Chattem Reports Increased Revenues and Earnings; Affirms Fiscal 2009 Guidance

October 6, 2009 7:30 AM EDT

CHATTANOOGA, Tenn.--(BUSINESS WIRE)-- 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(R), ACT(R), Icy Hot(R) and Cortizone-10(R) 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(R) 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(R)
        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.

FISCAL 2009 GUIDANCE

We currently expect earnings per share in fiscal 2009 to be in the range of $4.80 - $4.90, excluding non-cash employee stock option expense under SFAS 123R of $0.26 per share, any loss on debt extinguishment, which was $0.04 per share for the first nine months of fiscal 2009, and any non-cash brand asset value impairment charge.

NON-GAAP FINANCIAL MEASURES

In addition to presenting financial results in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, this earnings release also presents certain non-GAAP financial measures, including adjusted net income, adjusted earnings per share, EBITDA, EBITDA excluding one-time product recall expenses and free cash flow. A reconciliation of adjusted net income, EBITDA and EBITDA excluding one-time product recall expenses to net income reported in accordance with U.S. GAAP for the first nine months and third fiscal quarter of fiscal 2009 and fiscal 2008 is provided in the unaudited consolidated statements of income attached hereto. As discussed in this release, the Company defines free cash flow as cash flows from operations less capital expenditures. A reconciliation of free cash flow to cash flows from operations reported in accordance with U.S. GAAP is presented in the unaudited financial statements attached hereto. Chattem believes these non-GAAP financial measures provide both management and investors with additional insight into the Company's operational strength and ongoing operating performance. These non-GAAP financial measures should be considered in conjunction with, but not as a substitute for, the financial information presented in accordance with U.S. GAAP. See the accompanying Form 8-K under which this earnings financial release is furnished to the Securities and Exchange Commission for further discussion of the utility of these non-GAAP measures and the purposes for which they are used by management.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words, "believes," "expects," "anticipates," "plans," "estimates" or similar expressions. Examples of forward-looking statements in this press release include the estimated stock option expense under SFAS 123R for fiscal 2009 and the fiscal 2009 earnings per share guidance. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on beliefs and assumptions of management, which in turn are based on currently available information. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include, but are not limited to, the risk factors disclosed in our Annual Report on Form 10-K for the year ended November 30, 2008, as added or revised by our subsequent Quarterly Reports on Form 10-Q, under the caption "Risk Factors." We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of these in light of new information or future events.

WEBCAST

Chattem will provide an online Web simulcast and rebroadcast of its third fiscal quarter conference call. The live broadcast of the call will be available online at www.chattem.com and www.streetevents.com today, October 6, 2009, beginning at 8:30 a.m. ET. The online replay will follow shortly after the call and be available through October 13, 2009. Please note that the webcast requires Windows Media Player. For additional information please contact Robert Long, Vice President and Chief Financial Officer, at 423-822-4450.

About Chattem

Chattem, Inc. is a leading marketer and manufacturer of a broad portfolio of branded OTC healthcare products, toiletries and dietary supplements. The Company's products target niche market segments and are among the market leaders in their respective categories across food, drug and mass merchandisers. The Company's portfolio of products includes well-recognized brands such as Icy Hot, Gold Bond, Selsun Blue, ACT, Cortizone-10 and Unisom(R). Chattem conducts a portion of its global business through subsidiaries in the United Kingdom, Ireland and Canada. For more information, please visit the Company's website: www.chattem.com.

CHATTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

                 For the Three Months Ended  For the Nine Months Ended August
                 August 31,                  31,

                 2009         2008           2009         2008

REVENUES         $ 115,171    $ 111,929      $ 353,093    $ 349,418

COSTS AND
EXPENSES:

Cost of sales      34,765       31,753         107,153      99,127

Advertising and    22,866       26,789         78,424       91,532
promotion

Selling,
general and        15,275       15,024         45,031       45,676
administrative

Litigation         -            11,196         -            11,196
settlement

Product recall     -            (112    )      -            5,931
expenses

Total costs and    72,906       84,650         230,608      253,462
expenses

INCOME FROM        42,265       27,279         122,485      95,956
OPERATIONS

OTHER INCOME
(EXPENSE):

Interest           (5,126  )    (6,176  )      (16,075 )    (19,293 )
expense

Investment and
other income,      45           109            223          362
net

