1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-9913
KINETIC CONCEPTS, INC.
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1891727
- - - --------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
8023 Vantage Drive
San Antonio, Texas 78230 210/524-9000
- - - --------------------------------- ------------------------------------
(Address of principal executive (Registrant's telephone number)
offices and zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 43,845,670 shares as of September 30, 1994
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
September 30,
1994 December 31,
(Unaudited) 1993
-------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 78,482 $ 10,280
Accounts receivable, net 62,047 63,872
Refundable income taxes - 3,712
Finance lease receivables, current 7,495 6,659
Inventories 19,063 20,902
Notes receivable, current, net 6,092 -
Prepaid expenses 5,984 4,709
-------- --------
Total current assets 179,163 110,134
-------- --------
Net property, plant and equipment 54,720 113,602
Finance lease receivables, net of current 5,193 7,073
Notes receivable, net of current and allowance 3,760 -
Goodwill, net 15,842 44,859
Other assets, net 8,384 8,905
Deferred income tax benefit 9,357 -
-------- --------
$276,419 $284,573
======== ========
Liabilities and Capital Accounts
Current liabilities:
Note payable $ 3,288 $ 2,144
Current installments of long-term obligations 2,656 8,872
Current installments of capital lease obligations 83 2,955
Current installments of ESOP loan - 359
Accounts payable 5,197 7,751
Accrued expenses 34,420 24,499
Income taxes payable 49,878 2,647
-------- --------
Total current liabilities 95,522 49,227
-------- --------
Long-term obligations, net of current installments 2,350 99,533
Capital lease obligations,
net of current installments 71 2,060
ESOP loan, net of current installments - 296
Deferred income taxes - 7,710
-------- --------
97,943 158,826
-------- --------
Minority interest - 40
-------- --------
Common stock; issued, at par, 43,965 in 1994 and
45,501 in 1993 44 46
Additional paid-in capital 10,316 18,803
Retained earnings 168,825 117,685
Cumulative foreign currency translation adjustment (184) (1,602)
Treasury stock; common, at cost, 120 shares in
1994 and 1,542 shares in 1993 (477) (8,510)
Loan to ESOP - (655)
Notes receivable from officers (48) (60)
-------- --------
Total equity 178,476 125,707
-------- --------
$276,419 $284,573
======== ========
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
Revenue:
Service and rental $ 58,629 $ 57,942 $177,790 $174,246
Sales and other 11,610 9,861 32,285 27,114
-------- -------- -------- --------
Total revenue 70,239 67,803 210,075 201,360
-------- -------- -------- --------
Rental expenses 39,162 42,988 125,167 127,004
Cost of goods sold 6,112 5,359 16,504 13,767
-------- -------- -------- --------
45,274 48,347 141,671 140,771
-------- -------- -------- --------
Gross profit 24,965 19,456 68,404 60,589
Selling, general and
administrative expenses 14,631 14,151 40,874 39,268
Unusual items (Note 4) (82,868) - (82,868) -
-------- -------- -------- --------
Operating earnings 93,202 5,305 110,398 21,321
Interest expense 1,976 1,809 5,477 5,135
-------- -------- -------- --------
Earnings before income taxes,
minority interest and
cumulative effect of changes 91,226 3,496 104,921 16,186
in accounting principle 42,585 2,355 49,625 7,855
-------- -------- -------- --------
Income taxes
Earnings before minority
interest and cumulative
effect of changes in
accounting principle 48,641 1,141 55,296 8,331
Minority interest in subsidiary loss - 183 40 238
Cumulative effect of changes in
method of accounting (Note 2) - - 742 450
-------- -------- -------- --------
Net earnings $ 48,641 $ 1,324 $ 56,078 $ 9,019
======== ======== ======== ========
Earnings per common and
common equivalent share:
Earnings before cumulative
effect of changes in
accounting principle $ 1.10 $ 0.03 $ 1.25 $ 0.19
Cumulative effect of changes
in method of accounting
(Note 2) - - 0.02 0.01
-------- -------- -------- --------
Earnings per share $ 1.10 $ 0.03 $ 1.27 $ 0.20
======== ======== ======== ========
Shares used in earnings
per share computations 44,053 44,127 44,006 44,607
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
September 30,
----------------------
Cash flows from operating activities: 1994 1993
-------- --------
Net earnings $ 56,078 $ 9,019
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 28,985 32,581
Other amortization, net 2,848 3,186
Provision for uncollectible accounts receivable 284 4,099
Provision for taxes on KCIMS disposition 12,600 -
