Chattem Reports Increased Revenues and Earnings; Affirms Fiscal 2009 Guidance

http://www.businesswire.com/news/home/20091006005200/en

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, 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.

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. 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 August 31, For the Nine Months Ended August 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 promotion 22,866 26,789 78,424 91,532
Selling, general and administrative 15,275 15,024 45,031 45,676
Litigation settlement - 11,196 - 11,196
Product recall expenses - (112 ) - 5,931
Total costs and expenses 72,906 84,650 230,608 253,462

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

OTHER INCOME (EXPENSE):
Interest expense (5,126 ) (6,176 ) (16,075 ) (19,293 )
Investment and other income, net 45 109 223 362
Loss on early extinguishment of debt (405 ) - (1,101 ) (526 )
Total other income (expense) (5,486 ) (6,067 ) (16,953 ) (19,457 )

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

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

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

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

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

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 of debt 405 - 1,101 526
SFAS 123R expense 2,124 1,701 5,667 4,281
Litigation settlement - 11,196 - 11,196
Product recall expenses - (112 ) - 5,931
Provision for income taxes (918 ) (4,464 ) (2,457 ) (7,721 )

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

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

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

Net income $ 23,428 $ 13,966 $ 67,224 $ 49,571
Add:
Provision for income taxes 13,351 7,246 38,308 26,928
Interest expense, net (includes loss on early extinguishment of debt) 5,486 6,067 16,953 19,457
Depreciation and amortization (including SFAS 123R expense, less amounts included in interest) 3,388 3,145 9,465 8,604
EBITDA $ 45,653 $ 30,424 $ 131,950 $ 104,560
Litigation settlement - 11,196 - 11,196
Product recall expenses - (112 ) - 5,931
EBITDA (excluding litigation settlement and product recall expenses) $ 45,653 $ 41,508 $ 131,950 $ 121,687

Depreciation & amortization (including SFAS 123R expense) $ 4,010 $ 3,801 $ 11,338 $ 10,597
Capital expenditures $ 1,389 $ 1,101 $ 3,623 $ 3,567

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

2009 2008

Net income $ 67,224 $ 49,571
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,671 6,316
Deferred income taxes 12,635 12,404
Tax benefit realized from stock options exercised (325 ) (2,342 )
Stock-based compensation expense 5,667 4,281
Loss on early extinguishment of debt 1,101 526
Other, net (1 ) 137
Changes in operating assets and liabilities:
Accounts receivable 828 (7,567 )
Inventories (1,363 ) 2,611
Prepaid expenses and other current assets (5,174 ) (5,885 )
Accounts payable and accrued liabilities (2,376 ) 17,248
Net cash provided by operating activities $ 83,887 $ 77,300

FREE CASH FLOW RECONCILIATION:

Net cash provided by operating activities $ 83,887 $ 77,300
Less: Capital expenditures (3,623 ) (3,567 )
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, 2009 August 31, 2008

TOTAL REVENUES 100 % 100 % 100 % 100 %

COSTS AND EXPENSES:
Cost of sales 30.2 28.4 30.3 28.4
Advertising and promotion 19.8 23.9 22.2 26.2
Selling, general and administrative 13.3 13.4 12.8 13.0
Product recall expenses - 10.0 - 3.2
Litigation settlement - (0.1 ) - 1.7
Total costs and expenses 63.3 75.6 65.3 72.5

INCOME FROM OPERATIONS 36.7 24.4 34.7 27.5

OTHER INCOME (EXPENSE):
Interest expense (4.4 ) (5.5 ) (4.6 ) (5.5 )
Investment and other income, net - 0.1 0.1 0.1
Loss on early extinguishment of debt (0.4 ) - (0.3 ) (0.2 )
Total other income (expense) (4.8 ) (5.4 ) (4.8 ) (5.6 )

INCOME BEFORE INCOME TAXES 31.9 19.0 29.9 21.9

PROVISION FOR INCOME TAXES 11.6 6.5 10.9 7.7

NET INCOME 20.3 % 12.5 % 19.0 % 14.2 %

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

Cash and cash equivalents $ 59,400 $ 13,031
Accounts receivable, net $ 48,589 $ 51,320
Inventories $ 42,336 $ 40,655
Accounts payable, accrued liabilities and bank overdraft $ 38,181 $ 56,277

Senior bank debt $ 105,250 $ 127,750
Subordinated debt 294,670 332,500
Total debt $ 399,920 $ 460,250

SHARE REPURCHASE DATA: For the Three Months Ended For the Nine Months Ended
August 31, 2009 August 31, 2008 August 31, 2009 August 31, 2008

Shares repurchased - 231 491 418
Cash paid for share repurchases $ - $ 13,773 $ 26,107 $ 26,327

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 care $ 38,429 $ 35,806 $ 2,623 7 %
Topical pain care 26,023 24,192 1,831 8 %
Oral care 17,089 15,859 1,230 8 %
Internal OTC's 11,307 12,149 (842 ) (7 %)
Medicated dandruff shampoos 7,216 7,654 (438 ) (6 %)
Dietary supplements 5,141 4,939 202 4 %
Other OTC and toiletry products 3,391 4,364 (973 ) (22 %)
Total domestic 108,596 104,963 3,633 3 %
International revenues (including royalties) 6,575 6,966 (391 ) (6 %)
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 care $ 117,856 $ 107,931 $ 9,925 9 %
Topical pain care * 72,380 74,279 (1,899 ) (3 %)
Oral care 53,839 47,045 6,794 14 %
Internal OTC's 34,357 36,633 (2,276 ) (6 %)
Medicated dandruff shampoos 26,304 26,940 (636 ) (2 %)
Dietary supplements 14,982 15,446 (464 ) (3 %)
Other OTC and toiletry products 15,884 16,695 (811 ) (5 %)
Total domestic 335,602 324,969 10,633 3 %
International revenues (including royalties) 17,491 24,449 (6,958 ) (28 %)
Total revenues $ 353,093 $ 349,418 $ 3,675 1 %

* Includes Icy Hot Heat Therapy and Icy Hot Pro Therapy

Chattem, Inc.
Robert Long, 423-822-4450
Vice President and Chief Financial Officer

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