China Kanghui (NYSE:KH)

MINNEAPOLIS and CHANGZHOU, China, September 28, 2012 /PRNewswire/ -- Medtronic, Inc. (NYSE: MDT) and China Kanghui Holdings (NYSE: KH) announced today that they have entered into a merger agreement whereby Medtronic will acquire Kanghui. The agreement calls for Medtronic to pay approximately $816 million in cash ($30.75 per American depository share). The total value of the transaction, net of Kanghui's cash, is expected to be approximately $755 million.

"China is one of the fastest growing medical device markets with significant scale opportunities, and now Medtronic will establish a bigger and more direct local presence," said Chris O'Connell, executive vice president and president of Medtronic's Restorative Therapies Group, including the Neuromodulation, Spine, Surgical Technologies and Diabetes businesses. "Kanghui brings Medtronic a broad product portfolio, a strong local R&D and manufacturing operation, a vast China distribution network and an exceptional management team. This move will provide Medtronic sustainable advantages in the fast-growing Chinese orthopedic segment, as well as a foothold in the emerging global value segment in orthopedics."

"This agreement is directly aligned with our corporate strategies of globalization and economic value," said Omar Ishrak, chairman and CEO of Medtronic. "Kanghui represents a significant investment inChina, accelerating Medtronic's overall globalization strategy with an established value segment distribution network and strong R&D and operational capabilities."

As a leading provider of orthopedic devices in China, Kanghui brings a strong product portfolio and new product pipeline in trauma, spine and joint reconstruction. The combined portfolio expands Medtronic's offerings in orthopedic surgery and complements the company's existing presence in spine, neurosurgery, neuromodulation, advanced energy and surgical navigation.

"We are proud of the company we've built and recognize there is a tremendous opportunity to accelerate our global vision by building on Medtronic's size, scale and expertise as part of this combined organization," said Libo Yang, CEO of Kanghui. "We look forward to bringing to Medtronic our local operating expertise in China, including our wide distribution network, strong local sales and marketing teams, local manufacturing and R&D, as well as our active presence across a number of value orthopedic product lines that are necessary for success in China and other emerging markets."

The transaction is expected to close in the next few months and is subject to customary closing conditions, including approval from the shareholders of Kanghui. Medtronic expects the net impact from this transaction to be earnings neutral for fiscal years 2013 and 2014 as the company intends to offset any dilutive impact of the transaction. 

Second Quarter 2012 Highlights

• Total net revenue for the second quarter of 2012 increased by 23.6% year-over-year to RMB101.1 million from RMB81.8 million in the corresponding period of the prior year.
  
• Gross profit for the second quarter of 2012 increased by 24.0% year-over-year to RMB71.9 million from RMB58.0 million in the corresponding period of the prior year.
  
• Operating income for the second quarter of 2012 increased by 27.3% year-over-year to RMB38.7 million fromRMB30.4 million in the corresponding period of the prior year.
  
• Net income attributable to Kanghui for the second quarter of 2012 increased by 24.7% year-over-year to RMB34.8 million from RMB27.9 million in the corresponding period of the prior year.
  
• Non-GAAP[1] net income for the second quarter of 2012 increased by 33.0% year-over-year to RMB39.1 million from RMB29.4 million in the corresponding period of the prior year.
• Net income per diluted ADS of RMB1.33 ($0.21) in the second quarter of 2012, compared to a net income per diluted ADS of RMB1.09 in the corresponding period of the prior year.

Mr. Libo Yang, Chief Executive Officer of the Company, stated, "We are delighted that Kanghui's second quarter marked another strong performance. Growth from trauma and spine sales remained robust, and we further expanded our product offerings by launching our joint reconstruction product into the international markets, while adding another new spine product exclusively marketed in China. Domestic sales were strong, as we continued to gain momentum throughout China. With unabated strong demand and promising new product launches, we believe we are well positioned for sustained success going forward."

Ms. Sarah Wang, Chief Financial Officer of Kanghui, commented, "I am proud that Kanghui delivered our eighth consecutive strong quarter since its initial public offering, with our first-ever quarter of recording over RMB 100 millionin net revenue. Our outstanding growth in net revenue, along with double-digit growth in key operating metrics, exemplify the strength of our business model. Benefiting from the strong domestic sales of our proprietary products, our gross profit margins continued to exceed expectations, and as we build on this positive momentum, we are incrementally more confident in outlook for the remainder of 2012."

