ArthroCare Reports Fourth Quarter and Full Year 2010 Financial Results

AUSTIN, Texas--([ BUSINESS WIRE ])--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, 2010, as follows:

"Loss from discontinued operations, net of taxes"

FOURTH QUARTER 2010 HIGHLIGHTS

Total revenue of $92.6 million from continuing operations
Product margin of 69.0 percent
Operating income of $14.8 million, or operating margin of 15.9 percent
Net income applicable to common stockholders of $10.1 million, or $0.30 per diluted share

FULL YEAR 2010 HIGHLIGHTS

Total revenue of $355.4 million from continuing operations
Product margin of 67.3 percent
Operating income of $54.3 million, or operating margin of 15.3 percent
Net income applicable to common stockholders of $33.8 million, or $1.02 per diluted share

In the fourth quarter of 2010, management determined that the Companya�s non-Coblation spine products met the criteria under generally accepted accounting principles to be reported as discontinued operations. The Companya�s non-Coblation spine products consist of its Parallax and Contour product lines. As a result of this determination, reported product sales for the years ended December 31, 2010 and 2009 have been reduced by $5.9 million and $7.5 million, respectively and product sales in the fourth quarter of 2010 and 2009 have been reduced by $1.3 million and $1.6 million, respectively. The impact from these discontinued product lines on the Companya�s current and previously reported net income (loss) in all periods is separately reported as aLoss from discontinued operations, net of taxesa in its Consolidated Statements of Operations. Net assets of $3.1 million identifiable with these discontinued product lines is reported in the Companya�s December 31, 2010 Consolidated Balance Sheet as aAssets held for sale.a

REVENUE

Total revenue from continuing operations for the fourth quarter of 2010 was $92.6 million, compared to $90.9 million for the fourth quarter of 2009.

Sports Medicine product sales increased $0.8 million, or 1.3 percent, in the fourth quarter of 2010 compared to the same period in 2009. Products sales increased $2.4 million in International markets, partially offset by declines of $0.4 million, or 1.0 percent, in the Companya�s proprietary product sales in the Americas and $1.3 million in contract manufacturing volume pursuant to the Companya�s existing supply and distribution agreement with Smith & Nephew.

ENT product sales increased $2.8 million, or 13.2 percent, in the fourth quarter of 2010 compared to the same period of 2009, as a result of increased Coblation product sales volumes, increased Rapid Rhino product sales volumes, and higher average sales prices in the Americas. International product sales increased, particularly due to increased market penetration in the Asia Pacific region.

Other product sales, which consist principally of spine product sales, declined $0.8 million in the fourth quarter of 2010 compared to the same period of 2009.

Had the same foreign currency rates been in effect in the quarter ended December 31, 2010 as were in effect in the same quarter in 2009, the U.S. dollar reported value of product sales would have been lower by $0.7 million for the quarter ended December 31, 2010.

Total revenue from continuing operations for the full year in 2010 was $355.4 million, compared to $324.1 million for 2009.

Product sales in Sports Medicine increased $22.3 million, or 10.6 percent, for the year ended December 31, 2010 compared to 2009. Contract manufacturing sales pursuant to the Companya�s supply and distribution agreement with Smith & Nephew increased $13.2 million. 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 of 2010. Excluding the impact from recognition of deferred revenue, Americas Sports Medicine proprietary product sales declined $6.1 million, or 4.2 percent. Approximately half of this decline is attributed to lower volume due to an overall slowdown in the underlying Sports Medicine procedure utilization in the United States and half related to lower average sales prices. The decline in the Americas was offset by higher International product sales, which increased $8.6 million, or 13.7 percent in 2010 compared to 2009, primarily due to volume increases in the Companya�s direct markets.

ENT product sales increased $8.6 million, or 10.1 percent, in 2010 compared to 2009 as a result of increased Coblation product sales volumes, increased Rapid Rhino product sales volumes and higher average sales prices in the Americas. International product sales increased due to market penetration expansion, particularly in the Asia Pacific region.

Other product sales declined $0.6 million in 2010 compared to 2009.

During the year ended December 31, 2010, changes in foreign currency rates did not have a material effect on the comparison of 2010 product sales to 2009.

GROSS PRODUCT MARGIN

Gross product margin was 69.0 percent and 71.2 percent for the fourth quarters of 2010 and 2009, respectively, and 67.3 percent and 70.5 percent for the years ended December 31, 2010 and 2009, respectively. Gross product margin in the fourth quarter of 2010 was lower than the fourth quarter of 2009 due to charges recorded to reduce the carrying value of inventory as the Company chose to de-emphasize certain handhelds and instrumentation sets associated with its Sports Medicine Atlantech product line.

