CNS, Inc. Reports Fiscal 2006 Third Quarter Results

Business Wire, Jan 25, 2006

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

--Third quarter net sales of $30.9 million rose 8 percent driven by strong Breathe Right(R) international and FiberChoice(R) growth

--Third quarter operating income of $5.9 million grew 10 percent, excluding a prior year benefit related to a refund of European import duties

--Company continues to estimate $1.05 to $1.12 fully diluted earnings per share for full year fiscal 2006

CNS, Inc. (Nasdaq:CNXS), the Breathe Right(R) company, today announced results for its fiscal 2006 third quarter ended December 31, 2005.

Net sales for the quarter were $30.9 million, up 8 percent from $28.7 million in the prior year period. Net income for the quarter ended December 31, 2005, totaled $4.0 million, or $0.26 per fully diluted share. Net income for the prior year quarter was $4.4 million, or $0.30 per fully diluted share, which included the benefit related to a duty refund of $0.05 per fully diluted share.

For the first nine months of fiscal 2006, CNS reported net sales of $80.5 million, up 23 percent compared to $65.3 million in the same period last year. Net income for the first nine months of fiscal 2006 was $12.5 million, or $0.83 per share, compared to $9.6 million, or $0.65 per fully diluted share for the first nine months of fiscal 2005. Excluding the non-recurring European import duty refund, fully diluted earnings per share for the first nine months of fiscal 2006 grew 37 percent compared to the prior year.

"Overall, revenue growth in the third quarter moderated as anticipated, compared to last year's high sales volumes that resulted from the successful relaunch of domestic Breathe Right clear strips," said Marti Morfitt, CNS' president and CEO. "During the third quarter, we saw continued strong revenue growth in our Breathe Right international and FiberChoice(R) product lines. Our domestic Breathe Right sales were slightly below expectations as our promotions were not as effective as planned. However, we expect domestic Breathe Right revenues to return to growth in the fourth quarter."

CNS continues to focus on a number of key initiatives to grow the Breathe Right and FiberChoice brands 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 the expansion of advertising and the introduction of two new FiberChoice products which will begin shipping in February 2006 - FiberChoice with Calcium(TM) and FiberChoice Weight Management(TM);

--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.

On January 5, 2006, CNS announced the purchase, from Onesta Nutrition, Inc., of a portfolio of domestic and international patents and patents pending related to the FiberChoice brand for approximately $8 million. The purchase, which was completed January 4, 2006, reflects CNS' commitment to further develop and grow this important brand within the company's portfolio. The purchase was funded by CNS' existing cash balances, and is expected to be earnings neutral in the fiscal year ending March 31, 2007.

The gross profit rate for the fiscal 2006 third quarter was 69.6 percent, down 5.7 percentage points compared to the prior year period's gross profit rate of 75.3 percent, which included the benefit of the European import duty refund. Advertising and promotion expense for the 2006 third quarter of $11.4 million rose 6 percent compared to $10.7 million in the year earlier period, primarily due to increased advertising for FiberChoice in the U.S. and Breathe Right in several international markets.

CNS generated $9.6 million in cash from operations through the third quarter of fiscal 2006 and ended the period with $59.7 million in cash and marketable securities. During the first nine months of fiscal 2006, CNS repurchased 435,105 shares of its common stock for $9.2 million.

Yesterday, the company announced a quarterly dividend of $0.06 per share, payable on March 3, 2006, to shareholders of record as of February 17, 2006.

Third Quarter Product Results

Domestic Breathe Right sales in the 2006 third quarter were $21.5 million, down 1 percent compared to strong prior year period sales of $21.8 million which benefited from the clear nasal strip relaunch, including the "How it Works" component of our advertising message. For the first nine months of fiscal 2006, Breathe Right domestic revenues increased 12 percent to $54.7 million.

International sales of Breathe Right products in the fiscal 2006 third quarter rose 35 percent to $5.3 million, up from international sales in the prior year period of $3.9 million. Sales growth resulted from continued strong shipments to Canada, as well as normal shipments to Japan. In the first eight months of fiscal 2005, no revenues were recorded in Japan due to high inventory levels in that market. For the first nine months of fiscal 2006, international sales of Breathe Right products grew 48 percent to $11.9 million.