ArthroCare Reports Record Revenues of $51.7 Million for the Second Quarter; Year-Over-Year Revenue Growth of 37 Percent Accompanied by 53 Percent Net Income Increase.AUSTIN, Texas -- ArthroCare(R) Corp. (Nasdaq:ARTC ARTC Arthrocare Corp (stock symbol) ARTC Australian Rail Track Corporation ARTC Air Route Traffic Control ARTC Association de la Recherche Theatrale au Canada ARTC Andean Root and Tuber Crops ), a multi-business medical device company that develops minimally invasive surgical products, announced today financial results for the second quarter ended June 30, 2005. Second quarter product revenues were $49.7 million, a 38 percent increase over the $35.9 million recorded in the same quarter of the previous year. Total revenues, which include product revenues, license fees and royalties, for the second quarter were $51.7 million, a 37 percent increase over the $37.7 million reported in the second quarter of 2004. ArthroCare's revenue growth was positively impacted by the company's 2004 acquisitions of Opus opus (ō`pəs) [Lat.,=work], in music, term used in cataloging a composer's works, designating either a single composition or a group published together or considered a unit. Medical, and Medical Device Alliance, Inc. and its wholly owned subsidiary Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. Parallax parallax (pâr`əlăks), any alteration in the relative apparent positions of objects produced by a shift in the position of the observer. In astronomy the term is used for several techniques for determining distance. Medical, Inc. Excluding the impact of these acquisitions, product revenue growth for the second quarter of 2005 versus the comparable period in 2004 was approximately 20 percent. ArthroCare reported net income of $4.8 million, or $0.19 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share, for the second quarter of 2005, compared to net income of $3.1 million, or $0.14 per diluted share, reported in the same quarter of 2004.
Q2 SUMMARY TABLE
Q205 Q105 Q204
----------------------------------- -------- -------- --------
Product Sales $49.7 M $47.8 M $35.9 M
----------------------------------- -------- -------- --------
License Fees, Royalties and Other
Revenues $2.0 M $1.8 M $1.8 M
----------------------------------- -------- -------- --------
Total Revenues $51.7 M $49.7 M $37.7 M
----------------------------------- -------- -------- --------
Net Income $4.8 M $3.2 M $3.1 M
----------------------------------- -------- -------- --------
Earnings Per Diluted Share $0.19 $0.12 $0.14
----------------------------------- -------- -------- --------
FIRST SIX MONTHS OF 2005 For the first six months of 2005, total revenues reached $101.4 million compared with $73.3 million in the same period of 2004. The product sales portion of revenue increased to $97.5 million in 2005 compared to $70.2 million in 2004. Net income for the six-month period was $8.0 million, or $0.31 per diluted share, compared to six-month net income of $4.7 million, or $0.21 per diluted share, in the previous year. REVENUE In addition to second quarter product sales of $49.7 million, license fees, royalties and other revenue were $2.0 million in the second quarter of 2005, compared to $1.8 million in the second quarter of 2004. International sales increased 17 percent compared to the same period last year and represented 21 percent of product sales during the quarter. BUSINESS UNIT PERFORMANCE The Sports Medicine sports medicine, branch of medicine concerned with physical fitness and with the treatment and prevention of injuries and other disorders related to sports. Knee, leg, back, and shoulder injuries; stiffness and pain in joints; tendinitis; "tennis elbow"; and business unit produced year-over-year revenue growth of 43 percent during the quarter ended June 30, 2005 compared with the same period of 2004, and represented 66 percent of total product revenue. Sales in the Spine business unit grew 8 percent during the second quarter of 2005 compared to the same period in 2004 and represented 12 percent of product sales. The second quarter increase in ENT ENT ears, nose, and throat (otorhinolaryngology). ENT abbr. ear, nose, and throat ENT ear, nose and throat. ENT Ears, nose & throat; formally, otorhinolaryngology product sales over the comparable period of last year was 51 percent, with ENT sales representing 22 percent of product revenue during the quarter. This growth continues to be driven by tonsillectomy tonsillectomy /ton·sil·lec·to·my/ (ton?si-lek´tah-me) excision of a tonsil. ton·sil·lec·to·my n. Surgical removal of tonsils or a tonsil. sales