Noncash portion of unusual items 32,616 -
Noncash portion of KCIMS disposition (8,757) -
Change in assets and liabilities net of effect
from purchase of subsidiaries and unusual items:
Increase in accounts receivable (49) (79)
Decrease in refundable income taxes 3,712 -
Decrease in notes receivable 12 -
Increase in inventories (1,648) (1,314)
Increase in prepaid expenses (1,275) (1,948)
Decrease (increase) in other assets 936 (396)
Increase (decrease) in accounts payable (2,521) 1,223
Increase in accrued expenses 7,009 2,379
Decrease in income taxes payable (21,574) (3,695)
Increase (decrease) in deferred income taxes 7,371 (1,193)
-------- --------
Net cash provided by operating activities 116,627 43,862
-------- --------
Cash flows from investing activities:
Additions to property, plant, and equipment (10,706) (26,442)
Increase (decrease) in inventory to be converted into
equipment for short-term rental 3,650 (1,800)
Dispositions of property, plant, and equipment 3,652 1,750
Businesses acquired in purchase transactions, net of cash acquired - (4,127)
Proceeds from sale of KCIMS division 65,300 -
Decrease (increase) in finance lease receivables 1,044 (600)
Increase in other assets (966) (4,033)
-------- --------
Net cash provided (used) by investing activities 61,974 (35,252)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) of note payable and long-term obligations (102,244) 7,500
Repayments of capital lease obligations (2,347) (2,503)
Proceeds from the exercise of stock options 22 622
Minority interest in subsidiary loss, net (40) 362
Purchase of treasury stock (477) (2,448)
Payments for retirement of preferred stock - (3,442)
Cash dividends paid to shareholders (4,938) (5,014)
Other (752) (63)
-------- --------
Net cash used by financing activities (110,776) (4,986)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 377 (396)
-------- --------
Net increase in cash and cash equivalents 68,202 3,228
Cash and cash equivalents beginning of year 10,280 6,963
-------- --------
Cash and cash equivalents end of period $ 78,482 $ 10,191
======== ========
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Nine months ended
September 30,
----------------------
1994 1993
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the first nine months for:
Interest $ 5,042 $ 5,399
Income taxes 13,644 6,539
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
KINETIC CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The foregoing financial information reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and results of operations for the interim periods presented. Interim
period operating results are not necessarily indicative of the results to
be expected for the full fiscal year. The financial information presented
for the interim periods is unaudited and subject to year-end audit and
adjustments. Certain reclassifications of rental and selling, general and
administrative expenses related to 1993 have been made to conform with the
current period's presentation.
(2) ACCOUNTING CHANGES
On January 1, 1994, the Company changed its method of applying overhead to
inventory. Historically, a single labor overhead rate and a single
materials overhead rate were used in valuing ending inventory. Labor
overhead was applied as labor was incurred while materials overhead was
applied at the time of shipping. During 1993, the Company completed a
study to more precisely determine the labor overhead which should be
applied to specific products, parts and accessories which resulted in the
adoption of four separate labor overhead pools, and the application of
materials overhead upon the receipt of the materials.
The Company believes that the change in the application of this accounting
principle is preferable because it more accurately assigns overhead costs
to the products, parts and accessories which benefit from the related
activities and thus improves the matching of costs with revenues in
reporting operating results.
The change in the application of this accounting principle resulted in an
increase in net earnings of $742,000 (after reduction of income taxes of
$455,000), or $0.02 per share, which reflects the cumulative effect of
this change for the periods prior to January 1, 1994. The proforma
effects of the retroactive application of the change in accounting
principle have not been disclosed because the effects cannot be reasonably
estimated. The effect of the change for the three and nine-month periods
ended September 30, 1994 on the results of operations before the
cumulative effect of the change is not material.
