Kinetic Concepts, Inc.:
Fourth Quarter Highlights
- Total revenue increased 14% to $492.5 million, including $68.0 million of LifeCell revenue
- Net earnings were $52.1 million compared to $66.5 million one year ago
- Net earnings per diluted share were $0.74 compared to $0.92 one year ago
- LifeCell acquisition-related costs and expenses reduced net earnings by $11.4 million, or $0.16 per diluted share
- Restructuring charges reduced net earnings by $5.7 million, or $0.08 per diluted share
Full Year Highlights
- Total revenue increased 17% to $1.878 billion, including $156.8 million of LifeCell revenue
- Net earnings were $173.9 million compared to $237.1 million for the prior year
- Net earnings per diluted share were $2.42, compared to $3.31 for the prior year
- LifeCell acquisition-related costs and expenses reduced net earnings by $92.1 million, or $1.28 per diluted share
- Restructuring charges reduced net earnings by $5.7 million, or $0.08 per diluted share
Kinetic Concepts, Inc. today reported fourth quarter and full year 2008 total revenue of $492.5 million and $1.878 billion, respectively, an increase of 14% and 17% from the same respective periods of 2007. Foreign currency exchange rate movements negatively impacted total revenue by 4% for the fourth quarter of 2008 compared to the same period a year ago. For the full year of 2008, foreign currency exchange rate movements favorably impacted revenue by 1% compared to the prior year.
Net earnings for the fourth quarter of 2008 were $52.1 million compared to $66.5 million for the same period last year due primarily to expenses associated with our acquisition of LifeCell, higher debt interest costs and certain restructuring charges. Net earnings per diluted share for the fourth quarter of 2008 were $0.74 compared to $0.92 per diluted share for the same period in the prior year. The decrease in reported net earnings and net earnings per diluted share is due to after-tax acquisition-related costs and expenses of $11.4 million, or $0.16 per diluted share, associated with our acquisition of LifeCell in the second quarter of 2008. In addition, restructuring charges in the quarter were approximately $5.7 million, net of income taxes, or $0.08 per diluted share.
For the full year of 2008, net earnings were $173.9 million compared to $237.1 million for the prior year due primarily to refinancing costs and expenses associated with our acquisition of LifeCell, higher debt interest costs, and restructuring charges recorded during the year, totaling $97.8 million, net of taxes, or $1.36 per diluted share. Net earnings per diluted share for the full year of 2008 were $2.42 compared to $3.31 for the prior year. Net earnings per diluted share on a non-GAAP basis, excluding acquisition-related costs and expenses and restructuring charges, were $3.78, an increase of 14% over the prior year.
“In addition to growing our business in 2008, we made significant progress in key areas of strategic importance for the company: R&D innovation, global expansion and diversification,” said Catherine Burzik, President and Chief Executive Officer of KCI. “We launched the first of our new V.A.C. dressings, Simplace, in December and are on track with a number of new product launches planned for 2009. Additionally, we made progress toward regulatory approval of VAC therapy in the large Japanese market, and we made progress toward reimbursement of V.A.C. Therapy for home use in Germany, where we already have a significant hospital presence. Lastly, we made a very important step toward diversification of our business with the acquisition of the leading regenerative medicine company, LifeCell. LifeCell’s xeno-based Strattice dermal matrix had a very strong initial year in the US market. We achieved CE marking for Strattice in December and are now on the market in the UK and Germany. We expect Strattice to be an outstanding growth platform for the future of the company.”
Revenue Recap – Fourth Quarter and Full Year of 2008
North American revenue was $389.3 million for the fourth quarter and $1.428 billion for the full year of 2008, representing increases of 20% and 17%, respectively, from the prior periods due to revenue associated with the LifeCell acquisition and increased rental and sales volumes for V.A.C.® Therapy wound healing devices and related disposables.
North American V.A.C. Therapy revenue of $267.3 million for the fourth quarter and $1.049 billion for the full year of 2008 increased approximately 2% and 6%, respectively, compared to the same periods of the prior year due primarily to higher rental and sales unit volumes. A number of factors impacted North American V.A.C. Therapy revenue growth including increased competitive activity, lower hospital census, institutional budget constraints, shorter average treatment periods and reduced purchase levels of disposables. V.A.C. Therapy order demand in the fourth quarter exceeded unit volume growth as average treatment periods have declined due to improved treatment protocols, faster healing times and wound mix, primarily in the acute care setting. Rental unit volume increased approximately 5% in the fourth quarter of 2008 compared to the same quarter a year ago, partially offset by lower realized pricing due primarily to changes in payer mix.
