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