in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , where ArthroCare estimates Coblation technology was used in approximately 28 percent of all tonsillectomies, an increase of more than 5 percentage points versus the first quarter of 2005. OPERATIONS Product margin was 69 percent in the second quarter of 2005, compared to 68 percent in the year-ago quarter. This performance was driven primarily by the transition of Opus manufacturing to Costa Rica Costa Rica (kŏs`tə rē`kə), officially Republic of Costa Rica, republic (2005 est. pop. 4,016,000), 19,575 sq mi (50,700 sq km), Central America. . Operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. for the second quarter of $29.9 million represent an increase of approximately $8.0 million versus the comparable period in 2004. This increase was primarily driven by a $4.7 million increase in sales and marketing expense (including commissions); $1.0 million of Opus research and development expense and $0.9 million of Opus intangible asset Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. amortization; and a $0.7 million increase in general and administrative expenses, including accounting services, Sarbanes-Oxley compliance costs and a lease termination payment. ArthroCare ended the second quarter with approximately $32.6 million in cash and cash equivalents, up $8.7 million from the previous quarter. "We generated strong operating metrics metrics Managed care A popular term for standards by which the quality of a product, service, or outcome of a particular form of Pt management is evaluated. See TQM. across the company during the second quarter," said Michael A. Baker Michael Allen Baker (Captain, USN, Ret.) is the International Space Station Program Manager for International and Crew Operations, at NASA's Johnson Space Center. He is responsible for the coordination of program operations, integration and flight crew training and support , president and chief executive officer for ArthroCare. "We met or exceeded our business unit revenue goals and strategic initiatives across the board, and the quarter's strong financial results position the company to accomplish all of its objectives for 2005." RECENT CORPORATE DEVELOPMENTS --ArthroCare received notice from the U.S. Food and Drug Administration (FDA FDA abbr. Food and Drug Administration FDA, n.pr See Food and Drug Administration. FDA, n.pr the abbreviation for the Food and Drug Administration. ) that its Parallax(R) Acrylic Resin with TRACERS Tracers Refers to investment trusts which are populated by corporate bonds. In October 2001, Morgan Stanley's Tradable Custodial Receipts (Tracers) was launched. Tracers contain a number of coporate bonds and credit default swaps which are selected for liquidity and diversity. (R)-Ta Bone Cement Opacifier o·pac·i·fi·er n. A chemical agent added to a material, such as rocket propellant, to make it opaque. was cleared for the fixation fixation: see psychoanalysis. of pathological 1. pathological - [scientific computation] Used of a data set that is grossly atypical of normal expected input, especially one that exposes a weakness or bug in whatever algorithm one is using. fractures of the vertebral ver·te·bral adj. 1. Of, relating to, or of the nature of a vertebra. 2. Having or consisting of vertebrae. 3. Having a spinal column. body using vertebroplasty or kyphoplasty procedures. This product is designed to enhance the physician's ability to track the flow of bone cement under fluoroscopy fluoroscopy /flu·o·ros·co·py/ (fldbobr-ros´kah-pe) examination by means of the fluoroscope. fluo·ros·co·py n. Examination by means of a fluoroscope. Also called radioscopy. and consists of premeasured Polymethyl-methacrylate (PMMA PMMA polymethyl methacrylate. ), Barium Sulfate barium sulfate: see barite. and proprietary tantalum tantalum (tăn`tələm) [from Tantalus], metallic chemical element; symbol Ta; at. no. 73; at. wt. 180.9479; m.p. 2,996°C;; b.p. 5,400±100°C;; sp. gr. 16.65 at 20°C;; valence +2, +3, +4, or +5. disk opacifiers. These particles create visible dark dots that clearly show cement flow and placement within the bone cavity, increasing patient and procedure safety. --New study data published in the July issue of Arthroscopy Arthroscopy Definition Arthroscopy is the examination of a joint, specifically, the inside structures. The procedure is performed by inserting a specifically designed illuminated device into the joint through a small incision. : The Journal of Arthroscopic & Related Surgery showed the Coblation-based TOPAZ topaz (tō`păz), aluminum silicate mineral with either hydroxyl radicals or