ArthroCare's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: ArthroCare Corporation (ARTC)

ArthroCare Corporation (NASDAQ:ARTC)

Q1 2013 Earnings Call

May, 08, 2013, 08:30 am ET

Executives

Misty Romines - IR

David Fitzgerald - President & CEO

Todd Newton - EVP, CFO & COO

Analysts

Kayla Crum - William Blair

Matt Hewitt - Craig-Hallum Capital Group

Bill Plovanic - Canaccord Adams

Charles Croson - Sidoti & Company

Joanne Wuensch - BMO Capital Markets

Operator

Ladies and gentlemen, thank you for standing-by and welcome to the Q1 2013 Financial Results and Business Update Conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded on, Wednesday, May, 08, 2013.

I would now like to turn the conference over to Misty Romines. Please go ahead.

Misty Romines

Good morning, and welcome to ArthroCare’s conference call to discuss our first quarter 2013 operating results. Joining us on this is call are David Fitzgerald, President and Chief Executive Officer of ArthroCare and Todd Newton, ArthroCare’s Executive Vice President, Chief Financial Officer and Chief Operating Officer.

By now you all should have seen a copy of our press release which was released yesterday afternoon. But if you haven't, it is available on our website, www.arthrocare.com. A live and on-demand webcast of the conference call is also available on our website.

Following introductory comments by management, we will open up the lines for a short question-and-answer session. In order to give as many of you as possible an opportunity to ask questions, we will accept one question and one follow-up per caller, after which we welcome callers to rejoin the queue.

Before we begin, we would like to advise you of our forward-looking statements. Other than historical information, the matters we will be discussing today consist of forward-looking statements. These statements are subjects to the risks and uncertainties detailed in our Securities and Exchange Commission filings, including our 10-Q for the quarter ended March, 31, 2013 that was filed yesterday afternoon. Actual results could differ materially from our forward-looking statements.

The statements made in this conference call are based on the information available to ArthroCare today, and the company does not undertake any obligation to update or correct them before its regularly scheduled call at the end of next quarter.

Certain non-GAAP measures may be used during today's call. A reconciliation of these measures to the most directly comparable GAAP measure can be found in the Investor Relations section of our website.

I will now turn the call over to David Fitzgerald.

David Fitzgerald

Thank you, Misty. Good morning ladies and gentlemen and thank you for joining us this morning. As we measure performance we focus on three metrics. Revenue growth, operating margin, adjusted for investigation and restatement cost and cash generation. In terms of operating margin and cash generation, the first quarter results track very well with our whole year outlook that we discussed in February. First quarter revenue growth however was below our outlook. Our goal this morning is to discuss our first quarter results and provide you with an update on what we are planning for the rest of the year.

So I will now turn the call over to Todd to run through the first quarter results in more detail and I'll come back before questions to further comment. Todd?

Todd Newton

Thank you, David. Total revenues were $92.3 million this quarter versus $92.9 million for the first quarter of last year, a decrease of $600,000 or less than 1%. Product sales were $87.5 million in the first quarter compared to $88.4 million, a decrease of $900,000 or just over 1%. Product sales in the first quarter of last year included approximately $1 million in product sales related to fulfillment of Rapid Rhino backorders that were outstanding as of the end of 2011. Adjusted for these backorder fulfillments, worldwide product sales in the first quarter were basically flat compared to product sales in the first quarter of 2012.

In Sports Medicine, worldwide product sales increased $300,000 or 0.5% on higher contract manufacturing product sales. Contract manufactured product sales increased to $5.5 million this quarter compared to $4.8 million in the first quarter of 2012, an increase of $700,000. For our proprietary Sports Medicine products, which are those products that ArthroCare branded and distributed worldwide product sales decreased $400,000 this quarter.

