FOR MORE INFORMATION, CONTACT:
Investors: Todd Wyatt Office: 210-255-6157 Wireless: 210-347-3540 todd.wyatt@kci1.com | Media: Kevin Belgrade Office: 210-255-6232 Wireless: 210-216-1236 kevin.belgrade@kci1.com |
KINETIC CONCEPTS REPORTS
FOURTH QUARTER AND FULL YEAR
FINANCIAL RESULTS FOR 2010
Fourth Quarter Highlights
| | - Worldwide revenue of $527.5 million, up from $526.8 million in the prior-year period, as reported, and up 1% on a constant currency basis |
| | - Worldwide Active Healing SolutionsTM (“AHS”) revenue of $367.1 million, comparable to $367.2 million in the prior-year period, as reported, and up 1% on a constant currency basis |
| | - Worldwide Regenerative Medicine revenue of $93.7 million, up 22% from the prior-year period on both a reported and constant currency basis |
| | - Worldwide Therapeutic Support Systems (“TSS”) revenue of $66.6 million, down 19% from the prior-year period and down 17% on a constant currency basis |
| | - Diluted net earnings per share of $1.03, up 11% from the prior-year period |
San Antonio, Texas, February 1, 2011 – Kinetic Concepts, Inc. (NYSE: KCI) today reported fourth quarter and full year 2010 total revenue of $527.5 million and $2.02 billion, respectively, compared to $526.8 million and $1.99 billion in the corresponding periods of the prior year. Foreign currency exchange movements unfavorably impacted total revenue for the fourth quarter of 2010 by 1% while having no significant impact on revenue for the full year of 2010 compared to the corresponding periods of the prior year.
Net earnings for the fourth quarter of 2010 were $74.0 million, or $1.03 per diluted share, compared to $66.3 million, or $0.93 per diluted share, for the fourth quarter of 2009, representing increases of 12% and 11%, respectively, from the prior-year period. For the full year of 2010, net earnings were $256.1 million, or $3.57 per diluted share, compared to $228.7 million, or $3.24 per diluted share for 2009, representing increases of 12% and 10%, respectively, from the prior year. Net earnings per diluted share on a comparable, non-GAAP basis were $1.17 and $4.29 for the fourth quarter and full year of 2010, respectively, up 6% and 8% from the same corresponding periods of the prior year.
“We were very pleased with our fourth quarter results, particularly the outstanding performance of our LifeCell division and the stability of the U.S. AHS business,” said Catherine M. Burzik, President and Chief Executive Officer of KCI. “KCI continues to execute to its strategy. With the introduction of several new products and therapies, for example our new VAC Via Therapy, our geographic expansion and our demonstrated operating discipline, KCI is well positioned to deliver unparalleled value to its patients, caregivers, payers, and investors.”
Revenue Recap – Fourth Quarter and Full Year of 2010
Worldwide revenue from AHS products was $367.1 million for the fourth quarter of 2010 and $1.41 billion for the full year of 2010, which was essentially flat compared to the same corresponding periods of 2009. Compared to the prior-year periods, foreign currency exchange movements unfavorably impacted worldwide AHS revenue by 1% in the fourth quarter of 2010 while having no significant impact on worldwide AHS revenue for the full year of 2010. On a non-GAAP, constant currency basis, the growth in fourth quarter 2010 AHS revenue was attributable primarily to increased sales volumes.
North American AHS revenue of $279.4 million for the fourth quarter increased 2% from the prior-year quarter due primarily to improved rental and sales volumes. For the full year of 2010, North American AHS revenue was $1.07 billion, which was comparable to the prior year. Fourth quarter AHS revenue in the U.S. increased 1% over the prior-year quarter due largely to rental and sales volume growth.
EMEA/APAC AHS revenue decreased 6% to $87.7 million for the fourth quarter of 2010 and decreased 2% to $334.8 million for the full year of 2010, respectively, compared to the same corresponding periods of 2009. On a constant currency basis, EMEA/APAC AHS revenue decreased by 2% compared to the fourth quarter of the prior year while being comparable to the full year of 2009. The fourth quarter revenue decrease was due primarily to lower pricing and sales volumes in price sensitive and highly-competitive markets driven largely by governmental austerity measures in response to a challenging economic environment. The lower AHS revenue in EMEA was partially offset by volume growth related to new products and new geographies, particularly in Japan.
