ArthroCare Reports Record Revenues of $62.5 Million for the First Quarter; Net Income Increases 122 Percent.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 first quarter ended March 31, 2006. First quarter product revenues were $60.3 million, a 26 percent increase over the $47.8 million recorded in the same quarter of the previous year. Total revenues, which include product revenues, license fees and royalties, for the first quarter were $62.5 million, a 26 percent increase over the $49.7 million reported in the first quarter of 2005. ArthroCare reported net income of $7.1 million, or $0.26 per diluted share, for the first quarter of 2006, compared to net income of $3.2 million, or $0.12 per diluted share, reported in the same quarter of 2005. Adoption of FAS 123R in the first quarter resulted in a $2.1 million, or $0.05 per diluted share, non-cash charge Non-Cash Charge A charge off, made by a company against earnings, that does not require an initial outlay of cash. Notes: Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a company's balance sheet. to net income for stock-based compensation. Excluding this required charge, non-GAAP net income for the first quarter would have been $8.4 million, or $0.31 per diluted share.
Q1 SUMMARY TABLE
Q106 Q405 Q105
-----------------------
Product Sales $60.3 M $57.4 M $47.8 M
---------------------------------------------- ------- ------- -------
License Fees, Royalties and Other Revenues $ 2.2 M $ 1.9 M $ 1.8 M
---------------------------------------------- ------- ------- -------
Total Revenues $62.5 M $59.3 M $49.7 M
---------------------------------------------- ------- ------- -------
Net Income $ 7.1 M $ 8.4 M $ 3.2 M
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Earnings Per Diluted Share $ 0.26 $ 0.31 $ 0.12
---------------------------------------------- ------- ------- -------
REVENUE In addition to first quarter product sales of $60.3 million, license fees, royalties and other revenue were $2.2 million in the first quarter of 2006, which represents 4 percent of total revenue, compared to $1.8 million or 4 percent of total first quarter 2005 revenue. International product revenue for the first quarter of 2006 increased 20 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 revenue growth of 22 percent during the quarter ended March 31, 2006 compared with the same period of 2005, and represented 67 percent of total product revenue. Sales in the Spine business unit increased 15 percent during the first quarter of 2006 compared to the same period in 2005. Spine sales represented 11 percent of product sales in the first quarter of 2006. The first 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 50 percent, with ENT sales representing 22 percent of product revenue during the quarter. OPERATIONS Product margin was 71 percent in the first quarter of 2006, compared to 68 percent in the year-ago quarter, reflecting ongoing cost reduction activities and operating efficiencies. Additionally, product margin in the first quarter of 2005 included costs associated with the transition of Opus product manufacturing to our Costa Rican facility. No stock-based compensation expense related to FAS 123R was incurred in cost of product sales in the first quarter; however, a stock-based compensation cost of $269,000 was capitalized into inventory and will be amortized through cost of sales in future periods. 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 $35.0 million in the first quarter, including the $2.1 million stock-based compensation expense. Excluding this expense, which was not required in the first quarter of 2005, non-GAAP operating expenses were $32.9 million or 53 percent of total revenue, versus $29.2 million or 59 percent of total revenue in the first quarter of 2005. OTHER ITEMS During the quarter, ArthroCare made payments of approximately $58 million to the former shareholders of Opus Medical. These payments are accounted for as goodwill on the company's balance sheet and do not impact 2006 earnings. The $52 million cash portion of this payment was funded from internal cash and a $35 million loan from ArthroCare's revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facility. The remaining $6 million was paid in stock. "Our strong performance in the first quarter provides us a solid foundation to build upon for the rest of the fiscal year," 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. "In the first quarter we generated record revenue and exceeded our objective for earnings growth. The momentum gained during the first quarter positions us well to meet the objectives we've set for 2006." RECENT CORPORATE DEVELOPMENTS --At the International Cartilage Repair Society 6th Symposium in January, study results released in a presentation by Dr. James P. Tasto, Clinical Professor in the Department of Orthopaedics at the University of California The University of California has a combined student body of more than 191,000 students, over 1,340,000 living alumni, and a combined systemwide and campus endowment of just over $7.3 billion (8th largest in the United States). San Diego San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. , show the use of Coblation technology may aid in the repair of the avascular avascular /avas·cu·lar/ (a-vas´ku-ler) not vascular; bloodless. a·vas·cu·lar adj. Not associated with or supplied by blood vessels. region of the meniscus meniscus /me·nis·cus/ (me-nis´kus) pl. menis´ci [L.] something of crescent shape, as the concave or convex surface of a column of liquid in a pipet or buret, or a crescent-shaped cartilage in the knee joint. of rabbits following injury and suture suture /su·ture/ (soo´cher) 1. sutura. 