During the first quarter of 1993, the Company recorded the cumulative
effect of a change in accounting principle related to the adoption of FAS
109 "Accounting for Income Taxes" which resulted in a one-time after-tax
increase of $450,000, or $0.01 per share.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
(3) INVENTORY COMPONENTS
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value). Inventories are comprised of the following
(in thousands):
September 30, December 31,
------------- ------------
1994 1993
------- -------
Finished goods $ 7,594 $ 5,902
Work in process 2,210 1,546
Raw materials, supplies and parts 14,109 21,954
------- -------
23,913 29,402
Less amounts expected to be
converted into equipment for
short-term rental (4,850) (8,500)
------- -------
$19,063 $20,902
======= =======
(4) UNUSUAL ITEMS
The following is a summary of unusual items (in thousands):
SSI settlement, net of legal fees $81,596
Gain from KCIMS sale (Note 5) 8,121
Miscellaneous (6,849)
-------
Unusual items in operating income $82,868
=======
During the third quarter of 1994, the Company recorded a benefit from an
unusual item related to the settlement of a patent infringement lawsuit
with Support Systems International, Inc. (SSI). The settlement was $84.75
million. Net of legal expenses, this transaction added $81.6 million of
pre-tax income to the 1994 results.
The Company recorded certain other unusual items, primarily planned
dispositions of under-utilized rental assets and over-stocked inventories
which had a negative impact on operating earnings of $6.8 million.
(5) SALE OF KCI MEDICAL SERVICES DIVISION
(in thousands)
On September 30, 1994, KCI Therapeutic Services, Inc. ("KCTS"), a
wholly-owned subsidiary of the Company, sold certain assets (the "Assets")
used exclusively by KCTS' Medical Services Division (the "Medical Services
Division") to MEDIQ/PRN Life Support Services-I, Inc. ("Buyer") under an
Asset Purchase Agreement. Upon consummation of the transactions
contemplated by the Asset Purchase Agreement, the Buyer acquired the
Assets and assumed certain liabilities of the Medical Services Division.
The sales price was approximately $84,093. In conjunction with the sale,
KCTS and its affiliates agreed not to rent or distribute certain critical
care and life support equipment for 5 years.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Gross proceeds included a cash payment of approximately $65,300 and
promissory notes in the aggregate principal amount of $18,792. Currently,
the net proceeds of the sale for accounting purposes are estimated to be
approximately $72,817, as follows:
Cash $65,300
Note receivable (A) 4,361
Notes receivable (B) 3,183
Note receivable (C) 2,308
-------
$75,152
Fees and commissions (2,335)
-------
Net proceeds $72,817
=======
The discounting of the various notes receivable for accounting purposes are
described below:
Note receivable (A): $5,836, interest payable at 0%, due in 10
equal monthly installments beginning 90 days from closing.
Discounted at 11% with a 20% valuation allowance.
Notes receivable (B): $10,000, interest payable quarterly at 10%
after an 18 month grace period, principal due 5 years from closing.
Discounted at 17% with a 50% valuation allowance.
Note receivable (C): $2,957, interest payable at 8%, interest and
principal due in equal installments beginning 90 days after closing
with final payment due 1 year from closing. Discounted at 12% with a
20% valuation allowance.
In addition, the Asset Purchase Agreement includes a provision for a
post-closing adjustment which may result in a reimbursement to the Buyer
for a portion of the purchase price. The adjustment occurs if actual
inventory, or equipment levels are found to be lower than specified levels.
Interest accrues at the rate of 8% on any required payment. The Company
does not anticipate that a liability will result from this post-closing
adjustment calculation.
Revenue, net earnings and earnings per share attributable to the Medical
Services Division, for all periods presented, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1993 1994 1993 1994
------- ------- ------- -------
Revenue $14,439 $14,067 $41,982 $44,608
Net Earnings (Loss) (187) (5,129) 229 (3,106)
Earnings per share (Loss) $0.00 ($0.12) $0.01 ($0.07)
Shares used 44,127 44,053 44,607 44,006
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Assuming the sale was consummated as of the beginning of each fiscal
period presented, Pro forma operating results of the Company would be:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1993 1994 1993 1994
------- ------- ------- --------
Revenue $53,364 $56,172 $159,378 $165,467
Net Earnings (Loss) (2,165) 49,152 6,720 57,556
Earnings per share (Loss) $0.05 $1.12 $0.15 $1.31
Shares used 44,127 44,053 44,607 44,006
(6) INCOME TAXES
As discussed in Note 4, the Company recorded several unusual items during
the period which had significant tax effects. Income tax expense
attributable to unusual items consists of the following:
Current Deferred Total
------- -------- -----
SSI settlement $31,455 $ - $31,455
Sale of KCI Medical Services 20,000 (8,400) 12,600
Miscellaneous accruals and
adjustments (2,078) - (2,078)
------- ------- -------
$49,377 $(8,400) $40,977
======= ======= =======
The current tax payable related to the sale of KCI Medical Services
reflects the write-off of unamortized goodwill which is not deductible for
income tax purposes.