Business Outlook

Mr. Yang added, "Our solid performance in the first half of 2012 and the recent successful new product launches have set the stage for continued success in the remainder of 2012, providing us with greater comfort in our top line forecast. Moreover, reflecting on our strong gross margins and continuing discipline in optimizing operations and controlling overhead costs, we are slightly raising our full year 2012 guidance for Non-GAAP net income."

The Company narrows its total net revenue outlook for full year 2012 to be in the range of RMB395 million to RMB403 million, which represents year-over-year growth of 20.8% to 23.3%. The Company raises its full year 2012 non-GAAP net income to a range of RMB149 million to RMB154 million, from its prior expectation of RMB146 million to RMB153 million.

This guidance is based on the current market conditions and reflects the Company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

First Quarter 2012 Highlights

• Total net revenue for the first quarter of 2012 increased by 21.6% year-over-year to RMB82.7 million fromRMB68.0 million in the corresponding period of the prior year.
• Gross profit for the first quarter of 2012 increased by 20.3% year-over-year to RMB58.6 million from RMB48.7 million in the corresponding period of the prior year.
• Operating income for the first quarter of 2012 increased by 5.7% year-over-year to RMB31.5 million fromRMB29.8 million in the corresponding period of the prior year.
• Net income for the first quarter of 2012 increased by 35.0% year-over-year to RMB29.7 million from RMB22.0 million in the corresponding period of the prior year.
• Non-GAAP[1] net income for the first quarter of 2012 increased by 39.7% year-over-year to RMB32.7 millionfrom RMB23.4 million in the corresponding period of the prior year.

Mr. Libo Yang, Chief Executive Officer of the Company, stated, "We are very pleased that Kanghui once again delivered another strong quarterly financial performance in the first quarter of 2012, marking the seven consecutive strong quarter since our IPO. We focused strategically on growing our brand in the important China market, and thereby continued to expand our market share along with our robust domestic revenue growth in the first quarter of 2012. During the quarter, we successfully launched a new spine product that is seeing very good market uptake, and we experienced significant growth in both our trauma and spine segments."

Ms. Sarah Wang, Chief Financial Officer of Kanghui, commented, "Our strong first quarter financial results reflect our ability to consistently execute on our growth strategy. Leveraging our strong cash position and consistently positive cash flows, we further enhanced our competitive advantages by expanding our professional management team, domestic distribution network, and development of a broader product line. We are excited with having a very promising new product pipeline that we intend to launch during the remainder of 2012 and beyond."

Business Outlook

Mr. Yang added, "The strong first quarter provides us with good momentum for the remainder of 2012. Following our successful launch of a new spine product in the first quarter, we are launching one additional spine product in the second quarter, and two new trauma products and three new joint products in the second half of 2012. With our new joint products in place, we expect to kick start our reconstructive joint segment in the second half of 2012, which we believe can become a major revenue driver of the Company going forward."

The Company reiterates that it anticipates revenue for full year 2012 will be in the range ofRMB392 million to RMB403 million, which represents year-over-year growth of 20% to 23%. The Company also estimates its full year 2012 non-GAAP net income to be in the range of RMB146 million to RMB153 million.

Fourth Quarter 2011 Highlights

• Total net revenue for the fourth quarter of 2011 increased by 33.6% year-over-year to RMB96.6 million fromRMB72.3 million in the corresponding period of the prior year.
• Gross profit for the fourth quarter of 2011 increased by 32.3% year-over-year to RMB69.2 million fromRMB52.3 million in the corresponding period of the prior year.
• Operating income for the fourth quarter of 2011 increased by 17.0% year-over-year to RMB35.8 million fromRMB30.6 million in the corresponding period of the prior year.
• Net income for the fourth quarter of 2011 increased by 53.8% year-over-year to RMB42.3million fromRMB27.5 million in the corresponding period of the prior year.
• Non-GAAP(1) net income for the fourth quarter of 2011 increased by 57.4% year-over-year to RMB44.4 million from RMB28.2 million in the corresponding period of the prior year.

