ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the second quarter ended June 30, 2011 as follows:
SECOND QUARTER 2011 HIGHLIGHTS
- Total revenues of $91.3 million from continuing operations
- Income from operations of $15.0 million, or operating margin of 16.4 percent
- Net income available to common stockholders of $11.5 million, or $0.34 per diluted share
Total revenue from continuing operations for the second quarter of 2011 was $91.3 million, compared to $87.2 million for the second quarter of 2010, an increase of $4.1 million.
Sports Medicine product sales were $57.2 million in the second quarter of 2011 compared to $54.7 million in the same period in 2010, or an increase of $2.4 million. Product sales from the Company’s International markets increased $3.8 million, which was partially offset by a $1.5 million decrease in contract manufactured product sales.
ENT product sales increased $2.3 million, or 9.0 percent, in the second quarter of 2011 compared to the same period of 2010, a result of an increase in product sales related to the Company’s Rapid Rhino® product line and new Coblation products, as well as increased product volume across all geographies in the Company’s International markets.
Other product sales declined $0.8 million in the second quarter of 2011 compared to the same period of 2010.
Had the same foreign currency rates been in effect in the quarter ended June 30, 2011 as were in effect in the second quarter of 2010, the U.S. dollar reported value of product sales would have been lower by $2.9 million for the quarter ended June 30, 2011.
GROSS PRODUCT MARGIN
Gross product margin was 70.2 percent for the second quarter of 2011 compared to 65.9 percent for the second quarter of 2010. Inventory obsolescence charges in the second quarter of 2010 were $1.1 million higher than in the second quarter of 2011.
INCOME FROM OPERATIONS
Income from operations for the second quarter of 2011 was $15.0 million compared to $12.6 million for the same period in 2010, an increase of $2.4 million.
Gross profit was $6.6 million higher in the second quarter of 2011, a result of higher revenue and higher gross product margin as discussed above.
Offsetting the improvement in operating profit from higher gross profit was a $4.1 million increase in operating expenses in the second quarter of 2011 compared to the same period in 2010. The Company incurred exit costs of $2.5 million during the second quarter of 2011, primarily related to one-time compensation benefits offered to certain employees at the Company’s Sunnyvale, California facility. General and administrative expenses increased $1.3 million during the quarter ended June 30, 2011 compared to the second quarter of 2010, primarily due to accelerated amortization of leasehold improvement costs associated with the facilities affected by the relocation of the Sunnyvale, California activities and increased legal fees associated with indemnification agreements for certain former executives of the Company. Investigation and restatement related costs increased $1.7 million during the second quarter of 2011 compared to the same period in 2010. Investigation and restatement related expenses in the second quarter of 2010 were reduced by insurance recoveries for legal fees of $0.6 million.
The above increases in operating expenses were partially offset by a $1.8 million decrease in research and development (R&D) costs incurred during the quarter ended June 30, 2011 compared to the same period in 2010 as a higher proportion of the Company’s engineering activities were associated with the manufacturing process in the second quarter of 2011, which increased the allocation of R&D costs to inventory and cost of goods sold.
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
In the second quarter of 2011, net income applicable to common stockholders was $11.5 million or $0.34 per diluted share, compared to $7.3 million, or $0.22 per diluted share, for the second quarter of 2010. For the quarter ended June 30, 2011, net income available to common stockholders includes $1.6 million in income from discontinued operations, which includes a $1.3 million after-tax gain from the sale of the related assets.
BALANCE SHEET AND CASH FLOWS
Cash and cash equivalents increased $52.4 million to $184.9 million as of June 30, 2011 from $132.5 million at December 31, 2010. Cash flows provided by operating activities for the six months ended June 30, 2011 was $44.0 million compared to $32.4 million for the six months ended June 30, 2010. As of June 30, 2011, net inventory balances decreased approximately $2.6 million and accounts receivable decreased $0.9 million from December 31, 2010.
ArthroCare will hold a conference call to present these results Thursday, August 4, 2011, at 8:30 a.m. ET/5:30 a.m. PT to review the results. To participate in the live conference call dial 800-926-6185. A live and on-demand webcast of the call will be available on ArthroCare’s Web site at www.arthrocare.com. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21533651. The replay will remain available through August 18, 2011.
ArthroCare develops and manufactures surgical devices, instruments, and implants that strive to enhance surgical techniques as well as improve patient outcomes. Its devices improve many existing surgical procedures and enable new minimally invasive procedures. Many of ArthroCare’s devices use its internationally patented Coblation® technology. This technology precisely dissolves target tissue and limits damage to surrounding healthy tissue. ArthroCare also develops surgical devices utilizing other patented technology including its OPUS® line of fixation products as well as re-usable surgical instruments. ArthroCare is leveraging these technologies in order to offer a comprehensive line of surgical devices to capitalize on a multi-billion dollar market opportunity across several surgical specialties, including its two core product areas consisting of Sports Medicine and Ear, Nose, and Throat as well as other areas such as spine, wound care, urology and gynecology.
