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Kinetic Concepts Inc. (KCI) filed Quarterly Report for the period ended 2011-09-30.
Kinetic Concepts Inc. has a market cap of $5 billion; its shares were traded at around $68.4 with a P/E ratio of 14.1 and P/S ratio of 2.5. Kinetic Concepts Inc. had an annual average earning growth of 23.6% over the past 10 years. GuruFocus rated Kinetic Concepts Inc. the business predictability rank of 3.5-star.
This is the annual revenues and earnings per share of KCI over the last 10 years. For detailed 10-year financial data and charts, go to 10-Year Financials of KCI.
Highlight of Business Operations:
(a) Basis of Presentation The condensed consolidated financial statements presented herein include the accounts of Kinetic Concepts, Inc., together with its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The consolidated entity is referred to herein as "KCI®." The condensed consolidated financial statements appearing in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP” or “the Codification”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position and cash flows in conformity with GAAP. Operating results from interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our results for the interim periods presented. Certain prior-period amounts have been reclassified to conform to the 2011 presentation. We have three reportable operating segments which correspond to our global business units: Active Healing Solutions™ (“AHS”); LifeCell™; and Therapeutic Support Systems (“TSS”). We have three primary geographic regions for which we provide supplemental information: Americas, which is comprised principally of the United States and includes Canada, Puerto Rico and Latin America; EMEA, which is comprised principally of Europe and includes the Middle East and Africa; and APAC, which is comprised of the Asia Pacific region. On July 12, 2011, we entered into a definitive merger agreement (“Merger Agreement”) under which a consortium of funds advised by Apax Partners (“Apax”), together with controlled affiliates of Canada Pension Plan Investment Board (“CPPIB”) and the Public Sector Pension Investment Board (“PSP Investments”), will acquire KCI (the “Merger”) for $68.50 per share in cash in a transaction currently valued at $6.1 billion, inclusive of KCI s outstanding debt. The transaction is subject to certain closing conditions but is not subject to any closing condition with regard to the financing of the transaction. On October 28, 2011, we held a special meeting of shareholders to approve the Merger Agreement, which requires approval by the affirmative vote of holders of two-thirds of our outstanding shares entitled to vote. Approximately 85.7% of the outstanding shares of our common stock as of the record date were voted at the special meeting. Of the shares that were voted, approximately 99.9% voted in favor of the Merger and 0.05% voted against the Merger. We anticipate the Merger closing in early November 2011 with our subsequent delisting from the New York Stock Exchange. (b) Income Taxes We compute our quarterly effective income tax rate based on our annual estimated effective income tax rate plus the impact of any discrete items that occur in the quarter. The effective income tax rate for the third quarter and the first nine months ended September 30, 2011 was 27.0% and 27.1%, respectively, compared to 25.0% and 28.0%, respectively, for the third quarter and the first nine months of 2010. 7 Table of Contents (c) Derivative Financial Instruments and Fair Value Measurements We use derivative financial instruments to manage the economic impact of fluctuations in interest rates. We do not use financial instruments for speculative or trading purposes. Periodically, we enter into interest rate protection agreements to modify the interest characteristics of our outstanding debt. We designated our interest rate swap agreements as cash flow hedge instruments. Each interest rate swap is designated as a hedge of interest payments associated with specific principal balances and terms of our debt obligations. These agreements involve the exchange of amounts based on variable interest rates for amounts based on fixed interest rates, over the life of the agreement, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received, as interest rates change, is accrued and recognized as an adjustment to interest expense related to the debt. We also use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on our intercompany balances and corresponding cash flows and to manage our transactional currency exposures when our foreign subsidiaries enter into transactions denominated in currencies other than their local currency. We enter into foreign currency exchange contracts to manage these economic risks. These contracts are not designated as hedges; as such, we recognize the fair value of these instruments as an asset or liability with income or expense recognized in the current period. Gains and losses resulting from the foreign currency fluctuations impact on transactional exposures are included in foreign currency gain (loss) in our condensed consolidated statements of earnings. As