ArthroCare Reports Revenue Growth of 27 Percent for the Second Quarter; Earnings Per Share Increases 56 Percent to $0.14 Per Diluted Share.SUNNYVALE, Calif. -- 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 that in the second quarter ended June 30, 2004, the company reported product revenues of $35.9 million, a 26 percent increase over the $28.4 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 $37.7 million, a 27 percent increase over the $29.7 million reported in the second quarter of 2003. ArthroCare reported net income of $3.1 million, or $0.14 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 2004. In the same quarter of 2003, the company reported net income of $2.0 million, or $0.09 per diluted share.
Q2 SUMMARY TABLE
Q204 Q104(a) Q203
------- ------- -------
Product Sales $35.9 M $34.3 M $28.4 M
---------------------------------------------------------------------
License Fees, Royalties and Other Revenues $1.8 M $1.3 M $1.3 M
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Total Revenues $37.7 M $35.6 M $29.7 M
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Net Income $3.1 M $1.6 M $2.0 M
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Earnings Per Diluted Share $0.14 $0.07 $0.09
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(a) Reported results for the first quarter of 2004 include a $1.2
million non-recurring, non-cash charge related to the acquisition
of Parallax Medical in January 2004.
FIRST SIX MONTHS OF 2004 For the first six months of 2004, total revenues reached $73.3 million compared with $56.9 million in the same period of 2003. The product sales portion of revenue increased to $70.2 million in 2004 compared to $54.9 million in 2003. Net income for the six-month period was $4.7 million or $0.21 per diluted share, compared to six-month net income of $2.6 million, or $0.12 per diluted share in the previous year. REVENUE In addition to second quarter product sales of $35.9 million, license fees, royalties and other revenue were $1.8 million in the second quarter of 2004 compared to $1.3 in the second quarter of 2003. International sales increased 34 percent compared to the same period last year and represented 25 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 generated strong year-over-year revenue growth of 14 percent during the quarter ended June 30, 2004 compared with the same period of 2003, and represented 64 percent of total product revenue. Sales in the Spine business unit increased 55 percent during the quarter compared to the second quarter of 2003 and represented 15 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 74 percent, with ENT sales representing 20 percent of product revenue during the quarter. This growth was led 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 Coblation technology continues to progress towards becoming the standard-of-care for this procedure. OPERATIONS Product margin was 67 percent in the second quarter of 2004, compared to 62 percent in the previous quarter and 70 percent in the year-ago quarter. Gross margin was 68 percent in the second quarter of 2004, compared to 63 percent in the previous quarter and 71 percent in the year-ago quarter. 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 increased 16 percent compared to the second quarter a year ago. Sales and marketing and research and development expenses were essentially flat as a percentage of product revenue compared to the second quarter of 2003. General and administrative expenses decreased as a percentage of product revenue from 17 percent in the year-ago quarter to 12 percent in the quarter ended June 30, 2004. This decrease is due principally to lower legal expenses. "The ArthroCare team continued to execute well during the quarter, driving strong revenue growth while increasing profitability," 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 received another significant ruling in our patent enforcement lawsuit against Smith & Nephew NEPHEW, dom. rel. The son of a person's brother or sister. Amb. 514; 1 Jacob's Ch. R. 207. , ensuring Smith & Nephew's devices that infringe in·fringe v. in·fringed, in·fring·ing, in·fring·es v.tr. 1. To transgress or exceed the limits of; violate: infringe a contract; infringe a patent. 2. our patents will be off of the market by the end of this month. Our solid performance during the first half of 2004 has kept us on track to meet our financial objectives for this year." RECENT CORPORATE DEVELOPMENTS --The U.S. District Court in Delaware has permanently enjoined Smith & Nephew from manufacturing, using or selling in the United States surgical devices (the Saphyre, Control RF and ElectroBlade) that infringe ArthroCare's patents. The injunction became effective June 10, 2004. In addition, the Federal Circuit Court of Appeals denied Smith & Nephew's motion to delay enforcement of the injunction pending appeal. --ArthroCare opened a new, 5,000-square-foot finance and administrative headquarters in Austin, Texas that will allow the company to manage its business growth more cost-effectively. --A multi-center study, entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: "Pediatric pediatric /pe·di·at·ric/ (pe?de-at´rik) pertaining to the health of children. pe·di·at·ric adj. Of or relating to pediatrics. Total Tonsillectomy with Coblation Compared to Conventional 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. : A Prospective, Controlled Single-Blind Study single-blind study, n an experiment in which the person collecting the data knows whether the subjects are in the control or experimental groups but the subjects do not. single-blind study see blinding. ," was published in the June issue of Otolaryngology otolaryngology or otorhinolaryngology Medical specialty dealing with the ear, nose, and throat (see larynx, pharynx). The connection of these structures became known in the late 19th century. -- Head & Neck Surgery. The study found that pediatric tonsillectomy using Coblation led to a better quality recovery, fewer complications and decreased narcotic narcotic, any of a number of substances that have a depressant effect on the nervous system. The chief narcotic drugs are opium, its constituents morphine and codeine, and the morphine derivative heroin. See also drug addiction and drug abuse. use when compared to the standard technology, electrocautery. --In May 2004, Drs. Michael Timms and Magne Tvinnereim performed a Coblation tonsillectomy and Coblation Assisted Upper-airway Procedure (CAUP CAUP Centro de Astrofísica da Universidade do Porto (Portuguese: Center for Astrophysics of the University of Porto; Portugal) ) during a live Webcast from the Blackburn Royal Infirmary Royal Infirmary may refer to:
BUSINESS OUTLOOK The following statements are based on current expectations on July 20, 2004. 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 2004 remains unchanged and is as follows: --ArthroCare expects 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. ) for fiscal 2004 to be between $0.52 and $0.56, with an assumed share count of 23.1 million. --The company anticipates fiscal 2004 product revenue to grow in excess of 20 percent compared to 2003 revenues. --ArthroCare expects to improve operating margins Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: by 4-5 percentage points in 2004 compared with 2003. --The company also currently expects the effective tax rate for 2004 to be approximately 27 percent. ArthroCare's business outlook for fiscal 2005 remains unchanged and is as follows: --ArthroCare anticipates fiscal 2005 product revenue to grow by at least 20 percent compared to 2004 revenues. --As revenues increase, the company expects continued operating margin improvement in fiscal 2005. --On a long-term basis, ArthroCare expects its EPS growth rate will continue to exceed its revenue growth rate as margins improve. 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 Aug. 3, 2004. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21200563. ABOUT ARTHROCARE ArthroCare Corp. (www.arthrocare.com), headquartered in Sunnyvale, Calif., is a multi-business medical device company that develops, manufactures and markets minimally invasive surgical products, many of which are based on its patented Coblation technology. Coblation uses low-temperature radio-frequency 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. 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 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 . ArthroCare's Coblation-based devices have been used in more than two million surgical procedures worldwide. The company has developed and marketed Coblation-based products for arthroscopic, spine/neurologic, ear, nose and throat, cosmetic cosmetic /cos·met·ic/ (koz-met´ik) 1. pertaining to cosmesis. 2. a beautifying substance or preparation. cos·met·ic n. , urologic, gynecologic gynecologic /gy·ne·co·log·ic/ (gi?ne-) (jin?e-kah-loj´ik) pertaining to the female reproductive tract or to gynecology. and laparoscopic/general surgical procedures, and continues research in other areas. 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 2004 and 2005, 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, and the uncertainty of protecting the company's patent position. 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 December 31, 2003 and the 10-Q for the quarter ended March 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 Six Months Ended
June 30 March 31 June 30 June 30
2004 2004 Variance 2004 2003 Variance
-------- -------- -------- -------- -------- --------
Revenues:
Net Product
Sales $35,904 $34,292 $1,612 $70,196 $54,850 $15,346
Royalties, fees
and other 1,761 1,297 464 3,058 2,052 1,006
-------- -------- -------- -------- -------- --------
Total revenues 37,665 35,589 2,076 73,254 56,902 16,352
Cost of product
sales 11,867 13,080 1,213 24,947 17,259 (7,688)
-------- -------- -------- -------- -------- --------
Gross profit 25,798 22,509 3,289 48,307 39,643 8,664
-------- -------- -------- -------- -------- --------
Product Margin 67% 62% 64% 69%
Gross Margin 68% 63% 66% 70%
Operating expenses:
Research and
development 3,531 3,120 (411) 6,651 5,253 (1,398)
Sales and
marketing 14,088 14,328 240 28,416 23,038 (5,378)
General and
administrative 4,302 3,318 (984) 7,620 8,693 1,073
-------- -------- -------- -------- -------- --------
Total operating
expenses 21,921 20,766 (1,155) 42,687 36,984 (5,703)
Income from
operations 3,877 1,743 2,134 5,620 2,659 2,961
Interest and other
income, net 434 406 28 840 1,045 (205)
-------- -------- -------- -------- -------- --------
Income before
income tax
provision 4,311 2,149 2,162 6,460 3,704 2,756
Net margin 11% 6% 9% 7%
Income tax
provision 1,164 580 (584) 1,744 1,148 (596)
-------- -------- -------- -------- -------- --------
Net income $3,147 $1,569 1,578 $4,716 $2,556 2,160
======== ======== ======== ======== ======== ========
Basic net income
per share $0.15 $0.07 $0.08 $0.22 $0.12 $0.10
======== ======== ======== ======== ======== ========
Shares used in
computing basic
net income per
share 21,159 20,996 21,085 21,039
Diluted net
income per
common share $0.14 $0.07 $0.07 $0.21 $0.12 $0.09
======== ======== ======== ======== ======== ========
Shares used in
computing diluted
net income per
share 22,765 22,785 22,779 21,728
ARTHROCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
ASSETS 2004 2003
-------- -----------
Current assets:
Cash and cash equivalents $11,846 $20,890
Accounts receivable, net of allowances 26,215 24,122
Inventories 35,889 33,072
Prepaid expenses and other current assets 10,520 6,921
-------- --------
Total current assets 84,470 85,005
Available-for-sale securities 13,942 10,428
Property and equipment, net 26,666 23,493
Related party receivables 1,075 1,205
Other assets 47,621 18,007
-------- --------
Total assets $173,774 $138,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,094 $6,808
Accrued liabilities 8,062 4,082
Accrued compensation 5,691 5,323
Income taxes payable 1,789 1,122
-------- --------
Total current liabilities 21,636 17,335
Loan Payable 15,000 -
Other liabilities 3,826 155
-------- --------
Total liabilities 40,462 17,490
-------- --------
Total stockholders' equity 133,312 120,648
-------- --------
Total liabilities and stockholders'
equity $173,774 $138,138
======== ========
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