ArthroCare Reports First Quarter 2011 Financial Results

AUSTIN, Texas--()--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, 2011 as follows:

FIRST QUARTER 2011 HIGHLIGHTS

  • Total revenue of $87.9 million from continuing operations
  • Income from operations of $16.6 million, or operating margin of 18.9 percent
  • Net income available to common stockholders of $11.9 million, or $0.36 per diluted share

REVENUE

Total revenue from continuing operations for the first quarter of 2011 was $87.9 million, compared to $89.1 million for the first quarter of 2010.

Sports Medicine product sales were $56.7 million in the first quarter of 2011 compared to $60.4 million in the same period in 2010. In the first quarter of 2010, 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. Excluding the impact from the deferred revenue recognized in the first quarter of 2010, Sports Medicine product sales increased $2.9 million, or 5.3 percent, in the first quarter of 2011. The $2.9 million period over period increase was comprised of a $3.3 million increase in the Company’s International markets as well as a $0.5 million increase in contract manufactured product sales pursuant to the Company’s existing supply and distribution agreement with Smith & Nephew. These increases were partially offset by a $0.9 million decrease in the Company’s proprietary product sales in the Americas, primarily a result of lower sales to stocking distributors and lower average sales prices that offset a modest increase in sales volumes.

ENT product sales increased $2.6 million, or 11.8 percent, in the first quarter of 2011 compared to the same period of 2010, a result of an increase in the Company’s user and customer base as well as higher average selling prices. International product sales increased $0.9 million, due higher sales in the Asia Pacific region.

Other product sales, which consist principally of Coblation spine product sales, declined $0.5 million in the first quarter of 2011 compared to the same period of 2010.

Had the same foreign currency rates been in effect in the quarter ended March 31, 2011 as were in effect in the same quarter in 2010, the U.S. dollar reported value of product sales would have been lower by $0.7 million for the quarter ended March 31, 2011.

GROSS PRODUCT MARGIN

Gross product margin was 70.4 percent for the first quarter of 2011 compared to 68.8 percent for the first quarter of 2010. Inventory obsolescence charges in the first quarter of 2010 were $1.4 million higher than in the first quarter of 2011.

INCOME FROM OPERATIONS

Income from operations for the first quarter of 2011 was $16.6 million compared to $15.5 million for the same period in 2010. Research and development (R&D) costs decreased $1.8 million during the quarter ended March 31, 2011 compared to the same period in 2010, as materials and services consumed by the Company’s R&D efforts were lower in the first quarter of 2011 due to the timing of certain projects. Additionally, a higher proportion of the Company’s engineering costs in the first quarter of 2011 were associated with the manufacturing process, which increased the allocation of engineering costs to inventory and cost of goods sold.

Sales and marketing expenses increased approximately $1.2 million in the first quarter of 2011 compared to the same period in 2010. The increase is primarily due to increased commission expense.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

In the first quarter of 2011, net income applicable to common stockholders was $11.9 million or $0.36 per diluted share, compared to $8.0 million, or $0.24 per diluted share, for the first quarter of 2010. In the first quarter of 2011, income from continuing operations before taxes increased by $4.7 million of which $1.1 million was due to an increase in income from operations and $3.6 million was due to changes in foreign exchange gain (loss). During the quarter ended March 31, 2011, the U.S. dollar weakened against the British Pound, Euro, and Australian dollar, which decreased the local currency amount of U.S. dollar payables of certain international subsidiaries resulting in foreign exchange gains, whereby the Company incurred foreign exchange losses in the same period in 2010.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents increased $15.0 million to $147.5 million as of March 31, 2011 from $132.5 million at December 31, 2010. Cash flows provided by operating activities for the quarter ended March 31, 2011 was $15.2 million compared to $11.2 million for the quarter ended March 31, 2010. Net inventory balances decreased approximately $0.7 million and accounts receivable decreased $0.8 million from December 31, 2010.

