revenue, earnings and margins compared to the prior year.

Revenue Recap - First Quarter 2008

During 2007, we took steps to structure KCI as a global company, which included the alignment of key leadership positions for specific geographic regions. Beginning with the first quarter 2008, we have reported financial results consistent with this new structure. The geographic reporting structure is made up of (i) North America, which consists of the United States, Canada and Puerto Rico and (ii) Europe, the Middle East and Africa (EMEA) and the Asia Pacific region (APAC).

Total revenue for North America was $309.5 million for the first quarter of 2008, an increase of $25.8 million, or 9%, from the prior-year period due primarily to increased rental and sales volumes for V.A.C. wound healing devices and related disposables. North American V.A.C. revenue of $250.2 million for the first quarter was 10% higher than the same period one year ago due to continued market penetration. Rental unit growth was reported across all care settings. North American revenue from Therapeutic Support Systems (TSS) was $59.2 million for the first three months of 2008, a 4% increase from the prior-year period, due to higher rental unit volume in the acute care setting, partially offset by lower TSS sales in the period.

Total revenue outside of North America, which consists of EMEA and APAC, was $110.6 million for the first quarter of 2008, an increase of 30%, compared to the prior-year period due primarily to an increase in V.A.C. revenue. EMEA/APAC V.A.C. revenue for the first three months of 2008 was $82.7 million, an increase of $21.1 million, or 34%, from the prior-year period. EMEA/APAC TSS revenue increased 18% from the prior-year period to $27.8 million for the first quarter resulting primarily from an increase in rental volume and favorable foreign currency exchange movements. Foreign currency exchange movements favorably impacted total EMEA/APAC revenue by 14% compared to the prior-year period. Foreign currency exchange movements favorably impacted EMEA/APAC V.A.C. and TSS revenue by 14% and 13%, respectively, in the 2008 first quarter.

Worldwide V.A.C. revenue was $333.0 million for the first quarter of 2008, an increase of 15% from the prior-year period. Foreign currency exchange movements favorably impacted worldwide V.A.C. revenue by less than 4% compared to the first quarter of the prior year. The growth in V.A.C. revenue stemmed from increased market penetration, resulting in higher rental and sales unit volumes.

Worldwide TSS revenue was $87.1 million for the first quarter of 2008, an increase of $6.8 million, or 8%, due primarily to higher rental unit volume worldwide and foreign currency exchange movements. Foreign currency exchange movements favorably impacted worldwide TSS revenue by 5% compared to the same period one year ago.

Profit Margins

Gross profit for the first quarter of 2008 was $209.0 million, an increase of 22% from the prior-year period. Gross profit margin was 49.8% for the first quarter of 2008, an increase of approximately 335 basis points from the same period one year ago. As a percent of total revenue, lower field service expenses, product depreciation, cost of sales and marketing costs made up the majority of the increase in gross margin. Selling, general and administrative (SG&A) expenses increased $17.1 million, or 22%, year-to-year. The SG&A increase was due primarily to certain costs associated with the U.S. sales force realignment, additional costs associated with the transition of V.A.C. unit production to our Ireland manufacturing facility and higher share-based compensation expenses. Research and development spending increased 50% from the prior-year period to $14.7 million for the quarter. Total research and development expenses represented 3.5% of revenue for the first quarter of 2008.

Balance Sheet

Total long-term debt outstanding at March 31, 2008 was $68.0 million. Total cash at quarter-end was $305.2 million, an increase of $39.2 million from year-end 2007.

