Kinetic Concepts second quarter total revenue increases 4% to $519.8 million

Jul 26 2011

Kinetic Concepts, Inc. (NYSE: KCI) today reported second quarter 2011 total revenue of $519.8 million, an increase of 4% from the second quarter of 2010. Total revenue for the first half of 2011 was $1.02 billion, which also represented a 4% increase from the prior-year period. Foreign currency exchange movements favorably impacted total revenue by 3% for the second quarter of 2011 and 2% for the first half of 2011 compared to the corresponding periods of the prior year.

Net earnings for the second quarter of 2011 were $81.4 million, an increase of 52% compared to $53.6 million for the same period one year ago. Net earnings per diluted share for the second quarter of 2011 were $1.09 compared to $0.75, or an increase of 45%, from the same period in the prior year. On a non-GAAP basis, excluding the effects of certain acquisition-related costs and charges recorded in the second quarter of 2010 associated with our TSS portfolio rationalization and Global Business Transformation, net earnings per diluted share were $1.23 for the second quarter of 2011 compared to $1.01 from the same period of the prior year. Fully diluted, weighted average shares outstanding were 74.9 million for the second quarter of 2011 and 73.4 million for the first six months of 2011, representing increases of 4% and 2%, respectively, from the corresponding periods of the prior year.

"Despite a challenging operating environment, KCI delivered solid financial performance including stable revenue, and strong earnings and cash flow growth year over year," said Catherine Burzik, President and Chief Executive Officer of KCI. "After the quarter, we announced an agreement to be acquired for $6.3 billion by a consortium of well-respected private equity investors whose interest in KCI represents an endorsement of our market leadership, differentiated products and services and consistently strong performance. We're proud of what we've achieved in the marketplace and will continue making the right investments in people, product innovation and commercial capabilities that help the medical community deliver superior outcomes to patients."

Revenue Recap - Second Quarter and First Half of 2011

Worldwide revenue from AHS products was $358.0 million for the second quarter of 2011 and $698.5 million for the first half of 2011 compared to $347.7 million and $680.7 million, respectively, for the corresponding periods of 2010. The growth in second quarter worldwide AHS revenue was attributable primarily to favorable foreign currency movements and higher volumes from new markets and recent product introductions, partially offset by lower rental revenue in established markets. Foreign currency exchange movements favorably impacted worldwide AHS revenues in the second quarter and first half of 2011 by 3% and 2%, respectively, compared to the prior-year periods.

AHS revenue from the Americas region of $266.9 million for the second quarter of 2011 was comparable to the prior-year period and increased 3% from the first quarter of 2011. AHS Americas revenue for the first half of 2011 was $524.7 million, a 2% increase from the prior-year period resulting from a combination of increased V.A.C.^® disposable sales and the adoption of new negative pressure-based therapies we have introduced in the U.S., partially offset by an expected decrease in realized rental pricing. Foreign currency exchange movements did not have a significant impact on AHS Americas revenue as compared to the prior-year periods.

AHS EMEA revenue was $75.2 million and $144.1 million, respectively, for the second quarter and first half of 2011 compared to $71.9 million and $147.5 million, respectively, for the corresponding periods of the prior year. Foreign currency exchange rate movements favorably impacted second quarter and first half 2011 AHS EMEA revenue by 12% and 6%, respectively, compared to the prior-year periods. On a constant currency basis, AHS EMEA revenue decreased 8% during both the second quarter and the first half of 2011 compared to the prior-year periods due to increased European Union healthcare spending austerity measures combined with continued pricing pressures, partially offset by volume growth for V.A.C.Via™.

AHS APAC revenue was $16.0 million and $29.7 million, respectively, for the second quarter and first half of 2011 compared to $9.1 million and $16.6 million, respectively, in the prior-year periods. Foreign currency exchange rate movements favorably impacted second quarter and first half 2011 AHS APAC revenue by 21% and 18%, respectively, compared to the prior-year periods. On a constant currency basis, AHS APAC revenue increased 54% and 61%, respectively, during the second quarter and the first half of 2011 compared to the prior-year periods due primarily to higher unit volumes, particularly in Japan, and improved average pricing resulting from favorable product mix by country.

Worldwide LifeCell revenue was $96.3 million and $189.3 million, respectively, for the second quarter and first half of 2011, up 15% and 16%, respectively, from the corresponding prior-year periods. LifeCell EMEA sales totaled $3.1 million and $5.8 million, respectively, for the second quarter and first half of 2011, up from $1.6 million and $2.6 million, respectively, during the prior-year periods, with growth reported in all geographic locations where we have launched our LifeCell products. Foreign currency exchange movements did not have a significant impact on worldwide LifeCell revenue as compared to the second quarter and first half of the prior year.