The information provided herein includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on beliefs and assumptions by management and on information currently available to management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any of them publicly in light of new information or future events. Additional factors that could cause actual results to differ materially from those contained in any forward-looking statement include, without limitation: the resolution of litigation pending against the Company; the Company’s ability to design or improve internal controls to address issues detected in its reviews of internal controls and insurance reimbursement practices or by management in its reassessment of the Company’s internal controls; the impact upon the Company’s operations of legal compliance matters or internal controls review, improvement and remediation; the ability of the Company to control expenses relating to legal compliance matters or internal controls review, improvement and remediation; the Company’s ability to remain current in its periodic reporting requirements under the Exchange Act and to file required reports with the Securities and Exchange Commission on a timely basis; the results of the investigation being conducted by the United States Department of Justice; the impact on the Company of additional civil and criminal investigations by state and federal agencies and civil suits by private third parties involving the Company’s financial reporting and its previously announced restatement and its insurance billing and healthcare fraud-and-abuse compliance practices; the ability of the Company to attract and retain qualified senior management and to prepare and implement appropriate succession planning for its Chief Executive Officer; general business, economic and political conditions; competitive developments in the medical devices market; changes in applicable legislative or regulatory requirements; the Company’s ability to effectively and successfully implement its financial and strategic alternatives, as well as business strategies, and manage the risks in its business; and the reactions of the marketplace to the foregoing.
|Condensed Consolidated Balance Sheets - Unaudited|
|(in thousands, except par value data)|
|June 30, 2011||December 31, 2010|
|Cash and cash equivalents||$||184,900||$||132,536|
Accounts receivable, net of allowances of $2,265 and $2,445 at June 30, 2011 and December 31, 2010, respectively
|Deferred tax assets||18,075||24,661|
|Prepaid expenses and other current assets||6,404||4,424|
|Assets held for sale||-||3,081|
|Total current assets||288,847||247,659|
|Property and equipment, net||38,438||41,582|
|Intangible assets, net||8,137||10,733|
|Deferred tax assets||16,019||16,019|
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND |
|Deferred tax liabilities||149||149|
|Income tax payable||1,308||1,555|
|Total current liabilities||54,539||55,720|
|Deferred tax liabilities||233||213|
|Other non-current liabilities||12,916||13,766|
|Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;|
Issued and outstanding: 75 shares at June 30, 2011 and December 31, 2010; Redemption value $87,089
|Preferred stock, par value $0.001; Authorized: 4,900 shares; Issued and outstanding: none||-||-|
Common stock, par value $0.001; Authorized: 75,000 shares; Issued: 31,424 and 31,102 shares;
|Outstanding: 27,446 and 27,112 shares at June 30, 2011 and December 31, 2010, respectively||27||27|
|Treasury stock: 3,978 shares at June 30, 2011 and 3,990 shares December 31, 2010||(107,577||)||(107,899||)|
|Additional paid-in capital||395,409||386,395|
|Accumulated other comprehensive income||5,280||4,246|
|Total stockholders' equity||329,479||295,728|
|Total liabilities, redeemable convertible preferred stock and stockholders' equity||$||472,624||$||439,195|
|Condensed Consolidated Statements of Operations - Unaudited|
|(in thousands, except per share data)|
|Three Months Ended|
|Six Months Ended|
|Royalties, fees and other||4,349||4,113||8,774||8,062|
|Cost of product sales||25,897||28,358||50,641||54,937|
|Research and development||6,613||8,414||13,423||17,029|
|Sales and marketing||27,274||26,887||55,372||53,742|
|General and administrative||10,426||9,107||19,614||18,362|
|Amortization of intangible assets||1,323||1,302||2,634||2,617|
|Investigation and restatement related costs||2,257||528||3,461||1,571|
|Total operating expenses||50,383||46,238||96,994||93,321|
|Income from operations||14,994||12,583||31,571||28,035|
|Foreign exchange gain (loss)||78||(1,075||)||742||(4,035||)|
|Interest and other expense, net||(201||)||(89||)||(375||)||(190||)|
|Other income (expense)||(123||)||(1,164||)||367||(4,225||)|
|Income from continuing operations before income taxes||14,871||11,419||31,938||23,810|
|Income tax provision||4,171||3,134||8,779||6,448|
|Net income from continuing operations||10,700||8,285||23,159||17,362|
|Income (loss) from discontinued operations||1,600||(203||)||1,911||(453||)|
Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock
|Net income available to common stockholders||$||11,451||$||7,270||$||23,381||$||15,295|
|Weighted average shares outstanding:Weighted-average shares outstanding:|
|Earnings per share from continuing operations applicable to common stockholders:|
Earnings per share applicable to common stockholders:
|Supplemental Schedule of Product Sales|
|Three Months Ended||Three Months Ended|
|June 30, 2011||June 30, 2010|
|Total Product Sales||$||59,857||$||27,068||$||86,925||100.0||%||$||60,034||$||23,032||$||83,066||100.0||%|
|Six Months Ended||Six Months Ended|
|June 30, 2011||June 30, 2010|
|Total Product Sales||$||117,961||$||52,471||$||170,432||100.0||%||$||123,803||$||44,428||$||168,231||100.0||%|