posted July 10, 2007
Chattem, Inc. a marketer and manufacturer of branded consumer products, Tuesday announced financial results for the second fiscal quarter and six months ended May 31, 2007.
"The first six months of fiscal 2007 was a record period for the Company," said Bob Bosworth, President and Chief Operating Officer of Chattem. "The positive momentum in our business following the acquisition of five brands from Johnson & Johnson on Jan. 2, 2007 has continued as evidenced by the strong sales growth and operating results for the first half of fiscal 2007. Sales growth in the six months was driven by the five acquired brands, continued expansion of the Gold Bond(R) franchise, the growth of Icy Hot(R) led by the launch of Icy Hot Heat Therapy and the introduction of Bullfrog(R) Marathon Mist. The integration of the acquired brands is on schedule and we have successfully leveraged our infrastructure during this period resulting in incremental earnings growth. Also, the Company has effectively managed its capital structure by the issuance of $100 million of 1.625% convertible debt issued on April 11, 2007 and borrowings under the revolving credit facility. Additionally, the Company has significantly reduced total debt outstanding by about $35 million since the date of the acquisition of the J&J brands."First Six Months Financial Results
For the first six months of fiscal 2007, total revenues were $213.8 million compared to total revenues of $163.4 million in the prior year period, representing a 31% increase. Revenue growth for the first half of fiscal 2007 was primarily led by the sales of the five brands acquired from Johnson & Johnson. For the first six months of fiscal 2007, sales from the Gold Bond franchise increased 25%, the topical pain care portfolio, excluding Icy Hot Pro-Therapy, increased 9%, and Bullfrog increased 28%. Offsetting these gains were sales decreases of the Selsun(R) franchise (down 8%) and Icy Hot Pro-Therapy (down 83%), compared to the prior year period which included the initial launch of Selsun Salon and Icy Hot Pro-Therapy, and a sales decrease of the Sunsource(R) line of dietary supplements (down 34%) due to a decline in overall category sales of garlic products and reduced advertising for Garlique(R).
Net income in the first six months of fiscal 2007 was $28.6 million, compared to $25.0 million in the prior year period and earnings per share were $1.48, compared to $1.27 in the prior year period. Net income in the first six months of fiscal 2007 included a loss on early of extinguishment of debt ($0.08 per share after taxes) and employee stock option expenses under SFAS 123R ($0.09 per share after taxes). Net income in the first six months of fiscal 2006 included a loss on early extinguishment of debt ($0.09 per share after taxes), a recovery related to the Dexatrim(R) litigation settlement ($0.28 per share after taxes) and employee stock option expenses under SFAS 123R ($0.07 per share after taxes). As adjusted to exclude these items, net income in the first six months of fiscal 2007 was $31.7 million, up 40%, compared to $22.7 million in the prior year period, and earnings per share were $1.65, compared to $1.15 in the prior year period, an increase of 43%.
Second Quarter Financial Results
Total revenues for the second quarter of fiscal 2007 were $113.0 million compared to total revenues of $79.4 million in the prior year quarter, representing a 42% increase. Revenue growth for the quarter was driven by sales of the five brands acquired from Johnson & Johnson, continued growth of the Gold Bond franchise, up 23%, and strong performance from the Bullfrog franchise, up 62%, as a result of initial sales of the Marathon Mist product and the timing of shipments as compared to the second quarter of fiscal 2006.
Net income for the second quarter of fiscal 2007 was $14.9 million, up 46%, compared to net income of $10.2 million in the prior year quarter. Earnings per share for the second quarter were $0.77, up 48%, compared to $0.52 in the prior year quarter. Net income in the second quarter of fiscal 2007 included employee stock option expenses under SFAS 123R ($0.05 per share after taxes) and a loss on early extinguishment of debt ($0.08 per share after taxes). Net income in the second quarter of fiscal 2006 included employee stock option expenses under SFAS 123R ($0.05 per share after taxes) and legal expenses related to the Dexatrim litigation. As adjusted to exclude these items, net income in the second quarter of fiscal 2007 was $17.3 million, up 56%, compared to $11.1 million in the prior year quarter and earnings per share were $0.89, up 56%, compared to $0.57 in the prior year quarter.
"We are extremely pleased with the Company's performance in the quarter, with total revenues up 42%, adjusted earnings per share up 56% and EBITDA up an impressive 73%," said Zan Guerry, Chief Executive Officer of Chattem. "ACT, Cortizone-10 and Unisom continue to respond very well to advertising, with each brand performing strongly at retail. Moreover, the Gold Bond franchise continued its impressive growth at retail during this period, Icy Hot experienced renewed growth led by recently introduced line extensions and Bullfrog performed well with the Marathon Mist product. Given these positive results and the strength of our business, we remain very excited about the Company's prospects for the balance of fiscal 2007 and beyond."