On April 21, 2008, the Company closed its offering of $600 million aggregate principal amount of 3.25% convertible senior notes due 2015. The Company has also granted an option to the initial purchasers of the notes to purchase up to an additional $90 million aggregate principal amount of notes to cover over-allotments. The over-allotment option is exercisable during the 13 day period beginning on the closing date. The coupon on the notes will be 3.25% per year on the principal amount. Interest will accrue from April 21, 2008, and will be payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2008. The notes will mature on April 15, 2015, unless previously converted or repurchased in accordance with their terms. The notes are not redeemable by us prior to the maturity date. Upon conversion, holders will receive cash up to the aggregate principal amount of the notes being converted and shares of KCI common stock in respect of the remainder, if any, of KCI's conversion obligation in excess of the aggregate principal amount of the notes being converted. The initial conversion rate for the notes is based on an initial conversion price of approximately $51.34 per share of common stock and represents a 27.5% conversion premium over the last reported sale price of KCI's common stock on April 15, 2008 (the day of pricing of the notes), which was $40.27 per share. In connection with the offering, we entered into convertible note hedge and warrant transactions with financial institutions that are affiliates of two of the offering's initial purchasers to increase the effective conversion price of the notes to approximately $60.41, which is approximately 50% higher than the closing price of the Company's common stock on April 15, 2008. The Company intends to settle the principal amount of these notes in cash. The net proceeds of this offering will be used, in combination with other financing arrangements and existing cash on hand, primarily to fund our acquisition of LifeCell Corporation.

Income Tax Rate

The effective income tax rate for the first quarter of 2008 was 33.5%, which was comparable to 33.2% for the same period in 2007.

Outlook

The following guidance is based on current information and expectations as of April 22, 2008:

KCI is reaffirming its projections for 2008 total revenue of $1.77 - $1.82 billion based on continued demand for its V.A.C. negative pressure wound therapy devices and related supplies. The Company is also reaffirming its projections for net earnings per diluted share for 2008 of $3.85 - $3.95 per diluted share, based upon a weighted average diluted share estimate of 72.0 - 73.0 million shares. This outlook excludes the impact associated with our anticipated acquisition of LifeCell.

Earnings Release Conference Call

As previously announced, we have scheduled an earnings release conference call for 8:30 a.m. Eastern Daylight Time today, Tuesday, April 22, 2008. The dial-in numbers for this conference call are as follows:

Domestic Dial-in Number:                                 866-356-3377
International Dial-in Number:                            +617-597-5392
Participant Code:                                        20816919

This call is being webcast by Thomson and can be accessed at the Kinetic Concepts, Inc. web site at http://www.kci1.com/investor/index.asp, and clicking on Web cast - Q1 2008 Kinetic Concepts, Inc. Earnings Conference Call. The webcast is also being distributed over Thomson's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through Thomson's individual investor center at www.earnings.com and institutional investors can access the call via Thomson's password-protected event management site, StreetEvents (www.streetevents.com). An archive of the web cast will be available until April 21, 2009 at http://www.kci1.com/investor/index.asp.

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

KCI is a global medical technology company with leadership positions in advanced wound care and therapeutic support systems. 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. (R) Therapy technology, which has been demonstrated clinically to promote wound healing through unique mechanisms of action and can help reduce the cost of treating patients with serious wounds. Our therapeutic support systems, including specialty hospital beds, mattress replacement systems and overlays, are designed to address pulmonary complications associated with immobility, to reduce 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 healthcare settings, including acute care hospitals, extended care organizations and patients' homes, both in the United States and in 18 countries internationally. For more information, visit our web site at www.kci1.com.

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. The 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, the seasonal slowing of V.A.C. unit growth in the fourth and first quarter of each year, changes in payer reimbursement policies and our ability to protect our intellectual property rights. All information set forth in this release and its attachments is as of April 22, 2008. 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, 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 March 31, 2008, which will be filed with the SEC in early May 2008.



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


                                          Three months ended March 31,
                                          ----------------------------
                                                                  %
                                             2008       2007    Change
                                          ----------- --------- ------
Revenue:
  Rental                                    $297,839  $265,684   12.1%
  Sales                                      122,177   103,132   18.5
                                          ----------- ---------

    Total revenue                            420,016   368,816   13.9%

Rental expenses                              175,274   163,940    6.9
Cost of sales                                 35,756    33,691    6.1
                                          ----------- ---------

    Gross profit                             208,986   171,185   22.1%

Selling, general and administrative
 expenses                                     95,347    78,213   21.9
Research and development expenses             14,715     9,807   50.0
                                          ----------- ---------

    Operating earnings                        98,924    83,165   18.9%

Interest income and other                      2,005     1,364   47.0
Interest expense                              (1,128)   (4,091) (72.4)
Foreign currency gain (loss)                   2,387      (265)     -
                                          ----------- ---------