In addition, the year-to-date effective tax rate for 1994 was 47.3%
compared to 48.5% for 1993. The decrease is primarily attributable to the
recognition of foreign tax credits and net operating losses of Medical
Retro Design, Inc.
(7) SHARES USED IN EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE COMPUTATIONS
The weighted average number of common and common equivalent shares used
in the computation of earnings per share is as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------- ---------------
1994 1993 1994 1993
------ ------ ------ ------
Average outstanding common shares 43,866 43,926 43,914 44,119
Average common equivalent shares-
dilutive effect of option shares 187 201 92 488
------ ------ ------ ------
Shares used in earnings
per share computations 44,053 44,127 44,006 44,607
====== ====== ====== ======
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Earnings per common and common equivalent share are computed by dividing
net earnings (after deducting preferred stock dividends and accretion) by
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist
of stock options (using the treasury stock method). Earnings per share
computed on a fully-diluted basis is not presented because it is not
significantly different from earnings per share computed on a primary
basis.
(8) COMMITMENTS AND CONTINGENCIES
The Company is party to several lawsuits generally incidental to its
business and is contesting adjustments proposed by the Internal Revenue
Service to prior years' tax returns. Provisions have been made in the
accompanying financial statements for estimated exposures related to these
lawsuits and adjustments. In the opinion of management, the disposition of
these items will not result in any material additional liability to the
Company.
At September 30, 1994, the Company was committed to purchase approximately
$1.8 million of inventory associated with a new product over the remainder
of this year. The Company did not have any other material purchase
commitments.
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Independent Auditors' Report
The Board of Directors
Kinetic Concepts, Inc.:
We have reviewed the condensed consolidated balance sheet of Kinetic Concepts,
Inc. and subsidiaries as of September 30, 1994, and the related condensed
consolidated statements of earnings for the three and nine month periods ended
September 30, 1994 and 1993 and the condensed consolidated statements of cash
flows for the nine month periods ended September 30, 1994 and 1993. These
consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinetic Concepts, Inc. and
subsidiaries as of December 31, 1993, and the related consolidated statements
of earnings, capital accounts, and cash flows for the year then ended (not
presented herein); and in our report dated February 14, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1993, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
KPMG PEAT MARWICK LLP
San Antonio, Texas
October 28, 1994
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter of 1994 Compared to Third Quarter of 1993
The following table details the Company's Condensed Consolidated Statements
of Earnings for the quarters ended September 30, 1994 and 1993 and provides the
relationship of each item to total revenue and the increase or decrease and
percentage change of each line item as compared to the third quarter of the
prior year (in thousands):
Three Months Ended September 30,
------------------------------------------------------
1994 1993 Increase (decrease)
--------------- --------------- ------------------
Revenue:
Service and rental $ 58,629 83.5% $ 57,942 85.5% $ 687 1.2%
Sales and other 11,610 16.5% 9,861 14.5% 1,749 17.7%
-------- ----- -------- ----- --------
70,239 100.0% 67,803 100.0% 2,436 3.6%
Rental expenses 39,162 55.8% 42,988 63.4% (3,826) (8.9%)
Cost of goods sold 6,112 8.7% 5,359 7.9% 753 14.1%
-------- ----- -------- ----- --------
Gross profit 24,965 35.5% 19,456 28.7% 5,509 28.3%
Selling, general and
administrative expenses 14,631 20.8% 14,151 20.9% 480 (3.4%)
Unusual items 82,868 118.0% - - 82,868
-------- ----- -------- ----- --------
Operating Earnings 93,202 132.7% 5,305 7.8% 87,897 1656.9%
Interest expense 1,976 2.8% 1,809 2.6% 167 9.2%
-------- ----- -------- ----- --------
Earnings before income taxes
and minority interest 91,226 129.9% 3,496 5.2% 87,730 2509.4%
Income taxes 42,585 60.6% 2,355 3.5% 40,230 1708.3%
-------- ----- -------- ----- --------
Earnings before minority
interest 48,641 69.3% 1,141 1.7% 47,500 4163.0%
Minority interest in subsidiary
loss - - 183 0.3% (183) -
-------- ----- -------- ----- --------
Net earnings $ 48,641 69.3% $ 1,324 2.0% $ 47,317 3573.8%
======== ===== ======== ===== ========
Earnings per share before
unusual items $ 0.17 $ 0.03 $ 0.14 -
Unusual items 0.93 - 0.93 -
-------- -------- --------
Earnings per share $ 1.10 $ 0.03 $ 1.07 3566.7%
======== ======== ========
Weighted shares 44,053 44,127 (74)
======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenue in the third quarter of 1994 increased by 3.6% to $70.2
million from $67.8 million in the third quarter of 1993. Revenue from KCI
Therapeutic Services, KCI's domestic specialty patient surface businesses
including acute care and alternate care, was $38.8 million, down 1.9% from the
third quarter of 1993. Revenue from KCI's International division was $12.5
million, up 28.9% from $9.7 million in the prior-year quarter. Revenue from
the Company's other operating divisions increased 58.7% to $4.9 million in the
third quarter of 1994 related primarily to NuTech. Revenue from the KCI
Medical Services Division was $14.1 million for the three month period. The
Company sold substantially all of the operating assets related to the KCI
Medical Services Division effective September 30, 1994.