Worldwide TSS revenue was $65.5 million for the second quarter and $133.2 million for the first half of 2011 compared to $66.3 million and $140.1 million, respectively, for the same periods one year ago. Second quarter 2011 TSS revenue declined 6% on a constant currency basis compared to the same period one year ago due primarily to lower rental volumes in both wound care and bariatric care as hospitals shifted towards capital purchases and away from rentals. TSS Americas revenue was $41.0 million for the second quarter and $85.5 million for the first half of 2011 compared to $44.6 million and $93.0 million, respectively, for the same periods in the prior year. TSS EMEA revenue was $24.2 million for the second quarter and $47.1 million for the first half of 2011 compared to $21.6 million and $46.5 million, respectively, for the same periods in the prior year. Foreign currency exchange rate movements favorably impacted Americas and EMEA TSS revenue by 1% and 13%, respectively, in the second quarter of 2011 and 1% and 6%, respectively, in the first half of 2011 compared to the same periods of the prior year.

Profit Margins

Gross profit for the second quarter and first six months of 2011 was $313.1 million and $602.0 million, respectively, representing increases of 12% and 9%, respectively, from the same periods of the prior year. Gross profit margin was 60% for the second quarter of 2011, an increase of approximately 400 basis points from the same period one year ago. The gross profit margin increase was due primarily to lower royalty expense associated with our previous license agreement with Wake Forest University, higher gross margins associated with our LifeCell business unit and lower rental fleet depreciation, partially offset by the additional investment in our AHS sales force during the second half of 2010 and first half of 2011. During the second quarter of 2010, the Company recorded $23.0 million in royalty expense associated with our previously-existing licensing agreement with Wake Forest.

Selling, general and administrative ("SG&A") expenses for the second quarter and first six months of 2011 were $152.2 million and $296.5 million, respectively, representing increases of 3% and 5%, respectively, from the same periods of the prior year. SG&A increases included the impact of unfavorable foreign currency movements, selling costs associated with our LifeCell division, higher costs associated with geographic expansion and new product launches and acquisition-related costs, partially offset by reduced litigation costs and prior-year charges associated with our TSS portfolio rationalization and our Global Business Transformation.

Research and development expenses for the second quarter and first six months of 2011 were $23.4 million and $44.6 million, respectively, representing an increase of 8% from the second quarter of 2010 and a decrease of 4% from the first half of 2010. Research and development expenses for the first half of 2011 were lower than the prior-year period due primarily to higher costs in the first quarter of 2010 as we prepared for new product launches including V.A.C.Via and Prevena. Research and development expenses were higher during the second quarter of 2011 compared to the prior-year period due to increased headcount following the formation of our Center for Advanced Research and Technology ("ART"). The goal of ART is to identify, develop and acquire new technologies to support product development in our AHS, LifeCell and TSS businesses to broaden our existing portfolio with future advanced technologies. During the second quarter of 2011, total research and development expenses represented 4.5% of revenue compared to 4.4% for the same period one year ago.

Operating earnings for the second quarter and first six months of 2011 were $128.6 million and $243.2 million, respectively, representing increases of 27% and 20%, respectively, from the corresponding periods of the prior year. The increase in operating earnings resulted from a combination of lower royalty expense, favorable product mix and prior-year charges associated with our TSS portfolio rationalization and Global Business Transformation. During the second quarter of 2011, the Company recorded $1.2 million in expenses associated with the recently-announced leveraged buyout transaction.

Other Income/Expense

Second quarter 2011 interest expense decreased to $17.2 million compared to $22.3 million in the same period of the prior year due to scheduled and voluntary debt payments made over the last twelve months, as well as lower interest rates due, in part, to our debt refinancing completed in the first quarter of the year. Long-term debt outstanding, on a debt-instrument basis, as of June 30, 2011 consisted of a senior secured term loan of $536.3 million due 2016 and $690.0 million of 3.25% senior convertible notes due 2015. Foreign currency transaction losses decreased to $206,000 in the second quarter of 2011 compared to $2.7 million in the prior-year period due primarily to reduced foreign currency exposures.

Income Tax Rate

The effective income tax rate for the second quarter and first six months of 2011 was 27.0% and 27.1%, respectively, compared to 30.0% for both corresponding periods in 2010. The decrease in the effective income tax rate for the second quarter and first six months of 2011 was due primarily to a higher percentage of taxable income being generated in lower-tax foreign jurisdictions.

Financial Position

Total cash at quarter-end was $498.4 million, an increase of $181.8 million from year-end 2010. Operating cash flow less net capital expenditures for the first half of 2011 was $162.5 million compared to $99.0 million in the prior-year period due primarily to higher net earnings and lower cash outlays for royalty payments, inventory purchases, interest and income taxes, partially offset by lower cash collections and higher capital expenditures. Total long-term debt outstanding at June 30, 2011 was $1.125 billion on a GAAP-basis and $1.226 billion on an economic, or debt-instrument, basis.

Subsequent Event

On July 12, 2011, KCI entered into a definitive merger agreement under which a consortium of funds advised by Apax Partners, together with controlled affiliates of Canada Pension Plan Investment Board and Canada's Public Sector Pension Investment Board, will acquire KCI for $68.50 per share in cash in a transaction valued at $6.3 billion, inclusive of KCI's outstanding debt. The merger agreement also provides for a 40-day "go shop" period, during which KCI is permitted to encourage and solicit alternative proposals from third parties.

Source: Kinetic Concepts, Inc.