ArthroCare Reports Second Quarter 2011 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 second quarter ended June 30, 2011 as follows:

SECOND QUARTER 2011 HIGHLIGHTS

Total revenues of $91.3 million from continuing operations
Income from operations of $15.0 million, or operating margin of 16.4 percent
Net income available to common stockholders of $11.5 million, or $0.34 per diluted share

REVENUE

Total revenue from continuing operations for the second quarter of 2011 was $91.3 million, compared to $87.2 million for the second quarter of 2010, an increase of $4.1 million.

Sports Medicine product sales were $57.2 million in the second quarter of 2011 compared to $54.7 million in the same period in 2010, or an increase of $2.4 million. Product sales from the Companya�s International markets increased $3.8 million, which was partially offset by a $1.5 million decrease in contract manufactured product sales.

ENT product sales increased $2.3 million, or 9.0 percent, in the second quarter of 2011 compared to the same period of 2010, a result of an increase in product sales related to the Companya�s Rapid Rhino^� product line and new Coblation products, as well as increased product volume across all geographies in the Companya�s International markets.

Other product sales declined $0.8 million in the second quarter of 2011 compared to the same period of 2010.

Had the same foreign currency rates been in effect in the quarter ended June 30, 2011 as were in effect in the second quarter of 2010, the U.S. dollar reported value of product sales would have been lower by $2.9 million for the quarter ended June 30, 2011.

GROSS PRODUCT MARGIN

Gross product margin was 70.2 percent for the second quarter of 2011 compared to 65.9 percent for the second quarter of 2010. Inventory obsolescence charges in the second quarter of 2010 were $1.1 million higher than in the second quarter of 2011.

INCOME FROM OPERATIONS

Income from operations for the second quarter of 2011 was $15.0 million compared to $12.6 million for the same period in 2010, an increase of $2.4 million.

Gross profit was $6.6 million higher in the second quarter of 2011, a result of higher revenue and higher gross product margin as discussed above.

Offsetting the improvement in operating profit from higher gross profit was a $4.1 million increase in operating expenses in the second quarter of 2011 compared to the same period in 2010. The Company incurred exit costs of $2.5 million during the second quarter of 2011, primarily related to one-time compensation benefits offered to certain employees at the Companya�s Sunnyvale, California facility. General and administrative expenses increased $1.3 million during the quarter ended June 30, 2011 compared to the second quarter of 2010, primarily due to accelerated amortization of leasehold improvement costs associated with the facilities affected by the relocation of the Sunnyvale, California activities and increased legal fees associated with indemnification agreements for certain former executives of the Company. Investigation and restatement related costs increased $1.7 million during the second quarter of 2011 compared to the same period in 2010. Investigation and restatement related expenses in the second quarter of 2010 were reduced by insurance recoveries for legal fees of $0.6 million.

The above increases in operating expenses were partially offset by a $1.8 million decrease in research and development (R&D) costs incurred during the quarter ended June 30, 2011 compared to the same period in 2010 as a higher proportion of the Companya�s engineering activities were associated with the manufacturing process in the second quarter of 2011, which increased the allocation of R&D costs to inventory and cost of goods sold.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

In the second quarter of 2011, net income applicable to common stockholders was $11.5 million or $0.34 per diluted share, compared to $7.3 million, or $0.22 per diluted share, for the second quarter of 2010. For the quarter ended June 30, 2011, net income available to common stockholders includes $1.6 million in income from discontinued operations, which includes a $1.3 million after-tax gain from the sale of the related assets.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents increased $52.4 million to $184.9 million as of June 30, 2011 from $132.5 million at December 31, 2010. Cash flows provided by operating activities for the six months ended June 30, 2011 was $44.0 million compared to $32.4 million for the six months ended June 30, 2010. As of June 30, 2011, net inventory balances decreased approximately $2.6 million and accounts receivable decreased $0.9 million from December 31, 2010.

CONFERENCE CALL

ArthroCare will hold a conference call to present these results Thursday, August 4, 2011, at 8:30 a.m. ET/5:30 a.m. PT to review the results. To participate in the live conference call dial 800-926-6185. 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 21533651. The replay will remain available through August 18, 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 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
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except par value data)
			June 30, 2011			December 31, 2010

ASSETS
Current assets:
	Cash and cash equivalents		$	184,900		$	132,536
	Accounts receivable, net of allowances of $2,265 and $2,445 at June 30, 2011 and December 31, 2010, respectively			47,968			48,870
	Inventories, net			31,500			34,087
	Deferred tax assets			18,075			24,661
	Prepaid expenses and other current assets			6,404			4,424
	Assets held for sale			-			3,081
		Total current assets		288,847			247,659

