Chattem, Inc. (NASDAQ: CHTT), a leading marketer and manufacturer of branded consumer products, today announced results for the fiscal first quarter ended Feb. 29, including a 19.8 rise in revenue.
"The delivery of innovative new products combined with strong advertising support of our brands continued to drive impressive revenue growth of 19.8% for the quarter," said Zan Guerry, Chattem's chairman and chief executive officer.
"This momentum was fueled by our Big 6 brands, Gold Bond(R), Icy Hot(R), ACT(R), Cortizone-10(R), Selsun(R) and Unisom(R), and an additional month of revenue from the brands acquired on January 2, 2007 from Johnson & Johnson.
"During the first quarter of fiscal 2008, new products under the Gold Bond, Icy Hot, Cortizone-10, Selsun, Aspercreme and Dexatrim franchises were shipped while new products for Unisom and Balmex will be introduced during the second quarter. Gross margins improved significantly as a result of the manufacturing integration of certain of the brands acquired from Johnson & Johnson and we continued to utilize our free cash flow to de-lever the balance sheet," Guerry also highlighted.
FIRST QUARTER FINANCIAL RESULTS
Total revenues for the first quarter of fiscal 2008 were $120.8 million, compared to total revenues of $100.8 million in the prior year quarter, representing a 19.8% increase.
Revenue growth for the quarter was led by the five acquired brands as well as strong performances from the Gold Bond, BullFrog, Aspercreme and Selsun brands.
Offsetting these increases was a reduction in sales of Dexatrim due to increased competition in the weight loss category and lower sales of Icy Hot Heat Therapy as a result of the Feb. 8, voluntary recall of the product. Excluding the impact of the acquired brands and sales of Icy Hot Pro-Therapy, total revenues increased 5% in the first quarter of fiscal 2008 compared to the prior year quarter.
Net income in the first quarter of fiscal 2008 rose to $14.9 million, compared to $13.7 million for the prior year quarter, and earnings per share were $0.75, compared to $0.71 for the prior year quarter. Net income for the first quarter of fiscal 2008 included SFAS 123R employee stock option expense, debt extinguishment charges and non-recurring expenses discussed below related to the voluntary recall of Icy Hot Heat Therapy. Net income for the first quarter of fiscal 2007 included employee stock option expenses under SFAS 123R. As adjusted to exclude these items, net income for the first quarter of fiscal 2008 was $20.0 million, compared to $14.4 million for the prior year quarter, and earnings per share were $1.01 compared to $0.75 for the prior year quarter, a 34.7% increase.
On Feb. 8, Chattem announced the voluntary recall of its air-activated, self-heating Icy Hot Heat Therapy patch product. In the first fiscal quarter of 2008, Chattem recorded an estimate of product recall expenses of $6.0 million, or $0.20 per share. The charge encompasses an estimate of costs related to product returns, impairment of in-house inventory and other expenses related to the Icy Hot Heat Therapy recall.
KEY HIGHLIGHTS
-- Gross margin for the quarter rose to 71.2%, compared to 69.3% for the prior year quarter. Gross margin for fiscal 2008 is expected to remain at historical levels as a result of the full year impact of the manufacturing integration of certain of the five brands acquired from Johnson & Johnson.
-- Advertising and promotion expense (A&P) in the first quarter of fiscal 2008 increased by $5.7 million to $34.5 million, or 28.6% as a percentage of total revenues as compared to 28.5% of total revenues in the prior year quarter. The Company anticipates A&P spending to remain consistent with historical levels of 26% to 28% as a percentage of total revenues in fiscal 2008.
-- Selling, general and administrative expenses (SG&A) in the first quarter of fiscal 2008 increased by $3.1 million to $15.5 million, or 12.8% of total revenues as compared to 12.3% of total revenues in the prior year quarter. In the first quarter of fiscal 2008, the Company absorbed transition service costs similar to those paid to Johnson & Johnson related to freight and administrative costs that were recorded as acquisition expenses in the first quarter of fiscal 2007. SG&A expenses are not expected to rise commensurate with increases in total revenues.
-- Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding product recall expenses, increased 29.0% to $38.9 million, or 32.2% of total revenues, for the first quarter of fiscal 2008, compared to $30.1 million, or 29.9% of total revenues in the prior year quarter. Total debt was reduced during the first quarter of fiscal 2008 by $10.0 million to $498.0 million and the ratio of total debt to EBITDA (trailing twelve months excluding product recall expenses) was 3.49x as of February 29, 2008. The Company expects to reduce this ratio well below 3.0x as of November 30, 2008 as it utilizes its free cash flow to further reduce debt, absent a brand acquisition or repurchase of its common stock.
-- In the first quarter of fiscal 2008, the Company repurchased 3,700 shares of the Company's common stock for approximately $0.2 million, or an average cost of $64.93 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, trending toward the upper end of this range, excluding the non-cash stock option expense under SFAS 123R of $0.21 per share, any non-cash loss on debt extinguishment, which was $0.02 per share in the first quarter of fiscal 2008, and the estimated impact of the non-recurring Icy Hot Heat Therapy recall expenses of $0.20 per share.
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 product recall expenses and free cash flow. A reconciliation of adjusted net income, EBITDA and EBITDA excluding product recall expenses to net income reported in accordance with GAAP for the fiscal first quarter of 2008 and 2007 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 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 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.
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.
CHATTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months Ended
--------------------------
February 29, February 28,
2008 2007
------------- ------------
REVENUES $120,773 $100,831
------------- ------------
COSTS AND EXPENSES:
Cost of sales 34,733 30,980
Advertising and promotion 34,496 28,787
Selling, general and administrative 15,466 12,411
Product recall expenses 6,043 -
Acquisition expenses - 1,171
------------- ------------
Total costs and expenses 90,738 73,349
------------- ------------
INCOME FROM OPERATIONS 30,035 27,482
------------- ------------
OTHER INCOME (EXPENSE):
Interest expense (6,552) (7,236)
Investment and other income, net 137 593
Loss on early extinguishment of debt (526) -
------------- ------------
Total other income (expense) (6,941) (6,643)
------------- ------------
INCOME BEFORE INCOME TAXES 23,094 20,839
PROVISION FOR INCOME TAXES 8,221 7,189
------------- ------------
NET INCOME $ 14,873 $ 13,650
============= ============
DILUTED SHARES OUTSTANDING 19,788 19,224
============= ============
NET INCOME PER COMMON SHARE (DILUTED) $ 0.75 $ 0.71
============= ============
----------------------------------------------------------------------
NET INCOME (EXCLUDING DEBT EXTINGUISHMENT,
SFAS 123R EXPENSE AND PRODUCT RECALL
EXPENSES) PER COMMON SHARE (DILUTED):
Net income $ 14,873 $ 13,650
Add:
Loss on early extinguishment of debt 526 -
SFAS 123R expense 1,339 1,204
Product recall expenses 6,043 -
Provision for income taxes (2,815) (415)
------------- ------------
Net income (excluding debt extinguishment,
SFAS 123R expense and product recall
expenses) $ 19,966 $ 14,439
============= ============
Net income (excluding debt extinguishment,
SFAS 123R expense and product recall
expenses) per common share (diluted) $ 1.01 $ 0.75
============= ============
----------------------------------------------------------------------
EBITDA RECONCILIATION (EXCLUDING PRODUCT
RECALL EXPENSES):
Net income $ 14,873 $ 13,650
Add:
Provision for income taxes 8,221 7,189
Interest expense, net (includes loss on
early extinguishment of debt) 6,941 6,643
Depreciation and amortization
(including SFAS 123R expense, less
amounts included in interest) 2,777 2,646
------------- ------------
EBITDA $ 32,812 $ 30,128
Product recall expenses 6,043 -
------------- ------------
