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ArthroCare Reports Second Quarter 2012 Financial Results

Under the short-term incentive plan for 2012 approved by the Board of Directors, Adjusted Operating Margin is a key metric for purposes of evaluating business performance. Adjusted Operating Margin is Operating Margin adjusted for investigation and restatement related costs. Investigation and restatement related costs were 1.2 percent and 4.3 percent of total revenue for the second quarters of 2012 and 2011, respectively, and Adjusted Operating Margin was 20.8 percent and 20.7 percent for these same periods. Adjusted Operating Margin is a non-GAAP measure of profitability and it should not be considered as a substitute for measures prepared in accordance with GAAP.

Total operating expenses were $46.4 million in the second quarter of 2012 compared to $50.4 million in the second quarter of 2011. Research and development expense increased $1.3 million and sales and marketing expense increased $1.6 million, offset by a decrease of $3.4 million in exit costs and a decrease of $2.8 million in investigation and restatement-related costs.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Earnings per share from continuing operations applicable to common stockholders was $0.34 per diluted share in the second quarter of 2012 compared to $0.29 per diluted share in the second quarter of 2011.

Net income available to common stockholders in the second quarter of 2011 included income from discontinued operations of $1.6 million and earnings per share applicable to common stockholders was $11.4 million or $0.34 per diluted share in the second quarter of 2012, compared to $11.5 million, or $0.34 per diluted share, in the second quarter of 2011.

BALANCE SHEET AND CASH FLOWS

Cash and cash equivalents was $181.2 million as of June 30, 2012 compared to $219.6 at December 31, 2011. In the first quarter of 2012, the Company paid $74 million as required under the proposed settlement of the private securities class actions. Excluding this payment, cash and cash equivalents increased $35.6 million during the six-months ended June 30, 2012. Cash used in operating activities for the six months ended June 30, 2012 was $33.0 million compared to cash flows provided by operating activities of $44.0 million for the six months ended June 30, 2011. Adjusting for the funding of the $74 million settlement of the private securities class actions, cash provided by operating activities in the first six months of 2012 would have been $41.0 million.

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