Kinetic Concepts' first-quarter 2010 total revenues increase 3% to $485.8M

Kinetic Concepts, Inc. (NYSE: KCI) today reported first quarter 2010 total revenue of $485.8 million, an increase of 3% from the first quarter of 2009. Foreign currency exchange movements favorably impacted total revenue for the first quarter of 2010 by 2% compared to the corresponding period of the prior year.

“Given our investments in new product launches, global expansion and legal expenses, first quarter earnings performance was consistent with the plans we put in place for 2010”

Net earnings for the first quarter of 2010 were $52.7 million, an increase of 33% compared to $39.7 million for the same period one year ago. Net earnings per diluted share for the first quarter of 2010 were $0.74 compared to $0.57, or an increase of 30%, from the same period in the prior year. During the first quarter of the prior year, KCI reported restructuring charges of $6.3 million, net of income taxes, or $0.09 per diluted share. On a non-GAAP basis, which excludes the effects of non-cash acquisition-related items and prior-year restructuring charges, net earnings per diluted share increased 10% in the first quarter of 2010 compared to the same period of the prior year.

"Given our investments in new product launches, global expansion and legal expenses, first quarter earnings performance was consistent with the plans we put in place for 2010," said Catherine Burzik, President and Chief Executive Officer of KCI. "With a successful outcome to our U.S. patent litigation, a solid beginning to our commercial V.A.C. Therapy launch in Japan, strong growth in LifeCell and the recent FDA approval of V.A.C.Via™, our next generation NPWT product, we look forward to the rest of the year."

Revenue Recap - First Quarter 2010

Worldwide revenue from AHS products was $333.0 million for the first quarter of 2010, compared to $329.3 million for the corresponding period of 2009. Foreign currency exchange movements favorably impacted worldwide AHS revenue by approximately 3% compared to the first quarter of the prior year. On a constant currency basis, worldwide AHS revenue decreased approximately 1% from the prior-year period resulting primarily from lower average realized pricing compared to the prior-year period. Average realized pricing in the period was negatively impacted by shorter treatment periods, due primarily to wound mix, and pricing pressure as providers and payers worked to reduce line item expenditures.

North American AHS revenue of $249.8 million for the first quarter of 2010 was 2% lower than the same period one year ago due to lower unit volumes, particularly in non-acute settings, combined with lower average realized pricing due in part to a shift in wound mix to more acute wounds. Average U.S. unit volume during the first quarter decreased approximately 2% compared to the same period of 2009 due primarily to a decrease in homecare placements resulting from lower managed care and insurance enrollments and a decrease in average length of therapy resulting from a change in wound mix. EMEA/APAC AHS revenue for the first quarter of 2010 was $83.1 million, up 11% from $74.7 million for the first quarter of the prior year due primarily to higher unit volumes. Foreign currency exchange movements favorably impacted North America and EMEA/APAC AHS revenue by 1% and 9%, respectively, compared to the prior-year period.

Total revenue from our LifeCell division was $79.0 million for the first quarter of 2010, up $12.8 million, or 19%, from the prior-year period. Sales of Strattice, the porcine-based regenerative tissue matrix which launched in March 2008, were $29.1 million in the quarter, representing 37% of total Regenerative Medicine revenue for the period, up from 25% in the year-ago period. EMEA/APAC Regenerative Medicine sales totaled $1.0 million in the first quarter, with growth reported in all geographic locations where we have launched.

Worldwide TSS revenue was $73.8 million for the first quarter of 2010, compared to $74.6 million for the same period one year ago, due primarily to lower rental volumes in the United States resulting from a milder flu season and a weaker economic environment, partially offset by favorable foreign currency exchange movements. North American revenue from TSS was $48.4 million for the first three months of 2010, a 2% decrease from the prior-year period, due primarily to lower hospital census. EMEA/APAC TSS revenue was $25.4 million for the first quarter of 2010, essentially flat compared to $25.3 million for the same period in the prior year, due primarily to increased rental volume of our bariatric and wound care products, offset by lower critical care product sales volumes. Foreign currency exchange rate movements favorably impacted North America and EMEA/APAC TSS revenue by 3% and 6%, respectively, compared to the prior-year period.

Profit Margins

Gross profit for the first quarter of 2010 was $271.7 million, an increase of 8% from the prior-year period. Gross profit margin was 55.9% for the first quarter of 2010, an increase of approximately 260 basis points from the same period one year ago. The gross profit margin increase was due primarily to increased field service operations productivity, higher gross margins associated with our Regenerative Medicine business unit and lower product royalty payments.

Selling, general and administrative ("SG&A") expenses for the period increased $8.7 million, or 6.9% over the first quarter of 2009. SG&A increases included selling costs associated with our LifeCell division, increased legal fees associated with our ongoing domestic patent litigation, infrastructure investment associated with our Japan launch, higher share-based compensation expenses and higher costs associated with new product launches and global business transformation efforts.