Gross product margin for the full year of 2010 was lower than 2009 due to a higher proportion of contract manufactured product sales, which generally realize lower product margins, and adjustments made to the carrying value of inventory, such as discussed above.

INCOME FROM OPERATIONS

Income from operations for the fourth quarter of 2010 was $14.8 million compared to $10.7 million for the same period in 2009. The increase was the result of lower investigation and restatement related expenses, partially offset by charges recorded to further restructure the Companya�s spine marketing and distribution organization in the Americas.

For the full year in 2010, income from operations was $54.3 million compared to income from operations of less than $0.1 million for 2009. The increase was the result of higher revenue and lower operating expenses. Investigation and restatement related expenses were $28.8 million lower and sales and marketing and general and administrative expenses declined by $6.7 million and $7.5 million, respectively, in 2010 compared to 2009. The decrease in sales and marketing expenses was a result of lower product demonstration costs, a decrease in bad debt allowance requirements due to improved cash collections of accounts receivable, and a decline in sales expenses associated with the Companya�s spine products following an initial restructuring of its Americas sales organization in 2009. Moreover, contract manufactured product sales did not incur direct sales and marketing costs, such as commission expense. The reduction in general and administrative expenses was a result of lower legal fees after the completion of the arbitration matter involving Gyrus and Ethicon in December 2009.

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

In the fourth quarter of 2010, net income applicable to common stockholders was $10.1 million or $0.31 per diluted share, compared to $7.1 million, or $0.21 per diluted share, for the fourth quarter of 2009.

For the year ended December 31, 2010, net income applicable to common stockholders was $33.8 million, or $1.02 per diluted share, compared to a loss for the year ended December 31, 2009 of $33.8 million, or ($1.26) per share.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents increased $75.1 million to $132.5 million as of December 31, 2010 from $57.4 million at December 31, 2009.

Cash flows provided by operating activities for the year ended December 31, 2010 was $82.6 million compared to $19.5 million for the year ended December 31, 2009. Accounts receivable, net increased $3.1 million and net inventory balances decreased approximately $14.5 million from December 31, 2009.

CONFERENCE CALL

ArthroCare will hold a conference call to present these results at 8:30 a.m. ET/5:30 a.m. PT to review the results. To participate in the live conference call dial 800-945-8198. A live and on-demand webcast of the call will be available on ArthroCarea�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 21510984. The replay will remain available through February 28, 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 ArthroCarea�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 Section21E 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 SeriesA Convertible Preferred Stock, including but not limited to the redemption rights and registration rights of the holders of the SeriesA Convertible Preferred Stock; the resolution of litigation pending against the Company; the Companya�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 Companya�s internal controls; the impact upon the Companya�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 Companya�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 Companya�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 Companya�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
Consolidated Balance Sheets
(in thousands, except par value data)
	December 31, 2010			December 31, 2009

ASSETS
Current assets:
Cash and cash equivalents	$	132,536		$	57,386
Accounts receivable, net of allowances of $2,445 and $4,069 at 2010 and 2009, respectively		48,870			45,789
Inventories, net		34,087			48,628
Deferred tax assets		24,661			12,983
Prepaid expenses and other current assets		4,424			6,563
Assets held for sale		3,081			-
Total current assets		247,659			171,349

Property and equipment, net		41,582			47,386
Intangible assets, net		10,733			17,975
Goodwill		119,020			119,076
Deferred tax assets		16,019			30,526
Other assets		4,182			4,816
Total assets	$	439,195		$	391,128

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	13,819		$	14,299
Accrued liabilities		40,197			46,077
Deferred tax liabilities		149			3
Deferred revenue		-			4,508
Income tax payable		1,555			195
Total current liabilities		55,720			65,082

Deferred tax liabilities		213			303
Other non-current liabilities		13,766			4,844
Total liabilities		69,699			70,229

Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;
Issued and outstanding: 75 shares at 2009 and none at 2008.		73,768			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: 31,102 and 30,905 shares; Outstanding: 27,112 and 26,886 shares, at December 31, 2010 and 2009, respectively		27			27
Treasury stock: 3,990 and 4,019 shares at December 31, 2010 and 2009, respectively		(107,899	)		(108,724	)
Additional paid-in capital		386,395			379,921
Accumulated other comprehensive income		4,246			1,645
Retained earnings (accumulated deficit)		12,959			(22,474	)
Total stockholders' equity		295,728			250,395
Total liabilities, redeemable convertible preferred stock and stockholders' equity	$	439,195		$	391,128


