Chattem, Inc. (NASDAQ: CHTT), a Chattanooga-based leading marketer and manufacturer of branded consumer products, on Thursday reported total revenues in the third fiscal quarter ended August 31, 2007 of $109.0 million, a 51% increase compared to total revenues of $72.0 million in the prior year quarter.

Total revenues in the nine months ended August 31, 2007 rose to $322.8 million, an increase of 37% compared to total revenues of $235.4 million in the prior year period.

Revenue growth for both periods was driven by the five brands acquired from Johnson & Johnson on January 2, 2007, which include ACT®, Cortizone-10®, Unisom®, Balmex® and Kaopectate®, continued growth of the Gold Bond® franchise and the strength of the Icy Hot® business.

Net income for the quarter rose to $16.3 million, compared to $15.2 million for the prior year quarter, and earnings per share were $0.84, compared to $0.81 for the prior year quarter. Net income for the third quarter of fiscal 2007 included a loss on early extinguishment of debt and SFAS 123R employee stock option expense.

Net income for the third quarter of fiscal 2006 included a net recovery related to the Dexatrim® litigation settlement and SFAS 123R employee stock option expense. As adjusted to exclude these items, net income for the third quarter of fiscal 2007 was $17.5 million, compared to $8.9 million for the prior year quarter, and earnings per share were $0.90 compared to $0.47 for the prior year quarter, a 91% increase.

Net income for the nine months increased to a record $44.9 million, compared to $40.2 million for the prior year period, and earnings per share were $2.33, compared to $2.07 for the prior year period. Net income for the nine months of fiscal 2007 included a loss on early extinguishment of debt and SFAS 123R employee stock option expense. Net income for the nine months of fiscal 2006 included a loss on early extinguishment of debt, net recoveries related to the Dexatrim litigation settlement and SFAS 123R employee stock option expense. As adjusted to exclude these items, net income for the nine months of fiscal 2007 was $49.3 million, compared to $31.6 million for the prior year period, and earnings per share were $2.56 compared to $1.62 for the prior year period, a 58% increase.

“The third quarter proved to be another impressive quarter with total revenues up 51%, adjusted earnings per share up 91% and EBITDA up a significant 102%,” said President and Chief Operating Officer Bob Bosworth. “We are very pleased with our results for the quarter led by strong performances from our six largest brands. We have successfully integrated the acquired brands and are well positioned to capitalize on the continued strength of our business.”

KEY HIGHLIGHTS

Revenue growth for the quarter was led by the five acquired brands as well as strong performances from Gold Bond, Icy Hot and Selsun Blue®. Offsetting these increases were a reduction in sales of Icy Hot Pro-Therapy® and, due to increased competition in the weight loss category, a decrease in sales of Dexatrim. Excluding the impact of the acquired brands and Icy Hot Pro-Therapy, total revenues increased 4% in the third quarter of fiscal 2007 compared to the prior year quarter. If the impact of Dexatrim is also excluded, total revenues increased 9% in the third quarter of fiscal 2007 compared to the prior year quarter.
Revenue growth for the first nine months was driven by the five acquired brands, continued growth of the Gold Bond business along with increases in the Icy Hot franchise. Offsetting these increases were a reduction in sales of Icy Hot Pro-Therapy and a decline in sales of Dexatrim. Excluding the impact of the acquired brands and Icy Hot Pro-Therapy, total revenues increased 5% in the first nine months of fiscal 2007 compared to the prior year period. If the impact of Dexatrim is also excluded, total revenues increased 7% in the first nine months of fiscal 2007 compared to the prior year period.
Gross margin for the quarter rose to 69.9%, compared to 69.1% for the prior year quarter, and 69.4% for the nine months, compared to 68.8% for the prior year period. The increases in gross margin are primarily attributable to product mix including, most notably, a reduction in sales of lower margin Icy Hot Pro-Therapy.
Advertising and promotion expense (A&P) for the quarter increased by $4.2 million to $27.8 million, or 25.5% as a percentage of total revenues, and rose by $10.6 million to $86.2 million, or 26.7% of total revenues, for the nine months.
Selling, general and administrative expenses (SG&A) decreased to 14.3% of total revenues for the quarter, compared to 15.1% for the prior year quarter, and to 13.3% of total revenues for the nine months, compared to 14.4% for the prior year period. The decrease as a percentage of revenues was attributable to increased revenue without commensurate increases in SG&A, reflecting the Company’s ability to leverage its operating infrastructure.

Earnings before interest, taxes, depreciation and amortization (EBITDA) increased 102% to $35.8 million, or 32.8% of total revenues, for the quarter and increased 70.0% to $101.7 million, or 31.5% of total revenues, for the nine months.

The company’s effective tax rate increased to 35.0% for the nine months as a result of an increase in domestic taxable income, which is taxed at a higher statutory rate than foreign taxable income.
Since acquiring the five brands on January 2, 2007, the Company has reduced total debt by $46.7 million to $523.8 million as of August 31, 2007. During that same period, the Company funded the purchase of a net bond hedge of $12.1 million in connection with the issuance of the 1.625% senior convertible notes in April 2007; acquired the ACT business in Western Europe and the worldwide trademark rights to ACT for $4.1 million; and repurchased 380,129 shares of the Company’s common stock for $22.3 million, or an average cost of $58.56 per share.