10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the quarterly period ended September 30, 2013

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to              

Commission File Number: 001-34607

ArthroCare Corporation

(Exact name of registrant as specified in its charter)

Delaware	94-3180312
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

7000 W. William Cannon, Building One, Austin, Texas 78735

(Address of principal executive offices)

(512) 391-3900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b.2 of the Exchange Act: 

Large accelerated filer  x	Accelerated filer  o
Non-accelerated filer  o	Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b.2 of the Exchange Act). Yes  o  No  x

As of October 24, 2013, the number of outstanding shares of the Registrant’s Common Stock was 28,377,847.

ARTHROCARE CORPORATION

Form 10-Q Quarterly Report

For the quarter ended September 30, 2013

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS	1
CONDENSED CONSOLIDATED BALANCE SHEETS	1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18
ITEM 4. CONTROLS AND PROCEDURES	18
PART II. OTHER INFORMATION	20
ITEM 1. LEGAL PROCEEDINGS	20
ITEM 1A. RISK FACTORS	20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	20
ITEM 4. MINE SAFETY DISCLOSURES	20
ITEM 5. OTHER INFORMATION	20
ITEM 6. EXHIBITS	21
SIGNATURES	22
EXHIBIT INDEX	23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ARTHROCARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	208,435		$	218,787
Accounts receivable, net of allowances of $1,380 and $1,565 at September 30, 2013 and December 31, 2012, respectively	40,916			48,881
Inventories, net	46,526			48,417
Deferred tax assets	14,966			20,090
Prepaid expenses and other current assets	8,594			6,022
Total current assets	319,437			342,197
Property and equipment, net	45,459			30,461
Intangible assets, net	15,112			1,859
Goodwill	164,964			119,893
Deferred tax assets	25,041			23,206
Other assets	4,134			2,171
Total assets	$	574,147		$	519,787
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,385		$	12,189
Accrued liabilities	63,851			41,674
Income tax payable	15			286
Other liabilities	280			318
Total current liabilities	82,531			54,467
Deferred tax liabilities	361			354
Other non-current liabilities	19,259			20,200
Total liabilities	102,151			75,021
Commitments and contingencies (Notes 6 and 7)
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares; Issued and outstanding: 75 shares at September 30, 2013 and December 31, 2012; Redemption value: $87,089	83,548			80,759
Stockholders’ equity:
Preferred stock, par value $0.001; Authorized: 4,900 shares; Issued and outstanding: none	—			—
Common stock, par value $0.001; Authorized: 75,000 shares; Issued: 32,299 and 31,949 shares Outstanding: 28,368 and 27,977 shares at September 30, 2013 and December 31, 2012, respectively	28			28
Treasury stock: 3,931 and 3,942 shares at September 30, 2013 and December 31, 2012, respectively	(106,126		)	(106,425		)
Additional paid-in capital	426,224			413,660
Accumulated other comprehensive income	4,987			5,300
Retained earnings	63,335			51,444
Total stockholders’ equity	388,448			364,007
Total liabilities, redeemable convertible preferred stock and stockholders’ equity	$	574,147		$	519,787

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARTHROCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands, except per-share data)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Revenues:
Product sales	$	87,060		$	82,602		$	262,008		$	258,448
Royalties, fees and other	4,803			4,338			14,273			13,070
Total revenues	91,863			86,940			276,281			271,518
Cost of product sales	28,876			26,204			85,929			80,210
Gross profit	62,987			60,736			190,352			191,308
Operating expenses:
Research and development	8,433			8,184			25,536			23,677
Sales and marketing	29,322			27,175			89,872			86,217
General and administrative	8,785			8,191			24,926			24,833
Amortization of intangible assets	534			1,363			1,461			4,000
Exit costs	—			—			—			(778		)
Investigation and restatement related costs	3,164			2,139			33,391			4,363
Total operating expenses	50,238			47,052			175,186			142,312
Income from operations	12,749			13,684			15,166			48,996
Non-operating gains (losses)	(28		)	183			101			(578		)
Income before income taxes	12,721			13,867			15,267			48,418
Income tax provision	2,449			3,882			587			13,211
Net income	10,272			9,985			14,680			35,207
Accrued dividend and accretion charges on Series A 3% Redeemable Convertible Preferred Stock	(940		)	(900		)	(2,788		)	(2,666		)
Net income available to common stockholders	9,332			9,085			11,892			32,541
Other comprehensive income (loss)
Foreign currency translation adjustments	1,131			951			(312		)	565
Total comprehensive income	$	11,403		$	10,936		$	14,368		$	35,772
Weighted average shares outstanding:							1
Basic	28,374			27,714			28,239			27,698
Diluted	28,968			28,087			28,888			28,096
Earnings per share applicable to common stockholders:
Basic	$	0.27		$	0.27		$	0.35		$	0.97
Diluted	$	0.27		$	0.27		$	0.34		$	0.96

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARTHROCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine months ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	14,680		$	35,207
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	11,344			15,793
Provision for doubtful accounts receivable, product returns, and inventory valuation	1,368			2,032
Stock compensation expense	5,696			6,585
Income tax benefits relating to employee stock options	(343		)	—
Deferred taxes	10,567			12,347
Other	586			2,280
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Change in operating assets	5,529			(5,576		)
Change in operating liabilities	10,471			(79,226		)
Net cash provided by (used in) operating activities	59,898			(10,558		)
Cash flows from investing activities:
Purchases of property and equipment	(23,815		)	(7,189		)
Payments for business combinations, net of cash acquired	(44,983		)	(1,252		)
Payments for intangible asset acquisitions	(8,500		)	—
Net cash used in investing activities	(77,298		)	(8,441		)
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of common stock	6,574			2,777
Income tax benefits relating to employee stock options	343			—
Net cash provided by financing activities	6,917			2,777
Effect of exchange rate changes on cash and cash equivalents	131			(220		)
Net decrease in cash and cash equivalents	(10,352		)	(16,442		)
Cash and cash equivalents, beginning of period	218,787			219,605
Cash and cash equivalents, end of period	$	208,435		$	203,163

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ArthroCare Corporation (“ArthroCare”) and its subsidiaries (collectively with ArthroCare, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”).  The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2012 Annual Report on Form 10-K filed on February 14, 2013 (“2012 Form 10-K”).  In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at September 30, 2013 and December 31, 2012, the results of its operations for the three and nine month periods ended September 30, 2013 and 2012 and its cash flows for the nine month periods ended September 30, 2013 and 2012.  The results of operations for the periods presented are not necessarily indicative of results that may be expected for the year ending December 31, 2013.

Use of Estimates

The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies disclosed in its 2012 Form 10-K.

New Accounting Pronouncements

Accounting Standards Update (ASU) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued in July 2013 and addresses when an unrecognized tax benefit shall be recorded as a reduction to a deferred tax asset or presented as a gross liability. ASU 2013-11 is effective for the Company beginning in 2014. Management is evaluating the impact of this ASU.

NOTE 2 – COMPUTATION OF EARNINGS PER SHARE

The Company’s Series A 3% Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) has participation rights in dividends issued to common stockholders.  As a result, the Company calculates earnings per share using the two class method.  The following is a reconciliation of net income applicable to common stockholders and the number of shares used in the calculation of basic and diluted earnings per share applicable to common stockholders (in thousands, except per-share data):

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Net income allocated to common stockholders, net of $2,526 and $2,467 attributable to Series A Preferred Stock for the three months ended September 30, 2013 and 2012, respectively and $4,809 and $8,279 for the nine months ended September 30, 2013 and 2012, respectively.	$	7,746	$	7,518	$	9,871	$	26,928
Basic:
Weighted-average common shares outstanding	28,374		27,714		28,239		27,698
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.35	$	0.97
Diluted:
Weighted-average shares outstanding used in basic calculation	28,374		27,714		28,239		27,698
Dilutive effect of options	271		248		282		221
Dilutive effect of unvested restricted stock	323		125		367		177
Weighted-average common stock and common stock equivalents	28,968		28,087		28,888		28,096
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.34	$	0.96
Stock issuable upon conversion of the Series A Preferred Stock	5,806		5,806		5,806		5,806
Stock awards excluded from calculation as their effect would be anti-dilutive	577		937		563		880

Awards approved under the Company’s Long Term Incentive Program are excluded from diluted shares as the market conditions and performance conditions of the awards have not been met.

NOTE 3 –INVENTORIES

The following summarizes the Company’s inventories (in thousands):

	September 30, 2013			December 31, 2012
Raw materials	$	12,054		$	10,760
Work-in-process	13,640			11,984
Finished goods	25,468			30,338
	51,162			53,082
Inventory valuation reserves	(4,636		)	(4,665		)
Inventories, net	$	46,526		$	48,417

NOTE 4 – INTANGIBLE ASSETS

On December 31, 2012, the Company entered into a stock purchase agreement to acquire Eleven Blade Solutions, Inc. (Eleven Blade) which was accounted for as an asset acquisition in the first quarter of 2013.  As a result of this transaction, the Company recorded $10.8 million of intangible assets in the form of intellectual property rights, non-compete agreements with certain former employees, owners and consultants of Eleven Blade and the associated deferred tax liabilities.  The Company also agreed to pay the previous owners of Eleven Blade future cash consideration contingent on certain product sales over the next five years.  The amount of contingent future consideration payable to the previous owners of Eleven Blade is capped at $25 million and is not estimable at this time.The useful lives of the intellectual property rights and non-compete agreements are 20 years and 3 years, respectively. 

On July 1, 2013, the Company acquired ENTrigue Surgical, Inc. ("ENTrigue"), a privately-held Delaware corporation specializing in ENT sinus surgical products. As a result of this transaction, the Company recorded $2.4 million of identifiable

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

intangible assets in the form of trade names, developed technology, customer relationships, distribution agreements and non-compete agreements. See further discussion in Note 8.

As a result of these and other immaterial transactions during the nine months ended September 30, 2013, estimated future amortization expense as disclosed in Note 7 of the 2012 Form 10-K has been revised as follows (in thousands):

2013	$	546
2014	2,011
2015	1,739
2016	941
2017	919
Thereafter	8,956
	$	15,112

NOTE 5 – ACCRUED LIABILITIES

The following summarizes the Company’s accrued liabilities (in thousands):

	September 30, 2013		December 31, 2012
Insurance dispute reserve	$	30,000	$	9,729
Compensation	17,820		17,031
Legal expenses	3,249		3,730
Other	12,782		11,184
	$	63,851	$	41,674

The Company has recently engaged in preliminary resolution discussions with the DOJ regarding the DOJ investigation (see further discussion in Note 7). As a result of these ongoing discussions, the balance of the insurance dispute reserve was increased in the second quarter of 2013 to $30.0 million to reflect management's current best estimate of the financial component that will likely be included in the final resolution of the DOJ investigation. The actual amount of the financial component could be greater or less, and the timing of the final resolution and payment cannot yet be determined.

NOTE 6 – COMMITMENTS

Operating Leases

The Company leases certain facilities and equipment under operating leases.  The Company recognizes rent expense on a straight-line basis over the lease term.  Rent expense was $1.6 million and $5.1 million for the three and nine months ended September 30, 2013, respectively, compared to $1.6 million and $5.3 million for the same periods in 2012.  There were no material changes from the Company’s lease obligations presented in its 2012 Form 10-K.