Breaking this down further by geography, Americas Sports Medicine product sales decreased $200,000 or less than 1% as a decrease in proprietary Sports Medicine product sales of $900,000 or 2.5% offset the $700,000 increase in contract manufactured product sales in the quarter that I just mentioned. The decrease in Americas’ proprietary Sports Medicine product sales was primarily due to decreased sales of older generation athletes’ rotator cuff repair products and our fixation portfolio, such as the Magnum 2, a product that has been on the market since January of 2006.

While a newer generation fixation product sales were from products such as SpeedScrew and MULTIFIX [PHE] positive sales growth in the first quarter, these increases did not offset the decline in older fixation product sales. Across the United States, which our largest single market in the Americas, active fixation customers were about 2% lower than in the first quarter of 2012.

In our employee sales territories, quarter-over-quarter product sales increased while in territories covered by independent sales agents’ product sales declined this quarter. This quarter territories managed by employed sales person, employed sales personnel are accounted for nearly 37% of product sales up 3 percentage points when compare it with the first quarter of 2012.

International Sports Medicine product sales increased $500,000 or 2.3% in the first quarter of 2013 compared to the same period in 2012. Product sales in direct markets increased 3% while product sales to distributor markets decreased 2%.

Now in ENT worldwide product sales decreased $1.5 million or 5.7% in the first quarter of 2013 compared to the same quarter last year. As I previously mentioned, first quarter product sales last year included fulfilled Rapid Rhino backorders from 2011 of approximately $1 million.

In the Americas, ENT product sales decreased $2 million or 9.3% as compared to the first quarter of 2012, as a result of lower tonsillectomy procedures. In addition, the ENT product sales in the Americas in the first quarter of 2012 included approximately $700,000 of the $1 million in fulfilled rep Rapid Rhino backorders from the end of 2011. We expect the decrease in tonsillectomy procedures to be a trend that will continue.

More often we are hearing that customers are being required by payers to receive prior authorization for tonsillectomy procedure. We believe that one of the factors affecting this is the growing influence of the American Academy of Otolaryngology-Head and Neck Surgery Organizations practice guidelines that were issued in 2011. These practice guidelines recommended doctors first observe seven episodes of infection and a pediatric patient over a 12 month period or five episodes of infection in each of the prior two years before prescribing a tonsillectomy procedure for the patient. Additionally, tonsillectomy procedures appeared to be migrating to surgeon center and settings which remain very cost sensitive and where traditional electrocautery has a proportionally higher market share than in hospital settings.

Internationally, ENT product sales increased $500,000 or 8.8% due to higher product sales to distributor markets most notably in the Asian Pacific region. Other product sales increased $300,000 in the first quarter of 2013 as compared to the same period a year ago, as a result of higher Spine product sales to international distributor markets. Other product sales currently represent less than 3% of total product sales.

Royalty, fees and other revenue was $4.9 million in the first quarter of 2013 compared to $4.5 million in the same period of 2012, an increase of 8.3%. The company’s gross profit in the first quarter of 2013 decreased $2.2 million compared to the first quarter of 2012. Gross product margin for the first quarter of 2013 was 67.6% compared to 69.8% in the first quarter of 2012. The decrease in gross product margin this quarter was related to the medical device tax which came into effect this quarter on our U.S. product sales.

In addition, gross product margin was lower as a result of a higher proportion of product sales coming from contract manufactured products this quarter versus last year. We also had higher plant overhead costs combined with lower plant throughput this quarter.

Operating income for the first quarter of 2013 was $13.5 million, compared to $17.4 million in the first quarter of 2012 and our operating margin in the first quarter of 2013 was 14.6%, compared to 18.7% for the same quarter in 2012.

Adjusted operating margin, which is operating margin excluding investigation and restatement related costs, was 18.8% in the first quarter of 2013, compared to 19.9% for the first quarter of 2012. Operating expenses were $50.6 million this quarter, compared to $48.9 million in the first quarter of 2012, an increase of $1.7 million.

Investigation and restatement related costs increased $2.8 million in the first quarter on higher indemnity expense for former officers of the company. We expect to continue to incur a legal defense cost in connection with our ongoing legal matters and we expect to incur cost to indemnify former officers in accordance with the indemnity agreements with these former officers. These costs are likely to continue and to be significant.