LifeCell revenue was $68.0 million for the quarter and $156.8 million for the year-to-date period post acquisition. LifeCell revenue for the fourth quarter of 2008 represented an increase of approximately 29% over the same period one year ago due primarily to growth in its core challenging hernia repair and breast reconstruction applications.
North American revenue from Therapeutic Support Systems (“TSS”) was $54.0 million for the fourth quarter and $221.7 million for the full year of 2008, representing decreases of 12% and 4%, respectively, from the prior-year periods due primarily to the loss of a large GPO contract announced earlier this year, and lower demand in the fourth quarter due primarily to economic constraints and reduced capital availability to hospitals.
EMEA/APAC revenue of $103.2 million for the fourth quarter of 2008 decreased approximately 6% from the prior-year period due to unfavorable currency exchange rate movements. On a non-GAAP basis, excluding currency exchange rate movements, EMEA/APAC revenue grew approximately 7% from the prior-year period due primarily to increased V.A.C. Therapy rental unit volume and associated disposable sales.
For the full year, EMEA/APAC revenue of $450.2 million increased 17% from 2007. On a non-GAAP basis, excluding currency exchange rate movements, EMEA/APAC revenue increased approximately 11% compared to the prior year.
EMEA/APAC V.A.C. Therapy revenue of $80.1 million for the fourth quarter decreased 2% compared to the prior-year period due to unfavorable currency exchange rate movements. On a non-GAAP basis, excluding currency exchange rate movements, the fourth quarter EMEA/APAC V.A.C. Therapy revenue increased approximately 11% from the year-ago period due primarily to higher unit volume. For the full year of 2008, EMEA/APAC V.A.C. Therapy revenue of $344.7 million increased 20% from the prior year due to higher V.A.C. Therapy unit demand. Foreign currency exchange rate movements favorably impacted 2008 EMEA/APAC V.A.C. Therapy revenue by 5% compared to the prior year.
Worldwide V.A.C. Therapy revenue was $347.5 million for the fourth quarter of 2008 and $1.394 billion for the full year of 2008, an increase of 1% and 9%, respectively, from the corresponding periods in 2007 due primarily to increased rental and sales volumes for V.A.C. Therapy wound healing devices and related supplies, resulting from increased market penetration. In the fourth quarter of 2008, foreign currency exchange rate movements negatively impacted worldwide V.A.C. Therapy revenue by 4% compared to the prior year period. For the full year of 2008, foreign currency exchange rate movements favorably impacted worldwide V.A.C. Therapy revenue by 1% compared to the prior year.
Worldwide TSS revenue was $77.0 million for the fourth quarter and $327.1 million for the full year of 2008, representing decreases of 13% and 1%, respectively, compared to the corresponding periods of the prior year. Foreign currency exchange rate movements unfavorably impacted worldwide TSS revenue by 5% for the fourth quarter, while for the year, foreign currency exchange rate movements favorably impacted TSS revenue by 2% compared to 2007.
Profit Margins
Gross profit for the fourth quarter and full year of 2008 was $246.9 million and $934.4 million, respectively, representing increases of 15% and 20% from the same respective periods of the prior year. Gross profit margin for the fourth quarter of 2008 was 50.1% compared to 49.3% for the same period one year ago. For the full year of 2008, gross profit margin was 49.8%, up from 48.4% for the same period of the prior year. Fourth quarter 2008 gross profit margin was favorably impacted by higher gross margins associated with LifeCell regenerative medicine products and increased productivity of service operations.
Operating earnings for the fourth quarter and full year of 2008 were $93.5 million and $348.5 million, respectively, representing decreases of 7% and 6%, from the corresponding periods one year ago. Excluding the impact of certain non-cash acquisition-related expenses and restructuring charges on the Company’s financial results, non-GAAP operating earnings for the fourth quarter and full year of 2008 increased 18% and 23%, respectively, from the corresponding periods one year ago. The non-GAAP operating earnings improvement for the fourth quarter, excluding certain non-cash acquisition-related expenses and restructuring charges, was due primarily to higher gross profit. Research and development expenses for the fourth quarter and full year of 2008 increased 23% and 50%, respectively, compared to the same periods one year ago as the Company continued to expand its product development pipeline.
Interest Expense
Interest expense for the fourth quarter and full year of 2008 was $27.3 million and $68.6 million, respectively, compared to $1.5 million and $19.9 million for the corresponding periods of the prior year due to the addition of $1.7 billion in LifeCell acquisition financing completed during the second quarter of 2008. The acquisition financing was comprised of a senior secured term loan of $1.0 billion, due 2013, and $690.0 million of 3.25% convertible senior notes due 2015. Proceeds from these facilities were used to repay $68.0 million of outstanding debt under the previous credit facility, purchase all of the outstanding shares of LifeCell and pay related fees and expenses associated with the transaction. The senior secured term loan has a stated variable interest rate of 3-month LIBOR plus an applicable margin, however, we have entered into agreements that effectively fix the variable interest rate component on approximately $570 million of the term loan at an average of 2.9% plus the applicable margin.
