ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the quarter ended September 30, 2013.

THIRD QUARTER 2013 SUMMARY

  • Total revenue of $91.9 million.
  • Income from operations of $12.7 million, or operating margin of 13.9%.
  • Adjusted income from operations of $15.9 million, or adjusted operating margin of 17.3%
  • Net income available to common stockholders of $9.3 million, or $0.27 per share.

REVENUE

Total revenue for the third quarter of 2013 was $91.9 million, compared to $86.9 million for the third quarter of 2012, an increase of 5.7 percent. Product sales for the third quarter of 2013 were $87.1 million, compared to $82.6 million for the same quarter of 2012, an increase of 5.4 percent. In constant currency, product sales increased 5.8 percent for the three months ended September 30, 2013.

Worldwide sales of Sports Medicine products increased $2.9 million or 5.2 percent in the third quarter of 2013 when compared to the third quarter of 2012. In constant currency, Sports Medicine product sales increased 5.8 percent in this quarter when compared with the same quarter of 2012. In the third quarter of 2013 International Sports Medicine product sales increased $2.3 million, or 12.3 percent as compared to the third quarter of 2012 and proprietary Sports Medicine product sales in the Americas increased $1.4 million, or 4.5 percent. Partially offsetting the increase in Americas proprietary product sales was the decrease in contract manufactured product sales of approximately $0.8 million, or 11.2 percent in the third quarter of 2013, as compared to the third quarter of 2012.

Worldwide ENT product sales increased $1.2 million, or 4.7 percent in the third quarter of 2013 compared to the third quarter of 2012. Changes in foreign exchange rates did not have a material effect on reported worldwide ENT product sales. International ENT product sales increased $0.9 million or 16.2 percent and Americas ENT product sales increased $0.3 million or 1.3 percent.

Other product sales increased $0.4 million or 19.6 percent in the third quarter of 2013 compared to the same quarter of 2012. Other product sales represent less than 3 percent of total product sales.

Royalties, fees and other revenues was 5.2 percent of total revenues for the third quarter of 2013 compared to 5.0 percent for the third quarter of 2012.

INCOME / LOSS FROM OPERATIONS

Income from operations for the third quarter of 2013 was $12.7 million compared to $13.7 million for the same period in 2012. Operating margin for the third quarter of 2013 was 13.9 percent compared to 15.7 percent for the same quarter of 2012.

Investigation and restatement-related costs in the third quarter of 2013 was $3.2 million compared to $2.1 million in the third quarter of 2012.

Under the short-term incentive plan for 2013 approved by our Board of Directors, Adjusted Operating Margin is a key metric for purposes of evaluating management's performance. Adjusted Operating Margin is Operating Margin adjusted for investigation and restatement related costs. Investigation and restatement related costs were 3.4 percent and 2.5 percent of total revenue for the third quarters of 2013 and 2012, respectively, and Adjusted Operating Margin was 17.3 percent and 18.2 percent for these same periods. Adjusted Income from Operations is Income from Operations adjusted for investigation and restatement related costs. In the third quarter of 2013 Adjusted Income from Operations was $15.9 million compared to $15.8 million in the same quarter of 2012. Adjusted Operating Margin and Adjusted Income from Operations are non-GAAP measures of profitability and it should not be considered as a substitute for measures prepared in accordance with GAAP.

Gross Profit for the third quarter of 2013 was $63.0 million compared to $60.7 million in the third quarter of 2012. Gross product margin in the current quarter was 68.6 percent compared to 69.9 percent in the third quarter of 2012. The comparability of gross product margin between periods was impacted by the medical device excise tax imposed on US product sales by the Patient Protection and Affordable Care Act, which became effective in 2013 and was applied to the Company's domestic sales during the third quarter 2013. The decrease in gross product margin this quarter is due to the medical device tax as well as lower average selling price on Sports Medicine product sales and changes in sales mix versus the same period in 2012.

Total operating expenses were $50.2 million in the third quarter of 2013 compared to $47.1 million in the third quarter of 2012. Research and development expense increased $0.2 million this quarter due to Sports Medicine product development programs. General and administrative expense increased $0.6 million due to costs incurred as part of the acquisition of ENTrigue Surgical, Inc. that closed on July 1, 2013. Sales and marketing expense as a percent of revenue also increased this quarter to 31.9 percent as compared to 31.2 percent in the same quarter of 2012. These increases in operating expenses were partially offset by a decrease of $0.8 million in amortization expense for intangible assets relating to the 2004 acquisition of Opus Medical, which were fully amortized as of the end of 2012.

NET INCOME / LOSS AVAILABLE TO COMMON STOCKHOLDERS

Net income available to common stockholders was $9.3 million or $0.27 per share in the third quarter of 2013, compared to $9.1 million, or $0.27 per share in the third quarter of 2012.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents were $208.4 million as of September 30, 2013 compared to $218.8 million at December 31, 2012. Cash flows provided by operating activities for the nine months ended September 30, 2013 was $59.9 million compared to cash used in operations of $10.6 million for the nine months ended September 30, 2012 which included the payment of $74 million required to settle the private securities class actions against the Company. Adjusted for this payment, cash flows provided by operating activities would have been $63.4 million for the first nine months of 2012. Cash used in investing activities for the nine months ended September 30, 2013 was $77.3 million which includes cash paid for the acquisitions of Eleven Blade Solutions, Inc. and ENTrigue Surgical, Inc. and to purchase an investment in OrthoSpace Ltd.

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 Wednesday, October 30, 2013. To participate in the live conference call dial 800-771-7838. 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 21682277. The replay will remain available through November 13, 2013.