Total revenue from our LifeCell division was $93.7 million for the fourth quarter of 2010 and $341.4 million for the full year of 2010. Regenerative Medicine revenue increased 22% and 19% for the fourth quarter and full year of 2010, respectively, as compared to the same periods one year ago. Direct sales of Strattice™, our porcine-based reconstructive tissue matrix, generated $40.0 million of revenue in the quarter, or 43% of total Regenerative Medicine revenue for the period. Direct sales of Strattice in the fourth quarter of 2010 increased $12.9 million, or 48%, from the same period one year ago. The EMEA region contributed approximately 180 and 170 basis points of the Regenerative Medicine overall revenue growth rate for the fourth quarter and full year of 2010, respectively, as we continued to penetrate the European markets. We have now introduced our Regenerative Medicine products into eleven European countries.
Worldwide TSS revenue was $66.6 million for the fourth quarter and $270.2 million for the full year of 2010 compared to $82.7 million and $300.2 million, respectively, for the same corresponding periods of the prior year. North American revenue from TSS was $43.2 million for the fourth quarter of 2010, a 21% decrease from the prior-year period, due primarily to decreased demand in our critical care business stemming from a much less severe flu season than in 2009. North American TSS revenue for the full year of 2010 was $178.0 million, down 9% from the prior year revenue of $196.4 million. EMEA/APAC TSS revenue of $23.4 million and $92.2 million for the fourth quarter and full year of 2010, decreased 17% and 11%, respectively, compared to the corresponding periods of 2009. Excluding foreign c urrency exchange rate movements, EMEA/APAC TSS revenue decreased 10% and 8%, respectively, for the fourth quarter and the full year of 2010 compared to the same periods in the prior year due primarily to decreased rental volume and average rental pricing.
Profit Margins Stable
Gross profit for the fourth quarter and the full year of 2010 was $301.3 million and $1.14 billion, respectively, compared to $304.9 million and $1.11 billion, respectively, in the corresponding periods of the prior year. Gross profit margin was approximately 57% for the fourth quarter of 2010, down slightly from 58% in the prior-year period due primarily to additional investment in our AHS sales force during the second half of 2010, higher royalty expense, and lower TSS critical care rentals, partially offset by favorable margins in our Regenerative Medicine business.
Research and development expenses for the fourth quarter of 2010 decreased 5% from the prior-year period to $22.9 million. The majority of this decrease was due to the commercialization of new products in the second half of 2010 which were previously under development. Total research and development expenses represented approximately 4.5% of revenue for the full year of 2010.
Selling, general and administrative (“SG&A”) expenses for the fourth quarter were $146.1 million, a decrease of approximately 1% from the fourth quarter of the prior year. The lower SG&A spend was due to lower spending in shared services functions partially offset by continuing investment in the LifeCell sales force and our Japanese infrastructure.
Other Income/Expense Reflects Continued Deleveraging
Fourth quarter 2010 interest expense was $19.7 million compared to $24.5 million in the same period of the prior year due to a combination of scheduled and voluntary debt payments made over the last twelve months and lower interest rates. Long-term debt outstanding as of December 31, 2010 consisted of a senior secured term loan of $527.3 million due 2013 and 3.25% senior convertible notes of $690.0 million due 2015.
Foreign currency transaction losses were $1.4 million in the fourth quarter of 2010 compared to $108,000 in the prior-year period due primarily to continued volatility in currency exchange rates.
Income Tax Rate
The effective income tax rate for both the fourth quarter and full year of 2010 was 28.0% compared to 32.9% and 31.6%, respectively, for the corresponding periods of the prior year. The decrease in the effective income tax rate for the fourth quarter and full year 2010 resulted from a higher percentage of taxable income being generated in lower tax foreign jurisdictions and the favorable resolution of certain tax contingencies during 2010. The fourth quarter tax rate also benefited from the extension of the U.S. research and development credit.
Financial Position Provides Flexibility and Strength
Total cash at year-end was $316.6 million, an increase of $53.4 million from year-end 2009. During the fourth quarter and year ended December 31, 2010, the Company made scheduled and voluntary senior credit facility repayments totaling $37.7 million and $222.7 million, respectively, from cash-on-hand. Operating cash flow less net capital expenditures for the full year of 2010 was $275.4 million. Total long-term debt outstanding at December 31, 2010 was $1.11 billion on a GAAP-basis, including the discount associated with our adoption of required accounting standards, and $1.22 billion on an economic, or debt-instrument, basis.
Subsequent Event
Our liquidity and financial flexibility were enhanced in January 2011 when we entered into a new credit agreement which was used to refinance our existing senior credit facility and will also be used for strategic and general corporate purposes. The new credit agreement provides for (i) a $550.0 million term A facility that matures in January 2016, and (ii) a $650.0 million revolving credit facility that matures in January 2016, which represents a $350.0 million increase from our previous revolving credit facility. The Company also has the right at any time to increase its borrowings under the new credit agreement by an aggregate additional amount up to $500.0 million.
