Chattem, Inc. Thursday announced financial results for the six months and second fiscal quarter ended May 31, 2009.

Chairman and Chief Executive Officer of Chattem Zan Guerry said, "The strength of our business behind Gold Bond, ACT, Icy Hot, Cortizone-10 and Selsun Blue and the early success of the 2009 new product launches for these brands has continued to produce strong earnings and operating results. This earnings and cash flow growth has allowed us to manage our capital structure by reducing debt and repurchasing approximately 491,000 shares of our common stock in the first six months of fiscal 2009. The Company's domestic business, representing 95% of our total revenues, achieved growth of 4.1% and 6.8% over the year ago six and three month periods, respectively, when excluding the discontinued Icy Hot Heat Therapy product from the first quarter of fiscal 2008."

FIRST SIX MONTHS FINANCIAL RESULTS

Total revenues for the first six months of fiscal 2009 were $237.9 million, compared to total revenues of $237.5 million in the prior year period, representing a 0.2% 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 $8.9 million, or 4.1%, in the first six months of fiscal 2009 to $227.0 million, as compared to $218.1 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 of the smaller brands and a $6.8 million, or 62%, increase in promotional programs that were recorded as a reduction of revenue rather than as advertising and promotion expense in our consolidated statement of income. Revenues of the international division decreased by $6.6 million, or 38%, in the first six months of fiscal 2009, compared to an exceptionally strong first half for our international business in fiscal 2008, resulting from a change in distributors in Latin America, general sales weakness in the European markets due to the weak economy and an adverse foreign exchange rate impact. On a constant currency basis, international revenues for the first six months of fiscal 2009 decreased $4.8 million, or 27%, compared to the prior year period.

Net income in the first six months of fiscal 2009 was $43.8 million, compared to $35.6 million in the prior year period, and earnings per share were $2.26, compared to $1.82 in the prior year period. Net income in the first six 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 six months of fiscal 2008 included a loss on early extinguishment of debt, employee stock option expenses under SFAS 123R and non-recurring expenses related to the voluntary recall of Icy Hot Heat Therapy. As adjusted to exclude these items, net income in the first six months of fiscal 2009 was $46.5 million, compared to $41.5 million in the prior year period, and earnings per share were $2.40, compared to $2.12 in the prior year period, an increase of 12% and 13%, respectively.

SECOND QUARTER FINANCIAL RESULTS

Total revenues for the second quarter of fiscal 2009 were $121.8 million compared to total revenues of $116.7 million in the prior year quarter, representing a 4.4% increase. Total domestic revenues increased $7.4 million, or 6.8%, in the second quarter of fiscal 2009 to $116.1, as compared to $108.7 million in the prior year period. The increase in domestic revenues was led by sales of Gold Bond, ACT, Icy Hot, Cortizone-10 and Selsun Blue. Partially offsetting these increases were decreased sales of Unisom and certain of the smaller brands and a $4.2 million, or 83%, increase in promotional programs that were recorded as a reduction of revenue rather than as advertising and promotion expense in the consolidated statement of income. International revenues decreased $2.3 million, or 29%, in the second quarter of fiscal 2009 as a result of 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 second quarter of fiscal 2009 decreased $1.4 million, or 17%, compared to the prior year period.

Net income in the second quarter of fiscal 2009 was $24.2 million, an increase of 17%, compared to net income of $20.7 million in the prior year quarter. Earnings per share in the second quarter were $1.26, an increase of 19%, compared to $1.06 in the prior year quarter. Net income in the second quarter of fiscal 2009 and 2008 included employee stock option expenses under SFAS 123R. As adjusted to exclude this item, net income in the second quarter of fiscal 2009 was $25.5 million, or $1.33 per share, compared to $21.5 million, or $1.10 per share, in the prior year quarter, reflecting increases of 19% and 21% for net income and earnings per share, respectively, 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. 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. The utilization by retailers of more price promotion programs and the resulting impact on our reported total revenues for fiscal 2009 also arithmetically reduces the gross margin, decreases our reported advertising and promotion spend and the ratio of advertising and promotion expense 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 six months of fiscal 2009 was 69.6%, compared to 71.6% for the prior year period. For the second quarter of fiscal 2009, gross margin was 69.5%, compared to 72.0% 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, however, the company has realized consistent, and in some cases slightly lower costs on certain other input components.

Advertising and promotion expense decreased in the first six months of fiscal 2009 to $55.6 million or 23.4% as a percentage of total revenues, from $64.7 million, or 27.3% as a percentage of total revenues in the prior year period. For the second quarter of fiscal 2009, A&P decreased to $27.0 million, or 22.1% as a percentage of total revenues for the second quarter of fiscal 2009, as compared to 25.9% in the prior year quarter. The company has 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 decreased during the first six months of fiscal 2009 to $29.8 million or 12.5% as a percentage of total revenues, as compared to 12.9% for the first six months of fiscal 2008. SG&A decreased in the second quarter of fiscal 2009 to $14.3 million, or 11.8% as a percentage of total revenues for the second quarter of fiscal 2009, as compared to 13.0% in the prior year quarter.

Earnings before interest, taxes, depreciation and amortization excluding one-time product recall expenses in fiscal 2008 was $86.3 million, or 36.3% of total revenues, for the first six months of fiscal 2009, up 7.6%, compared to $80.2 million, or 33.8% of total revenues, for the first six months of fiscal 2008. EBITDA was $46.7 million, or 38.4% of total revenues, for the second quarter of fiscal 2009, up 13.1%, as compared to $41.3 million, or 35.4% of total revenues, for the prior year quarter.

For the first six months of fiscal 2009, cash flow from operations increased to $43.5 million, compared to $31.3 million in the year ago period. Free cash flow, defined as cash flow from operations less capital expenditures, was $41.3 million, compared to $28.8 million in the year ago period. The total debt was reduced during the first half of fiscal 2009 by $49.7 million to $409.8 million as a result of the repayment of $21.0 million of senior bank debt and 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. As of the date of this release, no amounts are outstanding under the $100.0 million revolving line-of-credit, which matures in November 2010, the earliest maturing debt obligation.
In the second quarter 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.