ArthroCare Reports Third Quarter 2011 Financial Results

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents increased $75.1 million to $207.7 million as of September 30, 2011 from December 31, 2010. Cash flows provided by operating activities for the nine months ended September 30, 2011 was $69.8 million compared to $63.6 million for the nine months ended September 30, 2010.

CONFERENCE CALL

ArthroCare will hold a conference call with the financial community to present these results at 8:30 a.m. ET/5:30 a.m. PT on Thursday, November 3, 2011. To participate in the live conference call dial 800-950-3502. A live and on-demand webcast of the call will be available on ArthroCare’s Web site at www.arthrocare.com. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21544090. The replay will remain available through November 17, 2011.

ABOUT ARTHROCARE

ArthroCare develops and manufactures surgical devices, instruments, and implants that strive to enhance surgical techniques as well as improve patient outcomes. Its devices improve many existing surgical procedures and enable new minimally invasive procedures. Many of ArthroCare’s devices use its internationally patented Coblation ^® technology. This technology precisely dissolves target tissue and limits damage to surrounding healthy tissue. ArthroCare also develops surgical devices utilizing other patented technology including its OPUS ^® line of fixation products as well as re-usable surgical instruments. ArthroCare is leveraging these technologies in order to offer a comprehensive line of surgical devices to capitalize on a multi-billion dollar market opportunity across several surgical specialties, including its two core product areas consisting of Sports Medicine and Ear, Nose, and Throat as well as other areas such as spine, wound care, urology and gynecology.

FORWARD-LOOKING STATEMENTS

The information provided herein includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on beliefs and assumptions by management and on information currently available to management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any of them publicly in light of new information or future events. Additional factors that could cause actual results to differ materially from those contained in any forward-looking statement include, without limitation: the resolution of litigation pending against the Company; the Company’s ability to design or improve internal controls to address issues detected in its reviews of internal controls and insurance reimbursement practices or by management in its reassessment of the Company’s internal controls; the impact upon the Company’s operations of legal compliance matters or internal controls review, improvement and remediation; the ability of the Company to control expenses relating to legal compliance matters or internal controls review, improvement and remediation; the Company’s ability to remain current in its periodic reporting requirements under the Exchange Act and to file required reports with the Securities and Exchange Commission on a timely basis; the results of the investigation being conducted by the United States Department of Justice; the impact on the Company of additional civil and criminal investigations by state and federal agencies and civil suits by private third parties involving the Company’s financial reporting and its previously announced restatement and its insurance billing and healthcare fraud-and-abuse compliance practices; the ability of the Company to attract and retain qualified senior management and to prepare and implement appropriate succession planning for its Chief Executive Officer; general business, economic and political conditions; competitive developments in the medical devices market; changes in applicable legislative or regulatory requirements; the Company’s ability to effectively and successfully implement its financial and strategic alternatives, as well as business strategies, and manage the risks in its business; and the reactions of the marketplace to the foregoing.

ARTHROCARE CORPORATION
Condensed Consolidated Balance Sheets - Unaudited
(in thousands, except par value data)
				September 30, 2011				December 31, 2010
ASSETS
Current assets:
	Cash and cash equivalents			$	207,674			$	132,536
	Accounts receivable, net of allowances of $2,226 and $2,445 at September 30, 2011 and December 31, 2010, respectively				39,917				48,870
	Inventories, net				35,593				34,087
	Deferred tax assets				18,496				24,661
	Prepaid expenses and other current assets				5,929				4,424
	Assets held for sale				-				3,081
		Total current assets			307,609				247,659
Property and equipment, net					36,120				41,582
Intangible assets, net					6,770				10,733
Goodwill					119,154				119,020
Deferred tax assets					16,019				16,019
Other assets					1,617				4,182
		Total assets		$	487,289			$	439,195
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	15,223			$	13,819
	Accrued liabilities				45,751				40,197
	Deferred tax liabilities				149				149
	Income tax payable				2,071				1,555
		Total current liabilities			63,194				55,720
Deferred tax liabilities					213				213
Other non-current liabilities					14,174				13,766
		Total liabilities			77,581				69,699
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares; Issued and outstanding: 75 shares at September 30, 2011 and December 31, 2010; Redemption value $87,089					76,316				73,768
Stockholders' equity:
	Preferred stock, par value $0.001; Authorized: 4,900 shares; Issued and outstanding: none				-				-
	Common stock, par value $0.001; Authorized: 75,000 shares; Issued: 31,458 and 31,102 shares; Outstanding: 27,479 and 27,112 shares at September 30, 2011 and December 31, 2010, respectively				27				27
	Treasury stock: 3,978 shares at September 30, 2011 and 3,990 shares December 31, 2010				(107,408	)			(107,899	)
	Additional paid-in capital				398,270				386,395
	Accumulated other comprehensive income				4,611				4,246
	Retained earnings				37,892				12,959
		Total stockholders' equity			333,392				295,728
		Total liabilities, redeemable convertible preferred stock and stockholders' equity		$	487,289			$	439,195