2011 Outlook
The following guidance is based on current information and expectations as of February 1, 2011 (in millions, except per share data):
| | | | | | % Change |
| | FY 2010 | | FY 2011 | | from 2010 |
| Total revenue | $2,018 | | $2,050 - $2,090 | | 2% - 4% |
| | | | | | |
| Diluted EPS – GAAP basis | $3.57 | | $3.82 - $3.96 | | 7% - 11% |
| Acquisition-related adjustments: | | | | | |
| Amortization-related adjustments | 0.43 | | 0.36 | | |
| Non-cash interest – accounting | | | | | |
| for convertible debt | 0.18 | | 0.20 | | |
Restructuring and other charges (1) | 0.11 | | 0.07 – 0.09 | | |
| | | | | | |
| Adjusted Diluted EPS – non-GAAP basis | $4.29 | | $4.45 - $4.61 | | 4% - 7% |
| | | | | | |
| Diluted weighted average shares outstanding | 71.7 | | 72.0 – 72.7 | | 0% - 1% |
| | | | | | |
| (1) 2011 guidance includes $0.03 per diluted share related to our January 2011 debt refinancing. |
The revenue guidance reflects our expectation of (i) flat to low-single digit growth in AHS resulting from emerging market penetration and new product introductions, partially offset by lower realized pricing and competitive share loss, (ii) mid-to-upper teens growth in Regenerative Medicine revenue and (iii) low-to-mid single digit contraction in TSS revenue. Our 2011 outlook also assumes foreign currency exchange rates are comparable to 2010 and assumes the seasonal slowing of AHS revenue growth which we have historically seen beginning late in the fourth quarter and continuing into the first quarter. We believe this seasonal pattern is generally caused by year-end clinical treatment patterns, such as the postponement of elective surgeries and increased discharges of individuals from the acute care setting aroun d the winter holidays. Historically, approximately 23% to 24% of our total annual revenue is realized during the first three months of the year.
The 2011 earnings guidance does not consider any potential impact to our royalty obligations resulting from ongoing patent litigation. KCI and its affiliates, together with Wake Forest University Health Sciences (“Wake Forest”) are involved in multiple patent infringement suits against companies including Smith & Nephew, all of whom are challenging the validity of the Wake Forest patents. In October 2010, the Federal District Court for the Western District of Texas entered an order in the Smith & Nephew case invalidating the patent claims involved in the lawsuit. In light of the ruling, KCI believes that continued payment of the royalties scheduled under the Wake Forest license is inappropriate and the Company is pursuing various alternatives.
While we expect 2011 to be an investment year in terms of expanding our presence in 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 financial leverage. In addition, during the first half of 2011, 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 fourth quarter and full year ended December 31, 2010, 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 and the second quarter of 2010. 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 ba sis 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.
Earnings Release Conference Call
As previously announced, we have scheduled an earnings release conference call for 8:30 a.m. Eastern Standard Time today, Tuesday, February 1, 2011. The dial-in numbers for this conference call are as follows:
| Domestic Dial-in Number: | 866-469-0048 |
| International Dial-in Number: | +706-758-3983 |
| Conference ID Number: | 37886174 |
This call is being webcast and can be accessed at the Kinetic Concepts, Inc. web site at http://www.kci1.com/investor/index.asp, by clicking on Web cast – Q4 and Year End 2010 Kinetic Concepts, Inc. Earnings Conference Call. An archive of the web cast will be available until January 31, 2012 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. Although KCI undertakes no duty to update its business outlook, KCI may update the full business outlook or any portion thereof at any time.
About KCI
Kinetic Concepts, Inc. (NYSE: KCI) is a leading global medical technology company devoted to the discovery, development, manufacture and marketing of innovative, high-technology therapies and products for the wound care, tissue regeneration and therapeutic support system markets. Headquartered in San Antonio, Texas, KCI's success spans more than three decades and can be traced to a history deeply rooted in innovation and a passion for significantly improving the healing and the lives of patients around the world.
The Company employs approximately 6,900 people and markets its products in 22 countries. For more information about KCI, and how its products are changing the practice of medicine, visit 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 V.A.C. Therapy resulting from increased competition, the seasonal slowing of V.A.C. Therapy unit growth in the fourth and first quarter of each year, changes in payer reimbursement policies or in our ability to protect our intellectual property rights. All information set forth in this release and its attachments is as of February 1, 2011. 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, 2009 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010, 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 may also be set forth in those sections in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which is expected to be filed with the SEC in late February 2011.