fluorine, Al2SiO4(F,OH)2, used as a gem. procedure to be effective when used in the treatment of common tendon tendon, tough cord composed of closely packed white fibers of connective tissue that serves to attach muscles to internal structures such as bones or other muscles. disorders such as lateral epicondylitis lateral epicondylitis Tennis elbow, see there , the condition commonly known as tennis elbow tennis elbow - overuse strain injury . The study, titled "Microtenotomy Using a Radiofrequency Probe to Treat Lateral Epicondylitis," consisted of thirteen subjects who had been suffering symptoms for six months or longer. Each of the patients had failed to achieve relief after conservative treatment. After treatment with TOPAZ, all of the patients reported significant improvement only seven to 10 days after the procedures. Ten of the 13 subjects reported noticeable improvement only one or two days after the procedure. --ArthroCare's TOPAZ procedure was named one of the top ten innovations in podiatry podiatry (pōdī`ətrē, pə–), science concerned with disorders, diseases, and deformities of the feet, also called chiropody. Podiatrists treat such common conditions as bunions, corns and calluses, and ingrown toenails. in the August 2005 issue of Podiatry Today. --During the second quarter, ArthroCare completed the transition of all Opus product manufacturing to the company's high-volume, tax-advantaged manufacturing facility in Costa Rica. --ArthroCare was named one of the fastest-growing technology companies by Business 2.0 in the publication's June 2005 issue. The magazine ranked ArthroCare number 89 in its annual Business 2.0 100 (B2 100), a list of businesses whose inventiveness and quick reflexes are helping them set the pace for the economy. Companies included in the B2 100 were ranked by Zacks Investment Research Zacks Investment Research A firm that compiles earnings estimates and brokerage firm investment recommendations for thousands of publicly traded firms. of Chicago using a rigorous combination of four financial criteria: growth in revenue, profit and operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. during the past three years, and the 12-month stock market return as of March 31, 2005. Cash flow growth counts for 40 percent of a company's ranking. Each of the other criteria counts for 20 percent. BUSINESS OUTLOOK The following statements are based on current expectations on Aug. 3, 2005. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any new businesses or license agreements the company may enter in future periods. In addition, the following guidance excludes the impact of non-cash or non-recurring charges related to equity compensation expenses. It does include anticipated depreciation, amortization and other non-recurring expenses related to all ArthroCare acquisitions, including Opus Medical. ArthroCare's business outlook for fiscal 2005 is as follows: --ArthroCare is updating fiscal 2005 guidance for product revenues, anticipating product revenues will grow by at least 35 percent compared to 2004 revenues. It also expects sequential revenue growth in all four quarters of 2005 with strong year-over-year comparisons. --The company is updating revenue guidance for the entire Sports Medicine business unit, anticipating the business will grow by at least 30 percent during 2005. This increase includes approximately $2 million in TOPAZ revenue during 2005. The company continues to expect sales of its existing Sports Medicine products to grow by at least 10 percent over 2004 revenues. It also continues to expect sales of Opus Medical products to grow by at least 50 percent. --ArthroCare is updating revenue guidance for the ENT business unit, anticipating revenues to grow by at least 40 percent. --Spine revenues are expected to grow by at least 20 percent. --ArthroCare also continues to expect operating margin Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: improvement of 3 percentage points compared with 2004, with at least 1 percentage point coming from gross margin improvement. --The company also currently expects its effective tax rate for 2005 to be approximately 23 percent versus previous guidance of 25 percent. --The company's fiscal 2005 EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. guidance remains unchanged. ArthroCare expects EPS to develop in line with recent historical patterns with strong sequential quarter-to-quarter growth; however, the company expects this pattern to be accentuated in 2005 by the integration of the Opus Medical acquisition. --ArthroCare expects EPS to grow more rapidly than