Rental expenses largely consist of service center facility and personnel
costs, regional sales and administrative expenses, advertising and promotion,
depreciation of the Company's rental equipment, the cost of the parts and
accessories used to maintain the equipment and other related expenses. Rental
expenses were 55.8% of total revenue in the third quarter of 1994 compared to
63.4% in the third quarter of 1993. This decrease is primarily attributable to
reduced depreciation expense as well as lower field personnel costs.
Management believes depreciation expense in the fourth quarter will remain
below historical levels, however, certain new product investments are expected
in 1995. Cost of goods sold includes the manufacturing cost of the Company's
beds and other products that are sold rather than rented by the Company.
Gross profit increased 28.3% to $25.0 million in the third quarter of 1994
from $19.5 million in the third quarter of 1993 due to both the increase in
revenue and decrease in rental expenses.
Selling, general and administrative expenses increased 3.4% to $14.6
million in the third quarter of 1994 from $14.1 million in the third quarter of
1993. Because of higher revenue in the quarter, selling, general and
administrative expenses as a percentage of total revenue dropped slightly to
20.8% in the third quarter of 1994 from 20.9% in the third quarter of 1993.
Third quarter 1994 selling, general and administrative expenses included
approximately $1.3 million in non-recurring accruals related primarily to
insurance and professional fees.
Unusual items included two significant events: (i) settlement of a patent
infringement suit with Support System International, Inc. for $81.6 million net
of legal fees and before taxes and (ii) sale of the Company's Medical Services
Division to MEDIQ Incorporated, effective September 30, 1994 for a pre-tax gain
of $8.1 million. In addition, the Company recorded certain other unusual
items, primarily planned dispositions of under-utilized rental assets and
over-stocked inventories which had a negative impact on operating earnings of
$6.8 million. The net after-tax impact of these three unusual items was $41.1
million or $0.93 per share. The effective income tax rate on the above items
approximated 50% due substantially to the write-off of unamortized goodwill
associated with the Medical Services Division which, for income tax purposes,
is not deductible.
Operating earnings increased to $93.2 million in the third quarter of 1994
from $5.3 million in the prior-year quarter. This increase is primarily due to
the unusual items described above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Given the significant cash inflows during the period and the related
pay-down of long term obligations, management expects to realize net interest
income for the last quarter of 1994. Net interest expense for the three months
ended September 30, 1994 was $1,976.
The Company's effective income tax rate in the third quarter of 1994 was
46.7%, compared to 67.4% in the third quarter of 1993. The effective tax rate
for the third quarter of 1994 was lower than the effective rate in 1993
primarily as a result of the recognition of the net operating loss of Medical
Retro Design, Inc. and recognition of foreign tax credits.
During 1994, the cumulative losses allocated to the minority interest
holder of Medical Retro Design exceeded the balance of its investment. As a
result, the Medical Retro Design third quarter loss was absorbed entirely by
the Company.
