ArthroCare Reports Third Quarter 2012 Financial Results

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

41,196

51,350

Inventories, net

49,591

35,761

Deferred tax assets

28,321

40,622

Prepaid expenses and other current assets

5,136

5,532

Total current assets

327,407

352,870

Property and equipment, net

30,946

35,769

Intangible assets, net

2,685

5,457

Goodwill

119,924

119,159

Deferred tax assets

18,178

18,159

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 liabilities

38,203

112,586

Deferred Revenue

451

742

Deferred tax liabilities

76

-

Income tax payable

-

1,542

Total current liabilities

52,395

130,128

Deferred tax liabilities

296

29

Other non-current liabilities

18,976

18,922

Total liabilities

71,667

149,079

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

79,850

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: 31,801 and 31,523 shares

Outstanding: 27,851 and 27,562 shares at September 30, 2012 and December 31, 2011, respectively

28

28

Treasury stock: 3,950 and 3,968 shares at September 30, 2012 and December 31, 2011, respectively

(106,645

)

(107,126

)

Additional paid-in capital

409,942

400,580

Accumulated other comprehensive income

5,180

4,615

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,

2012

2011

2012

2011

Revenues:

Product sales

$

82,602

$

79,432

$

258,448

$

249,864

Royalties, fees and other

4,338

3,835

13,070

12,609

Total revenues

86,940

83,267

271,518

262,473

Cost of product sales

26,204

25,529

80,210

76,170

Gross profit

60,736

57,738

191,308

186,303

Operating expenses:

Research and development

8,184

8,037

23,677

21,460

Sales and marketing

27,175

25,752

86,217

81,124

General and administrative

8,191

9,479

24,833

26,372

Amortization of intangible assets

1,363

1,338

4,000

3,972

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 operations

13,684

4,355

48,996

35,926

Non-operating gains (losses)

183

(1,028

)

(578

)

(661

)

Income from continuing operations before income taxes

13,867

3,327

48,418

35,265

Income tax provision

3,882

898

13,211

9,677

Net income from continuing operations

9,985

2,429

35,207

25,588

Income from discontinued operations, net of taxes

-

-

-

1,911

Net income

9,985

2,429

35,207

27,499

Accrued dividend and accretion charges on Series A

3% Redeemable Convertible Preferred Stock

(900

)

(857

)

(2,666

)

(2,546

)

Net income available to common stockholders

9,085

1,572

32,541

24,953

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:

Basic

27,714

27,466

27,698

27,335

Diluted

28,087

27,855

28,096

27,755

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