EBITDA (excluding product recall expenses) $ 38,855 $ 30,128
============= ============
Depreciation & amortization (including SFAS
123R expense) $ 3,458 $ 3,233
Capital expenditures $ 1,271 $ 453
----------------------------------------------------------------------
For the Three Months Ended
--------------------------
CASH FLOWS FROM OPERATIONS: February 29, February 28,
2008 2007
------------- ------------
Net Income $ 14,873 $ 13,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,119 2,029
Deferred income taxes 4,433 2,794
Stock-based compensation expense 1,339 1,204
Loss on early extinguishment of debt 526 -
Tax benefit realized from stock options
exercised (1,812) (3,013)
Other, net 112 124
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable (14,381) (23,212)
Inventories 737 358
Refundable income taxes - 196
Prepaid expenses and other current
assets (3,746) 680
Accounts payable and accrued
liabilities 6,047 15,127
------------- ------------
Net cash provided by operating
activities $ 10,247 $ 9,937
============= ============
FREE CASH FLOW RECONCILIATION:
Net cash provided by operating activities $ 10,247 $ 9,937
Less: Capital expenditures 1,271 453
------------- ------------
Free cash flow $ 8,976 $ 9,484
============= ============
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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
--------------------------
February 29, February 28,
2008 2007
------------- ------------
TOTAL REVENUES 100% 100%
------------- ------------
COSTS AND EXPENSES:
Cost of sales 28.8 30.7
Advertising and
promotion 28.6 28.5
Selling, general and
administrative 12.8 12.3
Product recall
expenses 5.0 -
Acquisition expenses - 1.2
------------- ------------
Total costs and
expenses 75.2 72.7
------------- ------------
INCOME FROM OPERATIONS 24.8 27.3
------------- ------------
OTHER INCOME (EXPENSE):
Interest expense (5.4) (7.2)
Investment and other
income, net 0.1 0.6
Loss on early
extinguishment of
debt (0.4) -
------------- ------------
Total other income
(expense) (5.7) (6.6)
------------- ------------
INCOME BEFORE INCOME
TAXES 19.1 20.7
PROVISION FOR INCOME
TAXES 6.8 7.1
------------- ------------
NET INCOME 12.3% 13.6%
============= ============
----------------------------------------------------------------------
SELECTED BALANCE SHEET February 29, February 28,
DATA: 2008 2007
------------- ------------
Cash and cash
equivalents $ 11,619 $ 15,749
Accounts receivable,
net $ 58,134 $ 53,064
Inventories $ 42,538 $ 37,570
Accounts payable,
accrued liabilities
and bank overdraft $ 48,456 $ 40,690
Senior bank debt $165,500 $330,000
Subordinated debt 332,500 232,500
------------- ------------
Total debt $498,000 $562,500
============= ============
----------------------------------------------------------------------
STOCK REPURCHASE DATA: For the Three Months Ended
--------------------------
February 29, February 28,
2008 2007
------------- ------------
Stock repurchased 4 -
Cash paid for stock
repurchases $ 240 $ -
----------------------------------------------------------------------
SUMMARY OF NET SALES:
Net sales by domestic product category and total international for the
first quarter of fiscal 2008, as compared to the corresponding period
in fiscal 2007, were as follows:
Increase (Decrease)
-------------------
2008 2007 Amount Percentage
------------- ------------ -------- ----------
Medicated skin care
products $ 37,653 $ 27,833 $ 9,820 35%
Topical pain care
products (a) 25,315 27,226 (1,911) (7%)
Oral care products 15,772 8,487 7,285 86%
Internal OTC's 11,210 8,449 2,761 33%
Medicated dandruff
shampoos 10,579 10,296 283 3%
Dietary supplements 5,374 8,030 (2,656) (33%)
Other OTC and toiletry
products 5,412 4,302 1,110 26%
------------- ------------ --------
Total Domestic 111,315 94,623 16,692 18%
International revenues
(including royalties) 9,458 6,208 3,250 52%
------------- ------------ --------
Total Revenues $120,773 $100,831 $19,942 20%
============= ============ ========
(a) Includes sales of Icy Hot Heat Therapy