Valassis Announces Results for the Third Quarter Ended Sept. 30, 2011

Reduces 2011 Outlook; Diluted Earnings per Share Increases 11.5%

Oct 26, 2011, 08:30 ET from Valassis

LIVONIA, Mich., Oct. 26, 2011 /PRNewswire/ -- Valassis (NYSE: VCI) today announced the following financial results for the third quarter ended Sept. 30, 2011:

  • Revenues were $528.4 million, a decrease of 7.7% compared to $572.4 million for the prior year quarter due to the negative impact of the macroeconomic climate on client advertising budgets; the previously announced anticipated shortfall in Run-of-Press (ROP) revenue within the Neighborhood Targeted segment; and the negative impact of the increased costs of high coupon redemption on annual consumer promotion budgets.  This has resulted in reduced consumer packaged goods (CPG) programs across our various business segments.
  • Diluted earnings per share (EPS) was $0.58, an increase of 11.5% from $0.52 for the prior year quarter.
  • Net earnings were $27.5 million, an increase of 1.9% from $27.0 million for the prior year quarter.
  • Adjusted EBITDA* was $69.8 million, a decrease of 12.5% compared to $79.8 million for the prior year quarter driven primarily by the decline in revenue.
  • Diluted cash EPS* was $0.79, a decrease of 3.7% compared to $0.82 for the prior year quarter.

"The combined effect of the economy and increasing coupon redemptions are prematurely exhausting annual consumer promotion budgets in the second half of 2011," said Alan F. Schultz, Valassis Chairman, President and Chief Executive Officer. "We believe marketers will expand their consumer promotion budgets in 2012 to accommodate the increasing redemptions as they have in the past.  We are also counseling clients to proactively manage redemption costs by controlling the variables we know influence redemptions such as coupon face values, coupon durations and multiple purchase requirements."

Some additional highlights include:

  • Selling, General and Administrative (SG&A) Costs: Third-quarter 2011 SG&A costs were $80.5 million, which included $2.2 million in non-cash stock-based compensation expense. This represents a decrease of 12.3% compared to third quarter 2010 SG&A costs of $91.8 million, which included $8.6 million in non-cash stock-based compensation expense.  
  • Capital Expenditures: Capital expenditures were $6.5 million for the third quarter and $18.1 million year to date.
  • Liquidity: Total cash was $91.0 million at Sept. 30, 2011, a decrease of $28.0 million from June 30, 2011 due to share repurchases of $50.0 million; offset, in part, by cash generated from operations of $32.2 million in the quarter.  
  • Stock Repurchases: During the quarter, we repurchased $50.0 million, or 2.1 million shares, of our common stock at an average price of $23.86 per share under the stock repurchase program. Year to date, we have repurchased $155.8 million, or 5.9 million shares of our common stock. We currently have 4.5 million shares authorized by our Board of Directors in our stock repurchase program. The stock repurchase program does not obligate us to acquire any particular amount of shares of common stock, and may be modified or suspended at any time at our discretion.

Outlook

Global economic uncertainty has resulted in a combination of factors that have negatively affected our business including: a decline in client advertising budgets, the aforementioned high coupon redemption and subsequent reduction in programs as CPG manufacturers have prematurely exhausted annual consumer promotion budgets.

Based on our current outlook, we have revised our full-year 2011 guidance as follows:

  • adjusted EBITDA* to be $315.1 million, compared to our previous adjusted EBITDA* guidance of approximately $355 million;
  • diluted EPS to be $2.33, compared to our previous guidance of $2.76;
  • adjusted diluted EPS* to be $2.56 (excludes the effect of loss on extinguishment of debt and related charges);
  • diluted cash EPS* to be approximately $3.56 (calculated using estimated 2011 full-year weighted average diluted shares of 49.3 million based on shares outstanding at Sept. 30, 2011), compared to the previous guidance of $3.71 (calculated using the estimated weighted average diluted shares of 53.1 million based on shares outstanding at Dec. 15, 2010); and
  • 2011 annual capital expenditures to be approximately $27 million, compared to our previous guidance of $30 million.  

We expect to discuss 2012 annual guidance in December 2011.