In addition, research and development costs were $8.5 million in the first quarter, as compared to $7.6 million in the same quarter of last year, an increase of about $900,000. The increase in R&D expenditure is consistent with our recent trend and with our previous comments that we would invest in key clinical and product development needs for both our Sports Medicine and ENT product areas.

Partially offsetting our increase in investigation and restatement costs and higher R&D costs were lower general and administrative costs and lower amortization of intangible assets as we fully amortized certain intangible assets related to our 2004 acquisition of Opus Medical at the end of 2012.

Sales and marketing expenses, as a percentage of total revenue, was largely unchanged and was 32.8% of revenue in the first quarter of 2013, compared to 32.5% in the first quarter of 2012. In the first quarter of 2013, severance cost increased by approximately $300,000 as a result of changes to our America’s sales and marketing organization.

Tax expense was reduced this quarter by $800,000 as a result of the retroactive extension of the federal research and development tax credit related to 2012, which was enacted in early 2013. As a result of this discrete item, our effective tax rate this quarter was 20%, compared to 27% in the same period in 2012.

In summary, net income available to common stockholders was $0.30 per diluted share in the first quarter of 2013, compared to $0.36 in the first quarter of 2012. The reduction to EPS from investigation and restatement expense this quarter was $0.08 per diluted share and the first quarter of last year, it was approximately $0.02. Without investigation and restatement expense in either period, EPS in both periods would have been approximately $0.38 per share on a diluted basis.

Turning to our balance sheet and liquidity, at March 31, 2013, we held cash and cash equivalents of $230 million, an increase of $11.2 million from the end of 2012. In the first quarter, we paid $7 million for the acquisition of Eleven Blade Solutions. We also are contracted to make future payments to the former owners of Eleven Blade dependent upon the level of future product sales we achieve over the next five years from the all-suture anchor technology we acquired.

For the three months ended March 31, 2013 cash flow provided by operations was $19.5 million versus adjusted cash flow provided by operating activities of $18.5 million in the first quarter of 2012, an increase of approximately $1 million. In the first quarter of 2012, our reported cash flow from operations was negative $55.5 million as that period's operating cash flow included the payment of $74 million in settlement of the private securities class actions that had been pending against the company.

Prior to handing the call back over to David, I will refer you to our disclosures in our Form 10-Q for the period regarding our outstanding contingencies. The DOJ investigation that began in 2008 continues. As we've already disclosed, we currently have a tolling agreement in place that will expire on May 31, 2013. And to repeat what we've said before, the tolling agreement basically means that the company has agreed not to raise statute of limitations, defenses until after May 31, 2013, for any matter that would otherwise be subject to an expiring statute of limitation prior to that.

Over the last four years we believe the company has provided the government with the fullest cooperation possible and we remain committed to full cooperation. We have also offered to the government our view of an acceptable framework for concluding the investigation as it relates to the company. We have not, however, received any proposal from the government.

As I’ve already said this morning we expect we will continue to incur legal defense costs in connection with this investigation. We also expect we will continue to incur costs related to the indemnity agreements with former officers and that these costs are likely to remain significant. At this time, we have no new information to provide related to the False Claims Act investigation which we first learned off and disclosed in early 2012. We have not received any additional requests nor has there been any substantive contact with the Department of Justice on this matter. We refer you to page 10 of our 2012 Form 10-K filed in February for more general information concerning the False Claims Act.

And with that, I will now turn the call back over to David.

David Fitzgerald

Thanks, Todd. In February, we provided you with our outlook for 2013 that included an overall revenue growth outlook of between 2% and 4.5%. Our first quarter revenue was off from our outlook, but we continue to think that whole year revenue growth will be consistent with the 2% to 4.5% outlook for several reasons.

