February 13, 2013 at 16:01 PM EST
ArthroCare Reports Fourth Quarter and Full Year 2012 Financial Results

ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the fourth quarter and year ended December 31, 2012.

FOURTH QUARTER 2012 SUMMARY

  • Total revenue of $96.9 million.
  • Income from operations of $15.1 million, or operating margin of 15.6 percent.
  • Net income applicable to common stockholders of $10.3 million, or $0.30 per diluted share.

FULL YEAR 2012 SUMMARY

  • Total revenue of $368.5 million.
  • Income from operations of $64.1 million, or operating margin of 17.4 percent.
  • Net income applicable to common stockholders of $42.8 million, or $1.25 per diluted share.

REVENUE – FOURTH QUARTER

Total revenue for the fourth quarter of 2012 was $96.9 million, compared to $92.4 million for the fourth quarter of 2011, an increase of 4.9 percent.

Product sales for the fourth quarter of 2012 were $92.2 million compared to $88.5 million in the fourth quarter of 2011, an increase of 4.3 percent. Product sales increased 4.5 percent in constant currency over the same quarter of the prior year.

Worldwide sales of Sports Medicine products increased $1.2 million or 1.9 percent in the fourth quarter of 2012 when compared to the fourth quarter of 2011. In constant currency, Sports Medicine product sales increased 2.1 percent. In the fourth quarter of 2012 proprietary Sports Medicine product sales in the Americas increased $1.5 million, or 4.5 percent and International Sports Medicine product sales increased $1.9 million, or 9.5 percent as compared to the fourth quarter of 2011. Contract manufactured product sales decreased $2.2 million, or 28.0 percent in the fourth quarter.

Worldwide ENT product sales increased $2.5 million, or 10.6 percent in the fourth quarter of 2012 compared to the fourth quarter of 2011. Americas ENT product sales increased $0.8 million or 4.3 percent and International ENT product sales increased $1.7 million or 37.1 percent as a result of increased product sales in Asia Pacific markets, most notably in Australia and China in the fourth quarter.

Across all product areas International product sales increased $3.8 million, or 14.0 percent in the fourth quarter of 2012 as compared to the same quarter of 2011. Had the same foreign currency rates been in effect in the fourth quarter of 2012 as were in effect in the fourth quarter in 2011, the U.S. dollar reported value of product sales would have been higher by $0.2 million for the current quarter.

REVENUE – FULL YEAR

Total revenue from continuing operations in 2012 was $368.5 million, compared to $354.9 million for 2011.

Worldwide Sports Medicine product sales increased $7.4 million or 3.3 percent in 2012 compared to 2011 and increased 4.5 percent in constant currency. Sports Medicine product sales in the Americas increased $6.2 million in 2012 compared to 2011 as proprietary product sales increased $5.9 million or 4.6 percent in 2012. International Sports Medicine product sales increased $1.3 million or 1.6 percent in 2012 compared to 2011. Contract manufactured product sales increased $0.3 million, or 1.4 percent in 2012.

Worldwide ENT product sales increased $5.5 million or 5.5 percent in 2012 compared to 2011 and increased 6.0 percent in constant currency. ENT product sales in the Americas increased $1.1 million or 1.3 percent and International ENT product sales increased $4.4 million or 23.9 percent in 2012 compared to 2011.

Worldwide other product sales decreased $0.6 million in 2012 when compared to 2011 and represented less than 3 percent of total product sales in 2012.

Management believes percentage sales growth in constant currency is an important metric for evaluating our operations because the impact of changing foreign currency exchange rates may not provide an accurate baseline for analyzing trends in our business. Percentage sales growth in constant currency is calculated by translating current year sales at prior year average foreign currency exchange rates. Constant currency is a non-GAAP measure and it should not be considered as a substitute for measures prepared in accordance with GAAP.

INCOME FROM OPERATIONS – FOURTH QUARTER

Income from operations for the fourth quarter of 2012 was $15.1 million compared to a loss from operations of $51.4 million for the same period in 2011. The loss from operations for the fourth quarter of 2011 included a charge of $74.0 million for the settlement of securities class actions pending against the Company.

Gross product margin as a percentage of product sales was 69.9 percent for the fourth quarter of 2012 compared to 69.3 percent for the fourth quarter of 2011.

Total operating expenses were $54.1 million in the fourth quarter of 2012 compared to $116.7 million in the fourth quarter of 2011 as the fourth quarter of 2011 included a charge of $74.0 million for the settlement of securities class actions pending against the Company. The Company also incurred Exit costs of $3.0 million in the fourth quarter of 2011 in connection with the closure and relocation of its Sunnyvale, California operations that did not recur in 2012. Sales and marketing expenses increased $2.4 million, to 30.9 percent of total revenues this quarter compared to 29.8 percent for the same quarter of 2011.