    Earnings before income taxes             102,188    80,173   27.5%

Income taxes                                  34,233    26,617   28.6
                                          ----------- ---------

    Net earnings                            $ 67,955  $ 53,556   26.9%
                                          =========== =========

    Net earnings per share:
      Basic                                 $   0.95  $   0.76   25.0%
                                          =========== =========

      Diluted                               $   0.94  $   0.75   25.3%
                                          =========== =========

    Weighted average shares outstanding:
      Basic                                   71,665    70,347
                                          =========== =========

      Diluted                                 72,162    71,079
                                          =========== =========



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


                                               March 31,  December 31,
                                                 2008          2007
                                              ----------- ------------
                                              (unaudited)

Assets:
Current assets:
  Cash and cash equivalents                    $  305,167  $  265,993
  Accounts receivable, net                        355,429     356,965
  Inventories, net                                 60,152      50,341
  Deferred income taxes                            41,780      41,504
  Prepaid expenses and other                       29,842      31,176
                                              ----------- ------------

    Total current assets                          792,370     745,979

Net property, plant and equipment                 234,853     228,471
Debt issuance costs, less accumulated
 amortization of $352 at 2008 and $218 at
 2007                                               2,322       2,456
Deferred income taxes                               8,442       8,743
Goodwill                                           48,897      48,897
Other non-current assets, less accumulated
 amortization of $10,788 at 2008 and $10,678
 at 2007                                           23,798      23,039
                                              ----------- ------------

                                               $1,110,682  $1,057,585
                                              =========== ============

Liabilities and Shareholders' Equity:
Current liabilities:
  Accounts payable                             $   44,479  $   50,804
  Accrued expenses and other                      161,303     212,874
  Income taxes payable                             15,956           -
                                              ----------- ------------

    Total current liabilities                     221,738     263,678

Long-term debt, net of current installments        68,000      68,000
Non-current tax liabilities                        33,189      31,313
Deferred income taxes                              20,126       9,921
Other non-current liabilities                       7,755       7,653
                                              ----------- ------------

                                                  350,808     380,565

Shareholders' equity:
  Common stock; authorized 225,000 at 2008
   and 2007, issued and outstanding 72,315 at
   2008 and 72,153 at 2007                             72          72
  Preferred stock; authorized 50,000 at 2008
   and 2007; issued and outstanding 0 at 2008
   and 2007                                             -           -
  Additional paid-in capital                      653,640     644,347
  Retained earnings (deficit)                      60,774      (7,181)
  Accumulated other comprehensive income           45,388      39,782
                                              ----------- ------------

    Shareholders' equity                          759,874     677,020
                                              ----------- ------------

                                               $1,110,682  $1,057,585
                                              =========== ============



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


                                          Three months ended March 31,
                                          ----------------------------
                                               2008          2007
                                          -------------- -------------
Cash flows from operating activities:
  Net earnings                                 $ 67,955      $ 53,556
  Adjustments to reconcile net earnings
   to net cash provided by operating
   activities:
    Depreciation, amortization and other         21,258        20,954
    Provision for bad debt                        1,600         1,750
    Amortization of deferred gain on sale
     of headquarters facility                      (268)         (268)
    Share-based compensation expense              7,566         5,772
    Excess tax benefit from share-based
     payment arrangements                          (131)       (7,076)
    Change in assets and liabilities:
      Decrease in accounts receivable,
       net                                        2,351         5,752
      Increase in inventories, net               (9,376)       (4,395)
      Decrease (increase) in prepaid
       expenses and other                         1,373        (4,973)
      Increase (decrease) in deferred
       income taxes, net                         10,230        (7,909)
      Decrease in accounts payable               (6,048)       (2,981)
      Decrease in accrued expenses and
       other                                    (50,509)      (39,773)
      Increase in tax liabilities, net           18,014        31,361
                                          -------------- -------------

        Net cash provided by operating
         activities                              64,015        51,770
                                          -------------- -------------