required, all derivative instruments are recorded on the balance sheet at fair value. The fair values of our interest rate swap agreements and foreign currency exchange contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly-quoted markets, which represent level 2 inputs as defined by the Codification. We estimate the effectiveness of our interest rate swap agreements utilizing the hypothetical derivative method. Under this method, the fair value of the actual interest rate swap agreement is compared to the fair value of a hypothetical swap agreement that has the same critical terms as the portion of the loan being hedged. Changes in the effective portion of the fair value of the remaining interest rate swap agreement are recognized in other comprehensive income, net of tax, until the hedged item is recognized into earnings. (d) Concentration of Credit Risk KCI has a concentration of credit risk with financial institutions related to its derivative instruments and the note hedge described in Note 3. As of September 30, 2011, Bank of America and JP Morgan Chase held equity hedges related to our convertible note hedge in notional amounts of approximately $176.5 million each. Bank of America was also the counterparty on some of our interest rate protection agreements and our foreign currency exchange contracts in notional amounts totaling $50.0 million and $4.9 million, respectively. Additionally, JP Morgan Chase was also the counterparty on some of our interest rate protection agreements and our foreign currency exchange contracts in notional amounts totaling $25.0 million and $7.0 million, respectively. We use master netting agreements with our derivative counterparties to reduce our risk and use multiple counterparties to reduce our concentration of credit risk. We maintain cash and cash equivalents with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained at financial institutions of reputable credit and, therefore, bear minimal credit risk. (e) Other Significant Accounting Policies For further information on our significant accounting policies, see Note 1 of the notes to the consolidated financial statements included in KCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. 8 Table of Contents NOTE 2. Supplemental Balance Sheet DataThe growth in LifeCell revenue over the prior-year periods was due primarily to increased demand for our acellular tissue matrix products as the result of continued market penetration and geographic expansion. EMEA LifeCell sales reported growth in all geographic locations where we have launched our LifeCell products. LifeCell revenue generated from the use of AlloDerm, Strattice, and other acellular tissue matrix products in reconstructive surgical procedures, including challenging hernia repair and breast reconstruction, accounted for 94.1% and 93.8%, respectively, of total LifeCell revenue for the third quarter and first nine months of 2011 compared to 94.3% and 93.5% during the corresponding prior-year periods. Direct sales of Strattice, our porcine-based reconstructive tissue matrix product, accounted for 46.1% and 45.4% of total LifeCell revenue for the third quarter and first nine months of 2011, respectively, compared to 42.2% and 39.6%, respectively, in the prior-year periods. Foreign currency exchange rate movements did not have a significant impact on worldwide LifeCell revenue as compared to the prior-year periods.
For the third quarter of 2011, we reported net earnings of $90.7 million, an increase of 19.7% compared to $75.8 million in the prior-year period. For the first nine months of 2011, we reported net earnings of $240.6 million, an increase of 32.1% compared to $182.1 million in the prior-year period. The effective income tax rate for the third quarter and first nine months of 2011 was 27.0% and 27.1%, respectively, compared to 25.0% and 28.0%, respectively, for the corresponding periods in 2010. The increase in the effective income tax rate for the third quarter of 2011 as compared to the prior-year period was due primarily to the favorable resolution of certain tax contingencies during 2010.
Net earnings per diluted share for the third quarter and first nine months of 2011 were $1.16 and $3.21, respectively, as compared to net earnings per diluted share of $1.06 and $2.54, respectively, in the corresponding prior-year periods. The dilutive effect associated with our Convertible Notes and related warrants were $0.06 during both the third quarter and first nine months of 2011.
As of September 30, 2011, our principal sources of liquidity consisted of $656.8 million of cash and cash equivalents and $638.0 million available under our revolving credit facility, net of $12.0 million in undrawn letters of credit. During the first nine months of 2011, we made scheduled repayments on the $550.0 million term A facility due in January 2016 totaling $20.6 million from cash-on-hand. The increase in net cash provided by operating activities was due primarily to higher net earnings and lower cash outlays for royalty payments, inventory purchases, interest and income taxes, partially offset by higher capital expenditures.
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