First quarter of 2013 had one less selling day in our most important direct markets compared to the first quarter of 2012. In some of our important international markets, we had less than two selling days. Later this year that situation will reverse. In Sports Medicine, we recently received FDA clearance for the SpeedLock HIP Knotless Fixation Implant. SpeedLock HIP is a PEEK implant that will be used primarily in acetabular labral reattachment and labral reconstruction.

There are many other new products scheduled for release in the latter part of the second half of the year. We intend to utilize Eleven Blade's all-suture soft anchor technology in products for a labral repair in the shoulder and hip and rotator cuff repair in the shoulder. Other second half product releases will include a simple disposable suture passer for use in the shoulder and hip that will allow surgeons to pass sutures through tissue using a single or accessory portal technique.

We will further expand our MultiFIX Suture Anchor platform to include a screw inversion to enhance performance in poor quality bone. We are continuing to press with our Knee Campaign, the medical education component of our campaign that we initiated last year and I have discussed with you in the past, is intended to raise awareness, address common misconceptions and reinforce clinical facts concerning the use of Coblation during the arthroscopy.

In the first quarter we held six more education events in the United States with 40 surgeons participating. Later this year we anticipate the release of an ACL reconstruction system and we will introduce a new energy platform that can deliver Coblation in versatile operating modes, specifically designed for knee tissue types.

This new platform is expected to be introduced outside the United States late this year and then in the United States market in early 2014. We continue to believe that knee arthroscopy is important opportunity for ArthroCare and our time for taking on this opportunities nearing.

Critical to the success of our new products will be our sales force and we have been actively looking to prepare our U.S. sales and distribution organization for products to come while maintaining our ability to support our existing products and customers, particularly in Sports Medicine.

We think good progress has been made. As Todd mentioned in the first quarter in those U.S. territories where we directly sell to our employees, same territory sales were up in the first quarter. In those territories served by independent agents, same territory sales were down. However, some of these agents that underperformed in Q1 are historically some of our best. We think that these agent led territories will show improvement performance over the year as the year progresses. Other areas of underperformance however still need to be address and we intend to address these.

For ENT, the U.S. tonsil business had another difficult quarter and we expect these challenges will continue as Todd indicated. Strategically our focus is to expand the ENT indication and procedures that can benefit from Coblation and thereby reduce the level of our dependency on the tonsil procedure. We intend to re-launch Rapid Rhino later in this year now that we think our supply issues are behind us. We also anticipated new Coblation product introduction towards the end of the year for the turbinate and head and neck procedures.

For operating margin; our outlook for 2013 was to achieve an adjusted operating margin equivalent to our 2011 operating margin which was 18.4%. This quarter adjusted operating margin was 18.8% as Todd mentioned. In terms of both our adjusted operating margin and cash flow generation, we are tracking with our outlook and for revenue we continue to think our region growth outlook as reasonable.

We’ll now open the call for the brief question and answer session, and then I will provide few closing remarks. Operator?

Question-and-Answer Session

Operator

(Operator instruction) And our first question comes from the line of Matt O’Brien with William Blair.

Kayla Crum - William Blair

Hi this is Kayla in for Matt. Thanks for taking the question. So the proprietary sports medicine business came in a bit softer than we were expecting. Can you help us understand what's going on there and then what sort of dynamics that you are seeing in the marketplace in terms of volume and pricing.

Todd Newton

Well, several things, many of which we cover in our advanced material scale. First of all we experienced a decline in older generation fixation product sales, especially those related to rotator cuff repair and particularly those that have been on the market now for a long time. The rate at which sales increased for the newer generation products simply didn't keep up with the decline in those older generation products. We also of course had the less selling days as David mentioned in his remarks and that's pretty much the sum of what happened in US sports medicine proprietary sales. We expect that will largely be something that over a period of time will reverse and we will see our proprietary sports medicine business performed pretty well for the rest of the year.

Kayla Crum - William Blair

Okay. And then excluding the impact of that one less selling days in the quarter where do you think that that segment would have come in.

