ArthroCare Reports Record Revenues of $53.6 Million for the Third Quarter; Revenue Growth of 40 Percent Drives Strong Cash Flow and a 99 Percent Increase in Net Income.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 invasive /in·va·sive/ (-siv) 1. having the quality of invasiveness. 2. involving puncture of the skin or insertion of an instrument or foreign material into the body; said of diagnostic techniques. surgical products, announced today financial results for the third quarter ended Sept. 30, 2005. Third quarter product revenues were $51.6 million, a 40 percent increase over the $36.8 million recorded in the same quarter of the previous year. Total revenues, which include product revenues, license fees and royalties, for the third quarter were $53.6 million, a 40 percent increase over the $38.2 million reported in the third 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, Inc. 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., as well as the 2005 acquisition of Applied Therapeutics therapeutics Treatment and care to combat disease or alleviate pain or injury. Its tools include drugs, surgery, radiation therapy, mechanical devices, diet, and psychiatry. , Inc. Excluding the impact of these acquisitions, total revenue growth for the third quarter of 2005 versus the comparable period in 2004 was approximately 19 percent. ArthroCare reported net income of $7.2 million, or $0.27 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 third quarter of 2005, compared to net income of $3.6 million, or $0.16 per diluted share, reported in the same quarter of 2004.
Q3 SUMMARY TABLE
Q305 Q205 Q304
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Product Sales $51.6 M $49.7 M $36.8 M
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License Fees, Royalties and Other
Revenues $2.0 M $2.0 M $1.4 M
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Total Revenues $53.6 M $51.7 M $38.2 M
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Net Income $7.2 M $4.8 M $3.6 M
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Earnings Per Diluted Share $0.27 $0.19 $0.16
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FIRST NINE MONTHS OF 2005 For the first nine months of 2005, total revenues reached $155.0 million, a 39 percent increase compared with 2004 total revenues of $111.4 million. The product sales portion of revenue also increased 39 percent to $149.1 million compared to $107.0 million in 2004. Net income for the nine-month period was $15.2 million, or $0.58 per diluted share, which represents a 61 percent increase in earnings per share (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. ) compared to nine-month net income of $8.3 million, or $0.36 per diluted share, in the previous year. REVENUE In addition to third quarter product sales of $51.6 million, license fees, royalties and other revenue were $2.0 million in the third quarter of 2005, which represents 4 percent of total revenue, compared to $1.4 million and 4 percent of total revenue in the third quarter of 2004. Despite the strengthening U.S. dollar, international revenue for the third quarter of 2005 increased 14 percent compared to the same period last year, and represented 20 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 49 percent during the quarter ended Sept. 30, 2005 compared with the same period of 2004, and represented 67 percent of total product revenue. Sales in the Spine business unit were flat during the third quarter of 2005 compared to the same period in 2004 and prior quarter in 2005. Spine sales represented 12 percent of product sales in the third quarter of 2005. The third 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 49 percent, with ENT sales representing 21 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 30 percent of all tonsillectomies during the third quarter. OPERATIONS Product margin was 68 percent in the third quarter of 2005, compared to 67 percent in the year-ago quarter, reflecting ongoing improvements related to ArthroCare's Costa Rican manufacturing strategy. 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. were approximately $26.5 million in the third quarter, compared to $29.9 million in the second quarter of 2005. This quarter-to-quarter decrease is due substantially to a payment associated with the Smith & Nephew NEPHEW, dom. rel. The son of a person's brother or sister. Amb. 514; 1 Jacob's Ch. R. 207. License and Settlement Agreement, as well as a reduction in consulting and accounting services fees and legal expenses. These reductions were partially offset by costs related to the acquisition of Applied Therapeutics, including a $2.4 million write-off Write-Off A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues. for in-process research and development. Cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses for the three months ended Sept. 30, 2005 improved to $14.3 million due, in part, to the Smith & Nephew settlement fee. ArthroCare ended the third quarter with approximately $39.7 million in cash and cash equivalents, up $7.1 million from the previous quarter after making a $10 million cash payment for the Applied Therapeutics asset purchase and a $1.1 million term loan payment. "We are pleased to report a strong financial performance for the third 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 generated record revenue, strong cash flow, and grew earnings per share even more rapidly than sales. In addition, we completed a number of strategic initiatives -- including the product supply agreement with Smith & Nephew and acquisition of Applied Therapeutics -- which will further enhance our strategic position moving forward." RECENT CORPORATE DEVELOPMENTS --On Oct. 5, 2005, ArthroCare repaid the remaining $26 million balance on its term loan related to the Opus Medical acquisition, enabling the company to eliminate its existing long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. . The company is in the process of negotiating