ArthroCare Reports Third Quarter 2012 Financial Results

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ArthroCare Reports Third Quarter 2012 Financial Results

AUSTIN, Texas--(BUSINESS WIRE)-- ArthroCare Corp. (NAS: ARTC) , a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the third quarter ended September 30, 2012.

THIRD QUARTER 2012 HIGHLIGHTS

  • Total revenue of $86.9 million.
  • Income from operations of $13.7 million, or operating margin of 15.7 percent.
  • Net income available to common stockholders of $9.1 million, or $0.27 per diluted share.

REVENUE

Total revenue for the third quarter of 2012 was $86.9 million, compared to $83.3 million for the third quarter of 2011, an increase of 4.4 percent.

Product sales for the third quarter of 2012 were $82.6 million compared to $79.4 million in the third quarter of 2011, an increase of 4.0 percent. Product sales increased 5.8 percent in constant currency over the same quarter of the prior year.

Worldwide sales of Sports Medicine products increased $3.1 million, or 5.9 percent. In constant currency, Sports Medicine product sales increased 8.1 percent this quarter when compared to the same quarter in 2011. For the quarter ended September 30, 2012, contract manufacturing product sales under our supply agreement with Smith and Nephew increased $2.0 million, or 42.2 percent, and proprietary Sports Medicine product sales increased $1.4 million, or 5.5 percent. The increase in Americas proprietary Sports Medicine sales in the quarter was due to unit volume increases due to recent Coblation® and fixation new product introductions as well as increased sales of knee wands resulting from our knee initiative. International Sports Medicine product sales decreased $0.4 million, or 2.3 percent, in the third quarter of 2012 compared to the same period in 2011. The decrease was the result of the translation effect of a stronger U.S. dollar against the euro, British pound and Australian dollar, partially offset by higher sales volumes primarily in direct markets.

Worldwide ENT product sales increased $0.6 million, or 2.5 percent. In constant currency, ENT product sales increased 3.2 percent in the third quarter of 2012 as compared to the same quarter of 2011. Americas ENT product sales decreased $0.4 million or 1.8 percent as a decrease in Coblation sales volumes was partially offset by higher average selling prices and higher sales volumes of our Rapid Rhino® products. International ENT product sales increased $1.0 million, or 20.5 percent, as a result of higher product sales in direct and distributor markets, with the exception of southern European and Middle Eastern distributor markets.

Other product sales decreased $0.6 million in the third quarter of 2012 compared to the same quarter of 2011.

Across all product areas International product sales increased $0.3 million, or 1.3 percent in the third quarter of 2012 as compared to the same quarter of 2011. Had the same foreign currency rates been in effect in the quarter ended September 30, 2012 as were in effect in the third quarter in 2011, the U.S. dollar reported value of product sales would have been higher by $1.4 million for this quarter.

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.

GROSS PRODUCT MARGIN

Gross product margin as a percentage of product sales was 68.3 percent for the third quarter of 2012 compared to 67.9 percent for the third quarter of 2011.

INCOME FROM OPERATIONS

Income from operations for the third quarter of 2012 was $13.7 million compared to $4.4 million for the same period in 2011. Operating margin for the third quarter of 2012 was 15.7 percent compared to 5.2 percent for the same period 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 2.5 percent and 7.2 percent of total revenue for the third quarters of 2012 and 2011, respectively, and Adjusted Operating Margin was 18.2 percent and 12.4 percent for these same periods. 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.

Total operating expenses were $47.1 million in the third quarter of 2012 compared to $53.4 million in the third quarter of 2011. Exit costs decreased $2.8 million and investigation and restatement costs decreased $3.8 million in this quarter as compared to the third quarter of 2011. Sales and marketing expenses increased $1.4 million, to 31.2 percent of total revenues this quarter compared to 30.9 percent for the same quarter of 2011.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Earnings per share from continuing operations applicable to common stockholders was $0.27 per diluted share in the third quarter of 2012 compared to $0.05 per diluted share in the third quarter of 2011.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $203.2 million as of September 30, 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 $57.6 million during the nine months ended September 30, 2012. Cash used in operating activities for the nine months ended September 30, 2012 was $10.6 million compared to cash provided by operating activities of $69.8 million for the nine months ended September 30, 2011. Adjusting for the funding of the $74 million settlement of the private securities class actions, cash provided by operating activities in the first nine months of 2012 would have been $63.4 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, November 1, 2012. To participate in the live conference call dial 855-724-2350. 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 21609480. The replay will remain available through November 15, 2012.