revenues with an assumed share count of 26.5 million. ArthroCare's business outlook for fiscal 2006 is as follows: --ArthroCare expects fiscal 2006 product revenues will grow by at least 20 percent compared to 2005 revenues. --ArthroCare expects an operating margin improvement of 2 to 3 percentage points compared with 2005. --ArthroCare expects EPS to increase more rapidly than revenue. CONFERENCE CALL ArthroCare will hold a conference call with the financial community to discuss these results at 4:30 p.m. ET/1:30 p.m. PT today. The call will be simultaneously Webcast by CCBN CCBN Central Coast Bancorp CCBN Charles County Business Network and can be accessed on ArthroCare's Web site at www.arthrocare.com. The Webcast will remain available through Sept. 3, 2005. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21252472. ABOUT ARTHROCARE Founded in 1993, ArthroCare Corp. (www.arthrocare.com) is a highly innovative, multi-business medical device company that develops, manufactures and markets minimally invasive surgical products. With these products, ArthroCare targets a multi-billion dollar market opportunity across several medical specialties Medical Specialties See also anatomy; disease and illness; drugs; health; remedies; surgery. adenography the science of the description of glands. — adenographic, adj. , significantly improving existing surgical procedures Surgical procedures have long and possibly daunting names. The meaning of many surgical procedure names can often be understood if the name is broken into parts. For example in splenectomy, "ectomy" is a suffix meaning the removal of a part of the body. "Splene-" means spleen. and enabling new, minimally invasive procedures Minimally invasive surgical procedures avoid open invasive surgery in favor of closed or local surgery with less trauma. These procedures involve use of laparoscopic devices and remote-control manipulation of instruments with indirect observation of the surgical field through an . Many of ArthroCare's products are based on its patented Coblation technology, which uses low-temperature radiofrequency energy to gently and precisely dissolve rather than burn soft tissue -- minimizing damage to healthy tissue. Used in more than four million surgeries worldwide, Coblation-based devices have been developed and marketed for sports medicine; spine/neurologic; ear, nose and throat (ENT); cosmetic; urologic and gynecologic gynecologic /gy·ne·co·log·ic/ (gi?ne-) (jin?e-kah-loj´ik) pertaining to the female reproductive tract or to gynecology. procedures. ArthroCare also has added a number of novel technologies to its portfolio, including Opus Medical sports medicine and Parallax spine products, to complement Coblation within key indications. SAFE HARBOR Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. STATEMENTS Except for historical information, this press release includes forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. . These statements include, but are not limited to, the company's stated business outlook for fiscal 2005 and 2006, continued strength of the company's fundamental position, the strength of the company's technology, the company's belief that strategic moves will enhance achievement of the company's long term potential, the potential and expected rate of growth of new businesses, continued success of product diversification efforts, and other statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to the uncertainty of success of the company's non-arthroscopic products, competitive risk, uncertainty of the success of strategic business alliances, uncertainty over reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. , need for governmental clearances or approvals before selling products, the uncertainty of protecting the company's patent position, and any changes in financial results from completion of year-end audit activities. These and other risks and uncertainties are detailed from time to time in the company's Securities and Exchange Commission filings, including ArthroCare's Form 10-Q Form 10-Q See 10-Q. for the quarter ended March 31, 2005 and Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended Dec. 31, 2004. Forward-looking statements are indicated by words or phrases such as "anticipates," "estimates," "projects," "believes," "intends," "expects," and similar words and phrases Words and Phrases® A multivolume set of law books published by West Group containing thousands of judicial definitions of words and phrases, arranged alphabetically, from 1658 to the present. . Actual results may differ materially from management expectations.
