Chattem Reports Increased Revenues and Earnings; Affirms Fiscal 2009 Guidance

CHATTANOOGA, Tenn.--(BUSINESS WIRE)--October 6, 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.

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.

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.

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.

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.

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.

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.

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

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