ArthroCare's Fourth Quarter 2007 Revenue Growth of 25 Percent Exceeds Consensus Estimates

ArthroCare Corp. (Nasdaq: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, reported earnings results for the quarter and year ended December 31, 2007 as follows: FOURTH QUARTER HIGHLIGHTS Total revenue increased 25 percent to $87.5 million Gross revenue margin increased four points to 76 percent Operating profit increased five points to 20 percent Net income increased 78 percent to $14.5 million, or $0.50 per diluted share HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 31, 2007 Total revenue increased 21 percent to $319.2 million Gross revenue margin increased three points to 74 percent Operating profit increased one point to 17 percent Net income increased 36 percent to $43.2 million, or $1.50 per diluted share Cash flow from operations increased 20 percent to $52.7 million "We continue to systematically leverage our platform technologies in the market place, resulting in breakthrough products, growing clinical credibility within the surgical community and significant increases in product acceptance both in the U.S. and abroad,” noted Mike Baker, CEO of ArthroCare. REVENUE Fourth quarter product sales of $84.5 million increased 26 percent from $67.2 million in the fourth quarter of 2006. Royalties, fees and other revenue was $3.0 million in the fourth quarter of 2007 compared to $2.6 million in the fourth quarter of 2006, which represents three percent of total revenue in the fourth quarter of 2007 and four percent of total revenue for the fourth quarter of 2006. International product sales increased 22 percent in the fourth quarter over the fourth quarter of 2006, led by the sale of Sports Medicine products in the Company’s direct distribution markets. For the year ended December 31, 2007, product sales increased 21 percent to $307.6 million from $253.4 million in 2006. Royalties, fees and other revenue was $11.6 million for the year ended December 31, 2007 compared to $9.6 million in 2006, which represents four percent of total revenue in both years. International product sales increased 26 percent for the year ended December 31, 2007 compared to the year ended December 31, 2006. BUSINESS UNIT PERFORMANCE The Sports Medicine business unit produced sales growth of 22 percent during the fourth quarter of 2007 compared with the same period of 2006, and represented 62 percent of total product sales in the fourth quarter of 2007. Sales in the Spine business unit during the fourth quarter of 2007 grew 53 percent compared to the same period in 2006, with Spine sales representing 15 percent of product sales in the fourth quarter of 2007. Fourth quarter 2007 ENT product sales increased 21 percent over the same period last year, with ENT sales representing 23 percent of product sales during the fourth quarter of 2007. For the year ended December 31, 2007, the Sports Medicine business unit produced sales growth of 14 percent compared to the same period of 2006, and represented 62 percent of total product sales for 2007. Sales in the Spine business unit grew 68 percent year over year and represented 14 percent of product sales in 2007. ENT product sales increased 22 percent in 2007 compared to 2006, with ENT sales representing 24 percent of annual product sales in 2007. OPERATIONS Product margin was 75 percent in the fourth quarter of 2007, compared to 71 percent in the fourth quarter of 2006. The four-point improvement in product margin is a result of increased manufacturing efficiencies, a rise in average selling prices and increased sales volume associated with the Company’s higher gross margin products. Operating expenses were $48.7 million in the fourth quarter of 2007 compared to $39.9 million in the fourth quarter of 2006. The increase in expense is principally driven by an increase in sales employees and additional marketing expenditures to support emerging spine and oncology opportunities. Product margin increased three points for the year ended December 31, 2007 to 73 percent from 70 percent in 2006. Operating expenses were $181.3 million in 2007 compared to $143.7 million in 2006. The year over year increase is primarily driven by sales volume-based compensation and expenses, clinical testing, marketing, and promotions related to new product lines. BALANCE SHEET Cash, cash equivalents and short-term investments increased $12.5 million to $43.3 million as of December 31, 2007, compared to $30.8 million at December 31, 2006. Inventory increased approximately $10.2 million or 20 percent to $61.8 million from $51.5 million at December 31, 2006. Accounts receivable increased 13 percent to $69.9 million from $61.9 million at December 31, 2006. During the fourth quarter of 2007, ArthroCare acquired DiscoCare, Inc., a third-party billing and reimbursement service provider for $25 million in cash plus potential future milestone payments. The Company also substantially completed a five percent repurchase of its common stock. Both the acquisition and share repurchase payments were funded from internal cash and a $60.0 million borrowing from ArthroCare’s revolving credit facility. RECENT CORPORATE DEVELOPMENTS ArthroCare’s Coblation technology was featured prominently in a new book published by the National Academy of Science, which evaluates the state of plasma science. ArthroCare was named among the Best Companies to Work for in Texas. The recognition comes from the Texas Association of Business and the Texas State Council of the Society for Human Resources Management and ranks ArthroCare No. 10 on its list of mid-sized companies. A total of 75 companies were ranked and segmented according to small, mid-sized and large companies. BUSINESS OUTLOOK The following statements are based on current expectations on February 19, 2008. 