August 03, 2011 at 16:01 PM EDT
ArthroCare Reports Second Quarter 2011 Financial Results

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

REVENUE

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.

CONFERENCE CALL

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.

ABOUT ARTHROCARE

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.

FORWARD-LOOKING STATEMENTS

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.

ARTHROCARE CORPORATION
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except par value data)
June 30, 2011December 31, 2010
ASSETS
Current assets:
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

47,968 48,870
Inventories, net 31,500 34,087
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
Goodwill 119,490 119,020
Deferred tax assets 16,019 16,019
Other assets 1,693 4,182
Total assets $ 472,624 $ 439,195
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 12,168 $ 13,819
Accrued liabilities 40,914 40,197
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
Total liabilities 67,688 69,699
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

75,457 73,768
Stockholders' equity:
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
Retained earnings 36,340 12,959
Total stockholders' equity 329,479 295,728
Total liabilities, redeemable convertible preferred stock and stockholders' equity $ 472,624 $ 439,195
ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
Three Months Ended

June 30,

Six Months Ended

June 30,

2011201020112010
Revenues:
Product sales $ 86,925 $ 83,066 $ 170,432 $ 168,231
Royalties, fees and other 4,349 4,113 8,774 8,062
Total revenues 91,274 87,179 179,206 176,293
Cost of product sales 25,897 28,358 50,641 54,937
Gross profit 65,377 58,821 128,565 121,356
Operating expenses:
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
Exit costs 2,490 - 2,490 -
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 )
Net income 12,300 8,082 25,070 16,909

Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock

(849 ) (812 ) (1,689 ) (1,614 )
Net income available to common stockholders $ 11,451 $ 7,270 $ 23,381 $ 15,295
Weighted average shares outstanding:Weighted-average shares outstanding:
Basic 27,338 26,976 27,267 26,958
Diluted 27,789 27,352 27,702 27,295
Earnings per share from continuing operations applicable to common stockholders:
Basic $ 0.30 $ 0.23 $ 0.65 $ 0.48
Diluted $ 0.29 $ 0.22 $ 0.64 $ 0.47

Earnings per share applicable to common stockholders:

Basic

$ 0.35 $ 0.22 $ 0.71 $ 0.47

Diluted

$ 0.34 $ 0.22 $ 0.70 $ 0.46

ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales
(in thousands)
Three Months EndedThree Months Ended
June 30, 2011June 30, 2010
AmericasInternational

Total
Product
Sales

% Net
Product
Sales

AmericasInternational

Total
Product
Sales

% Net
Product
Sales

Sports Medicine $ 36,348 $ 20,808 $ 57,156 65.7 % $ 37,701 $ 17,010 $ 54,711 65.9 %
ENT 22,650 4,785 27,435 31.6 % 21,196 3,979 25,175 30.3 %
Other 859 1,475 2,334 2.7 % 1,137 2,043 3,180 3.8 %
Total Product Sales $ 59,857 $ 27,068 $ 86,925 100.0 % $ 60,034 $ 23,032 $ 83,066 100.0 %
Six Months EndedSix Months Ended
June 30, 2011June 30, 2010
AmericasInternational

Total
Product
Sales

% Net
Product
Sales

AmericasInternational

Total
Product
Sales

% Net
Product
Sales

Sports Medicine $ 73,729 $ 40,136 $ 113,865 66.8 % $ 82,092 $ 33,068 $ 115,160

68.4

%
ENT 42,687 9,052 51,739 30.4 % 39,611 7,309 46,920 27.9 %
Other 1,545 3,283 4,828 2.8 % 2,100 4,051 6,151 3.7 %
Total Product Sales $ 117,961 $ 52,471 $ 170,432 100.0 % $ 123,803 $ 44,428 $ 168,231 100.0 %

Contacts:

ArthroCare Corp.
Corinne Ervin, 512-391-3907
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