Chattem announces financial results for the nine months and third fiscal quarter ended August 31, 2009

Chattem, Inc. (NASDAQ: CHTT), a leading marketer and manufacturer of branded consumer products, today announced financial results for the nine months and third fiscal quarter ended August 31, 2009.

“The strength of Gold Bond®, ACT®, Icy Hot® and Cortizone-10® and the successes of our 2009 new product launches for these brands produced another period of strong earnings and operating results. Our earnings and cash flow growth has allowed us to increase our cash reserves and manage our capital structure by reducing debt and repurchasing approximately 491,000 shares of our common stock in the first nine months of fiscal 2009. The Company’s domestic business, representing 95% of our total revenues, achieved growth of 3.9% and 3.5% over the year ago nine and three month periods, respectively, when excluding the discontinued Icy Hot Heat Therapy product from the first quarter of fiscal 2008,” stated Zan Guerry, Chairman and Chief Executive Officer of Chattem.

FIRST NINE MONTHS FINANCIAL RESULTS

Total revenues for the first nine months of fiscal 2009 were $353.1 million, compared to total revenues of $349.4 million in the prior year period, representing a 1.1% increase. Total domestic revenues, excluding $1.9 million of sales of Icy Hot Heat Therapy, which was recalled in the first quarter of fiscal 2008, increased $12.6 million, or 3.9%, in the first nine months of fiscal 2009 to $335.6 million, as compared to $323.0 million in the prior year period. The increase in domestic revenues was led by sales of Gold Bond, ACT, Icy Hot and Cortizone-10. Offsetting these increases were lower revenues from certain smaller brands and an $8.5 million, or 51%, increase in promotional programs recorded as a reduction of revenue rather than as advertising and promotion expense in our consolidated statement of income during the nine months ended August 31, 2009 as compared to the same year ago period. Revenues of our international division decreased by $7.0 million, or 29%, in the first nine months of fiscal 2009, resulting from our change in distributors in Latin America, general sales weakness in our European markets due to the weak economy and an adverse foreign exchange rate impact. On a constant currency basis, international revenues for the first nine months of fiscal 2009 decreased $4.6 million, or 19%, compared to the prior year period.

Net income in the first nine months of fiscal 2009 was $67.2 million, compared to $49.6 million in the prior year period, and earnings per share were $3.48, compared to $2.56 in the prior year period. Net income in the first nine months of fiscal 2009 included a loss on early extinguishment of debt and employee stock option expenses under SFAS 123R. Net income in the first nine months of fiscal 2008 included a loss on early extinguishment of debt, employee stock option expenses under SFAS 123R, non-recurring expenses related to the voluntary recall of Icy Hot Heat Therapy and a settlement related to claims alleging injury as a result of ingestion of Dexatrim® products in 1998 through 2003. As adjusted to exclude these items, net income in the first nine months of fiscal 2009 was $71.5 million, compared to $63.8 million in the prior year period, and earnings per share were $3.70, compared to $3.29 in the prior year period, an increase of 12% for both net income and earnings per share, as compared to the prior year period.

THIRD QUARTER FINANCIAL RESULTS

Total revenues for the third quarter of fiscal 2009 were $115.2 million compared to total revenues of $111.9 million in the prior year quarter, representing a 2.9% increase. Total domestic revenues increased $3.6 million, or 3.5%, in the third quarter of fiscal 2009 to $108.6 million, as compared to $105.0 million in the prior year period. The increase in domestic revenues was led by sales of Gold Bond, ACT, Icy Hot and Cortizone-10. Partially offsetting these increases were decreased sales of certain smaller brands and a $1.8 million, or 30%, increase in promotional programs recorded as a reduction of revenue rather than as advertising and promotion expense in our consolidated statement of income during the quarter ended August 31, 2009 as compared to the same year ago period. Revenues of our international division decreased by $0.4 million, or 5.6%, in the third quarter of fiscal 2009 resulting from our change in distributors in Latin America, general sales weakness in our European markets due to the weak economy and an adverse foreign exchange rate impact. On a constant currency basis, international revenues for the third quarter of fiscal 2009 increased $0.2 million, or 3%, compared to the prior year period.

Net income in the third quarter of fiscal 2009 was $23.4 million compared to net income of $14.0 million in the prior year quarter. Earnings per share in the third quarter of fiscal 2009 were $1.22 compared to $0.73 in the prior year quarter. Net income in the third quarter of fiscal 2009 included a loss on early extinguishment of debt and employee stock option expenses under SFAS 123R. Net income in the third quarter of fiscal 2008 included employee stock option expenses under SFAS 123R, a non-recurring adjustment related to the voluntary recall of Icy Hot Heat Therapy products and a settlement related to claims alleging injury as a result of ingestion of Dexatrim products in 1998 through 2003. As adjusted to exclude these items, net income in the third quarter of fiscal 2009 was $25.0 million, or $1.31 per share, compared to $22.3 million, or $1.17 per share, in the prior year quarter, reflecting increases of 12% for both net income and earnings per share, as compared to the prior year quarter.