INCOME FROM OPERATIONS – FULL YEAR

For the full year of 2012, income from operations was $64.1 million compared to a loss from operations in 2011 of $15.5 million. The 2011 loss from operations included $80.8 million for investigation and restatement expenses, mostly the result of the charge of $74.0 million for the settlement of the securities class actions pending against the Company in the fourth quarter of 2011.

Gross product margin as a percentage of product sales for the full year of 2012 was 69.2 percent compared to 69.5 percent in 2011.

Under the short-term incentive plan for 2012 approved by the Board of Directors, Adjusted Operating Margin is a key metric for purposes of evaluating business performance. Adjusted Operating Margin is Operating Margin adjusted for investigation and restatement related costs. Investigation and restatement related costs were 2.9 percent and 22.8 percent of total revenue for 2012 and 2011, respectively, and Adjusted Operating Margin was 20.3 percent and 18.4 percent, respectively, for these years. Adjusted Operating Margin is a non-GAAP measure of profitability and it should not be considered as a substitute for measures prepared in accordance with GAAP.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Net income applicable to common stockholders was $10.3 million or $0.30 per diluted share in the fourth quarter of 2012, compared to net loss attributable to common stockholders of $29.3 million, or a loss of $1.06 per share in the fourth quarter of 2011.

For the year ended December 31, 2012, net income applicable to common stockholders was $42.8 million, or $1.25 per diluted share, compared to net loss attributable to common stockholders of $4.3 million, or a loss of $0.16 per share for the year ended December 31, 2011.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $218.8 million as of December 31, 2012 compared to $219.6 million at December 31, 2011. In the first quarter of 2012, the Company paid $74 million as required under the proposed settlement of the private securities class actions. Excluding this payment, cash and cash equivalents increased $73.2 million during the year ended December 31, 2012. Cash provided by operating activities for year ended December 31, 2012 was $6.3 million compared to cash provided by operating activities of $84.6 million for the year ended December 31, 2011. Adjusting for the funding of the $74 million settlement of the private securities class actions, cash provided by operating activities in 2012 was $80.3 million.

CONFERENCE CALL

ArthroCare will hold a conference call with the financial community to present these results at 8:30 a.m. ET/5:30 a.m. PT on Thursday, February 14, 2013. To participate in the live conference call dial 800-763-5654. 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 21648357. The replay will remain available through February 28, 2013.

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 impact upon the Company’s operations of legal compliance matters which may require improvement and remediation; the ability of the Company to control expenses relating to legal or compliance matters; 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 results of the civil investigation by the Department of Justice related to the Civil Investigative Demand we received arising under the False Claims Act; the possibility that the Department of Justice could institute civil proceedings against us, based on the results of the investigation related to the Civil Investigative Demand; the risk that we could be subject to qui tam suits involving the False Claims Act; the possibility that the Department of Justice could institute a criminal enforcement action against us based on the results of the civil investigation related to the Civil Investigative Demand; the resolution of any litigation related to the civil investigation; 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 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)
December 31,

2012

December 31,

2011

ASSETS
Current assets:
Cash and cash equivalents $ 218,787 $ 219,605
Accounts receivable, net of allowances of $1,565 and $2,251 at 2012 and 2011, respectively 48,881 51,350
Inventories, net 48,417 35,761
Deferred tax assets 20,090 40,622
Prepaid expenses and other current assets 6,022 5,532
Total current assets 342,197 352,870
Property and equipment, net 30,461 35,769
Intangible assets, net 1,859 5,457
Goodwill 119,893 119,159
Deferred tax assets 23,206 18,159
Other assets 2,171 1,587
Total assets $ 519,787 $ 533,001
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,189 $ 15,258
Accrued liabilities 41,674 112,586
Deferred tax liabilities 33

-

Deferred revenue 285

742

Income tax payable 286 1,542
Total current liabilities 54,467 130,128
Deferred tax liabilities 354 29
Other non-current liabilities 20,200 18,922
Total liabilities 75,021 149,079
Commitments and contingencies (Notes 9 and 10)
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;
Issued and outstanding: 75 shares at December 31, 2012 and December 31, 2011; Redemption
value: $87,089 80,759 77,184
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: 31,949 and 31,523;

Outstanding: 27,977 and 27,562 shares at December 31, 2012 and 2011, respectively

28 28
Treasury stock: 3,942 and 3,968 shares at December 31, 2012 and 2011, respectively (106,425 ) (107,126 )
Additional paid-in capital 413,660 400,580

Accumulated other comprehensive income

5,300 4,615
Retained earnings 51,444 8,641
Total stockholders' equity 364,007 306,738
Total liabilities, redeemable convertible preferred stock and stockholders' equity $ 519,787 $ 533,001
ARTHROCARE CORPORATION