Net earnings increased to $48.6 million in the third quarter of 1994 from
$1.3 million in the third quarter of 1993. Earnings per share increased to
$1.10 per share from $0.03 per share in the prior year quarter. These increases
are primarily due to the unusual items as described above.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Nine Months of 1994 Compared to First Nine Months of 1993
The following table details the Company's Condensed Consolidated Statements
of Earnings for the nine months ended September 30, 1994 and 1993 and provides
the relationship of each item to total revenue and the increase or decrease and
percentage change of each line item as compared to the first nine months of the
prior year (in thousands):
Nine Months Ended September 30,
------------------------------------------------------
1994 1993 Increase (decrease)
--------------- --------------- -------------------
Revenue:
Service and rental $177,790 84.6% $174,246 86.5% $ 3,544 2.0%
Sales and other 32,285 15.4% 27,114 13.5% 5,171 19.1%
-------- ----- -------- ----- --------
210,075 100.0% 201,360 100.0% 8,715 4.3%
Rental expenses 125,167 59.6% 127,004 63.1% (1,837) (1.4%)
Cost of goods sold 16,504 7.8% 13,767 6.8% 2,737 19.9%
-------- ----- -------- ----- --------
Gross profit 68,404 32.6% 60,589 30.1% 7,815 12.9%
Selling, general and
administrative expenses 40,874 19.5% 39,268 19.5% 1,606 4.1%
Unusual items 82,868 39.4% - - 82,868
-------- ----- -------- ----- --------
Operating Earnings 110,398 52.5% 21,321 10.6% 89,077 417.8%
Interest expense 5,477 2.6% 5,135 2.5% 342 6.7%
-------- ----- -------- ----- --------
Earnings before income
taxes, minority interest
and cumulative effect of
changes in accounting
principle 104,921 49.9% 16,186 8.1% 88,735 548.2%
Income taxes 49,625 23.6% 7,855 3.9% 41,770 531.8%
-------- ----- -------- ----- --------
Earnings before minority
interest and cumulative
effect of changes in
accounting principle 55,296 26.3% 8,331 4.2% 46,965 563.7%
Minority interest 40 - 238 0.1% (198) -
Cumulative effect of changes
in method of accounting 742 0.4% 450 0.2% 292 -
-------- ----- -------- ----- --------
Net earnings $ 56,078 26.7% $ 9,019 4.5% $ 47,059 521.8%
======== ===== ======== ===== ========
Earnings per share before
unusual items and
cumulative effect $ 0.32 $ 0.19 $ 0.13 -
Unusual items 0.93 - 0.93 -
Cumulative effect 0.02 0.01 0.01 -
-------- -------- --------
Net earnings per share $ 1.27 $ 0.20 $ 1.07 535.0%
======== ======== ========
Weighted shares 44,006 44,607 (601)
======== ======== ========
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16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenue in the first nine months of 1994 increased by 4.3% to
$210.0 million from $201.4 million for the first nine months of 1993. Revenue
from KCI Therapeutic Services, KCI's domestic specialty patient surface
business including acute care and alternate site care, was $117.2 million,
down 2.0% from $119.6 million for the first nine months of 1993. Revenue from
KCI's International division was $33.9 million, up 13.5% from $29.9 million in
the same period of the prior year. Revenue from the Company's other operating
divisions was up 84.8% to $12.5 million for this year from $6.8 million
related primarily to NuTech. Revenue from the KCI Medical Services Division,
disposed on September 30, 1994, was $44.6 million for the nine month period.
Rental expenses were 59.6% of total revenue in the first nine months of
1994 compared to 63.1% in the first nine months of 1993, due primarily to
lower personnel costs and rental equipment depreciation expense. Cost of
goods sold includes the manufacturing cost of the Company's beds and other
products that are sold rather than rented by the Company.
Gross profit increased 12.9% to $68.4 million in the first nine months
of 1994 from $60.6 million in the first nine months of 1993 due to the
increase in revenue as discussed above.
Selling, general and administrative expenses increased 4.0% to $40.9
million in the first nine months of 1994 from $39.3 million in the first nine
months of 1993. The majority of the increase relates to an increase in
insurance expense and posting of additional accruals. Selling, general and
administrative expenses as a percentage of total revenue remained steady at
19.5% in the first nine months of 1994.