ARTHROCARE CORPORATION
Statement of Operations
(in thousands except per share data)


	Quarters Ended December 31,									Years Ended December 31,
		2010			2009		Variance				2010			2009		Variance

Revenues:
Product sales	$	87,609		$	84,759		$	2,850		$	338,757		$	308,493		$	30,264
Royalties, fees and other		5,024			6,169			(1,145	)		16,622			15,624			998
Total revenues		92,633			90,928			1,705			355,379			324,117			31,262

Cost of product sales		27,182			24,413			2,769			110,751			90,940			19,811
Gross profit		65,451			66,515			(1,064	)		244,628			233,177			11,451
Operating expenses:
Research and development		9,309			8,786			523			35,846			35,203			643
Sales and marketing		27,954			29,323			(1,369	)		107,852			114,539			(6,687	)
General and administrative		11,155			9,978			1,177			38,491			46,034			(7,543	)
Amortization of intangible assets		1,305			1,308			(3	)		5,237			5,309			(72	)
Reimbursement services		22			41			(19	)		92			353			(261	)
Investigation and restatement-related costs		952			6,363			(5,411	)		2,840			31,686			(28,846	)
Total operating expenses		50,697			55,799			(5,102	)		190,358			233,124			(42,766	)

Income from operations		14,754			10,716			4,038			54,270			53			54,217
Other income, net		(102	)		78			(180	)		216			312			(96	)
Interest expense and bank fees		(165	)		(184	)		19			(769	)		(3,757	)		2,988
Foreign exchange gain (loss), net		(599	)		2,814			(3,413	)		(3,311	)		1,233			(4,544	)
Interest and other income (expense), net		(866	)		2,708			(3,574	)		(3,864	)		(2,212	)		(1,652	)
Income (loss) from continuing operations before income taxes		13,888			13,424			464			50,406			(2,159	)		52,565

Income tax provision		2,904			5,550			(2,646	)		12,888			3,137			9,751

Net income (loss) from continuing operations		10,984			7,874			3,110			37,518			(5,296	)		42,814

Loss from discontinued operations, net of taxes		(66	)		(28	)		(38	)		(434	)		(481	)		47

Net income (loss)		10,918			7,846			3,072			37,084			(5,777	)		42,861
Accrued dividend, beneficial conversion feature and accretion charges on Series A 3% Convertible Preferred Stock		(830	)		(793	)		(37	)		(3,264	)		(28,045	)		24,781

Net income (loss) applicable to common stockholders	$	10,088		$	7,053		$	3,073		$	33,820		$	(33,822	)	$	67,642

Weighted-average shares outstanding:Weighted-average shares outstanding:
Basic		27,059			26,857						27,006			26,803
Diluted		27,446			27,024						27,348			26,803

Earnings (loss) per share from continuing operations applicable to common stockholders:
Basic	$	0.31		$	0.22					$	1.04		$	(1.24	)
Diluted	$	0.30		$	0.22					$	1.03		$	(1.24	)
Earnings (loss) per share applicable to common stockholders:
Basic	$	0.31		$	0.22					$	1.03		$	(1.26	)
Diluted	$	0.30		$	0.21					$	1.02		$	(1.26	)


ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales
(in thousands)


	Quarter Ended December 31, 2010						Quarter Ended December 31, 2009
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	38,738	$	21,108	$	59,846	$	40,409	$	18,666	$	59,075
ENT		20,029		4,325		24,354		17,493		4,021		21,514
Other		1,006		2,403		3,409		1,931		2,239		4,170
Total Product Sales	$	59,773	$	27,836	$	87,609	$	59,833	$	24,926	$	84,759



	Year Ended December 31, 2010						Year Ended December 31, 2009
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	160,859	$	71,120	$	231,979	$	147,169	$	62,533	$	209,702
ENT		79,019		15,270		94,289		72,375		13,299		85,674
Other		4,122		8,367		12,489		5,231		7,886		13,117
Total Product Sales	$	244,000	$	94,757	$	338,757	$	224,775	$	83,718	$	308,493

N@N

ArthroCare Reports Fourth Quarter and Full Year 2010 Financial Results