Mr. Libo Yang, Chief Executive Officer of the Company, stated, "We are very pleased that Kanghui once again exceeded expectations and delivered another strong quarterly financial performance in the fourth quarter of 2011. We continued to expand our market share in China, while further penetrated our existing international sales channels at the same time. Our fourth quarter success concluded a very successful 2011 for Kanghui. With our sustainable advantages, a proven product line, and an exciting new product pipeline, we believe we are well positioned to deliver another successful year in 2012."

Ms. Sarah Wang, Chief Financial Officer of Kanghui, commented, "Our strong fourth quarter financial results reflect our ability to consistently execute on our growth strategy. During the fourth quarter, we experienced strong sales growth across all product segments and markets, driven by the strong demand for our existing product lines. For 2012, we intend to continue with the solid momentum and foundation that we had built in 2011 and to launch additional new products throughout the year to further establish Kanghui as a leading international provider of innovative and diversified orthopedic products."

Business Outlook

Mr. Yang added, "Our progress in 2011 has laid a solid foundation for our continued growth in 2012, as we are focused on further penetrating both our existing domestic and international markets while expanding into new growth opportunities. As we successfully obtained FDA approvals for TGM's Helicon� Hip System ("HHS"), Milestone Knee System ("MKS") and related surgical instruments, we intend to launch these products this year to kick start our reconstructive joint segment. We have a good start in 2012 and will continue to position Kanghui as a leader in product quality in the fast-growing and relatively underserved joint reconstruction market in China."

The Company anticipates revenue for full year 2012 will be in the range of RMB392 million to RMB403 million, which represents year-over-year growth of 20% to 23%. The Company also estimates its full year 2012 non-GAAP net income to be in the range of RMB146 million to RMB153 million.

Second Quarter 2011 Results

First Quarter Results:

• Net revenue increased 39.3% to RMB68.0 million ($10.4 million) in the first quarter of 2011 from RMB48.8 million in the first quarter of 2010.
• Net income was RMB22.0 million ($3.4 million) in the first quarter of 2011, up 23.6% from RMB17.8 million in the first quarter of 2010.
• The Company reported non-GAAP net income per diluted ADS of RMB0.93 ($0.14) in the first quarter of 2011. This compares to a non-GAAP net loss per diluted ADS of RMB0.49 in the corresponding period of the prior year.

Mr. Libo Yang, the Company's Chief Executive Officer, stated, "We are delighted to report strong financial results for the first quarter of 2011. We experienced significant growth across all product segments and all markets, driven by the solid uptake of our spine products and robust international sales. We continued to implement our strategies, which led to our impressive product growth and further expanded our distribution network, and completed an important acquisition that will help us build our leadership position in China and internationally."

The Company expects year-over-year revenue growth of 20% to 25% in 2011, bringing revenue for the full year 2011 in the range of RMB292 million to RMB303 million. The Company also expects its full year 2011 non-GAAP net income, without taking into account relevant operating expenses in connection with the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li, to be in the range of RMB128 million to RMB133 million. The impact of the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li on the Company’s operating expenses is expected to be approximately RMB7 million. After taking into account the operating expenses relating to these transactions, the Company believes that non-GAAP net income for the full year 2011 will be between RMB121 million and RMB126 million.

Fourth Quarter Highlights:

• Net revenue increased 33.1% to RMB72.3 million ($11.0 million) from RMB54.3 million in the same period of the prior year;
• Gross profit increased 33.4% to RMB52.3 million ($7.9 million) from RMB39.2 million in the same period of the prior year;
• Operating income increased 49.3% to RMB30.6 million ($4.6 million) from RMB20.5 million in the same period of the prior year;
• Non-GAAP net income, which excludes share based compensation expense, increased 45.4% to RMB28.2 million ($4.3 million) from RMB19.4 million in the same period of the prior year. This is equivalent to approximately RMB1.12 ($0.17) per diluted ADS in the fourth quarter of 2010.