Todd Newton

Well it’s hard to say; I mean its one day out of probably something like more or less let's say in the near 60 selling days probably high 50 selling days so I mean that's a 2% selling day reduction.

Operator

And our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Matt Hewitt - Craig-Hallum Capital Group

Just one from me and it's regarding the gross margin. It was a little bit down year-over-year and you gave some good commentary as far it was the tax credit and mix in the first quarter. As you start to launch these new products as we get in to the back half of the year, it sounds like you are comfortable with your initial revenue guidance. Should we also anticipate that your gross margin contract higher and maybe even recapture some of that med device tax impact?

Todd Newton

Well, Matt, we do have a business that has a very high, variable gross margin. So what that basically means is that if we see the sales increase, we're going to see that, some of that contributes to higher gross margin and that should be the case definitely. Whether or not we can actually recover the medical device tax, I wouldn't necessarily go there because obviously medical device tax is something that would apply to all sales in the United States.

Matt Hewitt - Craig-Hallum Capital Group

I understand that but if you got these, the new products, I am assuming are going to have higher gross margins than some of the older products which are falling off. So I would think that your blended average gross margin should creep up and help you (inaudible). Maybe that’s the wrong way to look at it, but you should be able to get back up to 71%. Is that fair?

Todd Newton

Well, I don't think we would want to guide you in that direction, Matt. I think our general expectation with new products is that the average selling price does tend to be higher with respect to legacy products when they come out. Cost produced, though also seems to be generally a little bit higher especially in the early part of the products lifecycle before it ramps up to that kind of quantity that you get the benefits of cost synergy. So, we would not want to guide you up into that range, I think our view is that there should be an ASP benefit but it's largely going to be offset by relative cost increases for new products as well.

Operator

Thank you and our next question comes from the line of Bill Plovanic with the Canaccord. Please proceed.

Bill Plovanic - Canaccord Adams

Couple of questions first just on the sport med distribution fees you mentioned that some of your biggest distributors are the ones that were actually down year-over-year, can you remind me, are those 100% exclusive or can they carry competitive product?

David Fitzgerald

Well, some of them are 100%, in terms of exclusive to ArthroCare and the answer about competitive product is no we discourage that and we really don't have that as an issue in any of our independent agent.

Bill Plovanic - Canaccord Adams

What I am trying to get at here is if they are not selling your products are they just losing out on the case or are they selling another product in lieu your fixation, older fixation sales?

David Fitzgerald

They are losing out on the case; I think they had weakness in the first quarter and which we believe very strongly that they will recover over the next three quarters. Was it a little unusual for them to come out of the gate a little bit soft, yes we think so but, we also believe that they will common in a next three quarters pretty strong.

Bill Plovanic - Canaccord Adams

And remind me I think Todd, it was a couple of years ago that you changed all the contracts, so none of them have been stocking for the last year to, so this is not a stocking comp issue or anything like that, its all direct sales when you book the revenue correct. When the procedure is done you book it, its not a stocking book even in the year over your comps, is that correct?

Todd Newton

Yeah, that is correct. We do not have stock and distributors in the United States.

Bill Plovanic - Canaccord Adams

And then a follow up, just on the ENT what is it going to take for you to turn that ENT business around especially with this loss of the tonsillectomy procedures either the shift out or the total loss of those procedures, how do you turn that ENT business around, thanks?

David Fitzgerald

Well, I think that our strategy here is that we need to expand indications and its that simple, I mean its not simple in its execution and getting the products out there, but for us we continue to see the tonsil business being very, very soft and declining over the next couple of quarters. We don't see that changing perhaps when the economy picks up, I think that might have make a difference for us, but our main trust is to expand indications in that area.

Operator

(Operator Instructions) And our next question comes from the line of Charles Croson with Sidoti & Company. Please proceed.

Charles Croson - Sidoti & Company

So again going back to top line guidance here; I just wanted to get your sense of confidence with that in lieu of the weakness so at tonsillectomy procedures. Was it pretty much around where you are expecting or was there little bit more weakness in terms of volumes and then pricing by centers and such for the quarter?

