CNS, Inc. Reports Strong Fiscal 2006 Second-Quarter Results

Business Wire, Oct 27, 2005

MINNEAPOLIS -- CNS, Inc. (Nasdaq:CNXS):

--Second-quarter sales of $26.1 million, up 30% versus the prior year, driven by strong growth of Breathe Right(R) and FiberChoice(R) brands

--Second-quarter net income of $4.5 million, up 30% versus the prior-year period

CNS, Inc. (Nasdaq:CNXS), the Breathe Right(R) company, today announced results for its fiscal 2006 second quarter ended September 30, 2005.

Net sales for the second quarter were $26.1 million, an increase of 30 percent compared to $20.0 million in the prior-year period. Net income for the second quarter grew 30 percent to $4.5 million, or $0.30 per fully diluted share, versus net income of $3.5 million, or $0.24 per fully diluted share, in the second quarter of fiscal 2005.

For the first six months of fiscal 2006, CNS reported net sales of $49.6 million, up 36 percent compared to $36.6 million in the same period last year. Net income for the first half of fiscal 2006 rose 66 percent to $8.6 million, or $0.57 per fully diluted share, versus $5.2 million, or $0.35 per fully diluted share, in the prior-year period.

"We are pleased to announce very strong second-quarter results. Sales grew very nicely on the Breathe Right(R) brand, both domestically and internationally, as well as the FiberChoice(R) brand," said Marti Morfitt, CNS' president and CEO. "Our growth resulted from the effectiveness of important initiatives begun in the previous year, such as market testing designed to drive growth of Breathe Right nasal strips, new product development to expand the FiberChoice brand and lower distributor inventories in Japan."

Morfitt added, "We also were honored to be named to the Forbes 'Best Small Companies List' during the quarter. Additionally, on October 20, 2005, CNS was added to the Standard & Poor's SmallCap 600 Index."

In fiscal 2006, CNS continues to focus on a number of key initiatives including:

--Growing nasal strip sales with tested, proven marketing tactics, including an effective "How it Works" advertising demonstration to attract new nasal strip users;

--Increasing FiberChoice sales, with geographical expansion of advertising and the introduction of two new FiberChoice items in February 2005 (FiberChoice tropical orange fiber drops and FiberChoice sugar-free chewable tablets in assorted fruit flavors);

--Conducting market testing designed to create a robust pipeline of growth tactics for Breathe Right nasal strips, both domestically and internationally; and

--Building a pipeline of potential new products for both the Breathe Right and FiberChoice brands.

The gross margin rate for the 2006 second quarter was 71 percent, down slightly compared to the prior-year period's gross margin rate, primarily due to changes in product mix. Advertising and promotion expense for the 2006 second quarter of $7.3 million was up 30 percent compared to $5.7 million in the prior-year period, primarily due to increased advertising on both the FiberChoice and Breathe Right brands.

The company expects to carry somewhat higher inventory levels than it typically has in the past, due to the addition of new FiberChoice and Breathe Right products in its portfolio and to support the continued growth of its Breathe Right nasal strip business.

CNS generated $6.3 million in cash from operations year-to-date through the second quarter of fiscal 2006 and ended the period with $58.9 million in cash and marketable securities. During the first half of fiscal 2006, CNS repurchased 355,105 shares of its common stock for $7.3 million.

Yesterday, the company announced a quarterly dividend of $0.06 per share, payable on December 2, 2005, to shareholders of record as of November 18, 2005.

Second-Quarter Product Results

Domestic Breathe Right sales in the 2006 second quarter were $18.4 million, growing 22 percent compared to prior-year period sales of $15.1 million. This marks the third consecutive quarter that Breathe Right sales growth has exceeded 20 percent. Domestic nasal strips continued to grow behind the strong new advertising message, the new consumer trial generated by last year's relaunch of clear strips and initial sales of the new 28-count Mentholated Strips.

International sales of Breathe Right products in the fiscal 2006 second quarter rose 39 percent to $3.0 million, up from sales in the prior-year period of $2.1 million. Sales growth resulted from continued strong shipments to Canada and Europe, as well as normalized shipments to Japan. In the first half of fiscal 2005, no revenues were recorded in Japan due to high inventory levels in that market.

Sales of FiberChoice were $4.5 million, up 67 percent from the prior-year period sales of $2.7 million. Sales growth resulted from continued increases in consumer demand for the existing orange flavored tablets, as well as the FiberChoice new products launched February 2005. FiberChoice also benefited from expansion of advertising coverage to 100 percent of the United States compared to 85 percent of the United States in the prior-year period.

"We are very pleased to see another quarter of strong revenue growth in each of our product lines," said Morfitt. "Our flagship product, Breathe Right nasal strips, benefited from rising consumer demand, both domestically and internationally; and our FiberChoice brand has achieved a higher growth rate by the strength of new products, increased shelf space and continued effective advertising support."