Indemnification Agreements

The Company advances legal fees as required pursuant to indemnification agreements that were entered into with certain former executives and employees while they were employed with the Company.  During the nine months ended September 30, 2013 the Company advanced $8.5 million and has expensed $10.3 million under these indemnity agreements.  The Company expects to continue to advance payments pursuant to certain of these agreements in future periods; however, management is unable to estimate the amount or timing of future payments under such agreements.

NOTE 7 – LITIGATION AND CONTINGENCIES

In addition to the matters specifically described below, the Company is involved in other legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on the Company’s business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The Company records reserves for claims and lawsuits when they are probable and reasonably estimable. Except as otherwise specifically noted, the Company currently cannot determine the ultimate resolution of the matters described below. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, the Company has not recognized in its condensed consolidated financial statements the potential liability that may result from these matters. Further, for such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made and an estimate of the reasonably possible loss cannot be made at this time. If one or more of these matters is determined against the Company, it could have a material adverse effect on the Company’s earnings, liquidity and financial condition.

The Company continues to gather additional facts and information related to insurance billing and healthcare compliance issues and marketing and promotional practices in connection with these legal and administrative proceedings with the assistance of legal counsel.

DOJ Investigation

The Department of Justice (the “DOJ”) is investigating certain of the Company's activities including past sales, accounting and billing procedures primarily in relation to the operation of the Company's product sales. The DOJ is also reviewing the Company's relationship with its DiscoCare subsidiary. The Company is cooperating with this investigation. In connection with such cooperation, and pursuant to a request from the DOJ, the Company had previously entered into a series of statute of limitations tolling agreements with the DOJ, the most recent of which expired on August 31, 2013.

As previously disclosed, the Company has recently engaged in preliminary resolution discussions with the DOJ. As a result of these ongoing discussions, management continues to believe that a final resolution of this matter will include a financial component, and management's current best estimate of this financial component is $30 million. Accordingly, a charge of $20.2 million was recorded in the second quarter of 2013 as investigation and restatement related expenses which increased the balance of the Company’s insurance dispute reserve to $30 million. The actual amount could be greater or less, and the timing of the final resolution and payment cannot yet be determined. Based on the current discussions with the DOJ, management believes that any final resolution will likely contain continuing obligations for the Company, such as (1) a deferred prosecution agreement between the Company and the government and (2) the continuation of the Company's already established compliance monitoring and reporting systems. At this point, management is unable to estimate the length of time or the other conditions on such continuing obligations that may be associated with a final resolution. No agreement has been reached with or approved by the DOJ and any resolution would require approval by the U.S. District Court.

Private Securities Class Action

In 2008, two putative securities class actions were filed in Federal court against the Company and certain of its former executive officers, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiffs allege that the defendants violated federal securities laws by issuing false and misleading financial statements and making material misrepresentations regarding the Company’s internal controls, business and financial results. On October 28, 2008, and thereafter, the two putative securities class actions and the federal shareholder derivative actions were consolidated and designated: In Re ArthroCare Corporation Securities Litigation, Case No. 1:8-cv-574-SS (consolidated) in the U.S. District Court, Western District of Texas.

Settlement of Private Securities Actions

The Company reached an agreement to settle the private securities class action suits consolidated into the action titled In Re ArthroCare Corporation Securities Litigation, Case No. 1:8-cv-574-SS (consolidated) in the U.S. District Court, Western District of Texas.

The settlement resolves all claims arising from the purchase or sale of ArthroCare securities of a class of all purchasers of ArthroCare common stock and call options, and sellers of put options on ArthroCare common stock between December 11, 2007 and February 18, 2009, inclusive (the "Class"), except those members of the Class who opt out, for a payment of $74 million to a settlement fund to be created for the settlement. Counsel for the plaintiff applied for and received an award of attorneys’ fees and reimbursement of expenses from the settlement fund. On February 10, 2012, the Court entered an order of preliminary approval of the settlement and ordered that Notice be sent to all class members. Pursuant to the preliminary approval order, the Company paid the $74 million in settlement funds into the applicable settlement escrow account on February 23, 2012. The settlement was approved by the United States District Court for the Western District of Texas and entered as a final judgment on June 4, 2012.

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

False Claims Act Investigation

In the first quarter of 2012, the Company received a Civil Investigative Demand from the DOJ, requesting information related to the marketing of its radio-frequency ablation devices, which could implicate the False Claims Act, 31 U.S.C. § 3729. The Company completed its response to the information request in the second quarter of 2012 and is cooperating fully with the investigation, although no assurances can be given regarding the duration of the investigation or whether proceedings will be instituted against the Company. Management intends to represent the Company’s interests vigorously in this matter. At this stage of the investigation, however, management cannot predict the ultimate outcome of the investigation or any potential liability the Company may incur.

NOTE 8 – BUSINESS COMBINATIONS

On July 1, 2013, the Company acquired ENTrigue Surgical, Inc. ("ENTrigue"), a privately-held Delaware corporation specializing in ENT sinus surgical products. The Company paid approximately $45.0 million in cash to the former stockholders of ENTrigue, less an amount placed in escrow to secure the indemnification obligations of the former stockholders of ENTrigue.

The Agreement also provides that the Company will make annual cash payments to the former stockholders of ENTrigue shortly after each of the next five anniversaries of the acquisition date based on the annual net sales of the acquired products. The annual payment shall equal annual net sales growth times the applicable sales growth multiple for the year. The sales growth multiple is 0.6 for years 1-3; 1.1 for year 4; and 1.25 for year 5. For purposes of calculating this multiple, the annual growth of net sales each year is determined by subtracting the highest amount of net sales in any previous year from the net sales in the current year. The range of undiscounted future payments that could be required is currently estimated to be between $2.4 million and $32.2 million. The estimated fair value of the contingent consideration arrangement used for determining total purchase price is $14.5 million, which was estimated by applying the income approach using a Monte Carlo simulation model. That measure is based on valuation inputs that are not observable in the market.

The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below (in thousands):

Current assets	$	2,201
Property, plant and equipment	340
Intangible assets	2,386
Goodwill	45,187
Deferred tax assets	10,093
Total assets acquired	60,207
Liabilities	664
Total purchase price	$	59,543
Cash payments at acquisition date	45,000
Fair value of contingent consideration liability	14,543
Total purchase price	$	59,543

The fair value of the assets and liabilities acquired, including goodwill, is preliminary and therefore may be subject to adjustments. The goodwill of $45.2 million arising from the acquisition is not expected to be deductible for income tax purposes. Subsequent to July 1, 2013, the revenues and expenses of ENTrigue have been included in the Company's consolidated statements of income. The Company incurred transaction related expenses of approximately $0.8 million for the nine months ended September 30, 2013 which have been recorded as general and administrative expenses.

The fair value and weighted-average useful life of the identifiable intangible assets acquired are summarized below (in thousands):

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

			Weighted-Average Useful Life
Trade names	$	410	9 Years
Developed technology	940		12 Years
Customer relationships	390		10 Years
Distribution agreements	280		3 Years
Non-compete agreements	366		5 Years
	$	2,386

See further discussion of future amortization expense for intangible assets in Note 4.

NOTE 9 –EXIT COSTS

The Company completed the consolidation of its Sunnyvale, California activities to Austin, Texas in the fourth quarter of 2011.  In the second quarter of 2012, the Company entered into a sublease for its former Austin, Texas location which decreased the amount accrued for contract termination by $1.1 million.

The following table summarizes the accrued and paid exit costs during the nine month period ended September 30, 2013 (in thousands):

	Accrued Exit Cost Balance at January 1, 2013		Cost Incurred		Payments		Accrued Exit Cost Balance at September 30, 2013
Contract termination and other	$	909	$	—	$	297	$	612
	$	909	$	—	$	297	$	612

NOTE 10 – INCOME TAXES

The federal research and development tax credit was extended by the signing of the American Taxpayer Relief Act of 2012 (“Act”) on January 2, 2013. The Act retroactively extended this tax credit from January 1, 2012 through December 31, 2013. Since the Act was enacted during 2013, the income tax benefit related to the federal 2012 research and development tax credit resulted in a $0.8 million reduction of income tax expense for the nine months ended September 30, 2013.

As disclosed in Note 14 of the 2012 Form 10-K, the Company was notified in 2010 by the Internal Revenue Service (“IRS”) of its intention to examine the 2006 federal income tax return related to certain transfer pricing tax positions. This examination was subsequently extended to include the 2007 - 2011 federal income tax returns. In the third quarter of 2013, the Company received a final settlement letter from the IRS which resulted in additional taxes payable of $2.4 million for the cumulative 2006 - 2011 tax years.  As a result of this settlement, the Company reversed reserves for uncertain tax positions related to these years. The net effect of the final settlement was a net income tax benefit of $10.5 million for the nine months ended September 30, 2013.

NOTE 11 – SEGMENT INFORMATION

Our business consists of one operating and reportable segment for the development, manufacturing and marketing of disposable devices and implants for select surgical procedures.  The development, manufacturing and other supporting functions, such as regulatory affairs and distribution, are common across our Company.  We organize and manage our sales and marketing functions according to geography and the surgical specialty that typically employs our products.  Most of the Company’s products are used in Sports Medicine or ENT procedures.

Product sales by product area for the periods shown were as follows (in thousands):

ARTHROCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

	Three months ended September 30, 2013						Three months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	37,410	$	20,674	$	58,084	$	36,787	$	18,414	$	55,201
ENT	19,938		6,791		26,729		19,677		5,846		25,523
Other	372		1,875		2,247		322		1,556		1,878
Total product sales	$	57,720	$	29,340	$	87,060	$	56,786	$	25,816	$	82,602

	Nine months ended September 30, 2013						Nine months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	114,218	$	62,401	$	176,619	$	113,868	$	58,357	$	172,225
ENT	60,880		18,014		78,894		62,985		16,629		79,614
Other	1,185		5,310		6,495		1,322		5,287		6,609
Total product sales	$	176,283	$	85,725	$	262,008	$	178,175	$	80,273	$	258,448

Internationally, the Company markets and supports its products primarily through its subsidiaries and various distributors.  Product sales attributed to geographic areas are based on the country or regional area where the Company’s customer is domiciled.  Product sales by geography for the periods shown were as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
United States	$	55,616	$	53,936	$	170,195	$	169,937
Non-United States (1)	31,444		28,666		91,813		88,511
Total product sales	$	87,060	$	82,602	$	262,008	$	258,448

 ___________________________________________

(1) No additional locations are individually significant.

Long-lived assets, net by geography, at the balance sheet dates shown were as follows (in thousands):

	September 30, 2013		December 31, 2012
United States	$	171,232	$	109,950
Non-United States (1)	58,437		44,434
Total long-lived assets	$	229,669	$	154,384

 ___________________________________________

(1) No additional locations are individually significant.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Readers should also review carefully “Forward-Looking Statements,” in Part II of this quarterly report on Form 10-Q, which provides information about the forward-looking statements in this report

and a discussion of the factors that might cause our actual results to differ, perhaps materially, from these forward-looking statements.  Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q which express that we “believe,” “anticipate,” “expect” or “plan to” as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.  Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.  As such, actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere including, but not limited to, those factors discussed in Part II — Item 1A — “Risk Factors” of this report on Form 10-Q and in Part I — Item 1A — “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2012.  In this quarterly report on Form 10-Q, the terms the “Company”, “we”, “us” and “our” refer to ArthroCare Corporation and its subsidiaries.