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 into in future periods. ArthroCare’s business outlook for fiscal 2008 and for the first quarter 2008 is as follows: The Company expects total annual revenue growth of at least 20 percent. The Company expects the Sports Medicine business unit to achieve revenue growth in the low to mid teens. ENT business unit revenue growth is expected to be at least 20 percent. Spine business unit revenue growth is anticipated to exceed 40 percent. For 2008, the Company anticipates operating margin improvement of approximately 2 points. The Company expects net income per share growth greater than revenue growth. GAAP diluted net income per share for 2008 is forecast to be in the range of $1.92 to $2.00. For the first quarter, the Company expects revenue growth of at least 20 percent over the first quarter of 2007, with individual business unit revenues in line with calendar guidance. Margins are expected to be lower in the first quarter than the Company’s calendar year guidance due to acquisition integration expenses, annual holiday shutdown of the Company’s Costa Rican facility and seasonal marketing expenses. The Company anticipates sequential improvement in quarterly margins during the remainder of the year. Net income per share for the quarter is expected to be in the range of $0.30 to $0.32. 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. A live webcast of the call will be available on ArthroCare’s Web site at www.arthrocare.com. The webcast will remain available through March 18, 2008. A telephonic replay of the conference call can be accessed by dialing 800-633-8284 and entering pass code number 21374252. 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, significantly improving existing surgical procedures and enabling new, minimally invasive procedures. 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 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 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 2008, 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-Q for the quarter ended September 30, 2007 and its Form 10-K for the year ended December 31, 2006. Forward-looking statements are indicated by words or phrases such as "anticipates," "estimates," "projects," "believes," "intends," "expects," and similar words and phrases. Actual results may differ materially from management expectations. Financial Tables Appended ARTHROCARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)                       Three Months Ended Year Ended December 31   December 31   December 31   December 31   2007 2006 Variance 2007 2006 Variance   Revenues: Product sales $ 84,498 $ 67,180 $ 17,318 $ 307,596 $ 253,376 $ 54,220 Royalties, fees and other 2,998 2,640 358 11,646 9,625 2,021 Total revenues 87,496 69,820 17,676 319,242 263,001 56,241   Cost of product sales 21,065 19,444 (1,621) 84,724 76,838 (7,886)   Gross profit 66,431 50,376 16,055 234,518 186,163 48,355 Product Margin 75.1% 71.1% 72.5% 69.7% Gross Margin 75.9% 72.2% 73.5% 70.8%   Operating expenses: Research and development 7,278 5,294 (1,984) 26,886 23,247 (3,639) Sales and marketing 34,076 26,846 (7,230) 123,213 91,915 (31,298) General and administrative 5,701 5,903 202 24,033 21,355 (2,678) Amortization of intangible assets 1,623 1,852 229 7,211 7,176 (35) Total operating expenses 48,678 39,895 (8,783) 181,343 143,693 (37,650)   Income from operations 17,753 10,481 7,272 53,175 42,470 10,705 Other income (expense), net 369 (1,048) 1,417 2,184 (1,809) 3,993 Income before income tax provision 18,122 9,433 8,689 55,359 40,661 14,698   Income tax provision 3,614 1,266 (2,348) 12,179 8,986 (3,193)   Net income $ 14,508 $ 8,167 $ 6,341 $ 43,180 $ 31,675 $ 11,505   Basic net income per share $ 0.52 $ 0.31 $ 0.21 $ 1.57 $ 1.21 $ 0.36   Shares used in computing basic net income per share 27,805 26,859 27,452 26,207   Diluted net income per common share $ 0.50 $ 0.29 $ 0.21 $ 1.50 $ 1.14 $ 0.36   Shares used in computing diluted net income per share 29,018   28,115     28,870   27,900     ARTHROCARE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)     December 31, December 31, ASSETS 2007 2006 Current assets: Cash and cash equivalents $ 39,375 $ 15,531 Short-term investments 3,875 15,225 Accounts receivable, net 69,924 61,935 Inventories, net 61,776 51,542 Deferred tax assets 10,406 13,795 Prepaid expenses and other current assets 5,164 5,389 Total current assets 190,520 163,417   Property and equipment, net 43,405 36,071 Related party receivables - 500 Intangible assets, net 37,705 35,982 Goodwill 166,771 137,831 Deferred tax assets 4,940 - Other assets 6,727 1,245   Total assets $ 450,068 $ 375,046   LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 15,876 $ 12,993 Accrued liabilities 12,909 26,347 Accrued compensation 12,727 7,906 Tax liabilities 660 2,427 Total current liabilities 42,172 49,673   Notes payable 60,000 - Deferred tax liabilities 383 1,991 Other non-current liabilities 7,010 879 Total liabilities 109,565 52,543     Total stockholders' equity 340,503 322,503   Total liabilities and stockholders' equity $ 450,068 $ 375,046