Attached files

file filename
EX-99.1 - EXHIBIT - ARTHROCARE CORPq22013earningsrelease.htm



FOR IMMEDIATE RELEASE:                                 CONTACTS:
ArthroCare Corp.
Misty Romines
512-391-3902
 
ARTHROCARE REPORTS SECOND QUARTER 2013 FINANCIAL RESULTS
 
Austin, Texas - August 5, 2013 - ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the quarter ended June 30, 2013.
 
SECOND QUARTER 2013 SUMMARY
 
Total revenue of $92.1 million.
Loss from operations of $11.1 million, or operating margin of a negative 12.0%, including a charge of $20.2 million to
increase    the Company's reserves related to the ongoing Department of Justice investigation.
Adjusted Operating Margin of 16.6%
Net loss attributable to common stockholders of $7.7 million, or $0.27 per share.
 

REVENUE
 
Total revenue for the second quarter of 2013 was $92.1 million, compared to $91.7 million for the second quarter of 2012, an increase of less than one percent.
 
Product sales for the second quarters of both 2013 and 2012 were $87.5 million.
 
Worldwide sales of Sports Medicine products increased $1.2 million or 2.1 percent in the second quarter of 2013 when compared to the second quarter of 2012.  In the second quarter of 2013 proprietary Sports Medicine product sales in the Americas increased $1.1 million, or 3.4 percent and International Sports Medicine product sales increased $1.3 million, or 6.7 percent as compared to the second quarter of 2012.  Contract manufactured product sales decreased $1.2 million, or 18.2 percent in the second quarter of 2013, as compared to the second quarter of 2012.
 
Worldwide ENT product sales decreased $0.4 million, or 1.4 percent in the second quarter of 2013 compared to the second quarter of 2012.  Americas ENT product sales decreased $0.3 million or 1.6 percent and International ENT product sales were mostly unchanged.
 
Other product sales decreased $0.8 million in the second quarter of 2013 compared to the same quarter of 2012.
 
Royalties, fees and other revenues was 5.0 percent of total revenues for the second quarter of 2013 compared to 4.6 percent for the second quarter of 2012.

INCOME / LOSS FROM OPERATIONS
 
Loss from operations for the second quarter of 2013 was $11.1 million compared to income from operations of $17.9 million for the same period in 2012.  Operating margin for the second quarter of 2013 was a negative 12.0 percent compared to 19.6 percent for the same quarter of 2012.
 
Investigation and restatement-related costs in the second quarter of 2013 amounted to $26.3 million compared to $1.1 million in the second quarter of 2012. The Company has recently engaged in preliminary resolution discussions with the DOJ. As a result of these discussions, management believes that a final resolution of this matter will include a financial component, and management's current best estimate of this financial component is $30 million. Accordingly, the balance of the insurance dispute reserve as of June 30, 2013 was increased to reflect this estimate and a charge of $20.2 million recorded in the second quarter of 2013. The actual amount could be greater or less, and the timing of the final resolution and payment cannot yet be determined.

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 28.6 percent and 1.2 percent of





total revenue for the second quarters of 2013 and 2012, respectively, and Adjusted Operating Margin was 16.6 percent and 20.8 percent for these same periods.  Adjusted Operating Margin is a non-GAAP measure of profitability and it should not be considered as a substitute for measures prepared in accordance with GAAP.

Gross Profit for the second quarter of 2013 was $63.3 million compared to $64.4 million in the second quarter of 2012. Gross product margin in the current quarter was 68.8 percent compared to 70.2 percent in the second quarter of 2012.  The comparability of gross product margin between periods was impacted by the new 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 second quarter 2013, resulting in a lower gross margin when compared to the second quarter of 2012. 
 
Total operating expenses were $74.4 million in the second quarter of 2013 compared to $46.4 million in the second quarter of 2012.  Aside from the aforementioned increase in investigation and restatement-related costs, research and development expense increased $0.8 million this quarter while general and administrative expense increased by approximately $0.5 million. Sales and marketing as a percent of revenue also increased this quarter to 32.8 percent as compared to 31.5 percent in the same quarter of 2012. These additional 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 loss attributable to common stockholders was $7.7 million or $0.27 per share in the second quarter of 2013, compared to net income of $11.4 million, or $0.34 per share in the second quarter of 2012. 

BALANCE SHEET AND CASH FLOWS
 
Cash and cash equivalents were $251.0 million as of June 30, 2013 compared to $218.8 million at December 31, 2012.  Cash flows provided by operating activities for the six months ended June 30, 2013 was $45.5 million compared to cash used in operations of $33.0 million for the six months ended June 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 $41.0 million for the first six months of 2012.
 

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 Tuesday, August 6, 2013. To participate in the live conference call dial 800-732-6870.  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 21669641.  The replay will remain available through August 20, 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.
 
Financial Tables Appended






ARTHROCARE CORPORATION
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except par value data)
 
 
June 30, 2013
 
December 31, 2012
 
 
 
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
251,036

 
$
218,787

Accounts receivable, net of allowances of $1,396 and $1,565 at June 30, 2013 and December 31, 2012, respectively
 
42,241

 
48,881

Inventories, net
 
42,560

 
48,417

Deferred tax assets
 
16,502

 
20,090

Prepaid expenses and other current assets
 
7,103

 
6,022

Total current assets
 
359,442

 
342,197

 
 
 
 
 
Property and equipment, net
 
33,190

 
30,461

Intangible assets, net
 
11,728

 
1,859

Goodwill
 
119,330

 
119,893

Deferred tax assets
 
14,786

 
23,206

Other assets
 
422

 
2,171

Total assets
 
$
538,898

 
$
519,787

 
 
 
 
