Kinetic Concepts Reports Revenue and Earnings Growth for Third Quarter and First Nine Months of 2007

Kinetic Concepts, Inc. (NYSE:KCI) today reported third quarter 2007 total revenue of $410.9 million, an increase of 17% from the third quarter of 2006. Total revenue for the first nine months of 2007 was $1.18 billion, an 18% increase from the prior-year period. Foreign currency exchange movements favorably impacted total revenue for the third quarter and first nine months of 2007 by 2% compared to the corresponding periods of the prior year. Net earnings for the third quarter of 2007 were $59.0 million, up 21%, compared to $49.0 million for the same period one year ago. Net earnings per diluted share for the third quarter of 2007 increased 22% to $0.82, compared to $0.67 for the same period in the prior year. For the first nine months of 2007, net earnings were $170.7 million, up 18%, compared to $144.1 million from last year. Net earnings per diluted share for the first nine months of 2007 were $2.39, an increase of 21% from the same period one year ago. "I am pleased that we continued to execute on our 2007 business plan,” said Catherine Burzik, President and Chief Executive Officer of KCI. "V.A.C.® remains the only clinically-proven system that delivers effective negative pressure wound therapy. Looking forward, we will continue to make necessary changes and improvements in the business to enable longer-term top and bottom line growth for our shareholders.” Revenue Recap – Third Quarter and First Nine Months of 2007 Domestic revenue was $294.0 million for the third quarter and $846.6 million for the first nine months of 2007, representing increases of 16% and 17%, respectively, from the prior year due to increased rental and sales volumes for V.A.C. wound healing devices, related disposables, and therapeutic surfaces rental and sales volumes. Domestic V.A.C. revenue of $244.9 million for the third quarter and $699.2 million for the first nine months of 2007 increased 17% and 19%, respectively, compared to the same periods of the prior year due primarily to higher rental and sales unit volume. Domestic revenue from therapeutic surfaces was $49.1 million for the third quarter and $147.5 million for the first nine months of 2007, representing increases of 9% and 8%, respectively, from the prior-year periods due primarily to increased market penetration. International revenue of $116.8 million for the third quarter and $329.7 million for the first nine months of 2007 increased 21% and 20%, respectively, compared to the prior year due primarily to increased V.A.C. revenue. International V.A.C. revenue of $84.0 million for the third quarter and $235.6 million for the first nine months of 2007 increased 24% and 26%, respectively, compared to the same periods of the prior year due primarily to higher rental and sales unit volume. International therapeutic surfaces revenue for the third quarter of 2007 of $32.9 million was up 13% compared to the prior year, while therapeutic surfaces revenue of $94.1 million for the first nine months of 2007 increased 8% year-to-year. Foreign currency exchange movements favorably impacted total international revenue by 9% and 8% for the third quarter and first nine months of 2007, respectively, compared to the corresponding periods of the prior year. Worldwide V.A.C. revenue was $328.9 million for the third quarter of 2007 and $934.8 million for the first nine months of 2007, representing increases of 19% and 20%, respectively, due primarily to increased rental and sales volumes for V.A.C. wound healing devices and related supplies, resulting from increased market penetration. Foreign currency exchange movements favorably impacted worldwide V.A.C. revenue by 2% compared to both the third quarter and first nine months of the prior year. Worldwide therapeutic surfaces revenue was $82.0 million for the third quarter of 2007 and $241.6 million for the first nine months of 2007, representing increases of 11% and 8%, respectively, from the corresponding periods of the prior year. Foreign currency exchange movements favorably impacted worldwide therapeutic surfaces revenue by 3% for both the third quarter and first nine months of 2007 compared to the same periods one year ago. Profit Margins Gross profit for the third quarter and first nine months of 2007 was $204.2 million and $565.5 million, respectively, representing increases of 24% and 21% from the same periods of the prior year. Gross profit margin improved 290 basis points in the 2007 third quarter, compared to the year-ago period, due