Mr. Yang continued, "We believe our progress in 2010 laid a solid foundation for our continued growth in 2011, and we are focusing on further penetrating both our existing domestic and international markets while expanding into new growth opportunities. On that note, today we furthered our presence into the joint reconstruction market with the announcement of our acquisition of a majority stake in Beijing Wei Rui Li Medical Device Co., Ltd., or Wei Rui Li, a domestic Chinese provider of approved knee and hip systems. The deal enables us to work towards launching a competitive knee product in the Chinese market in 2012, and it nicely complements our recently announced exclusive partnership with Consensus Orthopedics. We are delighted with the progress achieved as we position Kanghui as a leader in product quality in the fast-growing and relatively underserved joint reconstruction market in China."

The Company expects year-over-year revenue growth of 20% to 25% in 2011, bringing revenue for the full year 2011 in the range of $44.5 million to $46.2 million. The Company also expects its full year 2011 non-GAAP net income to be in the range of $19.5 million to $20.3m, excluding the impact of operating expenses related to the exclusive partnership with Consensus Orthopedics and the acquisition of the majority stake in Wei Rui Li.

Third Quarter 2010 Financial Highlights

• Net revenue increased 33.9% to RMB63.6 million ($9.5 million¹) from RMB47.5 million in the same period of the prior year;

• Gross margin was 71.9%, compared to 71.0% in the same period of the prior year;

• Operating income increased 52.8% to RMB32.4 million ($4.8 million) from RMB21.2 million in the same period of the prior year;

• Net income increased to RMB26.6 million ($4.0 million) from RMB24.4 million in the same period of the prior year. This is equivalent to approximately RMB0.73 ($0.11) per diluted ADS², in the third quarter of 2010, compared to the equivalent of RMB0.09 per diluted ADS in the same period of the prior year.

• Non-GAAP net income, which excludes share based compensation expense, increased 4.4% to RMB28.2 million ($4.2 million), or RMB0.81 ($0.12) per diluted ADS² from RMB27.0 million in the same period of the prior year;

• Net income attributable to ordinary shareholders was RMB 13.6 million ($2.0 million) in the third quarter of 2010, and reflected the impact of accretion of convertible preferred notes which were extinguished in the Company’s initial public offering and will not impact the Company’s future financial results.

China Kanghui Holdings is preparing to go public under the symbol KH.

 Company Snapshot:

 Leading domestic developer, manufacturer and marketer of orthopedic implants in China.

 Industry Snapshot:

According to Frost & Sullivan, China’s orthopedic implant market grew from approximately RMB4.4 billion in sales in 2007 to approximately RMB6.1 billion in 2009. By 2015, the market is expected to grow to approximately RMB16.6 billion, representing a compound annual growth rate, or CAGR, of 18.1% from 2009, surpassing Japan to become the second largest orthopedic implant market in the world. This rapid growth has been driven by rising disposable incomes, an aging population and expansion of insurance coverage due to healthcare reform in China. Despite these growth factors, orthopedic implant implantation rates in China are low relative to more developed markets. According to Frost & Sullivan, in 2008, the implantation rates of trauma, spine and joint products in the United States were over eight times, almost four times and over 100 times higher, respectively, than in China. These low implantation rates leave significant potential for future growth in the Chinese orthopedic implant market.

Post IPO Share Count:

6,675,000 ADSs (or 7,676,250 ADSs if the underwriters exercise the option to purchase additional ADSs in full).

Financial Snapshot:

• Domestic sales of our proprietary products accounted for 76.6%, 76.5% and 84.9% of our net revenue in 2008, 2009 and the first quarter of 2010, respectively.
  
• International sales of our proprietary products accounted for 17.7%, 12.2% and 6.6% of our net revenue in 2008, 2009 and the first quarter of 2010, respectively.
   
• Net revenue increased by 32.0% from RMB139.6 million in 2008 to RMB184.3 million (US$27.0 million) in 2009, and increased by 29.4% from RMB37.7 million in the first quarter of 2009 to RMB48.8 million (US$7.2 million) in the first quarter of 2010.
  
• Our net income increased by 25.0% from RMB60.0 million in 2008 to RMB75.0 million (US$11.0 million) in 2009, and increased by 39.1% from RMB12.8 million in the first quarter of 2009 to RMB17.8 million (US$2.6 million) in the first quarter of 2010.