Business Segment Discussion

  • Shared Mail:  Revenues for the third quarter of 2011 were $330.5 million, an increase of 1.3% compared to the prior year quarter. Segment profit for the quarter was $46.2 million, an increase of 17.6% compared to the prior year quarter. The improvement in segment profit was driven primarily by an increase in revenue per package attributed to our pricing initiative and ongoing cost containment efforts.
  • Neighborhood Targeted:  Revenues for the third quarter of 2011 were $76.9 million, a decrease of 32.5% compared to the prior year quarter.  Revenue results for this segment were primarily due to a $25.0 million decrease in ROP revenue as well as the aforementioned reduction in CPG programs. Segment profit for the quarter was $0.4 million, a decrease of 94.4% compared to the prior year quarter. Segment profit was negatively impacted by margin pressure associated with a changing client mix and the aforementioned revenue shortfall.
  • Free-standing Inserts (FSI):  Revenues for the third quarter of 2011 were $73.5 million, a decrease of 17.6% compared to the prior year quarter due to the aforementioned reduction in CPG programs. Industry volume decreased by approximately 10%. Segment profit for the quarter was a loss of $0.8 million, a decrease of 116.3% compared to the prior year quarter.
  • International, Digital Media & Services (IDMS):  Revenues for the third quarter of 2011 were $47.5 million, an increase of 10.2% compared to the prior year quarter. Segment revenue results were driven by strong growth in our coupon clearing business despite lower than expected revenue in our new business initiatives.  Segment profit for the quarter was $3.2 million, a decrease of 28.9% compared to the prior year quarter. Segment profit results were negatively impacted by the aforementioned reduction in CPG programs, but partially offset by a substantial increase in profitability in our coupon clearing and analytics business, NCH Marketing Services, Inc.

Segment Results Summary

Quarter Ended Sept. 30,

Segment Revenues ($ in millions)

2011

2010

% Change

Shared Mail

$330.5

$326.1

1.3%

Neighborhood Targeted

$76.9

$114.0

-32.5%

Free-standing Inserts

$73.5

$89.2

-17.6%

International, Digital Media & Services

$47.5

$43.1

10.2%

Total Segment Revenues

$528.4

$572.4

-7.7%

Quarter Ended Sept. 30,

Segment Profit ($ in millions)

2011

2010

% Change

Shared Mail

$46.2

$39.3

17.6%

Neighborhood Targeted

$0.4

$7.2

-94.4%

Free-standing Inserts

($0.8)

$4.9

-116.3%

International, Digital Media & Services

$3.2

$4.5

-28.9%

Total Segment Profit

$49.0

$55.9

-12.3%

Conference Call Information

We will hold an investor call today to discuss our third-quarter 2011 results at 11 a.m. (ET). The call-in number is (877) 941-2332 (please reference conference #4467760). The call will be simulcast on our website at http://www.valassis.com.  This earnings release, together with the webcast and a transcript of the conference call, will be archived on our website under "Investor."

Non-GAAP Financial Measures  

*We define adjusted EBITDA as net earnings before interest expense, net, other non-cash expenses (income), net, income taxes, gain or loss on extinguishment of debt, depreciation, amortization, stock-based compensation expense, and News America litigation settlement proceeds, net of related payments.  We define diluted cash EPS as net earnings per common share, diluted, plus the per-share effect of depreciation, amortization, stock-based compensation expense and loss on extinguishment of debt, net of tax, less the per-share effect of capital expenditures. We define adjusted net earnings and adjusted diluted EPS as net earnings and diluted EPS excluding the effect of loss on extinguishment of debt and related charges, net of tax. Adjusted EBITDA, adjusted net earnings, adjusted diluted EPS and diluted cash EPS are non-GAAP financial measures commonly used by financial analysts, investors, rating agencies and other interested parties in evaluating companies, including marketing services companies.  Accordingly, management believes that these non-GAAP measures may be useful in assessing our operating performance and our ability to meet our debt service requirements.  In addition, these non-GAAP measures are used by management to measure and analyze our operating performance and, along with other data, as our internal measure for setting annual operating budgets, assessing financial performance of business segments and as a performance criteria for incentive compensation.  Management also believes that diluted cash EPS is useful to investors because it provides a measure of our profitability on a more comparable basis to historical periods and provides a more meaningful basis for forecasting future performance, by replacing non-cash amortization and depreciation expenses, which are currently running significantly higher than our annual capital needs, with actual and forecasted capital expenditures.  Additionally, because of management's focus on generating shareholder value, of which profitability is a primary driver, management believes these non-GAAP measures, as defined above, provide an important measure of our results of operations.