primarily to increased market penetration, improved revenue realization levels and increased sales force and service productivity. Operating earnings for the third quarter and first nine months of 2007 were $98.9 million and $272.2 million, respectively, representing increases of 24% and 20% from the same periods of the prior year. Research and development expenses for the third quarter and first nine months of 2007 increased 20% and 29%, respectively, compared to the same periods one year ago. Other selling, general and administrative expenses were higher in the third quarter of 2007 due primarily to management transition costs, share-based compensation and reserve provisions on selected therapeutic surfaces inventory and rental assets. Share-Based Compensation During the third quarter and first nine months of 2007, the Company recorded share-based compensation expense totaling approximately $6.6 million and $17.9 million, respectively, before income taxes, or $0.06 and $0.18, 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 ended   Nine months ended September 30, September 30,       2007     2006     2007     2006   Rental expenses $ 1,292 $ 1,056 $ 4,122 $ 3,014 Cost of sales 140 110 513 346 Selling, general and administrative expenses   5,198     2,828     13,273     8,037   Pre-tax share-based compensation expense 6,630 3,994 17,908 11,397 Less: Income tax benefit   (2,072 )   (1,242 )   (5,120 )   (3,322 )         Total share-based compensation expense, net of tax $ 4,558   $ 2,752   $ 12,788   $ 8,075           Diluted EPS impact $ 0.06   $ 0.04   $ 0.18   $ 0.11   Income Tax Rate The effective income tax rates for the third quarter and the first nine months of 2007 were 34.2% and 33.7%, respectively, compared to 35.0% and 32.5% for the corresponding periods in 2006. The lower income tax rate for the first nine months of the prior year resulted from the favorable resolution of tax contingencies. The effective tax rate for the full year of 2006 was 33.1%. Refinancing During the third quarter of 2007, KCI completed a new $500 million revolving credit facility due July 2012. The Company used a portion of the new facility to repay the remaining outstanding balance of $114.1 million due on our senior credit facility due August 2010. The Company also redeemed the remaining $68.1 million due under our 73/8% senior subordinated notes due August 2013. The Company recorded refinancing expenses associated with these transactions of $4.5 million, net of income taxes, or $0.06 per diluted share, in the third quarter of 2007. These expenses included the write-off of capitalized debt issuance costs associated with the repayment of our previous debt and the payment of a make-whole premium due to the holders of our senior subordinated notes. Share Repurchase Program During the third quarter of 2007, the Company’s Board of Directors authorized a one-year extension of the Company’s previously announced $200.0 million share repurchase program through September 30, 2008. This program had a remaining authorized amount for share repurchases of $87.5 million as of September 30, 2007. In addition, we have a pre-arranged purchase plan pursuant to Rule 10b5-1 of the Exchange Act, which is authorized through September 30, 2008. No open market repurchases were made under the share repurchase program during the third quarter of 2007. Outlook The following guidance is based on current information and expectations as of October 23, 2007: KCI is tightening its projections for 2007 total revenue to $1.58 – $1.60 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 $3.20 – $3.30 per share, based upon a weighted average diluted share estimate of 71.0 – 72.0 million shares. The 2007 guidance includes the third quarter charges associated with the debt refinancing transaction of $4.5 million, net of income taxes. 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, October 23, 2007. The dial-in numbers for this conference call are as follows: Domestic Dial-in Number:   866-356-4281 International Dial-in Number: +617-597-5395 Participant Code: 14032263 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 Webcast – Q3 2007 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. An archive of the webcast will be available at http://www.kci1.com/investor/index.asp until October 22, 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®, 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 October 23, 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 Reports on Form 10-Q for the quarterly periods ended March 31, 2007, and June 30, 