KEY FINANCIAL HIGHLIGHTS

• Alterations in the strategy for trade promotions by our retail customers has resulted in greater utilization of price promotion programs in fiscal 2009 as compared to fiscal 2008 (an increase of $8.5 million for the first nine months of fiscal 2009 as compared to the same period in 2008). The cost of these price promotion programs is reflected as a reduction of our total revenues and not as a component of advertising and promotion expense (A&P). The utilization by retailers of more price promotion programs and the resulting impact on our reported total revenues for fiscal 2009 also arithmetically reduces our gross margin, decreases our reported A&P and the ratio of A&P as a percentage of total revenues and increases the ratio of selling, general and administrative expense as a percentage of total revenues.
• Gross margin for the first nine months of fiscal 2009 was 69.7%, compared to 71.6% for the prior year period. For the third quarter of fiscal 2009, gross margin was 69.8%, compared to 71.6% in the prior year quarter. These gross margin decreases resulted in part from higher input costs for certain product components in fiscal 2009 as compared to the same year ago periods, offset in part by consistent, and in some cases slightly lower, costs realized on certain other input components.
• Advertising and promotion expense (A&P) for the first nine months of fiscal 2009 decreased to $78.4 million or 22.2% as a percentage of total revenues, from $91.5 million, or 26.2% as a percentage of total revenues in the prior year period. For the third quarter of fiscal 2009, A&P decreased to $22.9 million, or 19.8% as a percentage of total revenues, as compared to 23.9% in the prior year quarter. We have continued to support the new product launches for fiscal 2009, which are principally from the Gold Bond, ACT, Icy Hot, Cortizone-10 and Selsun Blue® franchises, with strong A&P support to drive consumer trial of the new products and continued growth of the base business.
• Selling, general and administrative expenses (SG&A) for the first nine months of fiscal 2009 decreased to $45.0 million or 12.8% as a percentage of total revenues, from $45.7 million, or 13.0% as a percentage of total revenues for the first nine months of fiscal 2008. SG&A as a percentage of total revenues for the third quarter of fiscal 2009 decreased to 13.3% as compared to 13.4% in the prior year quarter.
• Earnings before interest, taxes, depreciation and amortization (EBITDA) was $132.0 million, or 37.4% of total revenues, for the first nine months of fiscal 2009. EBITDA in fiscal 2009 was up 8.4%, compared to EBITDA, excluding litigation settlement costs and one-time product recall expenses, of $121.7 million, or 34.8% of total revenues, for the first nine months of fiscal 2008. EBITDA was $45.7 million, or 39.6% of total revenues, for the third quarter of fiscal 2009, up 10.0%, as compared to EBITDA, excluding litigation settlement costs and one-time product recall expenses, of $41.5 million, or 37.1% of total revenues, for the prior year quarter.
• For the first nine months of fiscal 2009, cash flow from operations increased to $83.9 million, compared to $77.3 million in the year ago period. Free cash flow, defined as cash flow from operations less capital expenditures, was $80.3 million, compared to $73.7 million in the year ago period. Our total debt was reduced during the first nine months of fiscal 2009 by $59.6 million to $399.9 million as a result of the repayment of $21.8 million of senior bank debt, the issuance of 487,123 shares of our common stock on December 4, 2008 in exchange for $28.7 million of our 2% Convertible Senior Notes due 2013 and the repurchase of $9.1 million of our 7.0% Senior Subordinated Notes (7% Notes) in the third quarter of fiscal 2009 at prices approximately equal to the par value of the 7% Notes. Subsequent to August 31, 2009, we have repurchased an additional $7.0 million of the 7% Notes at a premium to par value of 1.5%. As of the date of this release, no amounts are outstanding under our $100.0 million revolving line-of-credit.
• Effective September 30, 2009, we entered into an amendment to the credit agreement that governs our revolving line-of-credit and senior secured bank term loan to, among other things, extend the maturity date of the revolving line-of-credit portion to January 2013 and increase our flexibility to repurchase shares of our common stock and the 7% Notes. In connection with the amendment to our credit agreement our Board of Directors increased the authorization under our stock repurchase program to repurchase shares of our common stock to a total of $100.0 million.
• In the first nine months of fiscal 2009, we repurchased 491,392 shares of our common stock for approximately $26.1 million, or an average cost of $53.13 per share.

Source: Chattem, Inc.