a new credit facility, which will be used to fund the anticipated 2006 Opus Medical earn-out payments, the potential Applied Therapeutics earn-out payment and other strategic capital needs. --ArthroCare signed a worldwide product supply agreement with the Endoscopy endoscopy Examination of the body's interior through an instrument inserted into a natural opening or an incision, usually as an outpatient procedure. Endoscopes include the upper gastrointestinal endoscope (for the esophagus, stomach, and duodenum), the colonoscope (for the business of Smith & Nephew. Under the agreement, ArthroCare will manufacture bipolar (1) See bipolar transmission. (2) One of two major categories of transistor; the other is "field effect transistor" (FET). Although the first transistors and first silicon chips were bipolar, most chips today are field effect transistors wired as CMOS logic, which and monopolar 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. products for worldwide sale by Smith & Nephew. As part of a joint licensing agreement, ArthroCare also will receive royalty payments for all bipolar products Smith & Nephew sells in the United States and for bipolar shaver products manufactured and sold by Smith & Nephew worldwide. ArthroCare also has been granted a license for the worldwide sale of spine products. In addition to product sales from the supply agreement and royalties, ArthroCare received a one-time cash settlement payment at signing and will receive a series of related milestone payments over the next twelve months. The product supply and license agreements settle all legal disputes between ArthroCare and Smith & Nephew, including the pending legal matters in Delaware and Tennessee. --ArthroCare purchased substantially all of the business and assets and assumed certain liabilities of Applied Therapeutics, Inc., a maker of ENT sinus surgery treatment products. Its patented carboxymethyl-cellulose (CMC (Common Messaging Calls) A programming interface specified by the XAPIA as the standard messaging API for X.400 and other messaging systems. CMC is intended to provide a common API for applications that want to become mail enabled. 1. )-based packing and tamponade tamponade /tam·pon·ade/ (tam?po-nad´) 1. surgical use of a tampon. 2. pathologic compression of a part. products promote platelet aggregation Platelet aggregation The clumping together of blood cells, possibly forming a clot. Mentioned in: Herbalism, Traditional Chinese directly at the wound site while remaining moist moist having a moderate moisture content, slightly wet to the touch. moist dermatitis see moist dermatitis of rabbits. moist grain storage grain stored at about 30% moisture in airtight silos. for the duration of insertion insertion n. the addition of language at a place within an existing typed or written document, which is always suspect unless initialled by all parties. . --ArthroCare launched its new LabraFix System, a knotless Knot´less a. 1. Free from knots; without knots. arthroscopic repair technology that provides surgeons with an easy and fast labral repair. The LabraFix System -- which leverages the clinically proven AutoCuff(R) technology for Rotator Cuff rotator cuff n. A set of muscles and tendons that secures the arm to the shoulder joint and permits rotation of the arm. Also called musculotendinous cuff. Repair -- is designed to provide orthopedic orthopedic /or·tho·pe·dic/ (-pe´dik) pertaining to the correction of deformities of the musculoskeletal system; pertaining to orthopedics. surgeons with an enhanced arthroscopic approach to repairing shoulder labrum labrum /la·brum/ (la´brum) pl. la´bra [L.] an edge, rim, or lip. la·brum n. pl. la·bra A lip-shaped anatomical edge, rim, or structure. labrum pl. tears (Bankart and SLAP lesions) without having to tie complex and time-consuming surgical knots. The enabling technology has the potential to lower procedure costs by minimizing surgery time; it is faster than conventional arthroscopic techniques, enabling five-second direct, single-step suturing su·ture n. 1. a. The process of joining two surfaces or edges together along a line by or as if by sewing. b. The material, such as thread, gut, or wire, that is used in this procedure. c. and knotless fixation fixation: see psychoanalysis. . --ArthroCare was named one of the 50 fastest growing technology companies in Texas by Deloitte in its Technology Fast 50 Program. Technology Fast 50 winners are ranked based on percentage of revenue growth over five years (2000 - 2004). --ArthroCare received a 2005 Technology & Business award from Start magazine. These awards honor As a verb, to accept a bill of exchange, or to pay a note, check, or accepted bill, at maturity. To pay or to accept and pay, or, where a credit so engages, to purchase or discount a draft complying with the terms of the draft. manufacturers who have "shown themselves to be extremely adept at using leading-edge technology to solve critical business issues." ArthroCare won the award for the successful implementation of its product lifecycle Product lifecycle or product life cycle is the course of a product's sales and profits over time. The five stages of each product lifecycle are product development, introduction, growth, maturity and decline. management solution. BUSINESS OUTLOOK The following statements are based on current expectations on Nov. 1, 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. The following fiscal year 2005 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 ArthroCare acquisitions, including Opus Medical and Applied Therapeutics. ArthroCare's updated business outlook for fiscal 2005 is as follows: --ArthroCare expects total revenues for the fourth quarter of fiscal 2005 to be between $55 million and $60 million, and total revenues for fiscal 2005 to be in the range of $210 million to $215 million. --ArthroCare anticipates diluted EPS for the fourth quarter of fiscal 2005 to be between $0.28 and $0.30. The following fiscal year 2006 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 ArthroCare acquisitions, including Opus Medical and Applied Therapeutics, as well as the impact of the Smith & Nephew agreement, including the milestone payments from Smith & Nephew payable to ArthroCare in fiscal year 2006. ArthroCare's business outlook for fiscal 2006 is as follows: --The company expects total revenues for fiscal 2006 to be in the range of $255 million to $265 million. --ArthroCare anticipates diluted EPS for fiscal 2006 to be in the range of $1.25 to $1.35. 