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
June 30, June 30,
2005 2004 Variance
--------- -------- --------
Revenues:
Net Product Sales $49,683 $35,904 $13,779
Royalties, fees and other 2,049 1,761 288
--------- -------- --------
Total revenues 51,732 37,665 14,067
Cost of product sales 15,296 11,386 (3,910)
--------- -------- --------
Gross profit 36,436 26,279 10,157
--------- -------- --------
Product Margin 69.2% 68.3%
Gross Margin 70.4% 69.8%
Operating expenses:
Research and development 5,155 3,531 (1,624)
Sales and marketing 18,601 13,860 (4,741)
General and administrative 4,708 3,986 (722)
Intangible Amortization 1,458 544 (914)
--------- -------- --------
Total operating expenses 29,922 21,921 (8,001)
Income from operations 6,514 4,358 2,156
Interest and other income, net (366) (47) (319)
--------- -------- --------
Income before income tax provision 6,148 4,311 1,837
Net Operating Margin 12% 11%
Income tax provision 1,330 1,164 (166)
--------- -------- --------
Net income $4,818 $3,147 $1,671
========= ======== ========
Basic net income per share $0.20 $0.15 $0.05
========= ======== ========
Shares used in computing basic net income
per share 24,176 21,159
Diluted net income per common share $0.19 $0.14 $0.05
========= ======== ========
Shares used in computing diluted net
income per share 25,877 22,765
Six Months Ended
June, 30 June, 30
2005 2004 Variance
--------- ------------------
Revenues:
Net Product Sales $97,517 $70,196 $27,321
Royalties, fees and other 3,898 3,058 840
--------- ------------------
Total revenues 101,415 73,254 28,161
Cost of product sales 30,773 24,234 (6,539)
--------- ------------------
Gross profit 70,642 49,020 21,622
--------- ------------------
Product Margin 68.4% 65.5%
Gross Margin 69.7% 66.9%
Operating expenses:
Research and development 10,007 6,651 (3,356)
Sales and marketing 36,951 27,893 (9,058)
General and administrative 9,269 7,093 (2,176)
Intangible Amortization 2,916 1,050 (1,866)
--------- ------------------
Total operating expenses 59,143 42,687 (16,456)
Income from operations 11,499 6,333 5,166
Interest and other income, net (1,135) 127 (1,262)
--------- ------------------
Income before income tax provision 10,364 6,460 3,904
Net Operating Margin 10% 9%
Income tax provision 2,384 1,744 (640)
--------- ------------------
Net income $7,980 $4,716 $3,264
========= ==================
Basic net income per share $0.33 $0.22 $0.11
========= ==================
Shares used in computing basic net income
per share 24,044 21,085
Diluted net income per common share $0.31 $0.21 $0.10
========= ==================
Shares used in computing diluted net
income per share 25,833 22,779
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
ASSETS 2005 2004
----------- --------------
Current assets:
Cash and cash equivalents $32,590 $21,836
Accounts receivable, net of allowances 38,566 34,032
Inventories 40,309 40,484
Prepaid expenses and other current
assets 15,761 15,549
----------- --------------
Total current assets 127,226 111,901
Property and equipment, net 30,681 29,396
Related party receivables 1,075 1,075
Intangible assets 36,890 39,959
Goodwill 57,859 57,859
Other assets 327 341
----------- --------------
Total assets $254,058 $240,531
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,300 $9,517
Accrued liabilities 8,664 9,925
Accrued compensation 6,325 6,783
Current portion on long term debt 4,286 4,286
Income taxes payable 2,530 478
----------- --------------
Total current liabilities 31,105 30,989
Loan payable, net of current portion 22,500 24,643
Deferred taxes and other liabilities 9,632 9,647
----------- --------------
Total liabilities 63,237 65,279
----------- --------------
Total stockholders' equity 190,821 175,252
----------- --------------
Total liabilities and
stockholders' equity $254,058 $240,531
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