Unusual items included two significant events: (i) settlement of a
patent infringement suit with Support Systems International, Inc. for $81.6
million net of legal fees and before taxes and (ii) sale of the Company's
Medical Services Division to MEDIQ Incorporated, effective September 30, 1994
for $8.1 million. In addition, the Company recorded certain other unusual
items, primarily planned dispositions of under-utilized rental assets and
over-stocked inventories which had a negative impact of $6.8 million. The net
after-tax impact of these three unusual items was $41.1 million or $0.93 per
share. The effective income tax rate on the above items approximated 50% due
substantially to the write-off of unamortized goodwill associated with the
Medical Services Division which, for income tax purposes, is not deductible.
Operating earnings increased 418% to $110.4 million in the first nine
months of 1994 from $21.3 million in the same period of the prior year. This
increase is due substantially to the unusual items described above. In
addition, the increase in revenue and the reduction of rental expenses
contributed towards the increase in operating earnings.
The effective rate of income taxes in the first nine months of 1994 was
47.3%, compared to 48.5% in the first nine months of 1993. This decrease is
primarily attributable to recognition of deferred tax assets for foreign tax
credits and the Medical Retro Design, Inc. net operating loss.
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17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Minority interest in the first nine months of 1993 represents losses of
Medical Retro Design, Inc. allocated to the minority interest holder. During
1994, the cumulative losses allocated to Medical Retro Design, Inc. exceeded
the balance of the minority interest investment. As a result, a portion of
the losses incurred was absorbed by the Company.
During the first quarter of 1994, the Company recorded the cumulative
effect of a change in accounting principle related to its inventory costing
method which resulted in an earnings increase of $742,000, or $0.02 per share.
During the first quarter of 1993, the Company recorded the cumulative
effect of a change in accounting principle related to the adoption of FAS 109
"Accounting for Income Taxes" which resulted in a one-time after-tax increase
of $450,000, or $0.01 per share.
Net earnings increased 522% to $56.1 million in the first nine months
of 1994 from $9.0 million in the first nine months of 1993. Earnings per
share increased 535% to $1.27 in the first nine months of 1994 compared to
$0.20 in the first nine months of 1993. Excluding the above-mentioned
unusual items, net earnings year-to-date would have been $14.9 million or
$0.34 per share.
Financial Condition
The impact of the unusual items, as well as the change in revenue and
expenses experienced by the Company during the third quarter of 1994, resulted
in changes to the Company's balance sheet as follows:
Cash at September 30, 1994 increased $68.2 million, or 663% to $78.5
million from $10.3 million at December 31, 1993 primarily due to the $150
million received in conjunction with the settlement of the patent infringement
suit and the sale of KCI Medical Services. Approximately $82 million of the
total proceeds was used to repay borrowings under the Company's revolving
credit and term loan agreement. Overall, long-term obligations decreased
$97.2 million to $2.4 million at September 30, 1994 from $99.5 million at
December 31, 1993.
Net property, plant and equipment at September 30, 1994 decreased $58.9
million, or 51.8%, to $54.7 million from $113.6 million at December 31, 1993
due to the sale of certain assets and liabilities of the KCI Medical Services
Division.
Goodwill at September 30, 1994 decreased $29.0 million, or 183%, to $15.8
million from $44.9 million at December 31, 1993 primarily due to the write-off
of KCI Medical Services goodwill as part of the sale.
Income taxes payable at September 30, 1994 increased $47.2 million, or
17.8%, to $49.9 million from $2.6 million at December 31, 1993 due to the
earnings/gains resulting from the settlement of the patent infringement suit
and the sale of the KCI Medical Services Division.
During 1994, the Company has retired 1,541,876 shares of common stock held
as treasury shares with par value of $0.001 per share which resulted in a $8.5
million decline in additional paid-in capital and treasury stock.
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18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other items impacted by the sale of KCI Medical Services and Clinical
Systems assets include notes receivable, deferred federal income taxes,
capital lease obligations, and accrued expenses.
Market Trends
For the past decade, the healthcare industry has experienced increased
pressure from a variety of sources to control costs and improve patient
outcomes. This pressure intensified in 1993 as our nation debated healthcare
reform. Although the results of the recent elections would seem to indicate
that comprehensive reform of our healthcare system is not likely at this time,
it is apparent that the healthcare industry in the 1990's will be required to
become more cost effective than it is today and further improve patient
outcomes.