Overview

We are a medical device company that develops, manufactures and markets surgical products, many of which are based on our minimally invasive patented Coblation ® technology. Our products are used across several medical specialties, improving many existing soft-tissue surgical procedures and enabling new minimally invasive surgical procedures. Our business consists of one operating and reportable segment for the development, manufacturing and marketing of disposable devices and implants for select surgical procedures.  The product development, manufacturing and other supporting functions, such as regulatory affairs and distribution, are common across our Company.  We organize and manage our sales and marketing functions according to geography and the surgical specialty that typically uses our products.  Most of the Company’s products are used in Sports Medicine or ENT procedures.

Key Financial Items, Trends and Uncertainties Affecting Our Business

Our management reviews and analyzes several metrics and ratios in order to manage our business and assess the quality of and potential variability of our operating performance. The most important of these financial metrics and ratios include:

Product Sales

Our principal source of revenue is from sales of our products, which primarily include disposable surgical devices and implants. Product sales are made through our employed sales representatives, independent sales agents and distributors.  Product sales increased $4.5 million or 5.4 percent for the quarter ended September 30, 2013 and increased $3.6 million or 1.4 percent for the nine month period ended September 30, 2013 when compared to the same periods in 2012.  We anticipate that disposable surgical device and implant sales will remain key components of our product sales for the foreseeable future.  The strengthening of the U.S. Dollar, net, against the foreign currencies in which our subsidiaries operate reduced the U.S. dollar value of product sales by $0.4 million and $0.5 million for the three and nine months ended September 30, 2013, respectively. In constant currency, product sales increased 5.8 percent and 1.6 percent for the three and nine months ended September 30, 2013, respectively, when compared to the same periods in 2012. Management believes percentage sales growth in constant currency is an important metric for evaluating our operations because the impact of changing foreign currency exchange rates may not provide an accurate baseline for analyzing trends in our business. To measure percentage sales growth in constant currency, we remove the impact of changes in foreign currency exchange rates. Percentage sales growth in constant currency is calculated by translating current year sales at prior year average foreign currency exchange rates. Constant currency is a non-GAAP measure and should not be considered as a substitute for measures prepared in accordance with GAAP.

We contract manufacture disposable surgical devices and implants based on our technologies for other medical device companies.  Product sales from contract manufacturing for the three and nine month periods ended September 30, 2013 were $5.9 million and $16.8 million, respectively, compared to $6.6 million and $18.0 million during the same periods in 2012.

We also generate revenue from royalties, fees and other revenues from the licensing of our technology to other companies and earn other revenues from shipping and handling costs billed to customers.

Gross Product Margin

Gross product margin as a percentage of product sales for the three and nine month periods ended September 30, 2013 was 66.8 percent and 67.2 percent, respectively, compared to 68.3 percent and 69.0 percent for the same periods in 2012.  Cost of product sales consists of all product manufacturing costs (including material costs, labor costs, manufacturing overhead, warranty and other direct product costs), adjustments to the carrying value of inventory for excess or obsolete items, certain

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stock based compensation costs associated with manufacturing and operations personnel, costs to ship product to our customers and, beginning in the first quarter of 2013, excise tax imposed on our US product sales resulting from the Patient Protection and Affordable Care Act which was signed into law in March 2010 (the "Medical Device Tax").  Cost of product sales also includes the amortization of controller units and instruments that have been placed at customer locations to enable the use of our disposable surgical products. We maintain ownership of all placed controllers and instruments and the costs are amortized into cost of product sales over their estimated useful life.  Our products are mostly produced at our Costa Rica facility. Raw materials used to produce our products are generally not subject to substantial commodity price volatility.  Most of our product manufacturing costs are incurred in U.S. dollars.

The comparability of gross product margin between periods will be impacted by several items, including the Medical Device Tax that was newly implemented in 2013, the mix between proprietary and contract manufactured product sales; the stability of the average sales price we realize on proprietary products; changes in foreign exchange rates used to translate foreign currency denominated sales into U.S. dollars; changes in the estimated percentage of engineering activities related to manufacturing process design or improvement; and changes in our product emphasis which could result in excess and obsolescence charges being included in the cost of product sales in a particular period.

Operating Margin

Operating margin is our income from operations as a percentage of total revenues. Our key operating expenses include expenses incurred in connection with research and development, sales and marketing, and general and administrative activities, as well as the amortization of intangible assets.  Operating margin was 13.9 percent for the quarter ended September 30, 2013 and 5.5 percent for the nine month period ended September 30, 2013 compared to 15.7 percent and 18.0 percent for the same periods in 2012.

Under the short-term incentive plan for 2013 approved by our Board of Directors, adjusted operating margin is a key metric for purposes of evaluating management’s performance.  Adjusted operating margin is operating margin adjusted for investigation and restatement related costs.  Investigation and restatement related costs were 3.4 percent and 12.1 percent of total revenue for the three and nine month periods ended September 30, 2013, respectively, compared to 2.5 percent and 1.6 percent of total revenue for the same periods in 2012.  Adjusted operating margin was 17.3 percent and 17.6 percent for the three and nine month periods ended September 30, 2013, respectively, compared to 18.2 percent and 19.6 percent for the same periods in 2012. 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.

Net Earnings

For most periods, our net earnings will be affected by the same trends that impact our revenues, gross product margin and operating margin. In addition, net earnings will also be affected by non-operating other income and expenses, such as foreign currency gains and losses, and by income taxes.  We expect that we will report foreign currency gains or losses each period due primarily to changes in the value of the euro, British pound and Australian dollar versus the U.S. dollar.

In periods when we report income before taxes, our effective income tax rate is usually less than the U.S. statutory rate as a substantial portion of our operations are outside the U.S. in jurisdictions with lower tax rates, including Costa Rica, where we manufacture the majority of our products and have a tax holiday that extends through December 2015.  In years of loss, our effective tax rate has exceeded the U.S. statutory rate due to the apportionment of income or loss between jurisdictions in which we operate. In the third quarter of 2013, we finalized the settlement with the Internal Revenue Service (“IRS”) concerning its examination of our federal income tax returns for the 2006 - 2011 tax years. The net effect of the settlement recorded in the nine month period ended September 30, 2013 was a net income tax benefit of $10.5 million. We reversed $3.7 million of deferred tax assets in the second quarter of 2013 related to amounts accrued previously as insurance dispute reserves. We currently estimate that amounts accrued as insurance dispute reserves will be paid to settle the DOJ investigation and as a result we will obtain no income tax deduction when this settlement is paid. We expect to be able to fully utilize our net deferred tax assets, which amounted to $39.6 million as of September 30, 2013.

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Results of Operations

Results of operations for the three and nine month periods ended September 30, 2013 and 2012 (in thousands, except percentages and per-share data) were as follows: 

	Three months ended September 30,										Nine months ended September 30,
	2013					2012					2013					2012
	Dollars			% Total Revenue		Dollars			% Total Revenue		Dollars			% Total Revenue		Dollars			% Total Revenue
Revenues:
Product sales	$	87,060		94.8	%	$	82,602		95.0	%	$	262,008		94.8	%	$	258,448		95.2	%
Royalties, fees and other	4,803			5.2	%	4,338			5.0	%	14,273			5.2	%	13,070			4.8	%
Total revenues	91,863			100.0	%	86,940			100.0	%	276,281			100.0	%	271,518			100.0	%
Cost of product sales	28,876			31.4	%	26,204			30.1	%	85,929			31.1	%	80,210			29.5	%
Gross profit	62,987			68.6	%	60,736			69.9	%	190,352			68.9	%	191,308			70.5	%
Operating expenses:
Research and development	8,433			9.2	%	8,184			9.4	%	25,536			9.2	%	23,677			8.7	%
Sales and marketing	29,322			31.9	%	27,175			31.2	%	89,872			32.5	%	86,217			31.8	%
General and administrative	8,785			9.6	%	8,191			9.4	%	24,926			9.0	%	24,833			9.1	%
Amortization of intangible assets	534			0.6	%	1,363			1.6	%	1,461			0.5	%	4,000			1.5	%
Exit costs	—			—	%	—			—	%	—			—	%	(778		)	(0.3	)%
Investigation and restatement related costs	3,164			3.4	%	2,139			2.5	%	33,391			12.1	%	4,363			1.6	%
Total operating expenses	50,238			54.7	%	47,052			54.1	%	175,186			63.4	%	142,312			52.4	%
Income from operations	12,749			13.9	%	13,684			15.7	%	15,166			5.5	%	48,996			18.0	%
Non-operating gains (losses)	(28		)			183					101					(578		)
Income before income taxes	12,721					13,867					15,267					48,418
Income tax provision	2,449					3,882					587					13,211
Net income	10,272					9,985					14,680					35,207
Accrued dividends and accretion charges on Series A 3% Redeemable Convertible Preferred Stock	(940		)			(900		)			(2,788		)			(2,666		)
Net income available to common stockholders	9,332					9,085					11,892					32,541
Other comprehensive income (loss)
Foreign currency translation adjustments	1,131					951					(312		)			565
Total comprehensive income	$	11,403				$	10,936				$	14,368				$	35,772
Weighted-average shares outstanding:
Basic	28,374					27,714					28,239					27,698
Diluted	28,968					28,087					28,888					28,096
Earnings per share applicable to common stockholders:
Basic	$	0.27				$	0.27				$	0.35				$	0.97
Diluted	$	0.27				$	0.27				$	0.34				$	0.96

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Product Sales

Product sales by product group and geographic market for the periods shown were as follows (in thousands, except percentages):

	Three months ended September 30, 2013											Three months ended September 30, 2012
	Americas			International			Total Product Sales			% Net Product Sales		Americas			International			Total Product Sales			% Net Product Sales
Sports Medicine	$	37,410		$	20,674		$	58,084		66.7	%	$	36,787		$	18,414		$	55,201		66.8	%
ENT	19,938			6,791			26,729			30.7	%	19,677			5,846			25,523			30.9	%
Other	372			1,875			2,247			2.6	%	322			1,556			1,878			2.3	%
Total product sales	$	57,720		$	29,340		$	87,060		100	%	$	56,786		$	25,816		$	82,602		100	%
% Net product sales	66.3		%	33.7		%	100		%			68.7		%	31.3		%	100		%

	Nine months ended September 30, 2013											Nine months ended September 30, 2012
	Americas			International			Total Product Sales			% Net Product Sales		Americas			International			Total Product Sales			% Net Product Sales
Sports Medicine	$	114,218		$	62,401		$	176,619		67.4	%	$	113,868		$	58,357		$	172,225		66.6	%
ENT	60,880			18,014			78,894			30.1	%	62,985			16,629			79,614			30.8	%
Other	1,185			5,310			6,495			2.5	%	1,322			5,287			6,609			2.6	%
Total product sales	$	176,283		$	85,725		$	262,008		100	%	$	178,175		$	80,273		$	258,448		100	%
% Net product sales	67.3		%	32.7		%	100		%			68.9		%	31.1		%	100		%

Worldwide Sports Medicine product sales increased $2.9 million or 5.2 percent and $4.4 million or 2.6 percent for the three and nine month periods ended September 30, 2013, respectively, compared to the same periods in 2012 due to higher proprietary product sales. In constant currency, Sports Medicine product sales increased 5.8 percent and 2.8 percent for the three and nine months ended September 30, 2013, respectively, when compared to the same periods in 2012.