2007, including, among other sections, under the captions, "Risk Factors” and "Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These reports are 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 September 30, 2007, which will be filed with the SEC in early November 2007. KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (in thousands, except per share data) (unaudited)     Three months endedSeptember 30,   Nine months endedSeptember 30,     %     %   2007     2006   Change   2007     2006   Change Revenue: Rental $ 295,371 $ 252,974 16.8 % $ 844,400 $ 716,740 17.8 % Sales   115,509     97,883   18.0   331,948     283,405   17.1         Total revenue 410,880 350,857 17.1 1,176,348 1,000,145 17.6   Rental expenses 170,742 156,466 9.1 506,047 445,984 13.5 Cost of sales   35,917     30,254   18.7   104,764     87,222   20.1         Gross profit 204,221 164,137 24.4 565,537 466,939 21.1   Selling, general and adminis-trative expenses 94,349 75,182 25.5 261,183 215,807 21.0 Research and development expenses   10,996     9,174   19.9   32,200     25,056   28.5         Operating earnings 98,876 79,781 23.9 272,154 226,076 20.4   Interest income and other 689 1,660 (58.5 ) 3,569 3,787 (5.8 ) Interest expense (10,176 ) (5,337 ) 90.7 (18,398 ) (15,311 ) 20.2 Foreign currency gain (loss)   328     (747 ) -   (124 )   (1,125 ) (89.0 )         Earnings before income taxes 89,717 75,357 19.1 257,201 213,427 20.5   Income taxes   30,692     26,375   16.4   86,548     69,297   24.9         Net earnings $ 59,025   $ 48,982   20.5 % $ 170,653   $ 144,130   18.4 %         Net earnings per share:   Basic $ 0.83   $ 0.69   20.3 % $ 2.41   $ 2.03   18.7 %         Diluted $ 0.82   $ 0.67   22.4 % $ 2.39   $ 1.97   21.3 %         Weighted average shares out-standing: Basic   71,214     71,235     70,791     71,098           Diluted   71,929     73,105     71,490     73,321   KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands)     September 30, December 31,   2007     2006   (unaudited) Assets: Current assets: Cash and cash equivalents $ 164,174 $ 107,146 Accounts receivable, net 356,894 327,573 Inventories, net 49,122 43,489 Deferred income taxes 42,369 35,978 Prepaid expenses and other   33,619     17,602   Total current assets 646,178 531,788   Net property, plant and equipment 217,804 217,471 Debt issuance costs, less accumulated amortization of $87 at 2007 and $15,406 at 2006 2,497 4,848 Deferred income taxes 8,395 7,903 Goodwill 48,897 49,369 Other non-current assets, less accumulated amortization of $10,220 at 2007 and $9,757 at 2006   24,236     31,063       $ 948,007   $ 842,442     Liabilities and Shareholders’ Equity: Current liabilities: Accounts payable $ 35,204 $ 38,543 Accrued expenses and other 179,825 189,801 Current installments of long-term debt - 1,446 Income taxes payable   408     21,058       Total current liabilities 215,437 250,848   Long-term debt, net of current installments 88,000 206,175 Non-current tax liabilities 34,928 - Deferred income taxes 9,393 19,627 Other non-current liabilities   8,090     9,579       355,848 486,229   Shareholders' equity: Common stock; authorized 225,000 at 2007 and 2006; issued and outstanding 71,931 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 627,872 575,539 Retained deficit (73,672 ) (244,325 ) Accumulated other comprehensive income   37,887     24,929       Shareholders' equity 592,159 356,213 $ 948,007   $ 842,442   KINETIC CONCEPTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)     Nine months ended September 30,   2007     2006   Cash flows from operating activities: Net earnings $ 170,653 $ 144,130 Adjustments to reconcile net earnings to net cash provided by operating activities:   Depreciation, amortization and other 67,785 58,327 Provision for bad debt 5,519 10,490 Amortization of deferred gain on sale of headquarters facility (803 ) (803 ) Write-off of deferred debt issuance costs 3,922 1,262 Share-based compensation expense 17,908 11,397 Excess tax benefit from share-based payment arrangements (12,582 ) (29,286 ) Change in assets and liabilities: Increase in accounts receivable, net (30,781 ) (38,287 ) Increase in inventories, net (7,284 ) (12,861 ) Increase in prepaid expenses and other (7,987 ) (7,295 ) Increase in deferred income taxes, net (17,135 ) (13,594 ) Decrease in accounts payable (2,934 ) (8,757 ) Decrease in accrued expenses and other (9,779 ) (8,133 ) Increase in tax liabilities, net   27,963     42,514       Net cash provided by operating activities   204,465     149,104       Cash flows from investing activities: Additions to