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 protect its intellectual property rights; the ability of the Company to continue to fund its working capital needs and planned expenditures; the risk of product liability claims; risks associated with the Company's international operations; risks associated with integration of the Company's acquisitions; 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, 2013     December 31, 2012
 
ASSETS
Current assets:
Cash and cash equivalents $ 208,435 $ 218,787
Accounts receivable, net of allowances of $1,380 and $1,565 at September 30, 2013 and December 31, 2012, respectively 40,916 48,881
Inventories, net 46,526 48,417
Deferred tax assets 14,966 20,090
Prepaid expenses and other current assets   8,594     6,022  
Total current assets 319,437 342,197
 
Property and equipment, net 45,459 30,461
Intangible assets, net 15,112 1,859
Goodwill 164,964 119,893
Deferred tax assets 25,041 23,206
Other assets   4,134     2,171  
Total assets $ 574,147   $ 519,787  
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,385 $ 12,189
Accrued liabilities 63,851 41,674
Income tax payable 15 286
Other liabilities   280     318  
Total current liabilities 82,531 54,467
 
Deferred tax liabilities 361 354
Other non-current liabilities   19,259     20,200  
Total liabilities 102,151 75,021
 
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, 2013 and December 31, 2012; Redemption value: $87,089 83,548 80,759
 
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: 32,299 and 31,949 shares Outstanding: 28,368 and 27,977 shares at September 30, 2013 and December 31, 2012, respectively 28 28
Treasury stock: 3,391 and 3,942 shares at September 30, 2013 and December 31, 2012, respectively (106,126 ) (106,425 )
Additional paid-in capital 426,224 413,660
Accumulated other comprehensive income 4,987 5,300
Retained earnings   63,335     51,444  
Total stockholders' equity   388,448     364,007  
Total liabilities, redeemable convertible preferred stock and stockholders' equity $ 574,147   $ 519,787  
 
 
ARTHROCARE CORPORATION
Condensed Consolidated Statements of Comprehensive Income - Unaudited
(in thousands, except par value data)
 
   

Three months ended
September 30,

     

Nine months ended
September 30,

2013     2012 2013     2012
 
Revenues:
Product sales $ 87,060 $ 82,602 $ 262,008 $ 258,448
Royalties, fees and other   4,803     4,338     14,273     13,070  
Total revenues 91,863 86,940 276,281 271,518
 
Cost of product sales   28,876     26,204     85,929     80,210  
 
Gross profit

 

62,987  

 

60,736  

 

190,352     191,308  
Operating expenses:
Research and development 8,433 8,184 25,536 23,677
Sales and marketing 29,322 27,175 89,872 86,217
General and administrative 8,785 8,191 24,926 24,833
Amortization of intangible assets 534 1,363 1,461 4,000
Exit costs -- -- -- (778 )
Investigation and restatement related costs   3,164     2,139     33,391     4,363  
Total operating expenses   50,238     47,052     175,186     142,312  
 
Income (loss) from operations 12,749 13,684 15,166 48,996
 
Non-operating gains (losses)   (28 )   183     101     (578 )
 
Income (loss) before income taxes 12,721 13,867 15,267 48,418
 
Income tax provision   2,449     3,882     587     13,211  
 
Net income 10,272 9,985 14,680 35,207
 
Accrued dividend and accretion charges on Series A 3% Redeemable Convertible Preferred Stock   (940 )   (900 )   (2,788 )   (2,666 )
 
Net income available to common stockholders   9,332     9,085     11,892     32,541  
 
Other comprehensive income
Foreign currency translation adjustments   1,131     951     (312 )   565  
 
Total comprehensive income $ 11,403   $ 10,936   $ 14,368   $ 35,772  
Weighted average shares outstanding:
Basic 28,374 27,714 28,239 27,698
Diluted 28,968 28,087 28,888 28,096
 
Earnings per share applicable to common stockholders:
Basic $ 0.27   $ 0.27   $ 0.35   $ 0.97  
Diluted $ 0.27   $ 0.27   $ 0.34   $ 0.96  
 
 
ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales - Unaudited
(in thousands)
 
    Three months ended September 30, 2013       Three months ended September 30, 2012
Americas     International    

Total
Product
Sales

    

% Net
Product
Sales

Americas     International    

Total
Product
Sales

    

% Net
Product
Sales

 
Sports Medicine $ 37,410 $ 20,674 $ 58,084 66.7 % $ 36,787 $ 18,414 $ 55,201 66.8 %
ENT 19,938 6,791 26,729 30.7 % 19,677 5,846 25,523 30.9 %
Other   372   1,875   2,247 2.6 %   322   1,556   1,878 2.3 %
Total product sales $ 57,720 $ 29,340 $ 87,060 100 % $ 56,786 $ 25,816 $ 82,602 100 %
 
 
Nine months ended September 30, 2013 Nine months ended September 30, 2012
Americas International

Total
Product
Sales

% Net
Product
Sales

Americas International

Total
Product
Sales

% Net
Product
Sales

 
Sports Medicine $ 114,218 $ 62,401

$

176,619 67.4 % $ 113,868 $ 58,357 $ 172,225 66.6 %
ENT 60,880 18,014 78,894 30.1 % 62,985 16,629 79,614 30.8 %
Other   1,185   5,310   6,495 2.5 %   1,322   5,287   6,609 2.6 %
Total product sales $ 176,283 $ 85,725 $ 262,008 100 % $

178,175

$

80,273

$ 258,448 100 %

ArthroCare Corp.
Misty Romines, 512-391-3902