2. a stitch or series of stitches made to secure apposition of the edges of a surgical or traumatic wound. 3. to apply such stitches. 4. repair. --ArthroCare received clearance 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. ) to market its 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. Acrylic Resin Cartridge 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. that works with the Parallax Integrated Delivery System integrated delivery system Integrated provider Medical practice A coordinated health care system formed by physician groups and hospitals which ↑ efficiency and ↓ redundancy in providing health care; IDSs coordinate delivery of a broad range of health (IDS). The Parallax IDS is the industry's first fully enclosed device used to mix and deliver bone cement during vertebroplasty and kyphoplasty procedures. --ArthroCare launched the TOPAZ Endoscopic en·do·scope n. An instrument for examining visually the interior of a bodily canal or a hollow organ such as the colon, bladder, or stomach. en Plantar Fasciitis plantar fasciitis n. Inflammation of the fascia on the plantar surface of the foot, usually at the attachment to the heel, often making it painful to walk. product at the American College American College is the name of:
ACFAS Association Canadienne-Française pour l'Avancement des Sciences ) Annual Scientific Conference. --In the February issue of Otolaryngology-Head and Neck Surgery, an article entitled "Lingual lingual /lin·gual/ (ling´gwal) 1. pertaining to or near the tongue. 2. in dental anatomy, facing the tongue or oral cavity. lin·gual adj. 1. 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. Using Bipolar Radiofrequency Plasma Excision" describes the method of removing lingual tonsils The lingual tonsils are rounded masses of lymphatic tissue that cover the posterior region of the tongue. They are on the dorsal surface at the base of the tongue. Additional images Lingual tonsils not labeled, but would be at very back of tongue. using Coblation. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the article, the Coblation-based tool "generates a plasma field in saline irrigation irrigation, in agriculture, artificial watering of the land. Although used chiefly in regions with annual rainfall of less than 20 in. (51 cm), it is also used in wetter areas to grow certain crops, e.g., rice. and causes minimal tissue trauma, decreases interoperative bleeding and char formation, and minimizes postoperative post·op·er·a·tive adj. Happening or done after a surgical operation. postoperative after a surgical operation. postoperative care pain. Its ease of use, malleable malleable /mal·le·a·ble/ (mal´e-ah-b'l) susceptible of being beaten out into a thin plate. mal·le·a·ble adj. 1. Capable of being shaped or formed, as by hammering or pressure. probe, and ability to work outside the lumen of the laryngoscope la·ryn·go·scope n. A tubular endoscope that is inserted through the mouth and into the larynx and that is used for examining the interior of the larynx. la·ryn allow removal of tissue that would be extremely difficult to remove using laser or other techniques." --Also in the February issue of Otolaryngology-Head and Neck Surgery, an article entitled "Comparison of Posttonsillectomy Pain Using the Ultrasonic Scalpel scalpel /scal·pel/ (skal´p'l) a small surgical knife usually having a convex edge. scal·pel n. A small straight knife with a thin sharp blade used in surgery and dissection. , Coblator and Electrocautery electrocautery /elec·tro·cau·tery/ (-kaw´ter-e) an apparatus for surgical dissection and hemostasis, using heat generated by a high-voltage, high-frequency alternating current passed through an electrode. " concluded that patients undergoing tonsillectomy with the Coblator device reported less pain over a 10-day period than patients undergoing tonsillectomy with electrocautery or the Ultrasonic Scalpel. --Study results published in the April issue of the Journal 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. and Related Surgery show the use of Coblation technology preserves the same amount of healthy cells in a bovine model as a mechanical shaver in the treatment of the meniscus. The study also indicates Coblation may result in a smoother surface when compared to the shaver. BUSINESS OUTLOOK The following statements are based on current expectations on May 3, 2006. 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. 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. --For the second quarter of 2006, ArthroCare anticipates sequential revenue growth over the first quarter of 2006. --ArthroCare is revising its fiscal 2006 GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). diluted 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, which includes the impact of FAS 123R, to $1.10 to $1.20 from the previous range of $1.05 to $1.20. --ArthroCare estimates FAS 123R expense for stock-based compensation expenses in fiscal 2006 to be $0.15 to $0.20 per share. USE OF NON-GAAP FINANCIAL MEASURES ArthroCare believes that to properly understand the company's short- and long-term financial trends, investors may wish to consider the impact of certain charges. These charges result from facts and circumstances that vary in frequency and/or impact on continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the . In addition, ArthroCare management uses results of operations before certain charges to evaluate the operational performance of the company. