Kinetic Concepts Reports First Quarter 2008 Financial Results

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 Research and development expenses increased 50% to $14.7 million from 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.® 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®, or V.A.C. ® 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 SUBSIDIARIESCondensed 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 SUBSIDIARIESCondensed 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 SUBSIDIARIESCondensed 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 SUBSIDIARIESSupplemental 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.