Since 1987, the Company has been positioning itself to remain competitive
in an environment which demands accountability for patient outcomes at a lower
cost. The Company's Therapeutic Service's division offers the most complete
continuum of products in the industry and controls overall patient costs by
allowing the healthcare provider to match the needs of a particular patient
with the appropriate product and therapy. The Company has also made
significant investments in medical studies which demonstrate the clinical
efficacy and cost effectiveness of its products. Over the past several years,
the Company has entered into a number of partnering arrangements with its
customers which allow its customers to obtain state of the art medical
technology while at the same time lowering their overall costs. The Company
believes that these types of arrangements will be necessary in order to
succeed in the healthcare industry in the 1990's.
The Company also maintains the largest national accounts portfolio in the
specialty bed industry and expects to benefit from further consolidation of
providers and buying groups. At the same time, as shifts in reimbursement
policy have tended to move patients into lower cost environments, the Company
has continued to focus new efforts on the extended care and home care markets.
Since 1987, U.S. healthcare expenditures have grown 90% to $942.5 billion.
Estimated U.S. healthcare expenditures are expected to exceed one trillion
dollars in 1994. While future performance cannot be assured, the Company
believes that it is well positioned to compete in the dynamic healthcare
marketplace.
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19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Legal Proceedings
On February 21, 1992, Novamedix Limited filed a lawsuit against the
Company in the United States District Court for the Western District of Texas.
Novamedix holds the patent rights to the principal product which directly
competes with the PlexiPulse, which is marketed by KCI New Technologies, Inc.
The suit alleges that the PlexiPulse infringes several patents held by
Novamedix, that the Company breached a confidential relationship with
Novamedix and a variety of subsidiary claims. The Plaintiff seeks injunctive
relief and monetary damages. Although it is not possible to predict the
outcome of this litigation or the damages which could be awarded, the Company
believes that its defenses to these claims are meritorious and that the
litigation will not result in a material impact on the Company's operations or
financial condition.
During the third quarter of 1994, the Company settled its lawsuit against
SSI Medical Services, Inc. for $84.75 million. Net of expenses, the Company
realized $81.6 million, before taxes, from the settlement.
Liquidity and Capital Resources
During the first nine months of 1994, the Company generated net cash
provided by operating activities of $116.6 million compared to $43.9 million
during the first nine months of 1993. Net of unusual items, year-to-date cash
flow provided by operations would have been $48.0 million. The Company
believes that net cash provided by operations during the next twelve month
period will be sufficient to provide for new investments in equipment and
any working capital needed during the period.
At September 30, 1994, cash and cash equivalents totaling $78.5 million
were available for general corporate purposes. Additionally, the Company
maintains a Credit Agreement with a bank as an agent for itself and certain
other financial institutions. The Credit Agreement permits borrowings of up
to $45.0 million, all of which was available at September 30, 1994.
At September 30, 1994, the Company was committed to purchase approximately
$1.8 million of inventory associated with a new product over the remainder of
this year. The Company did not have any other material purchase commitments.
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20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of all exhibits filed or included as part of this quarterly
report on Form 10-Q is as follows:
EXHIBIT BY REFERENCE DESCRIPTION
------- ------------ -----------
15 Filed herewith Letter from KPMG
Peat Marwick LLP dated
November 14, 1994
27 Filed herewith Financial Data Schedule
99.1 Filed herewith Agreed Final Judgment,
dated September 19, 1994,
Kinetic Concepts, Inc.,
Plaintiff, v. Support
Systems International,
Inc. and SSI Medical
Services, Inc.
Defendants
99.2 Filed herewith Proforma Condensed
Divested Statement of
Earnings for the nine
months ended September
30, 1994
(b) REPORTS ON FORM 8-K NONE
The Company filed a Form 8-K on October 17, 1994 with respect to
the sale of its Medical Services Division. This filing included
the following financial statements: (i) Pro Forma Condensed
Divested Balance Sheet dated June 30, 1994, (ii) Statement of
Earnings for the six months ended June 30, 1994, (iii) Statement of
Earnings for the year ended December 31, 1993 and (iv) Notes to Pro
Forma Condensed Divested Financial Statements.
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21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINETIC CONCEPTS, INC.
(REGISTRANT)
By: JAMES R. LEININGER, M.D.
James R. Leininger, M.D.,
Chairman of the Board,
President & Chief Executive Officer
By: BIANCA A. RHODES
Bianca A. Rhodes
Senior Vice President and
Chief Financial Officer
Date: November 14, 1994
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