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Kinetic Concepts Reports $491.3 Million In Revenues For Q2 2009

Kinetic Concepts, Inc. (Kinetic Concepts) has reported total revenue of $491.3 million for second quarter of 2009, up 6%, compared to the year-ago quarter. Total revenue for the first half of 2009 was $961.4 million, a 9% increase from the prior-year period. Net earnings for the second quarter of 2009 were $58.1 million, or $0.82 per diluted share, compared to a net loss of $4.8 million, or $0.07 per diluted share, for the same period of 2008.

Foreign currency exchange movements negatively impacted total revenue for the second quarter and first six months of 2009 by 4% compared to the corresponding periods of the prior year.

In May 2008, KCI completed the acquisition of LifeCell Corporation (LifeCell). In connection with that acquisition, KCI incurred incremental transaction-related expenses in the 2008 second quarter of approximately $70.1 million, net of tax, related primarily to preliminary purchase accounting adjustments and certain other acquisition related expenses.

Revenue Recap – Second Quarter and First Half of 2009

V.A.C. Demand Shows Stability

Worldwide revenue from V.A.C. Therapy products was $349.4 million for the second quarter of 2009 and $678.7 million for the first half of 2009, compared to $353.2 million and $686.2 million, respectively, for the corresponding periods of 2008. Higher unit rental and sales volumes in the period were offset by unfavorable foreign currency exchange rate movements and lower realized pricing. Foreign currency exchange movements unfavorably impacted worldwide V.A.C. Therapy revenue by approximately 4% compared to the second quarter and first six months of the prior year. On a constant currency basis, the growth in V.A.C. Therapy revenue stemmed from increased market penetration of V.A.C. Therapy, resulting in higher rental and sales unit volumes. North American V.A.C. Therapy revenue of $266.3 million for the second quarter and $521.0 million for the first half of 2009 represented increases of approximately 2% compared to the same periods of the prior year due to continued market penetration. Average U.S. rental unit volume during the second quarter and first half of 2009 increased approximately 6% over the corresponding periods of 2008, partly offset by lower realized price due to unfavorable payer mix and lower Medicare pricing. EMEA/APAC V.A.C. Therapy revenue decreased to $83.1 million for the second quarter and $157.8 million for the first half of 2009 from $91.5 million and $174.3 million, respectively, for the second quarter and first six months of the prior year. Foreign currency exchange movements unfavorably impacted second quarter North American and EMEA/APAC V.A.C. Therapy revenue by 1% and 14%, respectively, compared to the prior-year period. The constant currency growth rate in EMEA markets was approximately 5%, which declined from the first quarter due primarily to continued economic weakness and increased competitive activities.

LifeCell Integration Continues on Course; New Division Approaching 15% of Total Revenue

Total revenue from our Regenerative Medicine, or LifeCell, division was $71.1 million and $137.3 million for the second quarter and first six months of 2009, respectively. We completed our acquisition of LifeCell in May of 2008. On a pro forma basis, second quarter Regenerative Medicine revenue increased 22% as compared to the same period one year ago. Sales of Strattice, our porcine-based regenerative tissue matrix which launched in March 2008, generated $21.9 million of total sales in the quarter, or 31% of total Regenerative Medicine revenue for the period, up from 10% in the comparable prior-year period.

Global Economic Downturn Continues to Constrain Facility Spending

Worldwide Therapeutic Support Systems (TSS) revenue was $70.8 million for the second quarter and $145.4 million for the first six months of 2009, compared to $81.3 million and $168.3 million for the same periods one year ago, due primarily to lower rental and sales volumes in the US resulting from the economic downturn and capital constraints on acute care facilities combined with unfavorable foreign currency exchange movements. North American revenue from TSS was $46.0 million for the second quarter of 2009, a 14% decrease from the prior-year period, due primarily to lower hospital census and customer capital constraints. North American TSS revenue for the first six months of 2009 was $95.3 million, down 15% from the prior year revenue of $112.6 million. On a constant currency basis, EMEA/APAC TSS revenue increased 2% for the second quarter and 3% for the first six months of 2009, compared to the same periods in the prior year. Foreign currency exchange movements unfavorably impacted North American and EMEA/APAC TSS revenue by 2% and 13%, respectively, compared to the prior-year periods.

Total North American revenue was $383.2 million for the second quarter and $753.1 million for the first six months of 2009, an increase of $40.5 million and $101.0 million, respectively, or 12% and 15%, respectively, from the prior-year periods due primarily to the acquisition of LifeCell in May 2008. Total EMEA/APAC revenue was $108.2 million for the second quarter of 2009 and $208.3 million for the first half of 2009, representing decreases of 9% for each period compared to the prior-year periods due primarily to unfavorable foreign currency exchange rate movements. Foreign currency exchange rate movements unfavorably impacted EMEA/APAC revenue by 14% both in the second quarter and first six months of 2009 compared to the prior-year periods.

Profit Margins Improve on Mix and Productivity Initiatives

Gross profit for the second quarter and first six months of 2009 was $263.8 million and $507.9 million, respectively, representing increases of 15% from the same periods of the prior year. Gross profit margin was 54% for the second quarter of 2009, an increase of approximately 400 basis points from the same period one year ago. The gross profit margin increase was due primarily to increased field service operations productivity and higher gross margins associated with the Regenerative Medicine business unit.

Second quarter selling, general and administrative (SG&A) expenses increased $16.1 million, or approximately 16%, over the second quarter of 2008. SG&A increases included selling and marketing costs associated with the Regenerative Medicine division and increased legal fees.

Research and development expenses for the second quarter of 2009 increased 27% from the prior-year period to $21.3 million, due in part to the second quarter 2008 acquisition of LifeCell, as well as increased activity related to the development of our next generation of advanced wound care products. Total research and development expenses represented approximately 4% of revenue for the current period. In July, the Company launched its next innovation in the care of the open abdomen, AbThera, which has received strong clinical reviews in its initial applications.

Financial Position Demonstrates Liquidity and Strength

Total cash at quarter-end was $235.3 million, a decrease of $12.5 million from year-end 2008. During the second quarter, the Company made a scheduled senior credit facility repayment of $25.0 million from cash-on-hand. Operating cash flow less net capital expenditures for the first half of 2009 was $125.6 million, an increase of $58.7 million, or 87.8%, from the same period one year ago, due to higher earnings and lower capital expenditures. Total long-term debt outstanding at June 30, 2009 was $1.396 billion on a GAAP-basis, including the discount associated with our adoption of FSP APB 14-1, and $1.540 billion on an economic, or debt-instrument, basis. The long-term debt balances in our condensed consolidated balance sheets reflect the discount associated with applying the estimated non-convertible borrowing rate upon the issuance of the notes. The total discount will accrete over the term of the notes. As of June 30, 2009 and December 31, 2008 these convertible notes had balances of $546.1 million and $536.4 million, respectively, within our condensed consolidated balance sheets.