Americas Sports Medicine product sales, which includes both proprietary product sales and contract manufacturing product sales, increased $0.6 million or 1.7 percent and $0.4 million or 0.3 percent for the three and nine month periods ended September 30, 2013, respectively when compared to the same periods in 2012.  Americas proprietary Sports Medicine product sales increased $1.4 million or 4.5 percent for the three months ended September 30, 2013 and $1.6 million or 2.0 percent for the nine-month period ended September 30, 2013 when compared to the same periods in 2012. The increase in Americas proprietary Sports Medicine sales in the quarter was a result of higher Coblation product sales volumes, partially offset by a 2 percent decrease in average selling price for the quarter. Fixation product sales were mostly unchanged in the quarter in terms of volumes and pricing. For the three months ended September 30, 2013, contract manufacturing product sales decreased $0.8 million or 11.2 percent and decreased $1.2 million or 6.8 percent for the nine-month period ended September 30, 2013 compared to the same periods in 2012.

International Sports Medicine product sales increased $2.3 million or 12.3 percent and $4.0 million or 6.9 percent for the three and nine month periods ended September 30, 2013, respectively, compared to the same periods in 2012.  Product sales to distributor markets increased in the quarter, most notably to Asia Pacific and southern European distributors. Product sales in direct markets increased 6 percent for each of the three and nine month periods ending September 30, 2013 when compared to

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the same periods in 2012 and product sales in direct markets were over 80 percent of total International Sports Medicine product sales for the nine month period ended September 30, 2013.

Worldwide ENT product sales increased $1.2 million or 4.7 percent and decreased $0.7 million or 0.9 percent for the three and nine month periods ended September 30, 2013, respectively, compared to the same periods in 2012. Changes in foreign exchange rates did not have a material effect on the comparability of reported ENT product sales between the periods.

Americas ENT sales increased $0.3 million or 1.3 percent and decreased $2.1 million or 3.3 percent for the three and nine month periods ended September 30, 2013, respectively, compared to the same periods in 2012.  The increase for the three months ended September 30, 2013 is due to sales of ENTrigue products. The decrease for the nine months ended September 30, 2013 is due to the decline in tonsillectomy product sales in 2013 as compared to the prior year.  In addition, Americas product sales in the first quarter of last year included approximately $0.7 million related to fulfilled Rapid Rhino back orders from the end of 2011. Excluding the effect of the back order on 2012 product sales, Americas ENT product sales decreased $1.4 million or 2.3 percent for the nine month period ended September 30, 2013.

International ENT product sales increased $0.9 million or 16.2 percent for the three month period ended September 30, 2013 and increased $1.4 million or 8.3 percent for the nine month period ended September 30, 2013 compared to the same periods in 2012.  Product sales to distributor markets increased in the quarter and for the nine months ended September 30, 2013 when compared to the same periods in 2012. Product sales in direct markets increased 10 percent for the quarter and 7 percent for the nine months ending September 30, 2013, when compared to the same periods in 2012. Direct markets product sales comprised approximately 50 percent of the total International ENT product sales through the first nine months of 2013. Product sales in the first quarter of 2012 included approximately $0.3 million related to fulfilled Rapid Rhino back orders from the end of 2011. Excluding the effect of the back order on 2012 product sales, International ENT product sales increased $1.7 million or 10.3 percent for the nine month period ended September 30, 2013.

Worldwide Other product sales increased $0.4 million and decreased $0.1 million for the three and nine month periods ended September 30, 2013, respectively, when compared to the same periods in 2012. Other product sales represent less than 3.0 percent of total product sales in the three and nine months ended September 30, 2013 and 2012.

Royalties, Fees and Other Revenues

Royalties, fees, and other revenues was 5.2 percent of total revenues for each of the three and nine month periods ended September 30, 2013 compared to 5.0 percent and 4.8 percent for the same periods in 2012, respectively.

Cost of Product Sales

Cost of product sales for the periods shown were as follows (in thousands, except percentages):

	Three months ended September 30,
	2013				2012
	Dollars		% Net Product Sales		Dollars		% Net Product Sales
Product cost	$	24,646	28.3	%	$	22,666	27.4	%
Controller amortization	1,650		1.9	%	2,008		2.4	%
Other	2,580		3.0	%	1,530		1.9	%
Total cost of product sales	$	28,876	33.2	%	$	26,204	31.7	%

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	Nine months ended September 30,
	2013				2012
	Dollars		% Net Product Sales		Dollars		% Net Product Sales
Product cost	$	72,877	27.8	%	$	68,177	26.4	%
Controller amortization	5,139		2.0	%	6,416		2.5	%
Other	7,913		3.0	%	5,617		2.1	%
Total cost of product sales	$	85,929	32.8	%	$	80,210	31.0	%

Gross product margin as a percentage of product sales was 66.8 percent and 67.2 percent for the three and nine month periods ended September 30, 2013, respectively, compared to 68.3 percent and 69.0 percent for the same periods in 2012.  The decrease in gross product margin for the three and nine months ended September 30, 2013 is due to the new Medical Device Tax which came into effect in the first quarter of 2013, lower average sales price on Sports Medicine product sales and changes in sales mix versus the same periods of 2012.

Operating Expenses

Operating expenses for the periods shown were as follows (in thousands, except percentages):

	Three months ended September 30,								Nine months ended September 30,
	2013				2012				2013				2012
	Dollars		% Total Revenue		Dollars		% Total Revenue		Dollars		% Total Revenue		Dollars			% Total Revenue
Research and development	$	8,433	9.2	%	$	8,184	9.4	%	$	25,536	9.2	%	$	23,677		8.7	%
Sales and marketing	29,322		31.9	%	27,175		31.2	%	89,872		32.5	%	86,217			31.8	%
General and administrative	8,785		9.6	%	8,191		9.4	%	24,926		9.0	%	24,833			9.1	%
Amortization of intangible assets	534		0.6	%	1,363		1.6	%	1,461		0.5	%	4,000			1.5	%
Exit costs	—		—	%	—		—	%	—		—	%	(778		)	(0.3	)%
Investigation and restatement related costs	3,164		3.4	%	2,139		2.5	%	33,391		12.1	%	4,363			1.6	%
Total operating expenses	$	50,238	54.7	%	$	47,052	54.1	%	$	175,186	63.3	%	$	142,312		52.4	%

Research and development expense increased $0.2 million and $1.9 million for the three and nine months ended September 30, 2013, respectively, when compared to the same periods in 2012 due primarily to increased Sports Medicine new product development costs.

Sales and marketing expense increased to 31.9 percent and 32.5 percent of total revenue for the three and nine months ended September 30, 2013, respectively, from 31.2 percent and 31.8 percent for the three and nine months ended September 30, 2012.  The increase in sales and marketing expense was a result of efforts to expand our sales and distribution coverage and sales force training in support of anticipated future new product introductions.  In addition, sales and marketing expense increased $0.3 million and $0.4 million for the three and nine months ended September 30, 2013, respectively, due to severance-related costs.

General and administrative expenses increased $0.6 million and $0.1 million for the three and nine month periods ended September 30, 2013, respectively, when compared to the same periods in 2012.  The increase in general and administrative expenses for the three months ended September 30, 2013 is primarily due to $0.7 million of one-time transaction-support costs and severance-related costs resulting from the ENTrigue acquisition.       

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Amortization of intangible assets expense decreased $0.8 million and $2.5 million for the three and nine month periods ended September 30, 2013, respectively, when compared to the same periods in 2012.  In the fourth quarter of 2012, certain intangible assets related to the acquisition of Opus Medical were fully amortized partially offset by amortization expense for intangible assets acquired in 2013.

Investigation and restatementexpenses increased $1.0 million and $29.0 million for the three and nine month periods ended September 30, 2013, respectively when compared to the same periods in 2012.  The Company has recently engaged in preliminary resolution discussions with the DOJ regarding the DOJ investigation (see further discussion in Note 7 of our condensed consolidated financial statements). As a result of these discussions, management believes that a final resolution of this matter will include a financial component, and management's current best estimate of this financial component is $30 million. Accordingly, during the second quarter of 2013 the balance of the insurance dispute reserve was increased to reflect this estimate and a charge of $20.2 million was recorded as investigation and restatement related expenses. The actual amount could be greater or less, and the timing of the final resolution and payment cannot yet be determined. The increase in investigation and restatement expenses is also a result of additional legal costs related to our indemnification agreements with certain former officers as described in Note 6 of our condensed consolidated financial statements.  We expect the indemnification expenses to continue until the matters concerning the former officers are concluded.

Non-operating gains (losses)

Non-operating gains (losses) netted to an immaterial loss for the three month period ended September 30, 2013 and was a gain of $0.1 million for the nine month period ended September 30, 2013. For the same periods in 2012, we reported a non-operating gain of $0.2 million and a loss of $0.6 million, respectively.  The non-operating loss for the three months ended September 30, 2013 is primarily a result of other income resulting from the deferred income recognized on the cancellation of the Wright Medical exclusive distribution contract offset by bank fees and interest expense. The non-operating gain for the nine months ended September 30, 2013 includes a gain of $1.7 million received from the extinguishment of our membership interests in a mutual insurance company offset by foreign currency losses reported by foreign subsidiaries on U.S. dollar inter-company net payables as the U.S. dollar strengthened against the British pound and Australian dollar as well as bank fees and interest expense.

Income Tax Provision

Our effective tax rate for the three month and nine month periods ended September 30, 2013 was 19.3 percent and 3.8 percent, respectively, compared to 28.0 percent and 27.3 percent in the same periods in 2012. The decrease in our effective tax rate was due to a number of discrete items during 2013. In the third quarter of 2013, we finalized the settlement with the IRS concerning its examination of our federal income tax returns for the 2006 – 2011 tax years which resulted in a net income tax benefit of $10.5 million for the nine months ended September 30, 2013. We recorded a charge of $20.2 million in the second quarter of 2013 as investigation and restatement related expenses which increased the balance of the Company's insurance dispute reserve to $30 million. We currently estimate that amounts accrued as insurance dispute reserves will be paid to settle the DOJ investigation and accordingly will not result in an income tax deduction when paid. We also reversed $3.7 million of deferred tax assets in the second quarter of 2013 related to amounts previously accrued as insurance dispute reserves. Lastly, income tax expense was lower for the nine months ended September 30, 2013 due to the signing into law of the American Taxpayer Relief Act of 2012 on January 2, 2013 (the Act) which retroactively extended the federal research and development tax credit from January 1, 2012 through December 31, 2013.   As a result of the Act, we recorded research and development tax credits related to 2012 of $0.8 million as a reduction of income tax expense for the nine months ended September 30, 2013.

Liquidity and Capital Resources

Our operating cash flow has historically been affected by the overall profitability of the sales of our products, our ability to invoice and collect from customers in a timely manner and our ability to efficiently implement our acquisition strategy and manage costs.  We expect that our cash flows from operations together with cash on hand will be sufficient to satisfy our short-term and long-term normal operating requirements.

As of September 30, 2013 we had $236.9 million in working capital compared to $287.7 million at December 31, 2012.  Our cash and cash equivalents balance was $208.4 million at September 30, 2013 and $218.8 million at December 31, 2012.   

Cash provided by operating activities for the nine months ended September 30, 2013 was $59.9 million and was higher than net income primarily as a result of non-cash items affecting net income during the period, including the charge recorded in the second quarter to revise the insurance dispute reserve to reflect our current best estimate of the financial

17

component of the potential resolution with the DOJ, net income tax benefit recorded in the second quarter resulting from the settlement of IRS examination of the 2006-2011 federal tax returns, and the period's normally recurring depreciation and amortization expense and stock based compensation expense.  Cash used by operating activities was $10.6 million for the nine month period ended September 30, 2012, due to the payment of $74 million required under the settlement of the private securities actions.  Adjusted for this payment, our cash provided by operating activities would have been $63.4 million in the first nine months of 2012.