Income Tax Rate
The effective income tax rate for the fourth quarter of 2008 was 27.0% compared to 34.0% in the prior-year period. The effective income tax rate for the full year of 2008 was 39.5% compared to 33.8% in 2007. The decrease in the fourth quarter 2008 effective income tax rate was due primarily to the favorable resolution of certain tax contingencies during the period. For the full year of 2008, the increase in the effective income tax rate was due primarily to the non-deductibility of the $61.6 million write-off of in-process research and development associated with the LifeCell acquisition.
Reconciliation to Adjusted Diluted Earnings per Share
Diluted net earnings per share, on a non-GAAP basis, adjusted for certain non-cash acquisition-related expenses and restructuring charges, were as follows:
Three months ended Year ended
December 31, 2008 December 31, 2008
Diluted EPS - GAAP basis $ 0.74 $ 2.42
In-process research and development - 0.86
Amortization of acquired intangibles 0.09 0.21
Expense from LifeCell inventory step-up 0.04 0.13
Debt issuance cost amortization 0.03 0.08
Restructuring charges 0.08 0.08
Adjusted diluted EPS - Non-GAAP basis $ 0.98 $ 3.78Financial Position
At December 31, 2008, total cash was $247.8 million and total long-term debt outstanding was $1.67 billion. Subsequent to December 31, 2008, the Company made voluntary senior credit facility repayments totaling $79.0 million from cash-on-hand. The Company’s leverage ratio at the end of 2008, on a non-GAAP basis, was approximately 2.7 times the 2008 consolidated EBITDA, as defined, and the Company was in compliance with all debt covenants. Net capital expenditures for 2008 were $136.5 million, consisting primarily of rental assets, construction cost associated with the LifeCell production plant expansion and IT infrastructure development.
Share Repurchase Program
In October 2008, KCI’s Board of Directors authorized a share repurchase program for the repurchase of up to $100.0 million in market value of KCI common stock through the third quarter of 2009. Through December 31, 2008, the Company had repurchased $50.1 million of KCI common stock at an average price of $24.12 per share.
Outlook
The following guidance is based on current information and expectations as of January 27, 2009 (in millions, except per share data):
% Change
FY 2008 FY 2009 from 2008
Total revenue $ 1,878 $ 2,000 - $2,060 7 % - 9%
Diluted EPS -- GAAP basis (1) $ 2.42 $ 3.45 - $3.60 43 % - 49%
Amortization of acquired intangibles 0.21 0.35
Debt issuance cost amortization 0.08 0.15
Restructuring charges 0.08 --
Other (2) 0.99 --
Adjusted Diluted EPS -- Non-GAAP basis (1) $ 3.78 $ 3.95 - $4.10 4 % - 8%
Diluted weighted average shares 71.8 70.5 - 71.5 (1 %) - 0%
outstanding
(1) Excluding the impact of FASB Staff Position No. APB 14-1, effective as of
January 1, 2009.
(2) Includes write-off of in-process R&D of $0.86 and expense from inventory
step-up of $0.13.KCI currently projects full-year 2009 total revenue to be $2.00 – $2.06 billion, representing revenue growth of 7 – 9%, comprised of low single digit growth from its V.A.C. Therapy negative pressure wound therapy product lines and related supplies, and growth approximating 20% from LifeCell, partially offset by flat to a slight contraction of TSS revenue. The Company currently projects GAAP net earnings per diluted share for 2009, before the application of FASB Staff Position No. APB 14-1 regarding convertible debt, to be in a range of $3.45 – $3.60, based upon a weighted average diluted share estimate of 70.5 – 71.5 million shares, representing diluted EPS growth of 43% – 49% compared to 2008. Excluding non-cash acquisition-related expenses, the Company projects adjusted net earnings per diluted share for 2009 of $3.95 – $4.10, representing an increase of 4% to 8% from a comparable number in 2008.
The Company’s practice is to provide guidance on a full-year basis. However, the Company has historically experienced a seasonal fluctuation in sequential revenue between the fourth quarter and first quarter of each year. As a result of this historical experience, the Company currently expects that revenue in the first quarter of 2009 will reflect a modest decline from the fourth quarter of 2008.
Source: Kinetic Concepts Inc.
published: January 27, 2009 in: Companies, Financial, Products