Loss on early
extinguishment     (405    )    -              (1,101  )    (526    )
of debt

Total other
income             (5,486  )    (6,067  )      (16,953 )    (19,457 )
(expense)

INCOME BEFORE      36,779       21,212         105,532      76,499
INCOME TAXES

PROVISION FOR      13,351       7,246          38,308       26,928
INCOME TAXES

NET INCOME       $ 23,428     $ 13,966       $ 67,224     $ 49,571

DILUTED SHARES     19,161       19,004         19,323       19,385
OUTSTANDING

NET INCOME PER
COMMON SHARE     $ 1.22       $ 0.73         $ 3.48       $ 2.56
(DILUTED)

NET INCOME
(EXCLUDING DEBT
EXTINGUISHMENT,
SFAS 123R
EXPENSE,
LITIGATION
SETTLEMENT AND
PRODUCT RECALL
EXPENSES) PER
COMMON SHARE
(DILUTED):

Net income       $ 23,428     $ 13,966       $ 67,224     $ 49,571

Add:

Loss on early
extinguishment     405          -              1,101        526
of debt

SFAS 123R          2,124        1,701          5,667        4,281
expense

Litigation         -            11,196         -            11,196
settlement

Product recall     -            (112    )      -            5,931
expenses

Provision for      (918    )    (4,464  )      (2,457  )    (7,721  )
income taxes

Net income
(excluding debt
extinguishment,
SFAS 123R
expense,         $ 25,039     $ 22,287       $ 71,535     $ 63,784
litigation
settlement and
product recall
expenses)

Net income
(excluding debt
extinguishment,
SFAS 123R
expense,
litigation       $ 1.31       $ 1.17         $ 3.70       $ 3.29
settlement and
product recall
expenses) per
common share
(diluted)

EBITDA
RECONCILIATION
(EXCLUDING
LITIGATION
SETTLEMENT AND
PRODUCT RECALL
EXPENSES):

Net income       $ 23,428     $ 13,966       $ 67,224     $ 49,571

Add:

Provision for      13,351       7,246          38,308       26,928
income taxes

Interest
expense, net
(includes loss     5,486        6,067          16,953       19,457
on early
extinguishment
of debt)

Depreciation
and
amortization
(including SFAS    3,388        3,145          9,465        8,604
123R expense,
less amounts
included in
interest)

EBITDA           $ 45,653     $ 30,424       $ 131,950    $ 104,560

Litigation         -            11,196         -            11,196
settlement

Product recall     -            (112    )      -            5,931
expenses

EBITDA
(excluding
litigation       $ 45,653     $ 41,508       $ 131,950    $ 121,687
settlement and
product recall
expenses)

Depreciation &
amortization     $ 4,010      $ 3,801        $ 11,338     $ 10,597
(including SFAS
123R expense)

Capital          $ 1,389      $ 1,101        $ 3,623      $ 3,567
expenditures

CASH FLOWS FROM  For the Nine Months Ended
OPERATIONS:      August 31,

                 2009         2008

Net income       $ 67,224     $ 49,571

Adjustments to
reconcile net
income to net
cash provided
by operating
activities:

Depreciation
and                5,671        6,316
amortization

Deferred income    12,635       12,404
taxes

Tax benefit
realized from      (325    )    (2,342  )
stock options
exercised

Stock-based
compensation       5,667        4,281
expense

Loss on early
extinguishment     1,101        526
of debt

Other, net         (1      )    137

Changes in
operating
assets and
liabilities:

Accounts           828          (7,567  )
receivable

Inventories        (1,363  )    2,611

Prepaid
expenses and       (5,174  )    (5,885  )
other current
assets

Accounts
payable and        (2,376  )    17,248
accrued
liabilities

Net cash
provided by      $ 83,887     $ 77,300
operating
activities

FREE CASH FLOW
RECONCILIATION:

Net cash
provided by      $ 83,887     $ 77,300
operating
activities

Less: Capital      (3,623  )    (3,567  )
expenditures

Free cash flow   $ 80,264     $ 73,733

Statements in this press release which are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
risks, uncertainties and assumptions that could cause actual outcomes and
results to differ materially from those expressed or projected.

CHATTEM, INC.