Cash used in investing activities for the nine months ended September 30, 2013 was $77.3 million which consisted primarily of $23.8 million in property and equipment purchases, including $12.5 million related to our new Costa Rica Manufacturing facility which is currently under construction, $7.0 million paid to acquire Eleven Blade and $45.0 million paid to acquire ENTrigue.  Cash used in investing activities was $8.4 million for the nine month period ended September 30, 2012 of which $7.2 million related to purchases of property and equipment and $1.3 million paid to acquire an orthopedic sales and marketing entity in Finland.

Cash provided by financing activities for the nine months ended September 30, 2013 and 2012 was $6.9 million and $2.8 million, respectively, primarily related to proceeds from exercises of stock options and purchases under the employee stock purchase plan.

Critical Accounting Policies and Estimates

There have been no other material updates to our critical accounting policies and estimates set forth in “Part II—Item 7—Management Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our 2012 Form 10-K.

Disclosures about Contractual Obligations and Commercial Commitments

We have various contractual obligations, which are recorded as liabilities in our condensed consolidated financial statements.  Other items, such as certain purchase commitments with suppliers and minimum lease payments under operating leases, are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed.  There were no material changes from our contractual obligations presented in our 2012 Form 10-K other than the agreements entered into to construct a new manufacturing facility in Costa Rica as disclosed in our June 30, 2013 Form 10-Q and the agreement entered into with the former stockholders of ENTrigue as discussed in Note 8.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations, primarily risks from changing foreign currency exchange rates that may impact, adversely or otherwise, our financial condition, results of operations or cash flows.  We have not historically used derivative financial instruments to manage these market risks.

Our interest income is dependent on changes in the general level of U.S. dollar interest rates. Our cash and cash equivalents consist of money market funds and various deposit accounts.  Due to the nature and value of our investments, we have concluded that we do not have material interest rate risk exposure.  An immediate 10 percent increase or decrease in interest rates would not have a material adverse impact on our future operating results or cash flows.

Our weighted average interest rate earned on our cash and cash equivalents for the period ended September 30, 2013 was less than 1 percent.

A significant portion of our international sales and operating expenses are denominated in currencies other than the U.S. dollar.  To the extent that the U.S. dollar exchange rates for these currencies fluctuate, we will experience variations in our earnings and financial condition.

Our cash and cash equivalents at September 30, 2013 are denominated primarily in U.S. dollars; however, we also maintain balances in euros, British pounds, Swedish kroner, Swiss francs, Australian dollars and Costa Rican colones.  A 10 percent change in the September 30, 2013 exchange rates for these currencies would have an impact on pre-tax income of approximately $0.6 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

18

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. Pursuant to this evaluation, our CEO and CFO concluded that, as of September 30, 2013, the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Management has evaluated, with the participation of our CEO and CFO, whether any changes in our internal control over financial reporting have occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, management concluded that there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

FORWARD-LOOKING STATEMENTS

The information provided herein includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on beliefs and assumptions by management and on information currently available to management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any of them publicly in light of new information or future events. Additional factors that could cause actual results to differ materially from those contained in any forward-looking statement include, without limitation: the resolution of litigation pending against the Company; the impact upon the Company’s operations of legal compliance matters which may require improvement and remediation; the ability of the Company to control expenses relating to legal or compliance matters; the Company’s ability to remain current in its periodic reporting requirements under the Exchange Act and to file required reports with the Securities and Exchange Commission on a timely basis; the results of the investigation being conducted by the United States Department of Justice; the impact on the Company of additional civil and criminal investigations by state and federal agencies and civil suits by private third parties involving the Company’s financial reporting and its previously announced restatement and its insurance billing and healthcare fraud-and-abuse compliance practices; the results of the civil investigation by the Department of Justice related to the Civil Investigative Demand we received arising under the False Claims Act; the possibility that the Department of Justice could institute civil proceedings against us, based on the results of the investigation related to the Civil Investigative Demand; the risk that we could be subject to qui tam suits involving the False Claims Act; the possibility that the Department of Justice could institute a criminal enforcement action against us based on the results of the civil investigation related to the Civil Investigative Demand; the resolution of any litigation related to the civil investigation; the ability of the Company to attract and retain qualified senior management and to prepare and implement appropriate succession planning for its Chief Executive Officer; general business, economic and political conditions; competitive developments in the medical devices market; changes in applicable legislative or regulatory requirements; the Company’s ability to effectively and successfully implement its business strategies, and manage the risks in its business; and the reactions of the marketplace to the foregoing.

ITEM 1.  LEGAL PROCEEDINGS

We discuss our material legal proceedings in Note 7, “Litigation and Contingencies,” in the notes to the condensed consolidated financial statements.  In addition to the matters specifically described in Note 7 we are involved in other legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on our business.  Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately. We record reserves for claims and lawsuits when they are probable and reasonably estimable.  Except as otherwise specifically noted, we currently cannot determine the ultimate resolution of the matters described in Note 7.  For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we have not recognized in our condensed consolidated financial statements the potential liability that may result from these matters.  If one or more of these matters is determined against us, it could have a material adverse effect on our earnings, liquidity and financial condition. 

ITEM 1A.  RISK FACTORS

There have been no material changes from risk factors as previously disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

None.

ITEM 5.  OTHER INFORMATION

None.

20

ITEM 6. EXHIBITS

Exhibit Number	Description
2.1	Agreement and Plan of Merger, by and among ArthroCare Corporation, Durante Merger Sub, Inc., ENTrigue Surgical, Inc., and Shareholder Representative Services, LLC as the Representative, dated as of July 1, 2013 (incorporated by reference to Exhibit 2.1 to ArthroCare Corporation’s Current Report on Form 8-K filed on July 2, 2013 (Commission File No. 0-027422)).
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	XBRL Instance Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ARTHROCARE CORPORATION
	a Delaware corporation
Date: October 29, 2013	/s/ David Fitzgerald
	David Fitzgerald
	President and Chief Executive Officer
Date: October 29, 2013	/s/ Todd Newton
	Todd Newton
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

22

EXHIBIT INDEX

EXHIBIT NO.	DOCUMENT DESCRIPTION
2.1	Agreement and Plan of Merger, by and among ArthroCare Corporation, Durante Merger Sub, Inc., ENTrigue Surgical, Inc., and Shareholder Representative Services, LLC as the Representative, dated as of July 1, 2013 (incorporated by reference to Exhibit 2.1 to ArthroCare Corporation’s Current Report on Form 8-K filed on July 2, 2013 (Commission File No. 0-027422)).
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	XBRL Instance Document

23

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David Fitzgerald, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ArthroCare Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 29, 2013	/s/ David Fitzgerald
	David Fitzgerald
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Todd Newton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ArthroCare Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 29, 2013	/s/ Todd Newton
	Todd Newton
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of ArthroCare Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) The accompanying Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  October 29, 2013	/s/ David Fitzgerald
	David Fitzgerald
	President and Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of the written statement required by Section 906, has been provided to ArthroCare Corporation and will be retained by ArthroCare Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of ArthroCare Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) The accompanying Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 29, 2013	/s/ Todd Newton
	Todd Newton
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of the written statement required by Section 906, has been provided to ArthroCare Corporation and will be retained by ArthroCare Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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BASIS OF PRESENTATION (Policies)

9 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ArthroCare Corporation (“ArthroCare”) and its subsidiaries (collectively with ArthroCare, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”).  The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2012 Annual Report on Form 10-K filed on February 14, 2013 (“2012 Form 10-K”).  In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at September 30, 2013 and December 31, 2012, the results of its operations for the three and nine month periods ended September 30, 2013 and 2012 and its cash flows for the nine month periods ended September 30, 2013 and 2012.  The results of operations for the periods presented are not necessarily indicative of results that may be expected for the year ending December 31, 2013.

Use of Estimates

Use of Estimates

The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.

New Accounting Pronouncements

New Accounting Pronouncements

Accounting Standards Update (ASU) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued in July 2013 and addresses when an unrecognized tax benefit shall be recorded as a reduction to a deferred tax asset or presented as a gross liability. ASU 2013-11 is effective for the Company beginning in 2014. Management is evaluating the impact of this ASU.

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues:
Product sales	$ 87,060	$ 82,602	$ 262,008	$ 258,448
Royalties, fees and other	4,803	4,338	14,273	13,070
Total revenues	91,863	86,940	276,281	271,518
Cost of product sales	28,876	26,204	85,929	80,210
Gross profit	62,987	60,736	190,352	191,308
Operating expenses:
Research and development	8,433	8,184	25,536	23,677
Sales and marketing	29,322	27,175	89,872	86,217
General and administrative	8,785	8,191	24,926	24,833
Amortization of intangible assets	534	1,363	1,461	4,000
Exit costs	0	0	0	(778)
Investigation and restatement related costs	3,164	2,139	33,391	4,363
Total operating expenses	50,238	47,052	175,186	142,312
Income from operations	12,749	13,684	15,166	48,996
Non-operating gains (losses)	(28)	183	101	(578)
Income before income taxes	12,721	13,867	15,267	48,418
Income tax provision	2,449	3,882	587	13,211
Net income	10,272	9,985	14,680	35,207
Accrued dividend and accretion charges on Series A 3% Redeemable Convertible Preferred Stock	(940)	(900)	(2,788)	(2,666)
Net income available to common stockholders	9,332	9,085	11,892	32,541
Other comprehensive income (loss)
Foreign currency translation adjustments	1,131	951	(312)	565
Total comprehensive income	$ 11,403	$ 10,936	$ 14,368	$ 35,772
Weighted average shares outstanding:
Basic (in shares)	28,374	27,714	28,239	27,698
Diluted (in shares)	28,968	28,087	28,888	28,096
Earnings per share applicable to common stockholders:
Basic (in dollars per share)	$ 0.27	$ 0.27	$ 0.35	$ 0.97
Diluted (in dollars per share)	$ 0.27	$ 0.27	$ 0.34	$ 0.96

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ACCRUED LIABILITIES

9 Months Ended

Sep. 30, 2013

Payables and Accruals [Abstract]

ACCRUED LIABILITIES

ACCRUED LIABILITIES

The following summarizes the Company’s accrued liabilities (in thousands):

	September 30, 2013		December 31, 2012
Insurance dispute reserve	$	30,000	$	9,729
Compensation	17,820		17,031
Legal expenses	3,249		3,730
Other	12,782		11,184
	$	63,851	$	41,674

The Company has recently engaged in preliminary resolution discussions with the DOJ regarding the DOJ investigation (see further discussion in Note 7). As a result of these ongoing discussions, the balance of the insurance dispute reserve was increased in the second quarter of 2013 to $30.0 million to reflect management's current best estimate of the financial component that will likely be included in the final resolution of the DOJ investigation. The actual amount of the financial component could be greater or less, and the timing of the final resolution and payment cannot yet be determined.

XML

SEGMENT INFORMATION (Tables)

9 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

Product sales by operating segment and product area

Product sales by product area for the periods shown were as follows (in thousands):

	Three months ended September 30, 2013						Three months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	37,410	$	20,674	$	58,084	$	36,787	$	18,414	$	55,201
ENT	19,938		6,791		26,729		19,677		5,846		25,523
Other	372		1,875		2,247		322		1,556		1,878
Total product sales	$	57,720	$	29,340	$	87,060	$	56,786	$	25,816	$	82,602

	Nine months ended September 30, 2013						Nine months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	114,218	$	62,401	$	176,619	$	113,868	$	58,357	$	172,225
ENT	60,880		18,014		78,894		62,985		16,629		79,614
Other	1,185		5,310		6,495		1,322		5,287		6,609
Total product sales	$	176,283	$	85,725	$	262,008	$	178,175	$	80,273	$	258,448

Product sales and long-lived assets, net by geography

Product sales by geography for the periods shown were as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
United States	$	55,616	$	53,936	$	170,195	$	169,937
Non-United States (1)	31,444		28,666		91,813		88,511
Total product sales	$	87,060	$	82,602	$	262,008	$	258,448

 ___________________________________________

(1) No additional locations are individually significant.