CONFERENCE CALL

ArthroCare will hold a conference call to present these results Tuesday, May 3, 2011, at 8:30 a.m. ET/5:30 a.m. PT to review the results. To participate in the live conference call dial 800-773-0497. 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 21521927. The replay will remain available through May 17, 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 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 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 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 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,
2011

December 31,
2010

 
ASSETS
Current assets:
Cash and cash equivalents $ 147,529 $ 132,536

Accounts receivable, net of allowances of $2,291 and $2,445 at March 31, 2011 and December 31, 2010, respectively

48,101 48,870
Inventories, net 33,409 34,087
Deferred tax assets 22,390 24,661
Prepaid expenses and other current assets 6,986 4,424
Assets held for sale   2,833     3,081  
Total current assets 261,248 247,659
 
Property and equipment, net 40,638 41,582
Intangible assets, net 9,447 10,733
Goodwill 119,495 119,020
Deferred tax assets 16,019 16,019
Other assets   1,960     4,182  
Total assets $ 448,807   $ 439,195  
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 13,828 $ 13,819
Accrued liabilities 32,606 40,197
Deferred tax liabilities 149 149
Income tax payable   1,421     1,555  
Total current liabilities 48,004 55,720
 
Deferred tax liabilities 225 213
Other non-current liabilities   13,846     13,766  
Total liabilities 62,075 69,699
 
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares;

Issued and outstanding: 75 shares at March 31, 2011 and December 31, 2010; Redemption value $87,089

74,608 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: 31,225 and 31,102 shares
Outstanding: 27,389 and 27,112 shares at March 31, 2011 and December 31, 2010, respectively 27 27

Treasury stock: 3,990 shares at March 31, 2011 and 3,990 shares at December 31, 2010

(107,731 ) (107,899 )
Additional paid-in capital 389,795 386,395
Accumulated other comprehensive income 5,145 4,246
Retained earnings (accumulated deficit)   24,888     12,959  
Total stockholders' equity   312,124     295,728  
Total liabilities, redeemable convertible preferred stock and stockholders' equity $ 448,807   $ 439,195  
 
 
ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
       

Three Months Ended
March 31,

 
  2011       2010   Variance
 
Revenues:
Product sales $ 83,507 $ 85,165 $ (1,658 )
Royalties, fees and other   4,425     3,949     476  
Total revenues 87,932 89,114 (1,182 )
 
Cost of product sales   24,744     26,579     (1,835 )
 
Gross profit   63,188     62,535     653  
Operating expenses:
Research and development 6,810 8,615 (1,805 )
Sales and marketing 28,098 26,855 1,243
General and administrative 9,188 9,255 (67 )
Amortization of intangible assets 1,311 1,315 (4 )
Investigation and restatement related costs   1,204     1,043     161  
Total operating expenses   46,611     47,083     (472 )
 
Income from operations 16,577 15,452 1,125
Foreign exchange gain (loss) 664 (2,960 ) 3,624
Other expense, net   (174 )   (101 )   (73 )
Other income (expense), net   490     (3,061 )   3,551  
 
Income from continuing operations before income taxes 17,067 12,391 4,676
 
Income tax provision   4,608     3,314     1,294  
 
Net income from continuing operations 12,459 9,077 3,382
 
Income from discontinued operations, net of taxes   311     (250 )   561  
 
Net income 12,770 8,827 3,943
 

Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock

  (840 )   (802 )   (38 )
 
Net income available to common stockholders $ 11,930   $ 8,025   $ 3,905  
 
Weighted average shares outstanding:Weighted-average shares outstanding:
Basic 27,168 26,922
Diluted 27,586 27,221
 
Earnings per share from continuing operations applicable to common stockholders:
Basic $ 0.35   $ 0.25  
Diluted $ 0.35   $ 0.25  
 

 

Earnings per share applicable to common stockholders:

$ 0.36   $ 0.25  
Basic $ 0.36   $ 0.24  
Diluted
 
 
ARTHROCARE CORPORATION
Supplemental schedule of Product Sales
(in thousands)
                   
Three Months Ended Three Months Ended
March 31, 2011 March 31, 2010
Americas International

Total
Product
Sales

% Net
Product
Sales

Americas International

Total
Product
Sales

% Net
Product
Sales

 
 
Sports Medicine $ 37,381 $ 19,328 $ 56,709 67.9% $ 44,391 $ 16,058 $ 60,449 71.0%
ENT 20,037 4,267 24,304 29.1% 18,415 3,330 21,745 25.5%
Other 685 1,809 2,494 3.0% 969 2,002 2,971 3.5%
Total Product Sales $ 58,103 $ 25,404 $ 83,507 100.0% $ 63,775 $ 21,390 $ 85,165 100.0%

Contacts

ArthroCare Corp.
Corinne Ervin, 512-391-3907

Contacts

ArthroCare Corp.
Corinne Ervin, 512-391-3907