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 Dec. 1, 2005. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21265578. 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 A Web site design technique borrowed from the film and video industry in which the transition between two Web pages is represented visually by one page fading into another. Also known as a "soft cut," the result is achieved in the HTML coding of the images to gradual pre-determined 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 cosmetic /cos·met·ic/ (koz-met´ik) 1. pertaining to cosmesis. 2. a beautifying substance or preparation. cos·met·ic n. ; 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, Parallax spine and Applied Therapeutics ENT 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 Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. 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 June 30, 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)
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Three Months Ended
September 30, September 30,
2005 2004 Variance
------------- ------------- -----------
Revenues:
Net Product Sales $51,621 $36,811 $14,810
Royalties, fees and other 2,003 1,383 620
------------- ------------- -----------
Total revenues 53,624 38,194 15,430
Cost of product sales 16,402 12,139 (4,263)
------------- ------------- -----------
Gross profit 37,222 26,055 11,167
------------- ------------- -----------
Product Margin 68.2% 67.0%
Gross Margin 69.4% 68.2%
Operating expenses:
Research and development 5,261 3,189 (2,072)
Sales and marketing 18,258 13,646 (4,612)
General and administrative (1,014) 3,989 5,003
Acquired in process research
and development costs
(IPR&D) 2,400 - (2,400)
Amortization of intangible
assets 1,564 586 (978)
------------- ------------- -----------
Total operating expenses 26,469 21,410 (5,059)
Income from operations 10,753 4,645 6,108
Interest and other income, net (693) 316 (1,009)
------------- ------------- -----------
Income before income tax
provision 10,060 4,961 5,099
Net Operating Margin 19% 13%
Income tax provision 2,866 1,340 (1,526)
------------- ------------- -----------
Net income $7,194 $3,621 $3,573
============= ============= ===========
Basic net income per share $0.29 $0.17 $0.12
============= ============= ===========
Shares used in computing basic
net income per share 24,538 21,411
Diluted net income per common
share $0.27 $0.16 $0.11
============= ============= ===========
Shares used in computing
diluted net income per share 26,470 23,194
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Nine Months Ended
September 30, September 30,
2005 2004 Variance
------------- ------------- -----------
Revenues:
Net Product Sales $149,139 $107,007 $42,132
Royalties, fees and other 5,900 4,441 1,459
------------- ------------- -----------
Total revenues 155,039 111,448 43,591
Cost of product sales 47,175 36,373 (10,802)
------------- ------------- -----------
Gross profit 107,864 75,075 32,789
------------- ------------- -----------
Product Margin 68.4% 66.0%
Gross Margin 69.6% 67.4%
Operating expenses:
Research and development 15,268 9,840 (5,428)
Sales and marketing 55,208 41,539 (13,669)
General and administrative 8,255 11,082 2,827
Acquired in process research
and development costs
(IPR&D) 2,400 - (2,400)
Amortization of intangible
assets 4,480 1,636 (2,844)
------------- ------------- -----------
Total operating expenses 85,611 64,097 (21,514)
Income from operations 22,253 10,978 11,275
Interest and other income, net (1,829) 443 (2,272)
------------- ------------- -----------
Income before income tax
provision 20,424 11,421 9,003
Net Operating Margin 13% 10%
Income tax provision 5,250 3,084 (2,166)
------------- ------------- -----------
Net income $15,174 $8,337 $6,837
============= ============= ===========
Basic net income per share $0.63 $0.39 $0.24
============= ============= ===========
Shares used in computing basic
net income per share 24,199 21,203
Diluted net income per common
share $0.58 $0.36 $0.22
============= ============= ===========
Shares used in computing
diluted net income per share 26,155 22,926
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ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
ASSETS 2005 2004
--------------- --------------
Current assets:
Cash and cash equivalents $39,684 $21,836
Accounts receivable, net of
allowances 42,159 34,032
Inventories, net 42,913 40,484
Prepaid expenses and other current
assets 15,310 15,549
--------------- --------------
Total current assets 140,066 111,901
Property and equipment, net 31,170 29,396
Related party receivables 1,075 1,075
Intangible assets, net 42,049 39,959
Goodwill 57,980 57,859
Other assets 328 341
--------------- --------------
Total assets $272,668 $240,531
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $12,068 $9,517
Accrued liabilities 8,429 9,925
Accrued compensation 6,198 6,783
Current portion of long term debt 25,714 4,286
Income taxes payable 5,338 478
--------------- --------------
Total current liabilities 57,747 30,989
Loan payable, net of current portion - 24,643
Deferred taxes and other liabilities 9,525 9,647
--------------- --------------
Total liabilities 67,272 65,279
--------------- --------------
Total stockholders' equity 205,396 175,252
--------------- --------------
Total liabilities and
stockholders' equity $272,668 $240,531
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