ArthroCare Reports First Quarter 2010 Financial Results

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AUSTIN, Texas, May 05, 2010 (BUSINESS WIRE) –ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the first quarter ended March 31, 2010 as follows:

FIRST QUARTER 2010 HIGHLIGHTS

  • First quarter 2010 total revenue of $90.6 million
  • Product margin of 68.9 percent
  • Operating income of $15.1 million
  • Net income available to common stockholders of $8.0 million, or $0.24 per diluted share

REVENUE

Total revenue for the first quarter of 2010 was $90.6 million, compared to $78.8 million for the first quarter of 2009. Product sales increased in both the Company’s core Sports Medicine and ENT businesses and across all geographies. Sports Medicine product sales for the Americas included the recognition of $6.6 million of product sales from prior periods that were deferred pending resolution of certain contract issues with customers which were resolved in the first quarter. Additionally, product sales increased due to higher contract manufacturing volume.

Product sales in the first quarter of 2010 increased by $3.1 million in the Company’s direct International markets while sales to distributors, a significant portion of which were in U.S. dollars, decreased by $0.9 million when compared to the first quarter of 2009. Product sales were also affected by changes in foreign exchange rates used to translate foreign currency sales from international markets to the Company’s U.S. dollar reporting currency. Changes in exchange rates increased the U.S. dollar reported value by approximately $1.8 million.

PRODUCT MARGIN

Product margin was 68.9 percent for the first quarter of 2010 compared to 71.2 percent for the first quarter of 2009. Product margin was lower due to adjustments made to the carrying value of inventory for excess and obsolete items and higher royalty costs incurred in the first quarter of 2010 as a result of the arbitration matter involving Gyrus and Ethicon. The deferred revenue recognized in the first quarter of 2010 increased net product margin by $4.2 million. Additionally, product margin for the first quarter of 2010 was impacted by higher contract manufactured product sales, which generally realize lower margins.

INCOME (LOSS) FROM OPERATIONS

Income from operations for the first quarter of 2010 was $15.1 million compared to a loss from operations of $3.5 million for the same period in 2009. Investigation and restatement related expenses were $1.0 million in the first quarter of 2010 compared to $8.7 million in the first quarter of 2009. Sales and marketing and general and administrative expenses declined by a combined $4.8 million compared to the first quarter of 2009, and include a reduction to stock compensation expense of $1.1 million to correct errors in prior periods. The remaining decrease in sales and marketing expense is associated with the Company’s continued initiatives to improve the cost-effectiveness of its sales and marketing efforts. The remaining decrease in general and administrative expense is attributable to lower legal fees associated with the completion of the arbitration matter involving Gyrus and Ethicon in December 2009. Additionally, contract manufactured products and the deferred revenues realized in the period did not incur direct sales and marketing costs, such as commission expense.

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

In the quarter ended March 31, 2010, the Company recorded charges of $0.8 million related to its Series A Redeemable Convertible 3% Preferred Stock issued on September 1, 2009. After these charges, first quarter 2010 net income available to common stockholders was $8.0 million, or $0.24 per diluted share, compared to a net loss of $6.5 million, or ($0.24) per share, for the first quarter of 2009.

BALANCE SHEET AND CASH FLOWS

Cash, cash equivalents, restricted cash equivalents, and investments increased $7.9 million to $65.3 million as of March 31, 2010 from $57.4 million at December 31, 2009. Cash flows provided by operating activities for the quarter ended March 31, 2010 was $11.2 million compared to $8.6 million for the quarter ended March 31, 2009. The Company continues to focus on working capital efficiency, process improvements, and cash conversion. Net inventory balances decreased approximately $1.5 million and accounts receivable decreased $2.2 from December 31, 2009.

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, May 6, 2010. To participate in the live conference call dial 800-785-6380. 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 21468493. The replay will remain available through May 20, 2010.

ABOUT ARTHROCARE

Founded in 1993, ArthroCare Corp. is a highly innovative, multi-business medical device company that develops, manufactures, and markets minimally invasive surgical products. With these products, ArthroCare targets a multi-billion dollar market across several medical specialties, significantly improving existing surgical procedures and enabling new, minimally invasive procedures. Many of ArthroCare’s products are based on its patented Coblation(R) technology, which uses low-temperature radiofrequency energy to gently and precisely dissolve rather than burn soft tissue — minimizing damage to healthy tissue. Used in surgeries worldwide, Coblation-based devices have been developed and marketed for sports medicine; spine/neurologic; ear, nose and throat (ENT); cosmetic; urologic; and gynecologic procedures. ArthroCare also has added a number of other technologies to its portfolio, including Opus Medical sports medicine, Parallax spine and Applied Therapeutics ENT products, to complement Coblation within key indications.