property, plant and equipment (53,947 ) (54,195 ) Increase in inventory to be converted into equipment for short-term rental (13,500 ) (6,000 ) Dispositions of property, plant and equipment 1,239 1,136 Purchase of investments (36,425 ) - Maturities of investments 36,425 - Increase in other non-current assets   (1,288 )   (3,967 )     Net cash used by investing activities   (67,496 )   (63,026 )     Cash flows from financing activities: Proceeds from revolving credit facility 188,000 - Repayments of long-term debt, capital lease and other obligations (307,584 ) (67,638 ) Payments of debt issuance costs (2,268 ) - Repurchase of common stock in open market transactions - (83,943 ) Excess tax benefit from share-based payment arrangements 12,582 29,286 Proceeds from exercise of stock options 21,634 8,521 Purchase of immature shares for minimum tax withholdings (2,321 ) (20,910 ) Proceeds from purchase of stock in ESPP and other   2,142     2,270       Net cash used by financing activities   (87,815 )   (132,414 )     Effect of exchange rate changes on cash and cash equivalents   7,874     3,682       Net increase (decrease) in cash and cash equivalents 57,028 (42,654 ) Cash and cash equivalents, beginning of period 107,146 123,383     Cash and cash equivalents, end of period $ 164,174   $ 80,729   KINETIC CONCEPTS, INC. AND SUBSIDIARIES Supplemental Revenue Data (in thousands) (unaudited)           Three months ended September 30, Variance   2007   2006   $   %   Total Revenue: V.A.C. Rental $ 226,114 $ 191,411 $ 34,703 18.1 % Sales   102,781   85,400   17,381 20.4       Total V.A.C. 328,895 276,811 52,084 18.8   Therapeutic surfaces/other Rental 69,257 61,563 7,694 12.5 Sales   12,728   12,483   245 2.0       Total therapeutic surfaces/other 81,985 74,046 7,939 10.7   Total rental revenue 295,371 252,974 42,397 16.8 Total sales revenue   115,509   97,883   17,626 18.0       Total Revenue $ 410,880 $ 350,857 $ 60,023 17.1 %         USA Revenue: V.A.C. Rental $ 183,186 $ 156,981 $ 26,205 16.7 % Sales   61,738   52,290   9,448 18.1       Total V.A.C. 244,924 209,271 35,653 17.0   Therapeutic surfaces/other Rental 42,994 38,010 4,984 13.1 Sales   6,128   6,945   (817 ) (11.8 )       Total therapeutic surfaces/other 49,122 44,955 4,167 9.3   Total USA rental 226,180 194,991 31,189 16.0 Total USA sales   67,866   59,235   8,631 14.6       Total – USA Revenue $ 294,046 $ 254,226 $ 39,820 15.7 %         International Revenue: V.A.C. Rental $ 42,928 $ 34,430 $ 8,498 24.7 % Sales   41,043   33,110   7,933 24.0       Total V.A.C. 83,971 67,540 16,431 24.3   Therapeutic surfaces/other Rental 26,263 23,553 2,710 11.5 Sales   6,600   5,538   1,062 19.2       Total therapeutic surfaces/other 32,863 29,091 3,772 13.0   Total International rental 69,191 57,983 11,208 19.3 Total International sales   47,643   38,648   8,995 23.3       Total – International Revenue $ 116,834 $ 96,631 $ 20,203 20.9 % KINETIC CONCEPTS, INC. AND SUBSIDIARIES Supplemental Revenue Data (in thousands) (unaudited)         Nine months ended September 30, Variance   2007   2006   $   %   Total Revenue: V.A.C. Rental $ 641,713 $ 531,590 $ 110,123 20.7 % Sales   293,052   244,310   48,742   20.0       Total V.A.C. 934,765 775,900 158,865 20.5   Therapeutic surfaces/other Rental 202,687 185,150 17,537 9.5 Sales   38,896   39,095   (199 ) (0.5 )       Total therapeutic surfaces/other 241,583 224,245 17,338 7.7   Total rental revenue 844,400 716,740 127,660 17.8 Total sales revenue   331,948   283,405   48,543   17.1       Total Revenue $ 1,176,348 $ 1,000,145 $ 176,203   17.6 %     USA Revenue: V.A.C. Rental $ 523,003 $ 439,526 $ 83,477 19.0 % Sales   176,173   149,243   26,930   18.0       Total V.A.C. 699,176 588,769 110,407 18.8   Therapeutic surfaces/other Rental 127,856 116,205 11,651 10.0 Sales   19,612   20,545   (933 ) (4.5 )       Total therapeutic surfaces/other 147,468 136,750 10,718 7.8   Total USA rental 650,859 555,731 95,128 17.1 Total USA sales   195,785   169,788   25,997   15.3       Total – USA Revenue $ 846,644 $ 725,519 $ 121,125   16.7 %         International Revenue: V.A.C. Rental $ 118,710 $ 92,064 $ 26,646 28.9 % Sales   116,879   95,067   21,812 22.9       Total V.A.C. 235,589 187,131 48,458 25.9   Therapeutic surfaces/other Rental 74,831 68,945 5,886 8.5 Sales   19,284   18,550   734   4.0       Total therapeutic surfaces/other 94,115 87,495 6,620 7.6   Total International rental 193,541 161,009 32,532 20.2 Total International sales   136,163   113,617   22,546   19.8       Total – International Revenue $ 329,704 $ 274,626 $ 55,078   20.1 %