Property and equipment, net				38,438			41,582
Intangible assets, net				8,137			10,733
Goodwill				119,490			119,020
Deferred tax assets				16,019			16,019
Other assets				1,693			4,182
		Total assets	$	472,624		$	439,195

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	12,168		$	13,819
	Accrued liabilities			40,914			40,197
	Deferred tax liabilities			149			149
	Income tax payable			1,308			1,555
		Total current liabilities		54,539			55,720

Deferred tax liabilities				233			213
Other non-current liabilities				12,916			13,766
		Total liabilities		67,688			69,699

Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;
Issued and outstanding: 75 shares at June 30, 2011 and December 31, 2010; Redemption value $87,089				75,457			73,768

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: 31,424 and 31,102 shares;
	Outstanding: 27,446 and 27,112 shares at June 30, 2011 and December 31, 2010, respectively			27			27
	Treasury stock: 3,978 shares at June 30, 2011 and 3,990 shares December 31, 2010			(107,577	)		(107,899	)
	Additional paid-in capital			395,409			386,395
	Accumulated other comprehensive income			5,280			4,246
	Retained earnings			36,340			12,959
		Total stockholders' equity		329,479			295,728
		Total liabilities, redeemable convertible preferred stock and stockholders' equity	$	472,624		$	439,195


ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
	Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010

Revenues:
Product sales	$	86,925		$	83,066		$	170,432		$	168,231
Royalties, fees and other		4,349			4,113			8,774			8,062
Total revenues		91,274			87,179			179,206			176,293

Cost of product sales		25,897			28,358			50,641			54,937

Gross profit		65,377			58,821			128,565			121,356
Operating expenses:
Research and development		6,613			8,414			13,423			17,029
Sales and marketing		27,274			26,887			55,372			53,742
General and administrative		10,426			9,107			19,614			18,362
Amortization of intangible assets		1,323			1,302			2,634			2,617
Exit costs		2,490			-			2,490			-
Investigation and restatement related costs		2,257			528			3,461			1,571
Total operating expenses		50,383			46,238			96,994			93,321

Income from operations		14,994			12,583			31,571			28,035
Foreign exchange gain (loss)		78			(1,075	)		742			(4,035	)
Interest and other expense, net		(201	)		(89	)		(375	)		(190	)
Other income (expense)		(123	)		(1,164	)		367			(4,225	)

Income from continuing operations before income taxes		14,871			11,419			31,938			23,810

Income tax provision		4,171			3,134			8,779			6,448

Net income from continuing operations		10,700			8,285			23,159			17,362

Income (loss) from discontinued operations		1,600			(203	)		1,911			(453	)

Net income		12,300			8,082			25,070			16,909

Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock		(849	)		(812	)		(1,689	)		(1,614	)

Net income available to common stockholders	$	11,451		$	7,270		$	23,381		$	15,295

Weighted average shares outstanding:Weighted-average shares outstanding:
Basic		27,338			26,976			27,267			26,958
Diluted		27,789			27,352			27,702			27,295

Earnings per share from continuing operations applicable to common stockholders:
Basic	$	0.30		$	0.23		$	0.65		$	0.48
Diluted	$	0.29		$	0.22		$	0.64		$	0.47

Earnings per share applicable to common stockholders:
Basic	$	0.35		$	0.22		$	0.71		$	0.47
Diluted	$	0.34		$	0.22		$	0.70		$	0.46


ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales
(in thousands)

	Three Months Ended								Three Months Ended
	June 30, 2011								June 30, 2010
	Americas		International		Total Product Sales		% Net Product Sales		Americas		International		Total Product Sales		% Net Product Sales


Sports Medicine	$	36,348	$	20,808	$	57,156	65.7	%	$	37,701	$	17,010	$	54,711	65.9	%
ENT		22,650		4,785		27,435	31.6	%		21,196		3,979		25,175	30.3	%
Other		859		1,475		2,334	2.7	%		1,137		2,043		3,180	3.8	%
Total Product Sales	$	59,857	$	27,068	$	86,925	100.0	%	$	60,034	$	23,032	$	83,066	100.0	%



	Six Months Ended								Six Months Ended
	June 30, 2011								June 30, 2010
	Americas		International		Total Product Sales		% Net Product Sales		Americas		International		Total Product Sales		% Net Product Sales


Sports Medicine	$	73,729	$	40,136	$	113,865	66.8	%	$	82,092	$	33,068	$	115,160	68.4	%
ENT		42,687		9,052		51,739	30.4	%		39,611		7,309		46,920	27.9	%
Other		1,545		3,283		4,828	2.8	%		2,100		4,051		6,151	3.7	%
Total Product Sales	$	117,961	$	52,471	$	170,432	100.0	%	$	123,803	$	44,428	$	168,231	100.0	%

Contributing Sources

Market Wire

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ArthroCare Reports Second Quarter 2011 Financial Results