ARTHROCARE CORPORATION
Condensed Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
			Three Months Ended September 30,								Nine Months Ended September 30,
			2011				2010				2011				2010
Revenues:
	Product sales		$	79,432			$	82,917			$	249,864			$	251,148
	Royalties, fees and other			3,835				3,536				12,609				11,598
	Total revenues			83,267				86,453				262,473				262,746
Cost of product sales				25,529				28,632				76,170				83,569
Gross profit				57,738				57,821				186,303				179,177
Operating expenses:
	Research and development			8,037				9,244				21,460				26,537
	Sales and marketing			25,752				26,156				81,124				79,898
	General and administrative			9,479				9,723				26,372				26,048
	Amortization of intangible assets			1,338				1,315				3,972				3,932
	Exit costs			2,814				-				5,304				-
	Investigation and restatement related costs			5,963				(99	)			12,145				3,245
	Total operating expenses			53,383				46,339				150,377				139,660
Income from operations				4,355				11,482				35,926				39,517
	Foreign exchange gain (loss)			(902	)			1,323				(160	)			(2,711	)
	Interest and other expense, net			(126	)			(96	)			(501	)			(287	)
	Other income (expense)			(1,028	)			1,227				(661	)			(2,998	)
Income from continuing operations before income taxes				3,327				12,709				35,265				36,519
Income tax provision				898				3,536				9,677				9,984
Net income from continuing operations				2,429				9,173				25,588				26,535
Income (loss) from discontinued operations				-				85				1,911				(368	)
Net income				2,429				9,258				27,499				26,167
	Accrued dividend and accretion charges on Series A 3% Convertible Preferred Stock			(857	)			(820	)			(2,546	)			(2,434	)
Net income available to common stockholders			$	1,572			$	8,438			$	24,953			$	23,733
Weighted-average shares outstanding:
	Basic			27,466				27,017				27,335				26,972
	Diluted			27,855				27,323				27,755				27,299
Earnings per share from continuing operations applicable to common stockholders:
	Basic		$	0.05			$	0.25			$	0.70			$	0.74
	Diluted		$	0.05			$	0.25			$	0.68			$	0.73
Earnings per share applicable to common stockholders:
	Basic		$	0.05			$	0.26			$	0.75			$	0.72
	Diluted		$	0.05			$	0.25			$	0.74			$	0.72

ARTHROCARE CORPORATION
Supplemental Schedule of Product Sales
(in thousands)
			Three Months Ended												Three Months Ended
			September 30, 2011												September 30, 2010
			Americas			International			Total Product Sales			% Net Product Sales			Americas			International			Total Product Sales			% Net Product Sales
	Sports Medicine		$	33,251		$	18,850		$	52,101		65.6	%		$	40,029		$	16,944		$	56,973		68.7	%
	ENT			20,046			4,851			24,897		31.3	%			19,379			3,636			23,015		27.8	%
	Other			658			1,776			2,434		3.1	%			1,016			1,913			2,929		3.5	%
	Total Product Sales		$	53,955		$	25,477		$	79,432		100.0	%		$	60,424		$	22,493		$	82,917		100.0	%
			Nine Months Ended												Nine Months Ended
			September 30, 2011												September 30, 2010
			Americas			International			Total Product Sales			% Net Product Sales			Americas			International			Total Product Sales			% Net Product Sales
	Sports Medicine		$	106,980		$	58,987		$	165,967		66.4	%		$	122,121		$	50,012		$	172,133		68.5	%
	ENT			62,732			13,903			76,635		30.7	%			58,990			10,945			69,935		27.9	%
	Other			2,203			5,059			7,262		2.9	%			3,115			5,965			9,080		3.6	%
	Total Product Sales		$	171,915		$	77,949		$	249,864		100.0	%		$	184,226		$	66,922		$	251,148		100.0	%

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