Chattem, Inc. (NASDAQ: CHTT), Chattanooga-based leading marketer and manufacturer of branded consumer products, announced results for the fiscal fourth quarter and year ended November 30, 2007, including record earnings.

“The company experienced the most successful year in its 128-year history,” said Zan Guerry, Chattem’s chairman and chief executive officer. “Early in the year, we made the exciting acquisition of five brands from Johnson & Johnson and were able to integrate those brands into our organization smoothly and ahead of schedule. The acquisition, combined with the growth of our existing business, resulted in a 41% increase in total revenues for the year to a record $423 million and even more impressive earnings growth.

“In reference to the balance sheet, we were able to finance the acquisition of the five brands on very favorable terms and have put in place a very solid and effective capital structure. Our strong operating cash flows for fiscal 2007 enabled us to reduce debt more rapidly than we anticipated at the time of the acquisition while also repurchasing over 400,000 shares of our common stock for $23.6 million, or an average cost of $58.98 per share.”

“Looking to fiscal 2008, we have tremendous momentum and robust advertising support planned for our Big 6 brands, Gold Bond, Icy Hot, ACT, Cortizone-10, Selsun and Unisom, which accounted for approximately 72% of our total revenues in fiscal 2007. The strength of our Big 6 brands, together with an impressive line up of new products, expected gross margin improvement and the ability to rapidly deleverage with strong cash flows, has led us to increase our earnings per share guidance for fiscal 2008 to a range of $4.00 to $4.20 per share before SFAS 123R and debt extinguishment charges.”

FISCAL YEAR 2007 FINANCIAL RESULTS

Total revenues for fiscal 2007 rose to a record $423.4 million, an increase of 40.9%, compared to total revenues of $300.5 million in fiscal 2006. Revenue growth for the fiscal year was driven by the five acquired brands and continued growth of the Gold Bond and Icy Hot businesses, offset by declines in the Icy Hot Pro-Therapy and Dexatrim franchises, the latter of which was impacted by unprecedented competition in the weight loss category as well as difficult comparisons to the fiscal 2006 launch period of Dex Max2O. Excluding the impact of the acquired brands and Icy Hot Pro-Therapy, total revenues increased 5% compared to fiscal 2006.

Net income for the fiscal year increased to a record $59.7 million, compared to $45.1 million for fiscal 2006, and earnings per share were $3.08, compared to $2.34 for fiscal 2006. Net income for fiscal 2007 included a loss on early extinguishment of debt and SFAS 123R employee stock option expense. Net income for fiscal 2006 included a debt extinguishment charge, litigation settlement items and SFAS 123R employee stock option expense. As adjusted to exclude these items, net income for fiscal 2007 was $65.1 million, compared to $37.5 million for fiscal 2006, and earnings per share were $3.36 compared to $1.95 for fiscal 2006, a 72.3% increase.

FOURTH QUARTER FINANCIAL RESULTS

Total revenues for the fourth quarter of fiscal 2007 were $100.6 million, compared to total revenues of $65.1 million in the prior year quarter, representing a 54.5% increase. Revenue growth for the quarter was led by the five acquired brands as well as strong performances from Gold Bond and Icy Hot. Offsetting these increases was a reduction in sales of Dexatrim and lower sales of Icy Hot Pro-Therapy. Excluding the impact of the acquired brands and Icy Hot Pro-Therapy, total revenues increased 3% compared to the prior year quarter.

Net income for the quarter rose to $14.8 million, compared to $4.9 million for the prior year quarter, and earnings per share were $0.76, compared to $0.26 for the prior year quarter. Net income for the fourth quarter of fiscal 2007 included SFAS 123R employee stock option expense. Net income for the fourth quarter of fiscal 2006 included litigation settlement items and SFAS 123R employee stock option expense. As adjusted to exclude these items, net income for the fourth quarter of fiscal 2007 was $15.8 million, compared to $6.0 million for the prior year quarter, and earnings per share were $0.81 compared to $0.32 for the prior year quarter, a 153% increase.

In the fourth quarter of fiscal 2007, the Company increased the reserves for Icy Hot Pro-Therapy retail and in-house inventory exposure by approximately $7.0 million, or $0.24 per share, which resulted in lower revenue and reduced gross margins during the fourth quarter of fiscal 2007. This increase in reserves was based on a detailed evaluation of the Icy Hot Pro-Therapy business. Management believes this amount fully addresses any significant product return or in-house inventory obsolescence exposure.

KEY HIGHLIGHTS

Gross margin for the quarter rose to 70.0%, compared to 68.2% for the prior year quarter, and 69.5% for fiscal 2007, compared to 68.7% for fiscal 2006. Gross margin for fiscal 2008 is expected to approach historical levels as a result of the full year impact of the in-house manufacturing of certain of the five acquired brands and product mix.

Advertising and promotion expense (A&P) for the quarter increased by $5.5 million to $26.0 million, or 25.8% as a percentage of total revenues, and rose by $16.1 million to $112.2 million, or 26.5% of total revenues, for the fiscal year, compared to $96.1 million, or 32.0% of total revenues in fiscal 2006. The decline in A&P expense as a percentage of total revenues from fiscal 2006 reflected unusually high A&P expenses in fiscal 2006 due primarily to the launch of Icy Hot Pro-Therapy. The Company anticipates A&P spending to increase significantly on a dollar basis for fiscal 2008 and remain consistent with historical levels of 26% to 28% as a percentage of total revenues.

Selling, general and administrative expenses (SG&A) decreased to 15.3% of total revenues for the quarter, compared to 20.0% for the prior year quarter, and to 13.6% of total revenues for the fiscal year, compared to 15.6% for fiscal 2006. For fiscal 2008, SG&A expenses are not expected to rise commensurate with increases in total revenues as the Company continues to leverage its operating infrastructure.

For the fiscal year, cash flows from operations increased 59.4% to $86.7 million compared to $54.4 million for fiscal 2006. Free cash flow, defined as cash flows from operations less capital expenditures, was $80.4 million, up 61.8%, compared to $49.7 million for fiscal 2006. Capital expenditures for the fiscal year were $6.3 million with more than half of these expenditures attributable to the integration of in-house manufacturing for certain of the five acquired brands.

Earnings before interest, taxes, depreciation and amortization (EBITDA) increased 139% to $32.2 million, or 32.0% of total revenues, for the quarter and increased 82.6% to $133.9 million, or 31.6% of total revenues, for the fiscal year, compared to $73.3 million, or 24.4% of total revenues in fiscal 2006.

Since acquiring the five brands on January 2, 2007, Chattem has reduced total debt by $62.5 million to $508.0 million as of November 30, 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 400,129 shares of the company’s common stock for $23.6 million, or an average cost of $58.98 per share.

FISCAL 2008 GUIDANCE

The company currently expects earnings per share for fiscal 2008 to be in the range of $4.00 to $4.20 as compared to an earlier estimate of $3.90 to $4.10, in each case excluding stock option expense under SFAS 123R and any loss on debt extinguishment. Stock option expense under SFAS 123R for fiscal 2008 is estimated to be $0.21 per share.