KEY HIGHLIGHTS
Gross margin for the second quarter of fiscal 2007 was 68.9%, compared to 68.4% in the prior year quarter. For the first six months of fiscal 2007 gross margin as a percentage of revenues was 69.1% compared to 68.7% for the prior year period. The gross margin increase was largely attributable to decreased sales of Icy Hot Pro-Therapy which has a lower margin compared to our other brands.
Advertising and promotion expense (A&P) for the second quarter of fiscal 2007 increased to $29.7 million from $24.8 million in the prior year quarter. A&P expense as a percentage of total revenues decreased to 26.2% for the second quarter of fiscal 2007, as compared to 31.2% in the prior year quarter. For the first six months of fiscal 2007 A&P expense increased to $58.5 million, or 27.3% of total revenues, from $52.0 million, or 31.8%, in the prior year period. The decrease in A&P expense as a percent of revenue for the quarter and six-month period reflects higher A&P spending for Icy Hot Pro-Therapy and Selsun Salon during the fiscal 2006 launch period.
Selling, general and administrative expenses (SG&A) for the second quarter of fiscal 2007 increased to $14.3 million from $11.5 million in the prior year quarter. SG&A as a percentage of total revenues for the second quarter of fiscal 2007 decreased to 12.7%, as compared to 14.5% in the prior year quarter and to 12.6% as compared to 14.1% for the first six months of fiscal 2007. The decrease as a percentage of revenue was attributable to increased revenue without commensurate increases in SG&A.
The integration of the brands acquired from Johnson & Johnson is essentially complete, except for the assimilation of manufacturing operations for certain brands that are expected to be brought in-house in the fourth quarter of 2007. The transition services agreement entered into at closing of the acquisition was terminated in April 2007 with the functions previously covered by the agreement having been transitioned to Chattem.
Earnings before interest, taxes, depreciation and amortization (EBITDA) excluding litigation settlement items was $36.0 million, or 31.8% of total revenues, for the second quarter of fiscal 2007, up 73.1%, as compared to $20.8 million, or 26.1% of total revenues, for the prior year quarter and $65.9 million, or 30.8% of total revenues, for the first six months of fiscal 2007, up 56.5%, compared to $42.1 million, or 25.8% of total revenues, for the first six months of fiscal 2006.(1)
Interest expense increased $5.9 million in the second quarter of fiscal 2007 as compared to the prior year quarter reflecting the impact of the additional indebtedness incurred to finance the acquisition of brands from Johnson & Johnson.
The Company refinanced $128.0 million of its senior secured term loan with net proceeds from a $100.0 million 1.625% Senior Convertible Note offering that was completed on April 11, 2007 and borrowings under the Company's senior secured revolving credit facility. As a result of the refinancing, the Company incurred a debt extinguishment charge of $2.2 million, or $0.08 per share after taxes, in the second quarter of fiscal 2007.
The Company decreased outstanding borrowings under its revolving credit facility to $29.0 million as of July 2, 2007, versus an outstanding balance of $32.0 million at May 31, 2007.
BRAND ACQUISITION
On May 25, 2007, the Company closed the previously announced agreement to acquire the ACT business in Western Europe together with worldwide trademark rights to ACT from Johnson & Johnson for $4.1 million in cash plus certain assumed liabilities. Chattem funded the acquisition with existing cash.
FISCAL 2007 GUIDANCE
Based on the continued strength of the base business and the successful integration of the acquired brands to date, the Company currently expects earnings per share in fiscal 2007 to be in the range of $3.00 - $3.19 as compared to the earlier estimate of $2.94 to $3.19, in each case excluding stock option expense under SFAS 123R and loss on debt extinguishment. Stock option expense under SFAS 123R for fiscal 2007 is estimated to be $0.19 per share, an increase of $.05 per share from the previous estimate of $0.14 per share as a result of the annual stock option grants during the second quarter of fiscal 2007. The estimated $0.19 of SFAS 123R stock option expense is before any additional stock option grants in fiscal 2007 which are expected to be immaterial.
NON-GAAP FINANCIAL MEASURES
In addition to presenting financial results in accordance with generally accepted accounting principles, or GAAP, this earnings release also presents certain non-GAAP financial measures, including adjusted net income, adjusted earnings per share and adjusted EBITDA. The non-GAAP financial measures exclude certain non-cash charges, such as stock option expenses, and certain charges, such as debt extinguishment charges and litigation settlement items. Chattem believes these measures provide both management and investors with additional insight into the Company's operational strength and ongoing operating performance. The additional non-GAAP financial measures should be considered in conjunction with, but not as a substitute for, the financial information presented in accordance with GAAP.
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