Research and development expenses for the first quarter of 2010 increased 12% from the prior-year period to $24.8 million. Total research and development expenses represented 5.1% of revenue for the current-year period compared to 4.7% one year ago. During the first quarter, the Company launched its Prevena Incision Management System in Europe and Canada. In the U.S., we expect to launch commercially upon receipt of FDA clearance. Prevena is the first and only powered negative pressure product designed specifically for management of surgically-closed incisions. In addition, during March 2010, the Company received 510(k) clearance from the FDA for its next generation V.A.C. Therapy device, V.A.C.Via™, a revolutionary single-patient use device utilizing novel, patent-protected technology.

Operating profit for the first quarter of 2010 was $101.3 million, representing an operating margin of 20.9%.

In addition, KCI has historically presented shared-service support costs associated with our international subsidiaries within rental expenses. Effective with the first quarter of 2010, we have reclassified these costs to SG&A for each of the periods presented in this release. The reclassification was enabled through the implementation of a global financial consolidation and reporting application that has allowed us to better capture certain international expenses associated with general and administrative activities. This reclassification increased our previously-reported gross profit, but it did not have any impact on previously-reported operating earnings or net earnings. We believe that this presentation is more consistent with our current practice for the reporting of global shared-service support costs and, therefore, provides more comparable financial information. We have also provided a tabular presentation of this change for each of the quarterly periods of 2009.

Other Income/Expense

First quarter 2010 interest expense decreased to $23.6 million, compared to $28.5 million in the same period of the prior year, due to scheduled and voluntary debt payments made over the last twelve months totaling $200.0 million and lower interest rates. Long-term debt outstanding as of March 31, 2010 consisted of a senior secured term loan of $675.0 million due 2013 and 3.25% senior convertible notes of $690.0 million due 2015.

During the first quarter of 2009, the Company adopted required accounting standards related to the accounting for certain convertible debt instruments. The standards specify that issuers of such instruments should account separately for the liability and equity components in a manner that reflects the entity's estimated non-convertible borrowing rate at the date of issuance. As a result of the Company's adoption of these standards, we recorded $3.2 million and $2.9 million, net of tax, or $0.05 and $0.04 per diluted share, respectively, of additional non-cash interest expense, net of income taxes, during the first three months of 2010 and 2009.

Income Tax Rate

The effective income tax rate for the first quarter of 2010 was 30.0%, compared to 31.8% for the same period in 2009. The lower effective income tax rate in the first quarter of 2010 was due primarily to the favorable resolution of certain tax contingencies during the period.

Financial Position

Total cash at quarter-end was $256.1 million, a decrease of $7.1 million from year-end 2009. During the first quarter, the Company made scheduled and voluntary senior credit facility repayments totaling $75.0 million from cash-on-hand. During April 2010, we made an additional voluntary debt repayment of $25.0 million on our senior credit facility. Operating cash flow less net capital expenditures for the first quarter of 2010 was $64.4 million compared to $37.3 million in the prior-year period due primarily to higher net earnings and working capital management. Total long-term debt outstanding at March 31, 2010 was $1.236 billion on a GAAP-basis and $1.365 billion on an economic, or debt-instrument, basis. The long-term debt balances in our condensed consolidated balance sheets reflect the discount associated with applying the estimated non-convertible borrowing rate upon the issuance of the notes. The total discount will accrete over the term of the notes. As of March 31, 2010 and December 31, 2009, these convertible notes had balances of $561.3 million and $556.2 million, respectively, within our condensed consolidated balance sheets.

Outlook

We are reaffirming the following guidance which is based on current information and expectations as of April 27, 2010 (in millions, except per share data):

The revenue guidance, relative to 2009, reflects our expectation of stable revenue in our AHS and TSS businesses and double-digit growth in Regenerative Medicine revenue. Our 2010 outlook also assumes foreign currency exchange rates are comparable to 2009.

While we expect 2010 to be an investment year in terms of entering the Japanese market and continuing with our global business transformation efforts, earnings leverage is expected to be realized through favorable product mix, operating efficiencies and continued debt reduction activities. In addition, during 2010, the Company expects to incur certain charges associated with its global business transformation and other business unit initiatives.

Non-GAAP Financial Information

Within this document, we have included our results for the first quarter ended March 31, 2010 and 2009 along with our outlook on a non-GAAP basis to exclude the impact of the specified non-cash expenses set forth above associated with our acquisition of LifeCell in the second quarter of 2008 and the impact of restructuring charges incurred during the first quarter of 2009. In addition, we have presented supplemental revenue data on a non-GAAP basis to exclude the impact of foreign currency fluctuations between 2009 and 2010. These non-GAAP financial measures do not replace the presentation of our GAAP results and outlook. We have provided this supplemental non-GAAP information because it may provide meaningful information regarding our results and outlook on a basis that better facilitates an understanding of our expected results of operations which may not be otherwise apparent under GAAP. Management uses this non-GAAP financial information, along with GAAP information, for reviewing the operating results of its business segments and for analyzing potential future business trends. In addition, we believe some investors may use this information in a similar fashion. A reconciliation of our GAAP selected financial information for the periods presented to the non-GAAP selected financial information provided is included herein.