SELECTED SUMMARY FINANCIAL DATA

(In thousands)

(Unaudited)

SELECTED INCOME STATEMENT DATA:

The following table sets forth, for the periods indicated, certain items from
our Consolidated Statements of Income expressed as a percentage of total
revenues:

                For the Three Months Ended        For the Nine Months Ended

                August 31, 2009  August 31, 2008  August 31,  August 31, 2008
                                                  2009

TOTAL REVENUES    100     %        100     %        100    %    100    %

COSTS AND
EXPENSES:

Cost of sales     30.2             28.4             30.3        28.4

Advertising       19.8             23.9             22.2        26.2
and promotion

Selling,
general and       13.3             13.4             12.8        13.0
administrative

Product recall    -                10.0             -           3.2
expenses

Litigation        -                (0.1    )        -           1.7
settlement

Total costs       63.3             75.6             65.3        72.5
and expenses

INCOME FROM       36.7             24.4             34.7        27.5
OPERATIONS

OTHER INCOME
(EXPENSE):

Interest          (4.4    )        (5.5    )        (4.6   )    (5.5   )
expense

Investment and
other income,     -                0.1              0.1         0.1
net

Loss on early
extinguishment    (0.4    )        -                (0.3   )    (0.2   )
of debt

Total other
income            (4.8    )        (5.4    )        (4.8   )    (5.6   )
(expense)

INCOME BEFORE     31.9             19.0             29.9        21.9
INCOME TAXES

PROVISION FOR     11.6             6.5              10.9        7.7
INCOME TAXES

NET INCOME        20.3    %        12.5    %        19.0   %    14.2   %

SELECTED
BALANCE SHEET   August 31, 2009  August 31, 2008
DATA:

Cash and cash   $ 59,400         $ 13,031
equivalents

Accounts
receivable,     $ 48,589         $ 51,320
net

Inventories     $ 42,336         $ 40,655

Accounts
payable,
accrued         $ 38,181         $ 56,277
liabilities
and bank
overdraft

Senior bank     $ 105,250        $ 127,750
debt

Subordinated      294,670          332,500
debt

Total debt      $ 399,920        $ 460,250

SHARE
REPURCHASE      For the Three Months Ended        For the Nine Months Ended
DATA:

                August 31, 2009  August 31, 2008  August 31,  August 31, 2008
                                                  2009

Shares            -                231              491         418
repurchased

Cash paid for
share           $ -              $ 13,773         $ 26,107    $ 26,327
repurchases

SUMMARY OF NET
SALES:

Net sales by domestic product category and total international for the third
quarter of fiscal 2009, as compared to the corresponding period in fiscal
2008, were as follows:

                                                  Increase (Decrease)

                2009             2008             Amount      Percentage

Medicated skin  $ 38,429         $ 35,806         $ 2,623       7      %
care

Topical pain      26,023           24,192           1,831       8      %
care

Oral care         17,089           15,859           1,230       8      %

Internal OTC's    11,307           12,149           (842   )    (7     %)

Medicated
dandruff          7,216            7,654            (438   )    (6     %)
shampoos

Dietary           5,141            4,939            202         4      %
supplements

Other OTC and
toiletry          3,391            4,364            (973   )    (22    %)
products

Total domestic    108,596          104,963          3,633       3      %

International
revenues          6,575            6,966            (391   )    (6     %)
(including
royalties)

Total revenues  $ 115,171        $ 111,929        $ 3,242       3      %

Net sales by domestic product category and total international for the first
nine months of fiscal 2009, as compared to the corresponding period in fiscal
2008, were as follows:

                                                  Increase (Decrease)

                2009             2008             Amount      Percentage

Medicated skin  $ 117,856        $ 107,931        $ 9,925       9      %
care

Topical pain      72,380           74,279           (1,899 )    (3     %)
care *

Oral care         53,839           47,045           6,794       14     %

Internal OTC's    34,357           36,633           (2,276 )    (6     %)

Medicated
dandruff          26,304           26,940           (636   )    (2     %)
shampoos

Dietary           14,982           15,446           (464   )    (3     %)
supplements

Other OTC and
toiletry          15,884           16,695           (811   )    (5     %)
products

Total domestic    335,602          324,969          10,633      3      %

International
revenues          17,491           24,449           (6,958 )    (28    %)
(including
royalties)

Total revenues  $ 353,093        $ 349,418        $ 3,675       1      %

* Includes Icy Hot Heat Therapy and Icy Hot Pro Therapy

    Source: Chattem, Inc.

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