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP. CONFERENCE CALL ArthroCare will hold a conference call with the financial community to discuss these results at 8:30 a.m. ET/5:30 a.m. PT today. The call will be simultaneously Webcast by Thomson-CCBN and can be accessed on ArthroCare's Web site at www.arthrocare.com. The Webcast will remain available through June 3, 2006. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21290210. 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, 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. These statements include, but are not limited to, the company's stated business outlook for fiscal 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, 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-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, 2005. 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
RECONCILIATION OF GAAP AND NON-GAAP OPERATING RESULTS
(In thousands, except per share data)
Three Months Ended
GAAP Non GAAP GAAP
March 31, Adjustments March 31, March 31,
2006 (1) 2006 2005 Variance
---------- ---------- ---------- -----------------
Revenues:
Net Product
Sales $ 60,257 $ 60,257 $ 47,834 $ 12,423
Royalties, fees
and other 2,224 2,224 1,849 375
--------- ---------- ---------- -------- --------
Total
revenues 62,481 - 62,481 49,683 12,798
Cost of product
sales 17,705 17,705 15,477 (2,228)
--------- ---------- ---------- -------- --------
Gross profit 44,776 - 44,776 34,206 10,570
--------- ---------- ---------- -------- --------
Product Margin 70.6% 70.6% 67.6%
Gross Margin 71.7% 71.7% 68.8%
Operating expenses:
Research and
development 6,202 (391) 5,811 4,852 (959)
Sales and
marketing 21,905 (787) 21,118 18,350 (2,768)
General and
administrative 5,061 (873) 4,188 4,561 373
Amortization of
intangible
assets 1,822 1,822 1,458 (364)
--------- ---------- ---------- -------- --------
Total operating
expenses 34,990 (2,051) 32,939 29,221 (3,718)
Income from
operations 9,786 2,051 11,837 4,985 6,852
Interest and
other income,
net (311) (311) (770) 459
--------- ---------- ---------- -------- --------
Income before
income tax
provision 9,475 2,051 11,526 4,215 7,311
Net Operating
Margin 15% 18% 8%
Income tax
provision 2,342 762 3,104 1,054 (2,050)
--------- ---------- ---------- -------- --------
Net income $ 7,133 $ 1,289 $ 8,422 $ 3,161 $ 5,261
========= ========== ========== ======== ========
Basic net income
per share $ 0.28 $ 0.05 $ 0.33 $ 0.13 $ 0.20
========= ========== ========== ======== ========
Shares used in
computing basic
net income
per share 25,455 25,455 25,455 23,916
Diluted net
income per
common share $ 0.26 $ 0.05 $ 0.31 $ 0.12 $ 0.19
========= ========== ========== ======== ========
Shares used in
computing
diluted net
income per share 27,107 27,107 27,107 25,741
---------- ---------- ----------- -----------------
(1) Adjustments consist of stock-based compensation and the
related tax effect for stock options. FAS 123R requires the
Company to estimate the cost of all forms of employee
stock-based compensation, including employee stock options and
awards under our employee stock purchase plan, and to record a
commensurate expense (which is subjective in nature) in the
income statement. This non-GAAP presentation is given in part
to enhance the understanding of the Company's historical
financial performance and comparability between periods in
light of a change in accounting standards adopted on January
1, 2006. The company has not previously included stock-based
compensation for stock options under FAS 123R as an expense in
its financial statements. In addition, the Company strongly
believes that the non-GAAP presentation to exclude stock-based
compensation related to its stock options is relevant and
useful information that will be widely used by analysts,
investors, and other interested parties in the medical device
industry. Accordingly, the Company is disclosing this
information to permit additional analysis of the Company's
performance.
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
-----------------------------
Three Months Ended
March 31, March 31,
2006 2005 Variance
--------- ------- --------
Revenues:
Net Product Sales $ 60,257 $47,834 $12,423
Royalties, fees and other 2,224 1,849 375
--------- ------- -------
Total revenues 62,481 49,683 12,798
Cost of product sales 17,705 15,477 (2,228)
--------- ------- -------
Gross profit 44,776 34,206 10,570
--------- ------- -------
Product Margin 70.6% 67.6%
Gross Margin 71.7% 68.8%
Operating expenses:
Research and development 6,202 4,852 (1,350)
Sales and marketing 21,905 18,350 (3,555)
General and administrative 5,061 4,561 (500)
Amortization of intangible assets 1,822 1,458 (364)
--------- ------- -------
Total operating expenses 34,990 29,221 (5,769)
Income from operations 9,786 4,985 4,801
Interest and other income, net (311) (770) 459
--------- ------- -------
Income before income tax provision 9,475 4,215 5,260
Net Operating Margin 15% 8%
Income tax provision 2,342 1,054 (1,288)
--------- ------- -------
Net income $ 7,133 $ 3,161 $ 3,972
========= ======= =======
Basic net income per share $ 0.28 $ 0.13 $ 0.15
========= ======= =======
Shares used in computing
basic net income per share 25,455 23,916
Diluted net income per common share $ 0.26 $ 0.12 $ 0.14
========= ======= =======
Shares used in computing
diluted net income per share 27,107 25,741
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