ArthroCare fourth quarter total revenue increases to $92.6 million

ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced its financial results for the fourth quarter and year ended December 31, 2010, as follows:

“Loss from discontinued operations, net of taxes”

FOURTH QUARTER 2010 HIGHLIGHTS

• Total revenue of $92.6 million from continuing operations
• Product margin of 69.0 percent
• Operating income of $14.8 million, or operating margin of 15.9 percent
• Net income applicable to common stockholders of $10.1 million, or $0.30 per diluted share

FULL YEAR 2010 HIGHLIGHTS

• Total revenue of $355.4 million from continuing operations
• Product margin of 67.3 percent
• Operating income of $54.3 million, or operating margin of 15.3 percent
• Net income applicable to common stockholders of $33.8 million, or $1.02 per diluted share

In the fourth quarter of 2010, management determined that the Company's non-Coblation spine products met the criteria under generally accepted accounting principles to be reported as discontinued operations. The Company's non-Coblation spine products consist of its Parallax and Contour product lines. As a result of this determination, reported product sales for the years ended December 31, 2010 and 2009 have been reduced by $5.9 million and $7.5 million, respectively and product sales in the fourth quarter of 2010 and 2009 have been reduced by $1.3 million and $1.6 million, respectively. The impact from these discontinued product lines on the Company's current and previously reported net income (loss) in all periods is separately reported as "Loss from discontinued operations, net of taxes" in its Consolidated Statements of Operations. Net assets of $3.1 million identifiable with these discontinued product lines is reported in the Company's December 31, 2010 Consolidated Balance Sheet as "Assets held for sale."

REVENUE

Total revenue from continuing operations for the fourth quarter of 2010 was $92.6 million, compared to $90.9 million for the fourth quarter of 2009.

Sports Medicine product sales increased $0.8 million, or 1.3 percent, in the fourth quarter of 2010 compared to the same period in 2009. Products sales increased $2.4 million in International markets, partially offset by declines of $0.4 million, or 1.0 percent, in the Company's proprietary product sales in the Americas and $1.3 million in contract manufacturing volume pursuant to the Company's existing supply and distribution agreement with Smith & Nephew.

ENT product sales increased $2.8 million, or 13.2 percent, in the fourth quarter of 2010 compared to the same period of 2009, as a result of increased Coblation product sales volumes, increased Rapid Rhino product sales volumes, and higher average sales prices in the Americas. International product sales increased, particularly due to increased market penetration in the Asia Pacific region.

Other product sales, which consist principally of spine product sales, declined $0.8 million in the fourth quarter of 2010 compared to the same period of 2009.

Had the same foreign currency rates been in effect in the quarter ended December 31, 2010 as were in effect in the same quarter in 2009, the U.S. dollar reported value of product sales would have been lower by $0.7 million for the quarter ended December 31, 2010.

Total revenue from continuing operations for the full year in 2010 was $355.4 million, compared to $324.1 million for 2009.

Product sales in Sports Medicine increased $22.3 million, or 10.6 percent, for the year ended December 31, 2010 compared to 2009. Contract manufacturing sales pursuant to the Company's supply and distribution agreement with Smith & Nephew increased $13.2 million. 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 of 2010. Excluding the impact from recognition of deferred revenue, Americas Sports Medicine proprietary product sales declined $6.1 million, or 4.2 percent. Approximately half of this decline is attributed to lower volume due to an overall slowdown in the underlying Sports Medicine procedure utilization in the United States and half related to lower average sales prices. The decline in the Americas was offset by higher International product sales, which increased $8.6 million, or 13.7 percent in 2010 compared to 2009, primarily due to volume increases in the Company's direct markets.

ENT product sales increased $8.6 million, or 10.1 percent, in 2010 compared to 2009 as a result of increased Coblation product sales volumes, increased Rapid Rhino product sales volumes and higher average sales prices in the Americas. International product sales increased due to market penetration expansion, particularly in the Asia Pacific region.

Other product sales declined $0.6 million in 2010 compared to 2009.

During the year ended December 31, 2010, changes in foreign currency rates did not have a material effect on the comparison of 2010 product sales to 2009.

GROSS PRODUCT MARGIN

Gross product margin was 69.0 percent and 71.2 percent for the fourth quarters of 2010 and 2009, respectively, and 67.3 percent and 70.5 percent for the years ended December 31, 2010 and 2009, respectively. Gross product margin in the fourth quarter of 2010 was lower than the fourth quarter of 2009 due to charges recorded to reduce the carrying value of inventory as the Company chose to de-emphasize certain handhelds and instrumentation sets associated with its Sports Medicine Atlantech product line.

Gross product margin for the full year of 2010 was lower than 2009 due to a higher proportion of contract manufactured product sales, which generally realize lower product margins, and adjustments made to the carrying value of inventory, such as discussed above.

INCOME FROM OPERATIONS

Income from operations for the fourth quarter of 2010 was $14.8 million compared to $10.7 million for the same period in 2009. The increase was the result of lower investigation and restatement related expenses, partially offset by charges recorded to further restructure the Company's spine marketing and distribution organization in the Americas.

For the full year in 2010, income from operations was $54.3 million compared to income from operations of less than $0.1 million for 2009. The increase was the result of higher revenue and lower operating expenses. Investigation and restatement related expenses were $28.8 million lower and sales and marketing and general and administrative expenses declined by $6.7 million and $7.5 million, respectively, in 2010 compared to 2009. The decrease in sales and marketing expenses was a result of lower product demonstration costs, a decrease in bad debt allowance requirements due to improved cash collections of accounts receivable, and a decline in sales expenses associated with the Company's spine products following an initial restructuring of its Americas sales organization in 2009. Moreover, contract manufactured product sales did not incur direct sales and marketing costs, such as commission expense. The reduction in general and administrative expenses was a result of lower legal fees after the completion of the arbitration matter involving Gyrus and Ethicon in December 2009.

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

In the fourth quarter of 2010, net income applicable to common stockholders was $10.1 million or $0.31 per diluted share, compared to $7.1 million, or $0.21 per diluted share, for the fourth quarter of 2009.

For the year ended December 31, 2010, net income applicable to common stockholders was $33.8 million, or $1.02 per diluted share, compared to a loss for the year ended December 31, 2009 of $33.8 million, or ($1.26) per share.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents increased $75.1 million to $132.5 million as of December 31, 2010 from $57.4 million at December 31, 2009.

Cash flows provided by operating activities for the year ended December 31, 2010 was $82.6 million compared to $19.5 million for the year ended December 31, 2009. Accounts receivable, net increased $3.1 million and net inventory balances decreased approximately $14.5 million from December 31, 2009.