ArthroCare Sees Flat Earnings, Misses Estimates


ArthroCare Corp. (ARTC) posted adjusted earnings per share (EPS) of 27 cents in the third quarter of 2013 that was flat compared with the year-ago level and fell short of the Zacks Consensus Estimate by a couple of cents. Considering net earnings, we could see a 2.2% rise to $9.3 million from $9.1 million a year ago.

Total revenues for the quarter rose 5.7% to $91.9 million, exceeding the Zacks Consensus Estimate of $89.0 million. The increase in revenues can be attributable to higher revenues in both the reporting segments.

Segments in Detail

Revenues from Product sales segment grew 5.4% to $87.1 million in the quarter. In constant currency, revenues from the segment increased 5.8% in the same period.

Revenues from global sales of Sports Medicine products rose 5.2% to $58.1 million. In constant currency, Sports Medicine revenues went up 5.8% in the quarter. Revenues from International Sports Medicine products sales increased 12.3%, while proprietary Sports Medicine product revenues in the Americas rose 4.5%, which was partially offset by 11.2% decrease in contract manufactured product sales.

Revenues from global ENT product sales escalated 4.7% to $26.7 million in the third quarter. Revenues from International ENT product sales rose 16.2% while the same from Americas ENT product sales inched up 1.3%. Other product sales spiked 19.6% to $1.9 million in the quarter, accounting for less than 3% of total product sales.

Revenues from Royalties, fees and other segment rose 10.7% to $4.8 million in the quarter. It accounted for 5.2% of total revenues in the third quarter of 2013.


Gross profit in the quarter rose 3.8% to $63.0 million while gross margin in the declined 130 basis points (bps) to 68.6% from 69.9% in the third quarter of 2012. The decrease in gross margin was attributable to medical device excise tax imposed on U.S. product sales by the Patient Protection and Affordable Care Act, as well as lower average selling price on Sports Medicine product sales and unfavorable changes in sales mix.

Operating profit fell 7.3% to $12.7 million while operating margin decreased 180 bps to 13.9% from 15.7% in the third quarter of 2012. After adjusting for the investigation and restatement-related costs in the quarter, operating profits improved marginally to $15.9 million from $15.8 million in the same quarter of 2012 but operating margin fell 90 bps to 17.3% from 18.2% in the 2012-third quarter.

Cash Balance and Cash Flow

Cash and cash equivalents were $208.4 million as of Sep 30, 2013 compared with $218.8 million as of Dec 31, 2012. For the first nine months of the year, cash flow from operating activities was $59.9 million in contrast to cash used in operations of $10.6 million in the same period of 2012.

Our Take

Based in Austin, Texas, ArthroCare is a manufacturer of surgical devices, instruments, and implants that improve surgical procedures. ARTC devices use its internationally patented Coblation technology, which dissolves target tissue and limits damage to surrounding healthy tissue. Currently, ARTC retains a Zacks Rank #3 (Hold).

While we remain on the sidelines about ARTC, stocks that are performing well in the medical instruments industry include Cynosure, Inc. (CYNO), CryoLife, Inc. (CRY) and Natus Medical Inc. (BABY). All of them carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on BABY
Read the Full Research Report on CRY
Read the Full Research Report on CYNO
Read the Full Research Report on ARTC

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