ArthroCare Q1 Earnings Miss Ests; Revs In Line

Zacks

ArthroCare Corp. (ARTC) posted a 13.5% drop in 2014-first-quarter adjusted earnings per share to 32 cents from 37 cents in the same quarter of 2013. Earnings also fell short of the Zacks Consensus Estimate of 35 cents. After the earnings release, shares of the company remained almost flat compared to its pre-earnings level.

Reported net earnings plummeted 64.7% to $3.6 million from $10.3 million in the first quarter of 2013. On a per share basis, earnings declined 66.7% to 10 cents from 30 cents a year ago.

Total revenues for the quarter stood at $96.1 million, reflecting an increase of 4.0% from $92.3 million in the first quarter of 2013. Revenues were in line with the Zacks Consensus Estimate.

Segments in Detail

Product revenues came in at $90.0 million, up 2.6% from $87.5 million a year ago.

Revenues from global sales of Sports Medicine products rose 7.0% to $63.8 million. Revenues from Sports Medicine products sales increased 13.8% in the international market, while it rose 3.4% in the U.S. Proprietary Sports Medicine product revenues in the Americas were flat with the prior-year quarter level.

Revenues from global ENT product sales declined 5.0% to $24.3 million in the quarter. Revenues from ENT product sales deteriorated 5.3% internationally while it decreased 4.9% in the U.S.

Other product revenues dropped 18.2% to $1.8 million in the quarter, accounting for less than 3% of the total product revenues.

Revenues from Royalties, fees and other segment spiked 24.8% to $6.1 million in the quarter. It accounted for 6.3% of total revenues in the first quarter of 2014.

Margins

On a year-over year basis, gross profit increased 5.6% to $67.6 million from $64.0 million and gross margin expanded 110 basis points (bps) to 70.4% from 69.3%.

Research and development (R&D) expenses decreased 4.9% to $8.0 million while as a percentage of sales, R&D expenses contracted 70 bps to 8.4%. The reduction was primarily due to lower prototype expenses and materials usage.

General and administrative (G&A) expenses surged 89.7% to $14.2 million while as a percentage of sales, it increased 660 bps to 14.7%. The increase was primarily related to the proposed merger expenses including legal fees, investment banker fees and proxy services.

Sales and marketing (S&M) expenses declined marginally by 0.6% to $30.5 million on lower severance related expenses in the quarter. As a percentage of sales, S&M expenses decreased 100 bps to 31.8%.

Operating earnings fell 31.7% to $9.2 million while operating margin contracted 500 bps to 9.6% from 14.6% in the first quarter of 2013. After adjusting for the investigation, restatement-related and merger related costs in the quarter, operating earnings improved 18.4% to $20.6 million from $17.4 million in the same quarter of 2013. Adjusted operating margin rose 260 bps to 21.4% from 18.8% in the year-earlier quarter.

Cash Balance and Cash Flow

Cash and cash equivalents were $191.0 million as of Mar 31, 2014, down 11.1% from $214.9 million as of Dec 31, 2013.

For the first three months ended Mar 31, 2014, cash flow from operating activities totaled $9.4 million, excluding a $30 million fine related to the resolution of the DOJ investigation, down 51.8% from $19.5 million in the prior-year period.

Cash used in investing activities during the quarter was $5.8 million compared with $10.4 million in the year-earlier quarter.

Zacks Rank

Currently ARTC retains a Zacks Rank #3 (Hold). Some better-ranked medical instruments stocks include RTI Surgical Inc. (RTIX), Delcath Systems, Inc. (DCTH) and Accuray Incorporated (ARAY). While RTI Surgical sports a Zacks Rank #1 (Strong Buy), both Delcath Systems and Accuray carry a Zacks Rank #2 (Buy).
 

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