Long-lived assets, net by geography, at the balance sheet dates shown were as follows (in thousands):

	September 30, 2013		December 31, 2012
United States	$	171,232	$	109,950
Non-United States (1)	58,437		44,434
Total long-lived assets	$	229,669	$	154,384

 ___________________________________________

(1) No additional locations are individually significant

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COMPUTATION OF EARNINGS (LOSS) PER SHARE (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Schedule of reconciliation of net income applicable to common stockholders and the number of shares used in the calculation of basic and diluted earnings per share applicable to common stockholders

The following is a reconciliation of net income applicable to common stockholders and the number of shares used in the calculation of basic and diluted earnings per share applicable to common stockholders (in thousands, except per-share data):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Net income allocated to common stockholders, net of $2,526 and $2,467 attributable to Series A Preferred Stock for the three months ended September 30, 2013 and 2012, respectively and $4,809 and $8,279 for the nine months ended September 30, 2013 and 2012, respectively.	$	7,746	$	7,518	$	9,871	$	26,928
Basic:
Weighted-average common shares outstanding	28,374		27,714		28,239		27,698
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.35	$	0.97
Diluted:
Weighted-average shares outstanding used in basic calculation	28,374		27,714		28,239		27,698
Dilutive effect of options	271		248		282		221
Dilutive effect of unvested restricted stock	323		125		367		177
Weighted-average common stock and common stock equivalents	28,968		28,087		28,888		28,096
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.34	$	0.96
Stock issuable upon conversion of the Series A Preferred Stock	5,806		5,806		5,806		5,806
Stock awards excluded from calculation as their effect would be anti-dilutive	577		937		563		880

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INTANGIBLE ASSETS (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Estimated future amortization expense
2013	$ 546,000
2014	2,011,000
2015	1,739,000
2016	941,000
2017	919,000
Thereafter	8,956,000
Future amortization expense, total	15,112,000
Intellectual property rights
Intangible assets acquire
Useful Life	20 years
Non-compete agreements
Intangible assets acquire
Useful Life	3 years
Eleven Blade Solutions, Inc
Intangible assets acquire
Intangible Asset acquired		10,800,000
Period over which contingent cash payments based on entity's future product sales will be paid	5 years
Maximum total potential cash payment for contingent consideration	$ 25,000,000

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INVENTORIES (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Inventory Disclosure [Abstract]
Raw materials	$ 12,054	$ 10,760
Work-in-process	13,640	11,984
Finished goods	25,468	30,338
Inventories, gross	51,162	53,082
Inventory valuation reserves	(4,636)	(4,665)
Inventories, net	$ 46,526	$ 48,417

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EXIT COSTS (Details) (USD $)	3 Months Ended	9 Months Ended
	Jun. 30, 2012	Sep. 30, 2013
Restructuring activities
Accrual balance at the beginning of the period		$ 909,000
Cost Incurred		0
Payments		297,000
Accrual balance at the end of the period		612,000
Contract termination and other
Restructuring activities
Increase (decrease) in amount accrued for contract termination	1,100,000
Restructuring activities
Accrual balance at the beginning of the period		909,000
Cost Incurred		0
Payments		297,000
Accrual balance at the end of the period		$ 612,000

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BUSINESS COMBINATIONS (Details) (ENTrigue Surgical, Inc., USD $)	9 Months Ended
	Sep. 30, 2013	Jun. 30, 2013
Business Acquisition [Line Items]
Cash payments at acquisition date		$ 45,000,000
Business Combination, Contingent Consideration Arrangements, Range of Outcomes, Value, Low		2,400,000
Business Combination, Contingent Consideration Arrangements, Range of Outcomes, Value, High		32,200,000
Fair value of contingent consideration liability		14,543,000
Acquisition related costs	$ 800,000
Years one through three
Business Acquisition [Line Items]
Business Combination, Contingent Consideration Arrangements, Sale Growth Multiple Factor		0.6
Year four
Business Acquisition [Line Items]
Business Combination, Contingent Consideration Arrangements, Sale Growth Multiple Factor		1.1
Year five
Business Acquisition [Line Items]
Business Combination, Contingent Consideration Arrangements, Sale Growth Multiple Factor		1.25

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COMPUTATION OF EARNINGS (LOSS) PER SHARE (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Information related to EPS computation
Series A 3% Redeemable Convertible Preferred Stock, dividend rate (as a percent)	3.00%	3.00%	3.00%	3.00%	3.00%
Net income allocated to common stockholders (in dollars)	$ 9,332	$ 9,085	$ 11,892	$ 32,541
Basic:
Weighted-average common shares outstanding	28,374	27,714	28,239	27,698
Basic (in dollars per share)	$ 0.27	$ 0.27	$ 0.35	$ 0.97
Diluted:
Weighted-average shares outstanding used in basic calculation	28,374	27,714	28,239	27,698
Dilutive effect of options	271	248	282	221
Dilutive effect of unvested restricted stock	323	125	367	177
Weighted-average common stock and common stock equivalents	28,968	28,087	28,888	28,096
Diluted (in dollars per share)	$ 0.27	$ 0.27	$ 0.34	$ 0.96
Common Stock
Information related to EPS computation
Net income allocated to common stockholders (in dollars)	7,746	7,518	9,871	26,928
Series A 3% Redeemable Convertible Preferred Stock
Information related to EPS computation
Series A 3% Redeemable Convertible Preferred Stock, dividend rate (as a percent)	3.00%	3.00%	3.00%	3.00%
Net income allocated to common stockholders (in dollars)	$ 2,526	$ 2,467	$ 4,809	$ 8,279
Diluted:
Stock issuable upon conversion of the Series A Preferred Stock	5,806	5,806	5,806	5,806
Stock awards excluded from calculation as their effect would be anti-dilutive	577	937	563	880

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BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BASIS OF PRESENTATION

BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ArthroCare Corporation (“ArthroCare”) and its subsidiaries (collectively with ArthroCare, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”).  The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2012 Annual Report on Form 10-K filed on February 14, 2013 (“2012 Form 10-K”).  In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at September 30, 2013 and December 31, 2012, the results of its operations for the three and nine month periods ended September 30, 2013 and 2012 and its cash flows for the nine month periods ended September 30, 2013 and 2012.  The results of operations for the periods presented are not necessarily indicative of results that may be expected for the year ending December 31, 2013.

Use of Estimates

The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies disclosed in its 2012 Form 10-K.

New Accounting Pronouncements

Accounting Standards Update (ASU) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued in July 2013 and addresses when an unrecognized tax benefit shall be recorded as a reduction to a deferred tax asset or presented as a gross liability. ASU 2013-11 is effective for the Company beginning in 2014. Management is evaluating the impact of this ASU.

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INVENTORIES

9 Months Ended

Sep. 30, 2013

Inventory Disclosure [Abstract]

INVENTORIES

INVENTORIES

The following summarizes the Company’s inventories (in thousands):

	September 30, 2013			December 31, 2012
Raw materials	$	12,054		$	10,760
Work-in-process	13,640			11,984
Finished goods	25,468			30,338
	51,162			53,082
Inventory valuation reserves	(4,636		)	(4,665		)
Inventories, net	$	46,526		$	48,417

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COMMITMENTS

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS

COMMITMENTS

Operating Leases

The Company leases certain facilities and equipment under operating leases.  The Company recognizes rent expense on a straight-line basis over the lease term.  Rent expense was $1.6 million and $5.1 million for the three and nine months ended September 30, 2013, respectively, compared to $1.6 million and $5.3 million for the same periods in 2012.  There were no material changes from the Company’s lease obligations presented in its 2012 Form 10-K.

Indemnification Agreements

The Company advances legal fees as required pursuant to indemnification agreements that were entered into with certain former executives and employees while they were employed with the Company.  During the nine months ended September 30, 2013 the Company advanced $8.5 million and has expensed $10.3 million under these indemnity agreements.  The Company expects to continue to advance payments pursuant to certain of these agreements in future periods; however, management is unable to estimate the amount or timing of future payments under such agreements.

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INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

INTANGIBLE ASSETS

INTANGIBLE ASSETS

On December 31, 2012, the Company entered into a stock purchase agreement to acquire Eleven Blade Solutions, Inc. (Eleven Blade) which was accounted for as an asset acquisition in the first quarter of 2013.  As a result of this transaction, the Company recorded $10.8 million of intangible assets in the form of intellectual property rights, non-compete agreements with certain former employees, owners and consultants of Eleven Blade and the associated deferred tax liabilities.  The Company also agreed to pay the previous owners of Eleven Blade future cash consideration contingent on certain product sales over the next five years.  The amount of contingent future consideration payable to the previous owners of Eleven Blade is capped at $25 million and is not estimable at this time.The useful lives of the intellectual property rights and non-compete agreements are 20 years and 3 years, respectively. 

On July 1, 2013, the Company acquired ENTrigue Surgical, Inc. ("ENTrigue"), a privately-held Delaware corporation specializing in ENT sinus surgical products. As a result of this transaction, the Company recorded $2.4 million of identifiable intangible assets in the form of trade names, developed technology, customer relationships, distribution agreements and non-compete agreements. See further discussion in Note 8.

As a result of these and other immaterial transactions during the nine months ended September 30, 2013, estimated future amortization expense as disclosed in Note 7 of the 2012 Form 10-K has been revised as follows (in thousands):

2013	$	546
2014	2,011
2015	1,739
2016	941
2017	919
Thereafter	8,956
	$	15,112

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ACCRUED LIABILITIES (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Payables and Accruals [Abstract]
Insurance dispute reserve	$ 30,000,000	$ 9,729,000
Compensation	17,820,000	17,031,000
Accrued Professional Fees, Current	3,249,000	3,730,000
Other	12,782,000	11,184,000
Accrual and estimate of the reasonably possible loss	0
Accrued liabilities	$ 63,851,000	$ 41,674,000

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BUSINESS COMBINATIONS (Details 1) (USD $)	Jun. 30, 2013
Business Acquisition, Purchase Price Allocation, Assets Acquired (Liabilities Assumed), Net [Abstract]
Total purchase price	$ 59,543,000
ENTrigue Surgical, Inc.
Business Acquisition, Purchase Price Allocation, Assets Acquired (Liabilities Assumed), Net [Abstract]
Current assets	2,201,000
Property, plant and equipment	340,000
Intangible assets	2,386,000
Goodwill	45,187,000
Deferred tax assets	10,093,000
Total assets acquired	60,207,000
Liabilities	664,000
Total purchase price	59,543,000
Cash payments at acquisition date	45,000,000
Fair value of contingent consideration liability	$ 14,543,000

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SEGMENT INFORMATION (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Geographical segment information
Product sales	$ 87,060	$ 82,602	$ 262,008	$ 258,448
Long-lived assets	229,669		229,669		154,384
United States
Geographical segment information
Product sales	55,616	53,936	170,195	169,937
Long-lived assets	171,232		171,232		109,950
Non-United States
Geographical segment information
Product sales	31,444	28,666	91,813	88,511
Long-lived assets	$ 58,437		$ 58,437		$ 44,434

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
Accounts receivable, allowances (in dollars)	$ 1,380	$ 1,380	$ 1,565
Interest rate (as a percent)	3.00%	3.00%	3.00%
Series A 3% Redeemable Convertible Preferred Stock, par value (in dollars per share)	$ 0.001	$ 0.001	$ 0.001
Series A 3% Redeemable Convertible Preferred Stock, Authorized shares	100	100	100
Series A 3% Redeemable Convertible Preferred Stock, Issued shares	75	75	75
Series A 3% Redeemable Convertible Preferred Stock, outstanding shares	75	75	75
Series A 3% Redeemable Convertible Preferred Stock, Redemption value (in dollars)	$ 87,089	$ 87,089	$ 87,089
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001	$ 0.001
Preferred stock, Authorized shares	4,900	4,900	4,900
Preferred stock, Issued shares	0	0	0
Preferred stock, outstanding shares	0	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001	$ 0.001
Common stock, Authorized shares	75,000	75,000	75,000
Common stock, Issued shares	32,299	32,299	31,949
Common stock, Outstanding shares	28,368	28,368	27,977
Treasury stock, shares	3,931	3,931	3,942

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EXIT COSTS

9 Months Ended

Sep. 30, 2013

Restructuring and Related Activities [Abstract]

EXIT COSTS

EXIT COSTS

The Company completed the consolidation of its Sunnyvale, California activities to Austin, Texas in the fourth quarter of 2011.  In the second quarter of 2012, the Company entered into a sublease for its former Austin, Texas location which decreased the amount accrued for contract termination by $1.1 million.