Cash flows from investing activities:
  Additions to property, plant and
   equipment                                    (15,600)      (12,867)
  Increase in inventory to be converted
   into equipment for short-term rental         (12,000)       (5,200)
  Dispositions of property, plant and
   equipment                                      3,031           410
  Increase in other non-current assets             (559)         (279)
                                          -------------- -------------

        Net cash used by investing
         activities                             (25,128)      (17,936)
                                          -------------- -------------

Cash flows from financing activities:
  Repayments of long-term debt, capital
   lease and other obligations                      (28)         (324)
  Excess tax benefit from share-based
   payment arrangements                             131         7,076
  Proceeds from exercise of stock options         1,552         3,634
  Purchase of immature shares for minimum
   tax withholdings                                  (5)       (1,317)
                                          -------------- -------------

        Net cash provided by financing
         activities                               1,650         9,069
                                          -------------- -------------

Effect of exchange rate changes on cash
 and cash equivalents                            (1,363)          590
                                          -------------- -------------

Net increase in cash and cash equivalents        39,174        43,493
Cash and cash equivalents, beginning of
 period                                         265,993       107,146
                                          -------------- -------------

Cash and cash equivalents, end of period       $305,167      $150,639
                                          ============== =============



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


                                       Three months ended March 31,
                                    ----------------------------------
                                                          Variance
                                                       ---------------
                                      2008   2007 (1)     $       %
                                    -------- --------- -------- ------
Total Revenue:
-----------------------------------
  V.A.C.
    Rental                          $222,097 $198,859  $23,238   11.7%
    Sales                            110,867   89,704   21,163   23.6
                                    -------- --------- --------

      Total V.A.C.                   332,964  288,563   44,401   15.4

  Therapeutic Support Systems
    Rental                            75,742   66,825    8,917   13.3
    Sales                             11,310   13,428   (2,118) (15.8)
                                    -------- --------- --------

      Total Therapeutic Support
       Systems                        87,052   80,253    6,799    8.5

  Total rental revenue               297,839  265,684   32,155   12.1
  Total sales revenue                122,177  103,132   19,045   18.5
                                    -------- --------- --------

    Total Revenue                   $420,016 $368,816  $51,200   13.9%
                                    ======== ========= ========



North America Revenue:
-----------------------------------
  V.A.C.
    Rental                          $180,845 $168,088  $12,757    7.6%
    Sales                             69,377   58,849   10,528   17.9
                                    -------- --------- --------

      Total V.A.C.                   250,222  226,937   23,285   10.3

  Therapeutic Support Systems
    Rental                            52,306   48,496    3,810    7.9
    Sales                              6,935    8,209   (1,274) (15.5)
                                    -------- --------- --------

      Total Therapeutic Support
       Systems                        59,241   56,705    2,536    4.5

  Total North America rental         233,151  216,584   16,567    7.6
  Total North America sales           76,312   67,058    9,254   13.8
                                    -------- --------- --------

    Total - North America Revenue   $309,463 $283,642  $25,821    9.1%
                                    ======== ========= ========



EMEA/APAC Revenue:
-----------------------------------
  V.A.C.
    Rental                          $ 41,252 $ 30,771  $10,481   34.1%
    Sales                             41,490   30,855   10,635   34.5
                                    -------- --------- --------

      Total V.A.C.                    82,742   61,626   21,116   34.3

  Therapeutic Support Systems
    Rental                            23,436   18,329    5,107   27.9
    Sales                              4,375    5,219     (844) (16.2)
                                    -------- --------- --------

      Total Therapeutic Support
       Systems                        27,811   23,548    4,263   18.1

  Total EMEA/APAC rental              64,688   49,100   15,588   31.7
  Total EMEA/APAC sales               45,865   36,074    9,791   27.1
                                    -------- --------- --------

    Total - EMEA/APAC Revenue       $110,553 $ 85,174  $25,379   29.8%
                                    ======== ========= ========

(1) Prior year amounts have been reclassified to conform to our
 current year segment presentation.

SOURCE:
Kinetic Concepts, Inc.

Kinetic Concepts, Inc.
Investor Relations:
David Holmes, 210-255-6892
david.holmes@kci1.com
or
Media Relations:
Kristie Madara, 210-255-6232
kristie.madara@kci1.com

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