However, these non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as alternatives to, operating income, cash flow, EPS or other income or cash flow data prepared in accordance with GAAP. Some of these limitations are:

  • adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
  • although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;
  • adjusted EBITDA and diluted cash EPS do not reflect changes in, or cash requirements for, our working capital needs;
  • adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
  • adjusted EBITDA does not reflect income tax expense or the cash necessary to pay income taxes;
  • adjusted EBITDA, adjusted net earnings, adjusted diluted EPS, and diluted cash EPS do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and
  • other companies, including companies in our industry, may calculate these measures differently and as the number of differences in the way two different companies calculate these measures increases, the degree of their usefulness as comparative measures correspondingly decreases.

Because of these limitations, adjusted EBITDA, adjusted net earnings, adjusted diluted EPS, and diluted cash EPS should not be considered as measures of discretionary cash available to us to invest in the growth of our business or reduce indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP financial measures only supplementally.  Further important information regarding reconciliations of these non-GAAP financial measures to their respective most comparable GAAP measures can be found below.  

Reconciliation of Full-year 2011 Adjusted EBITDA Guidance

to Full-year 2011 Net Earnings Guidance(1):

Full-year 2011

Guidance

($ in millions)

Net Earnings

$114.8

plus: Interest expense, net  

36.8

        Income taxes

72.9

        Depreciation and amortization  

60.7

        Loss on extinguishment of debt  

16.3

less:  Other non-cash income  

(2.0)

EBITDA

$299.5

plus: Stock-based compensation expense        

15.6

Adjusted EBITDA

$315.1

(1) Due to the forward-looking nature of adjusted EBITDA, information necessary to reconcile adjusted EBITDA to cash flows from operating activities is not available without unreasonable effort. We believe that the information necessary to reconcile these measures is not reasonably estimable or predictable.

Reconciliation of Full-year 2011 Adjusted Diluted EPS and Diluted Cash

EPS Guidance to Full-year 2011 Diluted EPS Guidance:

Full-year 2011

Guidance

Net Earnings (in millions)

$114.8

Diluted EPS

$2.33(2)

Loss on extinguishment of debt and related charges, net of tax

.23

Adjusted diluted EPS

$2.56

plus effect of:

       Depreciation

0.97

        Amortization

0.26

        Stock-based compensation expense

0.32

less effect of:    

        Capital expenditures

(0.55)

Diluted Cash EPS

$3.56

Shares Outstanding (in thousands) (3)

49,347

(2) Includes the effect of $8.2 million in costs, net of tax, related to the extinguishment of our 8¼% Senior Notes due 2015 during the first quarter of 2011, and $3.4 million in costs, net of tax, related to the refinancing of our senior secured credit facility.

(3)Represents full-year 2011 estimated weighted average diluted shares based on shares outstanding as of September 30, 2011 and does not include the effect of any share repurchases, option exercises or changes in dilution caused by movement in the stock price, in each case, subsequent to such date.

Reconciliation of Diluted Cash EPS to Diluted EPS:

Three Months Ended

Sept. 30, 2011

Sept. 30, 2010

Net Earnings (in millions)

$27.5

$27.0

Diluted EPS

$0.58

$0.52

plus effect of:

        Depreciation and amortization

0.30

0.29

        Stock-based compensation expense

0.05

0.17

less effect of:    

        Capital expenditures        

(0.14)

(0.16)

Diluted Cash EPS

$0.79

$0.82

Shares Outstanding (in thousands)

47,766

51,995

Reconciliation of Adjusted EBITDA to Net Earnings and Cash Flows from Operating Activities

(dollars in thousands)

Unaudited

Three Months Ended

September 30,

2011

2010

Net Earnings - GAAP

$                      27,494

$                      26,979

plus:

Income taxes

17,255

17,106

Interest expense, net

8,094

13,975

Depreciation and amortization

14,366

15,256

less:

Other non-cash income, net

346

(2,120)

EBITDA

$                      67,555

$                      71,196

Stock-based compensation expense

2,197

8,589

Adjusted EBITDA

$                      69,752

$                      79,785

Income taxes

(17,255)

(17,106)

Interest expense, net

(8,094)

(13,975)

Changes in operating assets and liabilities

(12,238)

(60,403)

Cash Flows from Operating Activities

$                      32,165

$                    (11,699)

Nine Months Ended

September 30,

2011

2010

Net Earnings - GAAP

$                      79,157

$                    360,612

plus:

Income taxes

50,391

227,303

Interest expense, net

29,334

51,574

Loss on extinguishment of debt

16,318

23,873

Depreciation and amortization

45,487

45,919

less:

Other non-cash income, net

(1,966)

(4,471)

EBITDA

$                    218,721

$                    704,810

Stock-based compensation expense

6,564

22,371

Litigation proceeds, net of related payments

-

(490,085)

Adjusted EBITDA

$                    225,285

$                    237,096

Income taxes

(50,391)

(227,303)

Interest expense, net

(29,334)

(51,574)

Litigation proceeds, net of related payments

-

490,085

Changes in operating assets and liabilities

(22,362)

(26,097)

Cash Flows from Operating Activities

$                    123,198

$                    422,207

About Valassis

Valassis is one of the nation's leading media and marketing services companies, offering unparalleled reach and scale to more than 15,000 advertisers. Its RedPlum™ media portfolio delivers value on a weekly basis to over 100 million shoppers across a multi-media platform – in-home, in-store and in-motion. Through its digital offering, including redplum.com and save.com, consumers can find compelling national and local deals online. Headquartered in Livonia, Michigan with approximately 7,000 associates in 28 states and eight countries, Valassis is widely recognized for its associate and corporate citizenship programs, including its America's Looking for Its Missing Children® program. Valassis companies include Valassis Direct Mail, Inc., Valassis Canada, Promotion Watch, Valassis Relationship Marketing Systems, LLC and NCH Marketing Services, Inc.  For more information, visit http://www.valassis.com, http://www.redplum.com and http://www.save.com.  

Cautionary Statements Regarding Forward-looking Statements

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: price competition from our existing competitors; new competitors in any of our businesses; a shift in client preference for different promotional materials, strategies or coupon delivery methods, including, without limitation, as a result of declines in newspaper circulation; an unforeseen increase in paper or postal costs; changes which affect the businesses of our clients and lead to reduced sales promotion spending, including, without limitation, a decrease of marketing budgets which are generally discretionary in nature and easier to reduce in the short-term than other expenses; our substantial indebtedness, and ability to refinance such indebtedness, if necessary, and our ability to incur additional indebtedness, may affect our financial health; the financial condition, including bankruptcies, of our clients, suppliers, senior secured credit facility lenders or other counterparties; certain covenants in our debt documents could adversely restrict our financial and operating flexibility; fluctuations in the amount, timing, pages, weight and kinds of advertising pieces from period to period, due to a change in our clients' promotional needs, inventories and other factors; our failure to attract and retain qualified personnel may affect our business and results of operations; a rise in interest rates could increase our borrowing costs; possible governmental regulation or litigation affecting aspects of our business; clients experiencing financial difficulties, or otherwise being unable to meet their obligations as they become due, could affect our results of operations and financial condition; uncertainty in the application and interpretation of applicable state sales tax laws may expose us to additional sales tax liability; and general economic conditions, whether nationally, internationally, or in the market areas in which we conduct our business, including the adverse impact of the ongoing economic downturn on the marketing expenditures and activities of our clients and prospective clients as well as our vendors, with whom we rely on to provide us with quality materials at the right prices and in a timely manner. These and other risks and uncertainties related to our business are described in greater detail in our filings with the United States Securities and Exchange Commission, including our reports on Forms 10-K and 10-Q and the foregoing information should be read in conjunction with these filings.  We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

VALASSIS COMMUNICATIONS, INC.