Condensed Consolidated Statements of Comprehensive Income - Unaudited

(in thousands, except per share data)
Three Months EndedYear Ended
December 31,December 31,
2012201120122011
Revenues:
Product sales $ 92,223 $ 88,455 $ 350,671 $ 338,319
Royalties, fees and other 4,713 3,957 17,783 16,566
Total revenues 96,936 92,412 368,454 354,885
Cost of product sales 27,741 27,144 107,951 103,314
Gross profit 69,195 65,268 260,503 251,571
Operating expenses:
Research and development 8,469 7,472 32,146 28,932
Sales and marketing 29,910 27,497 116,127 108,621
General and administrative 8,379 8,697 33,212 35,069
Amortization of intangible assets 857 1,319 4,857 5,291
Exit costs - 2,996 (778 ) 8,300
Investigation and restatement-related costs 6,442 68,680 10,805 80,825
Total operating expenses 54,057 116,661 196,369 267,038

Income (loss) from operations

15,138 (51,393 ) 64,134 (15,467 )
Interest and other income (expense), net 151 (670 ) (427 ) (1,331 )

Income (loss) from continuing operations before income taxes

15,289 (52,063 ) 63,707 (16,798 )

Income tax provision (benefit)

4,118 (23,662 ) 17,329 (13,985 )

Net income (loss) from continuing operations

11,171 (28,401 ) 46,378 (2,813 )
Income from discontinued operations, net of taxes - - - 1,911

Net income (loss)

11,171 (28,401 ) 46,378 (902 )

Accrued dividend and accretion charges on Series A

3% Redeemable Convertible Preferred Stock (909 ) (870 ) (3,575 ) (3,416 )

Net income (loss) available to common stockholders

10,262 (29,271 ) 42,803 (4,318 )
Other comprehensive income
Foreign currency translation adjustments 120

(1,416

)

685 369

Total comprehensive income (loss)

$ 11,291 $

(29,817

) $ 47,063 $ (533 )

Weighted average shares outstanding:

Basic 27,912 27,525 27,752 27,382
Diluted 28,341 27,525 28,454 27,382

Earnings (loss) per share from continuing operations

applicable to common stockholders:
Basic $

0.30

$ (1.06 ) $ 1.28 $ (0.23 )
Diluted $

0.30

$ (1.06 ) $ 1.25 $ (0.23 )

Earnings (loss) per share applicable to common stockholders:

Basic $ 0.30 $ (1.06 ) $ 1.28 $ (0.16 )
Diluted $ 0.30 $ (1.06 ) $ 1.25 $ (0.16 )
ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales - Unaudited
(in thousands)
Three Months EndedThree Months Ended
December 31, 2012December 31, 2011
AmericasInternational

Total
Product
Sales

% Net
Product
Sales

AmericasInternational

Total
Product
Sales

% Net
Product
Sales

Sports medicine $ 41,298 $ 22,274 $ 63,572 68.9 % $

42,030

$

20,350

$

62,380

70.5

%
ENT 19,895 6,205 26,100 28.3 %

19,077

4,526

23,603

26.7

%
Other 508 2,043 2,551 2.8 %

583

1,889

2,472

2.8

%
Total product sales $ 61,701 $ 30,522 $ 92,223 100.0 % $

61,690

$

26,765

$

88,455

100.0 %
Year EndedYear Ended
December 31, 2012December 31, 2011
AmericasInternational

Total
Product
Sales

% Net
Product
Sales

AmericasInternational

Total
Product
Sales

% Net
Product
Sales

Sports medicine $ 155,164 $ 80,631 $ 235,795 67.3 % $ 149,010 $ 79,337 $ 228,347 67.5 %
ENT 82,880 22,835 105,715 30.1 % 81,810 18,429 100,239 29.6 %
Other 1,831 7,330 9,161 2.6 % 2,785 6,948 9,733 2.9 %
Total product sales $ 239,875 $ 110,796 $ 350,671 100.0 % $ 233,605 $ 104,714 $ 338,319 100.0 %
ARTHROCARE CORPORATION

Reconciliation of Income from Operations to Adjusted Income from Operations - unaudited

(in thousands)
Quarter ended December 31,Year ended December 31,
2012201120122011
Income from operations $ 15,138 $ (51,393 ) $ 64,134 $ (15,467 )
Investigation and restatement-related costs 6,442 68,680 10,805 80,825
Non-GAAP adjusted income from operations 21,580 17,287 74,939 65,358
Total revenues $ 96,936 $ 92,412 $ 368,454 $ 354,885
Non-GAAP Adjusted Operating Margin 22.3 % 18.7 % 20.3 % 18.4 %

Contacts:

ArthroCare Corp.
Misty Romines, 512-391-3902
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