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 ability of the Company to fulfill its obligations with respect to the rights of the holders of the Series A Convertible Preferred Stock, including but not limited to the redemption rights and registration rights of the holders of the Series A Convertible Preferred Stock; 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 investigations being conducted by the Staff of the Division of Enforcement of the Securities and Exchange Commission and 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)
March 31, 2010 December 31,
2009
ASSETS
Current assets:
Cash and cash equivalents $ 65,252 $ 57,386
Accounts receivable, net of allowances of $3,716 and $4,069 at March 31, 2010 and December 31, 2009, respectively 43,631 45,789
Inventories, net 47,153 48,628
Deferred tax assets 10,040 12,983
Prepaid expenses and other current assets 4,535 6,563
Total current assets 170,611 171,349
Property and equipment, net 46,572 47,386
Intangible assets, net 16,405 17,975
Goodwill 118,748 119,076
Deferred tax assets 30,526 30,526
Other assets 4,723 4,816
Total assets $ 387,585 $ 391,128
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 15,562 $ 14,299
Accrued liabilities 33,457 46,077
Deferred tax liabilities 17 3
Deferred revenue 4,508
Income tax payable 195
Total current liabilities 49,036 65,082
Deferred tax liabilities 294 303
Other non-current liabilities 4,822 4,844
Total liabilities 54,152 70,229
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;
Issued and outstanding: 75 shares at March 31, 2010 and December 31, 2009; Redemption
value: $87,089 71,306 70,504
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 and outstanding:
26,959 shares at March 31, 2010 and 26,886 shares at December 31, 2009 27 27
Treasury stock: 4,012 shares at March 31, 2010 and 4,019 shares at December 31, 2009 (108,534 ) (108,724 )
Additional paid-in capital 380,734 379,921
Accumulated other comprehensive income 3,547 1,645
Accumulated deficit (13,647 ) (22,474 )
Total stockholders’ equity 262,127 250,395
Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 387,585 $ 391,128
ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations – Unaudited
(in thousands, except per share data)
Three Months EndedMarch 31,
2010 2009 Variance
Revenues:
Product sales $ 86,617 $ 75,568 $ 11,049
Royalties, fees and other 3,994 3,222 772
Total revenues 90,611 78,790 11,821
Cost of product sales 26,933 21,796 5,137
Gross profit 63,678 56,994 6,684
Operating expenses:
Research and development 9,150 8,362 788
Sales and marketing 27,820 29,666 (1,846 )
General and administrative 8,982 11,948 (2,966 )
Amortization of intangible assets 1,567 1,586 (19 )
Investigation and restatement related costs 1,043 8,724 (7,681 )
Reimbursement services 21 168 (147 )
Total operating expenses 48,583 60,454 (11,871 )
Income (loss) from operations 15,095 (3,460 ) 18,555
Interest and other expense, net (101 ) (1,192 ) 1,091
Foreign exchange loss, net (2,960 ) (146 ) (2,814 )
Interest and other expense, net (3,061 ) (1,338 ) (1,723 )
Income (loss) before income taxes 12,034 (4,798 ) 16,832
Income tax provision 3,207 1,709 1,498
Net income (loss) 8,827 (6,507 ) 15,334
Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock (802 ) (802 )
Net income (loss) available to common stockholders $ 8,025 $ (6,507 ) $ 14,532
Weighted average shares outstanding:
Basic 26,922 26,746
Diluted 27,221 26,746
Earnings (loss) per common share:
Basic $ 0.25 $ (0.24 )
Diluted $ 0.24 $ (0.24 )
ARTHROCARE CORPORATION
Supplemental schedule of Product Sales
(in thousands)
Three Months Ended Three Months Ended
March 31, 2010 March 31, 2009
Americas International Total
Product
Sales
% Net
Product
Sales
Americas International Total
Product
Sales
% Net
Product
Sales
Sports Medicine $ 44,391 $ 16,058 $ 60,449 69.8 % $ 35,829 $ 14,345 $ 50,174 66.4 %
ENT 18,415 3,330 21,745 25.1 % 17,307 2,932 20,239 26.8 %
Spine 2,281 2,142 4,423 5.1 % 3,128 2,027 5,155 6.8 %
Total Product Sales $ 65,087 $ 21,530 $ 86,617 100.0 % $ 56,264 $ 19,304 $ 75,568 100.0 %

SOURCE: ArthroCare Corp.

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