Condensed Consolidated Balance Sheets

(dollars in thousands)

Unaudited

Assets

Sept. 30,

Dec. 31,

2011

2010

Current assets:

Cash and cash equivalents

$            91,034

$          245,935

Accounts receivable

407,286

459,952

Inventories

36,135

41,987

Prepaid expenses and other

63,408

38,657

     Total current assets

597,863

786,531

Property, plant and equipment, net

157,000

175,567

Goodwill and other intangible assets, net

860,821

870,288

Other assets

16,764

13,272

     Total assets

$       1,632,448

$       1,845,658

VALASSIS COMMUNICATIONS, INC.

Condensed Consolidated Balance Sheets, Continued

(dollars in thousands)

Unaudited

Liabilities and Stockholders' Equity

Sept. 30,

Dec. 31,

2011

2010

Current liabilities:

Current portion, long-term debt

$              15,000

$               7,058

Accounts payable and accrued expenses

388,703

429,214

Progress billings

52,608

53,001

     Total current liabilities

456,311

489,273

Long-term debt

591,310

699,169

Other liabilities

39,738

49,568

Deferred income taxes

78,258

78,764

Stockholders' equity:

Common stock

654

653

Additional paid-in capital

125,507

124,988

Retained earnings

987,293

908,136

Treasury stock

(649,407)

(508,192)

Accumulated other comprehensive income

2,784

3,299

     Total stockholders' equity

466,831

528,884

Total liabilities and stockholders' equity

$         1,632,448

$        1,845,658

VALASSIS COMMUNICATIONS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

Unaudited

Quarter Ended

Sept. 30,

%

2011

2010

Change

Revenues

$    528,391

$    572,406

- 7.7%

Costs and expenses:

Costs of sales

395,728

421,510

- 6.1%

Selling, general and administrative

80,520

91,800

- 12.3%

Amortization

3,156

3,156

+ 0.0%

   Total costs and expenses

479,404

516,466

- 7.2%

Operating income

48,987

55,940

- 12.4%

Other expenses and income:

Interest expense

8,148

14,091

- 42.2%

Interest income

(54)

(116)

- 53.4%

Other income

(3,856)

(2,120)

+ 81.9%

   Total other expenses and income

4,238

11,855

- 64.3%

Earnings before income taxes

44,749

44,085

+ 1.5%

Income taxes

17,255

17,106

+ 0.9%

Net earnings

$      27,494

$      26,979

+ 1.9%

Net earnings per common share, diluted

$          0.58

$          0.52

+ 11.5%

Weighted average shares outstanding, diluted

47,766

51,995

- 8.1%

Supplementary Data

Amortization

$        3,156

$        3,156

Depreciation

11,210

12,100

Capital expenditures

6,501

8,046

VALASSIS COMMUNICATIONS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

Unaudited

Nine Months Ended

Sept. 30,

%

2011

2010

Change

Revenues

$  1,640,622

$  1,702,358

- 3.6%

Costs and expenses:

Costs of sales

1,222,345

1,248,664

- 2.1%

Selling, general and administrative

239,778

275,421

- 12.9%

Amortization

9,467

9,467

+ 0.0%

   Total costs and expenses

1,471,590

1,533,552

- 4.0%

Gain from litigation settlement

-

490,085

- 100.0%

Operating income

169,032

658,891

- 74.3%

Other expenses and income:

Interest expense

29,649

52,084

- 43.1%

Interest income

(315)

(510)

- 38.2%

Loss on extinguishment of debt

16,318

23,873

- 31.6%

Other income

(6,168)

(4,471)

+ 38.0%

   Total other expenses and income

39,484

70,976

- 44.4%

Earnings before income taxes

129,548

587,915

- 78.0%

Income taxes

50,391

227,303

- 77.8%

Net earnings

$       79,157

$     360,612

- 78.0%

Net earnings per common share, diluted

$           1.58

$           6.93

- 77.2%

Weighted average shares outstanding, diluted

50,089

52,033

- 3.7%

Supplementary Data

Amortization

$         9,467

$         9,467

Depreciation

36,020

36,452

Capital expenditures

18,127

16,447

SOURCE Valassis



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