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)

September 30,
2012

December 31,
2011

 
ASSETS
Current assets:
Cash and cash equivalents$203,163$219,605

Accounts receivable, net of allowances of $2,002 and $2,251 at September 30, 2012 and December 31, 2011, respectively

41,19651,350
Inventories, net49,59135,761
Deferred tax assets28,32140,622
Prepaid expenses and other current assets 5,136  5,532 
Total current assets327,407352,870
 
Property and equipment, net30,94635,769
Intangible assets, net2,6855,457
Goodwill119,924119,159
Deferred tax assets18,17818,159
Other assets 2,064  1,587 
Total assets$501,204 $533,001 
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$13,665$15,258
Accrued liabilities38,203112,586
Deferred Revenue451742
Deferred tax liabilities76-
Income tax payable -  1,542 
Total current liabilities52,395130,128
 
Deferred tax liabilities29629
Other non-current liabilities 18,976  18,922 
Total liabilities71,667149,079
 

Commitments and contingencies (Notes 6 and 7)

 

Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;

Issued and outstanding: 75 shares at September 30, 2012 and December 31, 2011; Redemption

value: $87,089

79,85077,184
 
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: 31,801 and 31,523 shares
Outstanding: 27,851 and 27,562 shares at September 30, 2012 and December 31, 2011, respectively2828
Treasury stock: 3,950 and 3,968 shares at September 30, 2012 and December 31, 2011, respectively(106,645)(107,126)
Additional paid-in capital409,942400,580
Accumulated other comprehensive income5,1804,615
Retained earnings 41,182  8,641 
Total stockholders' equity 349,687  306,738 
Total liabilities, redeemable convertible preferred stock and stockholders' equity$501,204 $533,001 
    
 
ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
 

Three Months Ended

Nine Months Ended

September 30,September 30,
2012201120122011
 
Revenues:
Product sales$82,602$79,432$258,448$249,864
Royalties, fees and other 4,338  3,835  13,070  12,609 
Total revenues86,94083,267271,518262,473
 
Cost of product sales 26,204  25,529  80,210  76,170 
 
Gross profit60,73657,738191,308186,303
Operating expenses:
Research and development8,1848,03723,67721,460
Sales and marketing27,17525,75286,21781,124
General and administrative8,1919,47924,83326,372
Amortization of intangible assets1,3631,3384,0003,972
Exit costs-2,814(778)5,304
Investigation and restatement-related costs 2,139  5,963  4,363  12,145 
Total operating expenses 47,052  53,383  142,312  150,377 
 
Income from operations13,6844,35548,99635,926
 
Non-operating gains (losses) 183  (1,028) (578) (661)
 
Income from continuing operations before income taxes13,8673,32748,41835,265
 
Income tax provision 3,882  898  13,211  9,677 
 
Net income from continuing operations9,9852,42935,20725,588
 
Income from discontinued operations, net of taxes -  -  -  1,911 
 
Net income9,9852,42935,20727,499
 

Accrued dividend and accretion charges on Series A

3% Redeemable Convertible Preferred Stock (900) (857) (2,666) (2,546)
 
Net income available to common stockholders9,0851,57232,54124,953
 
Other comprehensive income
Foreign currency translation adjustments 951  751  565  365 
 
Total comprehensive income$10,936 $3,180 $35,772 $27,864 
 

Weighted average shares outstanding:

Basic27,71427,46627,69827,335
Diluted28,08727,85528,09627,755
 
Earnings per share from continuing operations
applicable to common stockholders:
Basic$0.27 $0.05 $0.97 $0.70 
Diluted$0.27 $0.05 $0.96  Read Full Story

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