KCI total revenue increases 3% to $501.2 million for first quarter 2011

Kinetic Concepts, Inc. (NYSE: KCI) today reported first quarter 2011 total revenue of $501.2 million, an increase of 3% from the first quarter of 2010. Foreign currency exchange movements had no significant impact on total revenue for the first quarter of 2011 as compared to the prior year.

Net earnings for the first quarter of 2011 were $68.4 million, an increase of 30% compared to $52.7 million for the same period one year ago. Net earnings per diluted share for the first quarter of 2011 were $0.94 compared to $0.74, or an increase of 27%, from the same period in the prior year. On a non-GAAP basis, excluding the effects of certain non-cash acquisition-related costs and expenses associated with our first quarter 2011 debt refinancing as detailed in the reconciliation contained herein, net earnings per diluted share were $1.11 for the first quarter of 2011 compared to $0.91 from the same period of the prior year.

"I am pleased with our first quarter performance, which demonstrated strength in biologics and in our core V.A.C.^® Therapy franchise, particularly in the important U.S. and Japan regions," said Catherine Burzik, President and Chief Executive Officer of KCI. "We continue to execute on our strategic vision as we aggressively introduce new products and develop our business in new geographies."

Revenue Recap - First Quarter 2011

Worldwide revenue from AHS products was $340.5 million for the first quarter of 2011, an increase of 2% compared to $333.0 million for the corresponding period of 2010 resulting primarily from increased rental and sales volumes. Foreign currency exchange movements had no significant impact on worldwide AHS revenue as compared to the first quarter of the prior year.

AHS revenue from the Americas region of $257.9 million for the first quarter of 2011 increased 3% from the prior-year quarter driven by higher unit volumes, resulting from a combination of increased usage of traditional V.A.C. Therapy products and the adoption of new negative pressure-based therapies we have introduced in the U.S. Foreign currency exchange movements had no significant impact on Americas AHS revenue as compared to the prior-year period.

AHS revenue from the EMEA region for the first quarter of 2011 was $68.9 million, a decrease of 9% from $75.6 million for the first quarter of the prior year due primarily to lower average rental pricing and lower disposables volumes. Foreign currency exchange movements had no significant impact on EMEA AHS revenue as compared to the prior-year period.

APAC AHS revenue for the first quarter of 2011 was $13.7 million, up 83% from $7.5 million for the first quarter of the prior year due primarily to higher unit volumes and improved average pricing resulting from our entry into Japan. Foreign currency exchange movements favorably impacted APAC AHS revenue by 13% compared to the prior-year period.

Worldwide LifeCell revenue was $93.0 million for the first quarter of 2011, up 18% compared to $79.0 million for the first quarter of the prior year. EMEA LifeCell sales totaled $2.8 million in the first quarter, up from $1.0 million in the year-ago period, with growth reported in all geographic locations where we have launched our LifeCell products. Foreign currency exchange movements had no significant impact on worldwide LifeCell revenue as compared to the first quarter of the prior year.

Worldwide TSS revenue was $67.6 million for the first quarter of 2011, compared to $73.8 million for the same period one year ago, due primarily to lower rental and sales volumes of wound care surfaces. Americas revenue from TSS was $44.6 million for the first three months of 2011, compared to $48.4 million for the prior-year period. EMEA TSS revenue was $22.9 million for the first quarter of 2011, compared to $24.9 million for the same period in the prior year. Foreign currency exchange rate movements favorably impacted Americas TSS revenue by 1% and had an unfavorable impact of 1% on EMEA TSS revenue, as compared to the prior-year period.

Profit Margins

Gross profit for the first quarter of 2011 was $289.0 million, an increase of approximately 6% from the prior-year period. Gross profit margin was 58% for the first quarter of 2011, an increase of approximately 170 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 and 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.

Selling, general and administrative ("SG&A") expenses for the period increased $9.0 million, or 7%, over the first quarter of 2010. SG&A increases included selling costs associated with our LifeCell division, higher costs associated with new product launches and geographic expansion and increased amortization from recent technology acquisitions, partially offset by reduced litigation costs.

Research and development expenses for the first quarter of 2011 decreased 15% from the prior-year period to $21.2 million. Total research and development expenses represented 4% of revenue for the current-year period compared to 5% one year ago. Research and development expenses were higher during the first quarter of 2010 as we prepared for product launches such as V.A.C.Via™ and Prevena™.

Operating profit for the first quarter of 2011 was $114.6 million, representing an operating margin of 23%, up from 21% in the corresponding period of the prior year. The increase in operating margin resulted from a combination of lower royalty expense, favorable product mix and other operating efficiencies.

Other Income/Expense

First quarter 2011 interest expense decreased to $20.8 million, compared to $23.6 million in the same period of the prior year, due to scheduled and voluntary debt payments made over the last twelve months totaling $154.5 million as well as lower interest rates. Long-term debt outstanding as of March 31, 2011 consisted of a senior secured term loan of $543.1 million due 2016 and $690.0 million of 3.25% senior convertible notes due 2015.

As previously disclosed, we completed the refinancing of our senior credit facility during the first quarter of 2011. Related to the refinancing, we wrote-off $3.2 million in capitalized debt issuance costs, which is included within interest expense in the accompanying condensed consolidated statement of earnings.

Foreign currency transaction gains were $181,000 in the first quarter of 2011 compared to losses of $2.6 million in the prior-year period due primarily to continued volatility in currency exchange rates.

Income Tax Rate

The effective income tax rate for the first quarter of 2011 was 27.3%, compared to 30.0% for the same period in 2010. The lower effective income tax rate in the first quarter 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 $442.2 million, an increase of $125.6 million from year-end 2010. Operating cash flow less net capital expenditures for the first quarter of 2011 was $123.2 million compared to $64.4 million in the prior-year period due primarily to higher net earnings and lower cash outlays resulting from our actions related to the Wake Forest patent claims. Total long-term debt outstanding at March 31, 2011 was $1.126 billion on a GAAP-basis and $1.233 billion on an economic, or debt-instrument, basis.

Outlook

We are reaffirming revenue guidance and increasing both GAAP and non-GAAP diluted earnings per share guidance which is based on current information and expectations as of April 26, 2011 (in millions, except per share data):

The revenue guidance reflects our expectation of (i) flat-to-low single digit growth in AHS, (ii) mid-to-upper teens growth in LifeCell revenue, (iii) low-to-mid single digit contraction in TSS revenue and (iv) foreign currency exchange rates remaining comparable to 2010.

As announced on February 28, 2011, KCI filed a lawsuit in the Federal District Court in the Western District of Texas seeking a declaratory judgment that KCI no longer owes royalties to Wake Forest University since the relevant patents are invalid or not infringed. Additionally, during the pendency of this case, KCI does not plan to accrue or pay royalties under the licensing agreement starting February 28, 2011. We have also reflected the dilutive effect of our convertible debt as our stock price currently exceeds the initial conversion price of $51.34. In addition, we have included the $0.03 net earnings per diluted share impact of our first quarter debt refinancing within restructuring and other charges above.