The following table summarizes the accrued and paid exit costs during the nine month period ended September 30, 2013 (in thousands):

	Accrued Exit Cost Balance at January 1, 2013		Cost Incurred		Payments		Accrued Exit Cost Balance at September 30, 2013
Contract termination and other	$	909	$	—	$	297	$	612
	$	909	$	—	$	297	$	612

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income	$ 14,680	$ 35,207
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	11,344	15,793
Provision for doubtful accounts receivable, product returns, and inventory valuation	1,368	2,032
Stock compensation expense	5,696	6,585
Income tax benefits relating to employee stock options	(343)	0
Deferred taxes	10,567	12,347
Other	586	2,280
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Change in operating assets	5,529	(5,576)
Change in operating liabilities	10,471	(79,226)
Net cash provided by (used in) operating activities	59,898	(10,558)
Cash flows from investing activities:
Purchases of property and equipment	(23,815)	(7,189)
Payments for business combinations, net of cash acquired	(44,983)	(1,252)
Payments for intangible asset acquisitions	(8,500)	0
Net cash used in investing activities	(77,298)	(8,441)
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of common stock	6,574	2,777
Income tax benefits relating to employee stock options	343	0
Net cash provided by financing activities	6,917	2,777
Effect of exchange rate changes on cash and cash equivalents	131	(220)
Net decrease in cash and cash equivalents	(10,352)	(16,442)
Cash and cash equivalents, beginning of period	218,787	219,605
Cash and cash equivalents, end of period	$ 208,435	$ 203,163

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 208,435	$ 218,787
Accounts receivable, net of allowances of $1,380 and $1,565 at September 30, 2013 and December 31, 2012, respectively	40,916	48,881
Inventories, net	46,526	48,417
Deferred tax assets	14,966	20,090
Prepaid expenses and other current assets	8,594	6,022
Total current assets	319,437	342,197
Property and equipment, net	45,459	30,461
Intangible assets, net	15,112	1,859
Goodwill	164,964	119,893
Deferred tax assets	25,041	23,206
Other assets	4,134	2,171
Total assets	574,147	519,787
Current liabilities:
Accounts payable	18,385	12,189
Accrued liabilities	63,851	41,674
Income tax payable	15	286
Other liabilities	280	318
Total current liabilities	82,531	54,467
Deferred tax liabilities	361	354
Other non-current liabilities	19,259	20,200
Total liabilities	102,151	75,021
Commitments and contingencies (Notes 6 and 7)
Series A 3% Redeemable Convertible Preferred Stock, par value $0.001; Authorized: 100 shares; Issued and outstanding: 75 shares at September 30, 2013 and December 31, 2012; Redemption value: $87,089	83,548	80,759
Stockholders' equity:
Preferred stock, par value $0.001; Authorized: 4,900 shares; Issued and outstanding: none	0	0
Common stock, par value $0.001; Authorized: 75,000 shares; Issued: 32,299 and 31,949 shares Outstanding: 28,368 and 27,977 shares at September 30, 2013 and December 31, 2012, respectively	28	28
Treasury stock: 3,931 and 3,942 shares at September 30, 2013 and December 31, 2012, respectively	(106,126)	(106,425)
Additional paid-in capital	426,224	413,660
Accumulated other comprehensive income	4,987	5,300
Retained earnings	63,335	51,444
Total stockholders' equity	388,448	364,007
Total liabilities, redeemable convertible preferred stock and stockholders' equity	$ 574,147	$ 519,787

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COMMITMENTS (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Commitments and Contingencies Disclosure [Abstract]
Operating leases, rent expense	$ 1.6	$ 1.6	$ 5.1	$ 5.3
Indemnification Agreements
Indemnity agreements
Legal fees paid in advance			8.5
Legal fees related to indemnity agreements			$ 10.3

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EXIT COSTS (Tables)

9 Months Ended

Sep. 30, 2013

Restructuring and Related Activities [Abstract]

Summary of accrued and paid exit costs

The following table summarizes the accrued and paid exit costs during the nine month period ended September 30, 2013 (in thousands):

	Accrued Exit Cost Balance at January 1, 2013		Cost Incurred		Payments		Accrued Exit Cost Balance at September 30, 2013
Contract termination and other	$	909	$	—	$	297	$	612
	$	909	$	—	$	297	$	612

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INCOME TAXES (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Income Tax Disclosure [Abstract]
Increase (Decrease) in Income Taxes	$ (0.8)
Settlement with Taxing Authority [Member]
Income Tax Examination [Line Items]
Increase (Decrease) in Income Taxes Payable	2.4
Income Tax Reconciliation, Tax Settlements, Domestic	$ 10.5

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SEGMENT INFORMATION (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 segment	Sep. 30, 2012
Segment Reporting [Abstract]
Number of operating segments			1
Number of reportable segments			1
Product sales by operating segment and product area
Product sales	$ 87,060	$ 82,602	$ 262,008	$ 258,448
Americas
Product sales by operating segment and product area
Product sales	57,720	56,786	176,283	178,175
International
Product sales by operating segment and product area
Product sales	29,340	25,816	85,725	80,273
Sports Medicine
Product sales by operating segment and product area
Product sales	58,084	55,201	176,619	172,225
Sports Medicine | Americas
Product sales by operating segment and product area
Product sales	37,410	36,787	114,218	113,868
Sports Medicine | International
Product sales by operating segment and product area
Product sales	20,674	18,414	62,401	58,357
ENT
Product sales by operating segment and product area
Product sales	26,729	25,523	78,894	79,614
ENT | Americas
Product sales by operating segment and product area
Product sales	19,938	19,677	60,880	62,985
ENT | International
Product sales by operating segment and product area
Product sales	6,791	5,846	18,014	16,629
Other Revenue
Product sales by operating segment and product area
Product sales	2,247	1,878	6,495	6,609
Other Revenue | Americas
Product sales by operating segment and product area
Product sales	372	322	1,185	1,322
Other Revenue | International
Product sales by operating segment and product area
Product sales	$ 1,875	$ 1,556	$ 5,310	$ 5,287

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BUSINESS COMBINATIONS BUSINESS COMBINATIONS

3 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

BUSINESS COMBINATIONS

On July 1, 2013, the Company acquired ENTrigue Surgical, Inc. ("ENTrigue"), a privately-held Delaware corporation specializing in ENT sinus surgical products. The Company paid approximately $45.0 million in cash to the former stockholders of ENTrigue, less an amount placed in escrow to secure the indemnification obligations of the former stockholders of ENTrigue.

The Agreement also provides that the Company will make annual cash payments to the former stockholders of ENTrigue shortly after each of the next five anniversaries of the acquisition date based on the annual net sales of the acquired products. The annual payment shall equal annual net sales growth times the applicable sales growth multiple for the year. The sales growth multiple is 0.6 for years 1-3; 1.1 for year 4; and 1.25 for year 5. For purposes of calculating this multiple, the annual growth of net sales each year is determined by subtracting the highest amount of net sales in any previous year from the net sales in the current year. The range of undiscounted future payments that could be required is currently estimated to be between $2.4 million and $32.2 million. The estimated fair value of the contingent consideration arrangement used for determining total purchase price is $14.5 million, which was estimated by applying the income approach using a Monte Carlo simulation model. That measure is based on valuation inputs that are not observable in the market.

The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below (in thousands):

Current assets	$	2,201
Property, plant and equipment	340
Intangible assets	2,386
Goodwill	45,187
Deferred tax assets	10,093
Total assets acquired	60,207
Liabilities	664
Total purchase price	$	59,543
Cash payments at acquisition date	45,000
Fair value of contingent consideration liability	14,543
Total purchase price	$	59,543

The fair value of the assets and liabilities acquired, including goodwill, is preliminary and therefore may be subject to adjustments. The goodwill of $45.2 million arising from the acquisition is not expected to be deductible for income tax purposes. Subsequent to July 1, 2013, the revenues and expenses of ENTrigue have been included in the Company's consolidated statements of income. The Company incurred transaction related expenses of approximately $0.8 million for the nine months ended September 30, 2013 which have been recorded as general and administrative expenses.

The fair value and weighted-average useful life of the identifiable intangible assets acquired are summarized below (in thousands):

			Weighted-Average Useful Life
Trade names	$	410	9 Years
Developed technology	940		12 Years
Customer relationships	390		10 Years
Distribution agreements	280		3 Years
Non-compete agreements	366		5 Years
	$	2,386

See further discussion of future amortization expense for intangible assets in Note 4.

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LITIGATION AND CONTINGENCIES (Details) (USD $)		9 Months Ended	10 Months Ended
	Sep. 30, 2013	Sep. 30, 2013 DOJ Investigation [Member]	Oct. 31, 2008 Pending Litigation [Member] item	Feb. 23, 2012 Pending Litigation [Member]
LITIGATION AND CONTINGENCIES
Accrual and estimate of the reasonably possible loss	$ 0
Litigation and Contingencies
Loss contingency accrual, at carrying value		30,000,000
Increase in insurance dispute reserve		20,200,000
Number of putative securities class actions consolidated with shareholder derivative actions			2
Settlement amount paid				$ 74,000,000

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SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

SEGMENT INFORMATION

SEGMENT INFORMATION

Our business consists of one operating and reportable segment for the development, manufacturing and marketing of disposable devices and implants for select surgical procedures.  The development, manufacturing and other supporting functions, such as regulatory affairs and distribution, are common across our Company.  We organize and manage our sales and marketing functions according to geography and the surgical specialty that typically employs our products.  Most of the Company’s products are used in Sports Medicine or ENT procedures.