David Fitzgerald

I don’t think we were too surprised. I mean, we certainly anticipated our tonsil business going down. I think it was reasonable to say that when we looked at the first quarter of last year, it was a very good quarter for us in 2012, followed by very soft quarter in Q2 and so there are some movements and there from quarter to quarter, it’s always difficult to track. I mean, we came off a very good quarter in Q4. I don’t think we’re necessarily surprised that the softness we had expected a little bit more out of Sports Medicine coming in Q1 and we didn’t get it, but as I said in previous that we anticipate the balance of the year which Sports Medicine coming in to where we expect it to be.

Charles Croson - Sidoti & Company

Okay, right. That’s helpful. And then one more if I may on the new initiative here, it sounds like you are launching some new products in Europe and then in the U.S. And then if I am not mistaken, I think I heard that you are trying to get more boots on the ground once you get those products in the U.S. Can you give us an idea on that and then what you ultimately hope to see, let’s say, just directionally in terms of sales levels say 3 to 5 years from now? Thanks.

David Fitzgerald

Well, 3 to 5 years from now, I am not sure if I have a crystal ball, but I would say that the essence of your question is, do we need more people selling our products, [walking] down the street? And the answer is absolutely. We think that’s also true in ENT as well as Sports Medicine, but primarily in Sports Medicine. And we also see our mix shifting a bit in Sports Medicine. There will be more direct employees as we move forward. It’s not to say that our agency performed very well and there's a number of them that are excellent and we will continue along those lines, but more feet on the street and as we broaden our portfolio, it’s absolutely necessary.

Operator

And our next question is from the line of Joanne Wuensch from BMO.

Joanne Wuensch - BMO Capital Markets

The one selling day that you were short this quarter, which quarter does it reverse in?

Todd Newton

To answer Joanne but I believe it’s -- in the United States, its Q3 and that's where the primary market was where we were down one selling day. Most of our European markets this quarter were down two selling days. And I'm not real sure when those two selling days are going to reverse.

Joanne Wuensch - BMO Capital Markets

Okay. And how much did foreign exchange impact your top line this quarter?

Todd Newton

It was really negligible. It wasn't a meaningful headwind or tailwind. It was pretty equivalent.

Joanne Wuensch - BMO Capital Markets

And as a follow-up to the previous question, leading more feet on the street is one thing, but you also commented that you've been training your current sales force on new products. Could you give us some idea throughout the rest of this year, will you be adding sales people which is one question? And then the second one is, are we going to have a slow ramp with your new product launches or are your current sales people ready to go? Thank you.

David Fitzgerald

No. I think let me try to answer that question in reverse. I think the training of our sales force is critical, especially with the ACL and some of the newer products that are coming out. So it's not going to be a full ramp or full launch. We will have a limited rollout at year end and hopefully that we will be able to full launch some time in early '14. So some of the products that we will have will be in Europe first, especially on the new energy platform and we will need to train our sales force in some of these new procedures. So it's going to take a little time to do that over the course of the year.

Joanne Wuensch - BMO Capital Markets

All right. And is there anything in terms of detail on the new energy platform you can provide to us?

David Fitzgerald

Not at this time, we will be reluctant to -- we haven't submitted it yet to the FDA, so we need a little bit more time to add color in the future.

Operator

Thank you. And we have a follow-up question from the line of Bill Plovanic from Canaccord. Please proceed.

Bill Plovanic - Canaccord Adams

So couple of technical questions, Todd. Exactly, how much was the med device tax in the quarter?

Todd Newton

It was just under a $1 million this quarter.

Bill Plovanic - Canaccord Adams

Okay. And then, what tax rate do you expect in Q2, 3 and 4?

Todd Newton

We expect that we're going to revert back to our normal effective tax rate so that would be approximately 27%.

