posted April 7, 2009
Chattem, Inc. (NASDAQ: CHTT), a leading marketer and manufacturer of branded consumer products, today announced results for the first fiscal quarter ended Feb. 28, includng an earnings decrease of 3.9 percent.
Zan Guerry, the company's chairman and chief executive officer, said, "During the first quarter, we achieved earnings per share growth, generated strong cash flow and effectively managed our capital structure by repaying $20.3 million of senior bank debt and issuing 487,123 shares of our common stock in exchange for $28.7 million of our 2% Convertible Senior Notes.
"Given the underlying strength of our business, we expect earnings per share for fiscal 2009 to be in the range of $4.80 to $4.90, excluding stock option expense under SFAS 123R of $0.26 per share and any non-cash loss on debt extinguishment, which was $0.02 per share in the first quarter of fiscal 2009."
Total revenues for the first quarter of fiscal 2009 were $116.1 million, compared to total revenues of $120.8 million in the prior year quarter, representing a 3.9% decrease.
Mr. Guerry said, "The decrease in total revenues was due primarily to a $4.3 million reduction in our international revenues, a 45% decrease, compared to an exceptionally strong first quarter for our international business in fiscal 2008, resulting from our elimination of the sale of English language packaging in Latin America, an adverse foreign exchange rate impact and general sales weakness in our European markets due to the weakening economy.
"The balance of the decrease in total revenues was related to our domestic business, primarily a result of lower sales of Icy Hot, Selsun(R), Bullfrog(R) and Dexatrim(R), caused in part by the timing of shipments, reduced retail inventory levels and two fewer shipping days in the first quarter of fiscal 2009 as a result of the leap year in fiscal 2008, and the loss of sales of Icy Hot Heat Therapy which was recalled on February 8, 2008 and the discontinued Icy Hot Pro Therapy.
"Also adversely impacting our total revenues for the first quarter of fiscal 2009 was an increase in promotional programs that are recorded as a reduction of revenue rather than as advertising and promotion expense in our consolidated statement of income. Excluding the impact of Icy Hot Heat Therapy and Icy Hot Pro Therapy, total revenues decreased 2% in the first quarter of fiscal 2009 compared to the prior year quarter. When excluding the discontinued products from our domestic business, which represents 96% of our total revenues for the first quarter of fiscal 2009, our domestic revenues increased 2% as compared to the same period in fiscal 2008."
Sales decreases were offset by sales increases in the ACT(R), Gold Bond(R) and Unisom(R) franchises.
Net income for the first quarter of fiscal 2009 rose to $19.6 million, compared to $14.9 million for the prior year quarter, and earnings per share were $0.99, compared to $0.75 for the prior year quarter. Net income for the first quarter of fiscal 2009 included SFAS 123R employee stock option expense and a non-cash debt extinguishment charge. Net income for the first quarter of fiscal 2008 included employee stock option expenses under SFAS 123R, a non-cash debt extinguishment charge and non-recurring expenses related to the voluntary recall of Icy Hot Heat Therapy. As adjusted to exclude these items, net income for the first quarter of fiscal 2009 was $21.0 million, compared to $20.0 million for the prior year quarter, and earnings per share were $1.07 compared to $1.01 for the prior year quarter, a 6% increase.
On Feb. 8, 2008, Chattem announced the voluntary recall of its air-activated, self-heating Icy Hot Heat Therapy patch product. In the first fiscal quarter of 2008, the company 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.
Gross margin for the quarter was 69.6%, compared to 71.2% for the prior year quarter. Gross margin for the first quarter of fiscal 2009 was lower as a result of higher input costs for certain product components and the impact of lower reported revenue as a result of a greater percentage of promotion costs recorded as a reduction of revenue rather than as a component of A&P expense.
Advertising and promotion expense (A&P) in the first quarter of fiscal 2009 decreased by $5.9 million to $28.6 million, or 24.6% as a percentage of total revenues as compared to 28.6% of total revenues in the prior year quarter. A&P expense was lower for the first quarter of fiscal 2009 due in part to an increase in promotion programs utilized by retailers that were recorded as a reduction of revenue rather than A&P expense and price efficiencies realized on certain media purchases.
Selling, general and administrative expense (SG&A) in the first quarter of fiscal 2009 was consistent with spending for the first quarter of fiscal 2008 but increased to 13.3% of total revenues for the first fiscal quarter of 2009 as compared to 12.8% of total revenues in the prior year quarter.
For the first quarter of fiscal 2009, cash flow from operations increased $9.5 million to $19.7 million, compared to $10.2 million in the prior year quarter. Free cash flow, defined as cash flow from operations less capital expenditures, was $19.0 million, up $10.0 million, compared to $9.0 million in the prior year quarter. The total debt was reduced during the first quarter of fiscal 2009 by $49.0 million to $410.6 million as a result of the repayment of $20.3 million of senior bank debt and the issuance of 487,123 shares of common stock in exchange for $28.7 million of the 2% Convertible Senior Notes due 2013. As of the date of this release, no amounts are outstanding under the $100 million revolving line-of-credit, which matures in November 2010, the earliest maturing debt obligation.
Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding product recall expenses, increased 1.8% to $39.6 million, or 34.1% of total revenues, for the first quarter of fiscal 2009, compared to $38.9 million, or 32.2% of total revenues in the prior year quarter. The ratio of total debt to adjusted EBITDA (trailing 12 months) was 2.6x as of Feb. 28.
Mr. Guerry said, "We expect to reduce this ratio well below 2.0x as of November 30, 2009 as we utilize our free cash flow to further reduce debt, absent a brand acquisition or repurchase of our common stock.
Subsequent to Nov. 30, 2008, we have repurchased 125,500 shares of our common stock for approximately $6.8 million, or an average cost of $53.99 per share."
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