ArthroCare reports total revenue of $90.6M for first-quarter 2010

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, 2010 as follows:

FIRST QUARTER 2010 HIGHLIGHTS

• First quarter 2010 total revenue of $90.6 million
• Product margin of 68.9 percent
• Operating income of $15.1 million
• Net income available to common stockholders of $8.0 million, or $0.24 per diluted share

REVENUE

Total revenue for the first quarter of 2010 was $90.6 million, compared to $78.8 million for the first quarter of 2009. Product sales increased in both the Company's core Sports Medicine and ENT businesses and across all geographies. 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. Additionally, product sales increased due to higher contract manufacturing volume.

Product sales in the first quarter of 2010 increased by $3.1 million in the Company's direct International markets while sales to distributors, a significant portion of which were in U.S. dollars, decreased by $0.9 million when compared to the first quarter of 2009. Product sales were also affected by changes in foreign exchange rates used to translate foreign currency sales from international markets to the Company's U.S. dollar reporting currency. Changes in exchange rates increased the U.S. dollar reported value by approximately $1.8 million.

PRODUCT MARGIN

Product margin was 68.9 percent for the first quarter of 2010 compared to 71.2 percent for the first quarter of 2009. Product margin was lower due to adjustments made to the carrying value of inventory for excess and obsolete items and higher royalty costs incurred in the first quarter of 2010 as a result of the arbitration matter involving Gyrus and Ethicon. The deferred revenue recognized in the first quarter of 2010 increased net product margin by $4.2 million. Additionally, product margin for the first quarter of 2010 was impacted by higher contract manufactured product sales, which generally realize lower margins.

INCOME (LOSS) FROM OPERATIONS

Income from operations for the first quarter of 2010 was $15.1 million compared to a loss from operations of $3.5 million for the same period in 2009. Investigation and restatement related expenses were $1.0 million in the first quarter of 2010 compared to $8.7 million in the first quarter of 2009. Sales and marketing and general and administrative expenses declined by a combined $4.8 million compared to the first quarter of 2009, and include a reduction to stock compensation expense of $1.1 million to correct errors in prior periods. The remaining decrease in sales and marketing expense is associated with the Company's continued initiatives to improve the cost-effectiveness of its sales and marketing efforts. The remaining decrease in general and administrative expense is attributable to lower legal fees associated with the completion of the arbitration matter involving Gyrus and Ethicon in December 2009. Additionally, contract manufactured products and the deferred revenues realized in the period did not incur direct sales and marketing costs, such as commission expense.

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

In the quarter ended March 31, 2010, the Company recorded charges of $0.8 million related to its Series A Redeemable Convertible 3% Preferred Stock issued on September 1, 2009. After these charges, first quarter 2010 net income available to common stockholders was $8.0 million, or $0.24 per diluted share, compared to a net loss of $6.5 million, or ($0.24) per share, for the first quarter of 2009.

BALANCE SHEET AND CASH FLOWS

Cash, cash equivalents, restricted cash equivalents, and investments increased $7.9 million to $65.3 million as of March 31, 2010 from $57.4 million at December 31, 2009. Cash flows provided by operating activities for the quarter ended March 31, 2010 was $11.2 million compared to $8.6 million for the quarter ended March 31, 2009. The Company continues to focus on working capital efficiency, process improvements, and cash conversion. Net inventory balances decreased approximately $1.5 million and accounts receivable decreased $2.2 from December 31, 2009.