Bill Plovanic - Canaccord Adams

Okay. And then, as for the potential settlement with the FDA or with the DOJ, that’s the first time that I can recollect that you put something forward like that. Is that correct, is this the first time you are making that statement?

Todd Newton

Which statement specifically Bill you are referring to?

Bill Plovanic - Canaccord Adams

I believe basically that I am paraphrasing but you submitted a framework for conclusion or something to that effect with the investigation?

Todd Newton

Actually we had that as part of - we disclosed that last quarter, because that had happened back right after the end of the year, but you are right if you are thinking back beyond that. It's a relatively new event, but we did discuss it in our year-end call.

Bill Plovanic - Canaccord Adams

Okay. But they you said they have not responded to that as yet.

Todd Newton

That’s right we have received no proposal from the DOJ whether formal or informal.

Bill Plovanic - Canaccord Adams

And then just on that same topic; as I look I believe that the former executives go to trial in mid-July is that correct?

Todd Newton

That is correct.

Bill Plovanic - Canaccord Adams

Okay. So maybe that’s a timeframe for conclusion if we continue with these [tooling] agreement extension at least, I would speculate not putting words in your mouth, but if the government is hanging on to you for anything it's probably so that they can finish that piece of this. And then in your filings, I saw in the 2007 to 2010 IRS audit you have $2.7 million charge but you pick-up a significant benefit in terms of taxes, can you elaborate on that, is that going to impact, how we are going to see that or we don't see it in the P&L or what's it mean for you?

Todd Newton

Well it will mean a benefit to our P&L, net benefit to our P&L in Q2, and as that number is in Q2 what we’ll do is we’ll of course make sure that that’s very clear as to what that discreet affect is.

Bill Plovanic - Canaccord Adams

Is it bigger than a bread basket, what’s the size of this?

Todd Newton

Well, we are still looking at all those reserves and so I don't have a number for you right now, but it will be in that benefit.

Bill Plovanic - Canaccord Adams

Okay, and I am sorry, I want to go back to another question. Just do you think considering that you have already been in the tooling agreement and the extensions, can the government go after any more of the previous executives or his statue to limitations run out on that?

Todd Newton

That’s a very nuanced questions for lot of reasons Bill, my understanding is that there are situations where statue of limitations could apply and then there is other theories where the statue of limitations would remain open. So I think as we’ve talked through those issues with our attorneys we continue to see that there is not a single clearance let me just put it that way.

Operator

Thank you. And we have a follow up question from Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Matt Hewitt - Craig-Hallum Capital Group

Regarding your cash position that is obviously very substantial and if we assume that you resolve the DOJ situation, it doesn't take up all of your cash or even a significant portion. Could you kind of layout your priorities for using that cash going forward, is it M&A obviously, that sounds that can be adding your sales force but repurchase program, special dividends, how do you think about the priorities for the cash once the DOJ situation is resolved?

David Fitzgerald

I think our focus is on M&A. I think as we said before that to broaden our portfolio is very important for us. There are some areas that we think our sales force can benefit from. I would say that’s the primary use of our cash. There is no expectation on our part that we would dividend it out or repurchase shares I think the focus will be entirely on M&A.

Operator

Thank you and there are no other questions at this time.

David Fitzgerald

Thank you. To conclude our goal remains to provide the appropriate balanced growth with improvement to operational efficiency in cash flow generation, to create value for our shareholders in both near and the long-term. On behalf of the entire management team, thank you for your interest in ArthroCare. We appreciate everyone taking the time to dial in for today's call, and if you have any additional questions or information contained in the SEC documents we recently filed, please contact Misty Romines in our Investor Relations Department and she will be happy to help you out. That concludes our call for today, thank you very much.

Operator

Thank you. Ladies and gentlemen, that does conclude the call for today. We thank you for your participation, and ask that you please disconnect your lines.

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ArthroCare (ARTC): Q1 EPS of $0.30 misses by $0.07. Revenue of $92.3M misses by $2.11M. (PR)