ArthroCare fourth quarter total revenue increases 4.9% to $96.9 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, 2012.

FOURTH QUARTER 2012 SUMMARY

• Total revenue of $96.9 million.
• Income from operations of $15.1 million, or operating margin of 15.6 percent.
• Net income applicable to common stockholders of $10.3 million, or $0.30 per diluted share.

FULL YEAR 2012 SUMMARY

• Total revenue of $368.5 million.
• Income from operations of $64.1 million, or operating margin of 17.4 percent.
• Net income applicable to common stockholders of $42.8 million, or $1.25 per diluted share.

REVENUE - FOURTH QUARTER

Total revenue for the fourth quarter of 2012 was $96.9 million, compared to $92.4 million for the fourth quarter of 2011, an increase of 4.9 percent.

Product sales for the fourth quarter of 2012 were $92.2 million compared to $88.5 million in the fourth quarter of 2011, an increase of 4.3 percent. Product sales increased 4.5 percent in constant currency over the same quarter of the prior year.

Worldwide sales of Sports Medicine products increased $1.2 million or 1.9 percent in the fourth quarter of 2012 when compared to the fourth quarter of 2011. In constant currency, Sports Medicine product sales increased 2.1 percent. In the fourth quarter of 2012 proprietary Sports Medicine product sales in the Americas increased $1.5 million, or 4.5 percent and International Sports Medicine product sales increased $1.9 million, or 9.5 percent as compared to the fourth quarter of 2011. Contract manufactured product sales decreased $2.2 million, or 28.0 percent in the fourth quarter.

Worldwide ENT product sales increased $2.5 million, or 10.6 percent in the fourth quarter of 2012 compared to the fourth quarter of 2011. Americas ENT product sales increased $0.8 million or 4.3 percent and International ENT product sales increased $1.7 million or 37.1 percent as a result of increased product sales in Asia Pacific markets, most notably in Australia and China in the fourth quarter.

Across all product areas International product sales increased $3.8 million, or 14.0 percent in the fourth quarter of 2012 as compared to the same quarter of 2011. Had the same foreign currency rates been in effect in the fourth quarter of 2012 as were in effect in the fourth quarter in 2011, the U.S. dollar reported value of product sales would have been higher by $0.2 million for the current quarter.

REVENUE - FULL YEAR

Total revenue from continuing operations in 2012 was $368.5 million, compared to $354.9 million for 2011.

Worldwide Sports Medicine product sales increased $7.4 million or 3.3 percent in 2012 compared to 2011 and increased 4.5 percent in constant currency. Sports Medicine product sales in the Americas increased $6.2 million in 2012 compared to 2011 as proprietary product sales increased $5.9 million or 4.6 percent in 2012. International Sports Medicine product sales increased $1.3 million or 1.6 percent in 2012 compared to 2011. Contract manufactured product sales increased $0.3 million, or 1.4 percent in 2012.

Worldwide ENT product sales increased $5.5 million or 5.5 percent in 2012 compared to 2011 and increased 6.0 percent in constant currency. ENT product sales in the Americas increased $1.1 million or 1.3 percent and International ENT product sales increased $4.4 million or 23.9 percent in 2012 compared to 2011.

Worldwide other product sales decreased $0.6 million in 2012 when compared to 2011 and represented less than 3 percent of total product sales in 2012.

Management believes percentage sales growth in constant currency is an important metric for evaluating our operations because the impact of changing foreign currency exchange rates may not provide an accurate baseline for analyzing trends in our business. Percentage sales growth in constant currency is calculated by translating current year sales at prior year average foreign currency exchange rates. Constant currency is a non-GAAP measure and it should not be considered as a substitute for measures prepared in accordance with GAAP.

INCOME FROM OPERATIONS - FOURTH QUARTER

Income from operations for the fourth quarter of 2012 was $15.1 million compared to a loss from operations of $51.4 million for the same period in 2011. The loss from operations for the fourth quarter of 2011 included a charge of $74.0 million for the settlement of securities class actions pending against the Company.

Gross product margin as a percentage of product sales was 69.9 percent for the fourth quarter of 2012 compared to 69.3 percent for the fourth quarter of 2011.

Total operating expenses were $54.1 million in the fourth quarter of 2012 compared to $116.7 million in the fourth quarter of 2011 as the fourth quarter of 2011 included a charge of $74.0 million for the settlement of securities class actions pending against the Company. The Company also incurred Exit costs of $3.0 million in the fourth quarter of 2011 in connection with the closure and relocation of its Sunnyvale, California operations that did not recur in 2012. Sales and marketing expenses increased $2.4 million, to 30.9 percent of total revenues this quarter compared to 29.8 percent for the same quarter of 2011.

INCOME FROM OPERATIONS - FULL YEAR

For the full year of 2012, income from operations was $64.1 million compared to a loss from operations in 2011 of $15.5 million. The 2011 loss from operations included $80.8 million for investigation and restatement expenses, mostly the result of the charge of $74.0 million for the settlement of the securities class actions pending against the Company in the fourth quarter of 2011.

Gross product margin as a percentage of product sales for the full year of 2012 was 69.2 percent compared to 69.5 percent in 2011.

Under the short-term incentive plan for 2012 approved by the Board of Directors, Adjusted Operating Margin is a key metric for purposes of evaluating business performance. Adjusted Operating Margin is Operating Margin adjusted for investigation and restatement related costs. Investigation and restatement related costs were 2.9 percent and 22.8 percent of total revenue for 2012 and 2011, respectively, and Adjusted Operating Margin was 20.3 percent and 18.4 percent, respectively, for these years. 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.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Net income applicable to common stockholders was $10.3 million or $0.30 per diluted share in the fourth quarter of 2012, compared to net loss attributable to common stockholders of $29.3 million, or a loss of $1.06 per share in the fourth quarter of 2011.

For the year ended December 31, 2012, net income applicable to common stockholders was $42.8 million, or $1.25 per diluted share, compared to net loss attributable to common stockholders of $4.3 million, or a loss of $0.16 per share for the year ended December 31, 2011.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $218.8 million as of December 31, 2012 compared to $219.6 million at December 31, 2011. In the first quarter of 2012, the Company paid $74 million as required under the proposed settlement of the private securities class actions. Excluding this payment, cash and cash equivalents increased $73.2 million during the year ended December 31, 2012. Cash provided by operating activities for year ended December 31, 2012 was $6.3 million compared to cash provided by operating activities of $84.6 million for the year ended December 31, 2011. Adjusting for the funding of the $74 million settlement of the private securities class actions, cash provided by operating activities in 2012 was $80.3 million.