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
13,491

 
$
12,189

Accrued liabilities
 
59,224

 
41,674

Income tax payable
 
3,298

 
286

Other liabilities
 
354

 
318

Total current liabilities
 
76,367

 
54,467

 
 
 
 
 
Deferred tax liabilities
 
354

 
354

Other non-current liabilities
 
6,221

 
20,200

Total liabilities
 
82,942

 
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 June 30, 2013 and December 31, 2012; Redemption value: $87,089
 
82,607

 
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: 32,175 and 31,949 shares Outstanding: 28,244 and 27,977 shares at June 30, 2013 and December 31, 2012, respectively
 
28

 
28

Treasury stock: 3,931 and 3,942 shares at June 30, 2013 and December 31, 2012, respectively
 
(106,126
)
 
(106,425
)
Additional paid-in capital
 
421,587

 
413,660

Accumulated other comprehensive income
 
3,857

 
5,300

Retained earnings
 
54,003

 
51,444

Total stockholders’ equity
 
373,349

 
364,007

Total liabilities, redeemable convertible preferred stock and stockholders’ equity
 
$
538,898

 
$
519,787

 
 
 
 
 






ARTHROCARE CORPORATION
Condensed Consolidated Statements of Comprehensive Income - Unaudited
(in thousands, except par value data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Revenues:
 
 

 
 

 
 
 
 
Product sales
 
$
87,470

 
$
87,471

 
$
174,947

 
$
175,846

Royalties, fees and other
 
4,600

 
4,235

 
9,470

 
8,732

Total revenues
 
92,070

 
91,706

 
184,417

 
184,578

 
 
 
 
 
 
 
 
 
Cost of product sales
 
28,724

 
27,355

 
57,053

 
54,006

 
 
 
 
 
 
 
 
 
Gross profit
 
63,346

 
64,351

 
127,364

 
130,572

Operating expenses:
 
 
 
 

 
 
 
 

Research and development
 
8,659

 
7,899

 
17,103

 
15,493

Sales and marketing
 
30,218

 
28,842

 
60,550

 
59,042

General and administrative
 
8,683

 
8,154

 
16,141

 
16,642

Amortization of intangible assets
 
505

 
1,316

 
927

 
2,637

Exit costs
 

 
(938
)
 

 
(778
)
Investigation and restatement related costs
 
26,335

 
1,131

 
30,227

 
2,224

Total operating expenses
 
74,400

 
46,404

 
124,948

 
95,260

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
(11,054
)
 
17,947

 
2,416

 
35,312

 
 
 
 
 
 
 
 
 
Non-operating gains (losses)
 
(392
)
 
(1,147
)
 
129

 
(761
)
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(11,446
)
 
16,800

 
2,545

 
34,551

 
 
 
 
 
 
 
 
 
Income tax provision (benefit)
 
(4,667
)
 
4,536

 
(1,860
)
 
9,329

 
 
 
 
 
 
 
 
 
Net income (loss)
 
(6,779
)
 
12,264

 
4,405

 
25,222

 
 
 
 
 
 
 
 
 
Accrued dividend and accretion charges on Series A 3% Redeemable Convertible Preferred Stock
 
(929
)
 
(887
)
 
(1,848
)
 
(1,766
)
 
 
 
 
 
 
 
 
 
Net income (loss) available to common stockholders
 
(7,708
)
 
11,377

 
2,557

 
23,456

 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 

 
 
 
 

Foreign currency translation adjustments
 
(344
)
 
(778
)
 
(1,443
)
 
(386
)
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
$
(7,123
)
 
$
11,486

 
$
2,962

 
$
24,836

Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
28,081

 
27,639

 
28,130

 
27,648

Diluted
 
28,081

 
27,934

 
28,836

 
28,003

 
 
 
 
 
 
 
 
 
Earnings (loss) per share applicable to common stockholders:
 
 

 
 

 
 

 
 

Basic
 
$
(0.27
)
 
$
0.34

 
$
0.08

 
$
0.70

Diluted
 
$
(0.27
)
 
$
0.34

 
$
0.07

 
$
0.69







ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales - Unaudited
(in thousands)
 
 
Three months ended June 30, 2013
 
Three months ended June 30, 2012
 
 
Americas
 
International
 
Total Product Sales
 
% Net Product Sales
 
Americas
 
International
 
Total Product Sales
 
% Net Product Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sports Medicine
 
$
37,944

 
$
20,973

 
$
58,917

 
67.4
%
 
$
38,051

 
$
19,661

 
$
57,712

 
66.0
%
ENT
 
21,194

 
5,355

 
26,549

 
30.4
%
 
21,532

 
5,390

 
26,922

 
30.8
%
Other
 
311

 
1,693

 
2,004

 
2.2
%
 
411

 
2,426

 
2,837

 
3.2
%
Total product sales
 
$
59,449

 
$
28,021

 
$
87,470

 
100.0
%
 
$
59,994

 
$
27,477

 
$
87,471

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
Six months ended June 30, 2012
 
 
Americas
 
International
 
Total Product Sales
 
% Net Product Sales
 
Americas
 
International
 
Total Product Sales
 
% Net Product Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sports Medicine
 
$
76,806

 
$
41,727

 
118,533

 
67.8
%
 
$
77,081

 
$
39,943

 
$
117,024

 
66.5
%
ENT
 
40,942

 
11,223

 
52,165

 
29.8
%
 
43,308

 
10,783

 
54,091

 
30.8
%
Other
 
813

 
3,436

 
4,249

 
2.4
%
 
1,000

 
3,731

 
4,731

 
2.7
%
Total product sales
 
118,561

 
56,386

 
174,947

 
100.0
%
 
$
121,389

 
$
54,457

 
$
175,846

 
100.0
%