Product sales by product area for the periods shown were as follows (in thousands):

	Three months ended September 30, 2013						Three months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	37,410	$	20,674	$	58,084	$	36,787	$	18,414	$	55,201
ENT	19,938		6,791		26,729		19,677		5,846		25,523
Other	372		1,875		2,247		322		1,556		1,878
Total product sales	$	57,720	$	29,340	$	87,060	$	56,786	$	25,816	$	82,602

	Nine months ended September 30, 2013						Nine months ended September 30, 2012
	Americas		International		Total Product Sales		Americas		International		Total Product Sales
Sports Medicine	$	114,218	$	62,401	$	176,619	$	113,868	$	58,357	$	172,225
ENT	60,880		18,014		78,894		62,985		16,629		79,614
Other	1,185		5,310		6,495		1,322		5,287		6,609
Total product sales	$	176,283	$	85,725	$	262,008	$	178,175	$	80,273	$	258,448

Internationally, the Company markets and supports its products primarily through its subsidiaries and various distributors.  Product sales attributed to geographic areas are based on the country or regional area where the Company’s customer is domiciled.  Product sales by geography for the periods shown were as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
United States	$	55,616	$	53,936	$	170,195	$	169,937
Non-United States (1)	31,444		28,666		91,813		88,511
Total product sales	$	87,060	$	82,602	$	262,008	$	258,448

 ___________________________________________

(1) No additional locations are individually significant.

Long-lived assets, net by geography, at the balance sheet dates shown were as follows (in thousands):

	September 30, 2013		December 31, 2012
United States	$	171,232	$	109,950
Non-United States (1)	58,437		44,434
Total long-lived assets	$	229,669	$	154,384

 ___________________________________________

(1) No additional locations are individually significant.

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LITIGATION AND CONTINGENCIES

9 Months Ended

Sep. 30, 2013

LITIGATION AND CONTINGENCIES

LITIGATION AND CONTINGENCIES

LITIGATION AND CONTINGENCIES

In addition to the matters specifically described below, the Company is involved in other legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on the Company’s business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.

The Company records reserves for claims and lawsuits when they are probable and reasonably estimable. Except as otherwise specifically noted, the Company currently cannot determine the ultimate resolution of the matters described below. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, the Company has not recognized in its condensed consolidated financial statements the potential liability that may result from these matters. Further, for such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made and an estimate of the reasonably possible loss cannot be made at this time. If one or more of these matters is determined against the Company, it could have a material adverse effect on the Company’s earnings, liquidity and financial condition.

The Company continues to gather additional facts and information related to insurance billing and healthcare compliance issues and marketing and promotional practices in connection with these legal and administrative proceedings with the assistance of legal counsel.

DOJ Investigation

The Department of Justice (the “DOJ”) is investigating certain of the Company's activities including past sales, accounting and billing procedures primarily in relation to the operation of the Company's product sales. The DOJ is also reviewing the Company's relationship with its DiscoCare subsidiary. The Company is cooperating with this investigation. In connection with such cooperation, and pursuant to a request from the DOJ, the Company had previously entered into a series of statute of limitations tolling agreements with the DOJ, the most recent of which expired on August 31, 2013.

As previously disclosed, the Company has recently engaged in preliminary resolution discussions with the DOJ. As a result of these ongoing discussions, management continues to believe that a final resolution of this matter will include a financial component, and management's current best estimate of this financial component is $30 million. Accordingly, a charge of $20.2 million was recorded in the second quarter of 2013 as investigation and restatement related expenses which increased the balance of the Company’s insurance dispute reserve to $30 million. The actual amount could be greater or less, and the timing of the final resolution and payment cannot yet be determined. Based on the current discussions with the DOJ, management believes that any final resolution will likely contain continuing obligations for the Company, such as (1) a deferred prosecution agreement between the Company and the government and (2) the continuation of the Company's already established compliance monitoring and reporting systems. At this point, management is unable to estimate the length of time or the other conditions on such continuing obligations that may be associated with a final resolution. No agreement has been reached with or approved by the DOJ and any resolution would require approval by the U.S. District Court.

Private Securities Class Action

In 2008, two putative securities class actions were filed in Federal court against the Company and certain of its former executive officers, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiffs allege that the defendants violated federal securities laws by issuing false and misleading financial statements and making material misrepresentations regarding the Company’s internal controls, business and financial results. On October 28, 2008, and thereafter, the two putative securities class actions and the federal shareholder derivative actions were consolidated and designated: In Re ArthroCare Corporation Securities Litigation, Case No. 1:8-cv-574-SS (consolidated) in the U.S. District Court, Western District of Texas.

Settlement of Private Securities Actions

The Company reached an agreement to settle the private securities class action suits consolidated into the action titled In Re ArthroCare Corporation Securities Litigation, Case No. 1:8-cv-574-SS (consolidated) in the U.S. District Court, Western District of Texas.

The settlement resolves all claims arising from the purchase or sale of ArthroCare securities of a class of all purchasers of ArthroCare common stock and call options, and sellers of put options on ArthroCare common stock between December 11, 2007 and February 18, 2009, inclusive (the "Class"), except those members of the Class who opt out, for a payment of $74 million to a settlement fund to be created for the settlement. Counsel for the plaintiff applied for and received an award of attorneys’ fees and reimbursement of expenses from the settlement fund. On February 10, 2012, the Court entered an order of preliminary approval of the settlement and ordered that Notice be sent to all class members. Pursuant to the preliminary approval order, the Company paid the $74 million in settlement funds into the applicable settlement escrow account on February 23, 2012. The settlement was approved by the United States District Court for the Western District of Texas and entered as a final judgment on June 4, 2012.

False Claims Act Investigation

In the first quarter of 2012, the Company received a Civil Investigative Demand from the DOJ, requesting information related to the marketing of its radio-frequency ablation devices, which could implicate the False Claims Act, 31 U.S.C. § 3729. The Company completed its response to the information request in the second quarter of 2012 and is cooperating fully with the investigation, although no assurances can be given regarding the duration of the investigation or whether proceedings will be instituted against the Company. Management intends to represent the Company’s interests vigorously in this matter. At this stage of the investigation, however, management cannot predict the ultimate outcome of the investigation or any potential liability the Company may incur.

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COMPUTATION OF EARNINGS (LOSS) PER SHARE

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

COMPUTATION OF EARNINGS (LOSS) PER SHARE

COMPUTATION OF EARNINGS PER SHARE

The Company’s Series A 3% Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) has participation rights in dividends issued to common stockholders.  As a result, the Company calculates earnings per share using the two class method.  The following is a reconciliation of net income applicable to common stockholders and the number of shares used in the calculation of basic and diluted earnings per share applicable to common stockholders (in thousands, except per-share data):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Net income allocated to common stockholders, net of $2,526 and $2,467 attributable to Series A Preferred Stock for the three months ended September 30, 2013 and 2012, respectively and $4,809 and $8,279 for the nine months ended September 30, 2013 and 2012, respectively.	$	7,746	$	7,518	$	9,871	$	26,928
Basic:
Weighted-average common shares outstanding	28,374		27,714		28,239		27,698
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.35	$	0.97
Diluted:
Weighted-average shares outstanding used in basic calculation	28,374		27,714		28,239		27,698
Dilutive effect of options	271		248		282		221
Dilutive effect of unvested restricted stock	323		125		367		177
Weighted-average common stock and common stock equivalents	28,968		28,087		28,888		28,096
Earnings per share allocated to common stockholders	$	0.27	$	0.27	$	0.34	$	0.96
Stock issuable upon conversion of the Series A Preferred Stock	5,806		5,806		5,806		5,806
Stock awards excluded from calculation as their effect would be anti-dilutive	577		937		563		880

Awards approved under the Company’s Long Term Incentive Program are excluded from diluted shares as the market conditions and performance conditions of the awards have not been met.

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BUSINESS COMBINATIONS (Details 2) (ENTrigue Surgical, Inc., USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2013	Jun. 30, 2013
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		$ 2,386
Trade names
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		410
Acquired finite-lived intangible assets, weighted average useful life	9 years
Developed technology
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		940
Acquired finite-lived intangible assets, weighted average useful life	12 years
Customer relationships
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		390
Acquired finite-lived intangible assets, weighted average useful life	10 years
Distribution agreements
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		280
Acquired finite-lived intangible assets, weighted average useful life	3 years
Non-compete agreements
Acquired Finite-Lived Intangible Assets [Line Items]
Acquired finite-lived intangible asset, amount		$ 366
Acquired finite-lived intangible assets, weighted average useful life	5 years

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INVENTORIES (Tables)

9 Months Ended

Sep. 30, 2013

Inventory Disclosure [Abstract]

Summary of inventories

The following summarizes the Company’s inventories (in thousands):

	September 30, 2013			December 31, 2012
Raw materials	$	12,054		$	10,760
Work-in-process	13,640			11,984
Finished goods	25,468			30,338
	51,162			53,082
Inventory valuation reserves	(4,636		)	(4,665		)
Inventories, net	$	46,526		$	48,417

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INCOME TAXES

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The federal research and development tax credit was extended by the signing of the American Taxpayer Relief Act of 2012 (“Act”) on January 2, 2013. The Act retroactively extended this tax credit from January 1, 2012 through December 31, 2013. Since the Act was enacted during 2013, the income tax benefit related to the federal 2012 research and development tax credit resulted in a $0.8 million reduction of income tax expense for the nine months ended September 30, 2013.

As disclosed in Note 14 of the 2012 Form 10-K, the Company was notified in 2010 by the Internal Revenue Service (“IRS”) of its intention to examine the 2006 federal income tax return related to certain transfer pricing tax positions. This examination was subsequently extended to include the 2007 - 2011 federal income tax returns. In the third quarter of 2013, the Company received a final settlement letter from the IRS which resulted in additional taxes payable of $2.4 million for the cumulative 2006 - 2011 tax years.  As a result of this settlement, the Company reversed reserves for uncertain tax positions related to these years. The net effect of the final settlement was a net income tax benefit of $10.5 million for the nine months ended September 30, 2013.

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BUSINESS COMBINATIONS (Tables)

3 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Schedule of business acquisitions, by acquisition

The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below (in thousands):

Current assets	$	2,201
Property, plant and equipment	340
Intangible assets	2,386
Goodwill	45,187
Deferred tax assets	10,093
Total assets acquired	60,207
Liabilities	664
Total purchase price	$	59,543
Cash payments at acquisition date	45,000
Fair value of contingent consideration liability	14,543
Total purchase price	$	59,543

Schedule of finite-lived intangible assets acquired as part of business combination

The fair value and weighted-average useful life of the identifiable intangible assets acquired are summarized below (in thousands):

			Weighted-Average Useful Life
Trade names	$	410	9 Years
Developed technology	940		12 Years
Customer relationships	390		10 Years
Distribution agreements	280		3 Years
Non-compete agreements	366		5 Years
	$	2,386

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INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of estimated future amortization expense

As a result of these and other immaterial transactions during the nine months ended September 30, 2013, estimated future amortization expense as disclosed in Note 7 of the 2012 Form 10-K has been revised as follows (in thousands):

2013	$	546
2014	2,011
2015	1,739
2016	941
2017	919
Thereafter	8,956
	$	15,112

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 24, 2013
Document and Entity Information
Entity Registrant Name	ARTHROCARE CORP
Entity Central Index Key	0001005010
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		28,377,847
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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ACCRUED LIABILITIES (Tables)

9 Months Ended

Sep. 30, 2013

Payables and Accruals [Abstract]

Summary of accrued liabilities

The following summarizes the Company’s accrued liabilities (in thousands):

	September 30, 2013		December 31, 2012
Insurance dispute reserve	$	30,000	$	9,729
Compensation	17,820		17,031
Legal expenses	3,249		3,730
Other	12,782		11,184
	$	63,851	$	41,674