LIVONIA, Mich., July 31 /PRNewswire-FirstCall/ -- Valassis today announced financial results for the second quarter ended June 30, 2007. The company reported quarterly revenues of $612.1 million, up 134.9% from the second quarter of 2006, due to the acquisition of ADVO, Inc. (ADVO) that was completed on March 2, 2007. Second-quarter net earnings were $9.8 million, or $0.20 in earnings per share (EPS). For the second quarter, operating income was $40.6 million and adjusted EBITDA* was $63.1 million. Adjusted free cash flow* was $25.1 million for the quarter.
"Since the close of the ADVO acquisition on March 2, we have been extremely pleased with our efforts to reduce costs and capital expenditures as we focus on maximizing free cash flow," said Alan F. Schultz, Valassis Chairman, President and CEO. "We expect to see the incremental benefits from our optimization efforts during the next 12 months, with the expected realization of revenue synergies beginning in the second half of 2008.
"Second quarter adjusted EBITDA was below our internal projections due to revenue shortfalls. As a result of reducing our revenue projections, we have lowered our previously announced 2007 adjusted EBITDA* guidance from $255 million to $241 million. Going forward, we expect to complete the sales integration process by Jan. 1, 2008. In addition, a new comprehensive targeting system will be completed during the second quarter of 2008. This proprietary system will provide scalable, multi-product solutions, enabling us to accelerate cross-selling opportunities.
"Let me share with you some of our recent accomplishments:
-- Successfully transitioned to a new ADVO ShopWise(R) wrap format,
eliminating the detached address label (DAL) by printing the consumer
address on the wrap. This transition has enabled us to avoid a double-
digit postal rate increase and has set the stage to being able to
target shared mail at the household level.
-- Started printing ADVO's shared mail wrap at the Valassis Durham
printing facility during the last week of June. We expect to be
producing the vast majority of the wrap in our printing facilities
starting in the fourth quarter of 2007, saving approximately $8 million
on an annualized basis.
-- Announced the shutdown of the weekend shared mail program in Southern
California outside of the newspaper alliance footprint, as well as the
second in-home date in Las Vegas.
-- Announced the shutdown of the Columbia, Maryland and Los Angeles II
ADVO production facilities to drive efficiencies.
-- Announced the closure of ADVO's unprofitable New Jersey Shopper Guide
product with the goal of transitioning any remaining customers into
existing shared mail products.
-- Improved ADVO's shared mail gross margin percentage to 22.6% and
lowered the amount of unused postage to 22.2%.
-- Continued to reduce accounts receivable at ADVO, reducing days sales
outstanding (DSO) from 51 as of Dec. 31, 2006 to 44 as of June 30,
2007.
-- Reduced combined company capital expenditures for the second quarter to
$6.6 million. ADVO capital expenditures for the second quarter totaled
$2.3 million, significantly lower than its historical quarterly run-
rate.
-- Made a second $25.0 million voluntary payment on the term loan B of our
senior secured credit facility in July.
-- Entered into two interest rate swaps converting a total of $480.0
million, or approximately 89%, of the floating-rate term loan B debt to
a lower, fixed effective rate of 6.8%.
-- Strengthened the strategic alliance with Insignia Systems, Inc., a
marketer of in-store promotions, which expands Valassis' role to secure
and service retail customers. In July, Valassis also received warrants
to purchase 800,000 shares of Insignia stock.
-- Executed first mobile marketing program during the second quarter of
2007 helping our client reach consumers how, when and where they want."
*Further important information regarding operating results and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures can be found in the "Reconciliation of Non-GAAP Measures" schedule following the financial statements accompanying this press release, which should be thoroughly reviewed.
Outlook
Management noted that unlike the legacy Valassis business which had a relatively high degree of visibility given the amount and the way in which business is contracted, the combined business with the acquisition of ADVO is much less predictable. This is due to the significant operating leverage, movement in business primarily within the ADVO shared mail product, and the timing and manner in which management is able to see sales in progress. In any particular period, transactional fluctuations in the amount, timing, pages, weight and types of advertising pieces distributed by ADVO's customers can vary significantly. These fluctuations can make it difficult to predict and can materially affect revenue and profit results.
As a result of the current revenue forecast, the company updated its 2007 revenue and adjusted EBITDA* guidance from its guidance provided on May 3, 2007. The following figures represent a full-year for Valassis and the period of March 2, 2007 through Dec. 31, 2007 for ADVO.
-- Revenue of $2.22 billion to $2.25 billion, down from $2.25 billion to
$2.35 billion; and
-- Adjusted EBITDA* of approximately $241.0 million, down from $255.0
million (includes cost synergies, but does not include one-time
expenses associated with cost-to-achieve synergies). Expected one-time
cost-to-achieve synergies of $25.0 million to be incurred in 2007,
which includes $10.5 million of capital expenditures.
In addition, the company made the following adjustments:
-- Expected cost synergies of $20.0 million for 2007. The company has
increased the cost synergies expected for 2008 from $32.0 million to
$36.0 million;
-- Expected capital expenditures of $53.6 million for 2007 was lowered to
less than $50.0 million for 2007. Capital expenditures for 2008 through
2011 are expected to be approximately $35.0 million each year; and
-- Expected tax rate for 2007 has increased from 37.2% to 37.8%.
Business Segment Discussion
-- Market Delivered Free-standing Insert (FSI): Co-op FSI revenues for the
second quarter were $98.7 million, down 15.6% from the second quarter
of 2006, due to an approximately 10% reduction in FSI pricing and a
4.6% decline in industry volume, coupled with a slight decrease in
market share. Industry page volume for the first six months of 2007 was
down 1.3%. Management noted that FSI cost of goods sold was down
slightly for the quarter on a cost per thousand (CPM) basis. Segment
profit for the quarter was $5.4 million.
-- Neighborhood Targeted Products: As of Jan. 1, 2007, the Neighborhood
Targeted segment includes the Run of Press (ROP) business, previously
reported as a separate business segment. Revenues for the second
quarter were $120.2 million, up 18.1% from the pro-forma prior year
quarter. Segment profits were up 62.9% to $14.5 million for the
quarter. The growth is due to increases in ROP, polybags/sampling and
preprints primarily in the telecommunications, consumer packaged goods,
financial services and grocery retail customer verticals.
-- Household Targeted Products: Household Targeted product revenues for
the second quarter were $12.7 million, down 10.6% from the second
quarter of 2006, due to continued softness in solo direct mail
programs. Segment profit was $500,000 for the quarter. During the
quarter, $700,000 in expenses associated with the company's investment
in its new interactive initiatives were incurred and charged against
earnings in this segment.
-- International & Services: International & Services revenues are
comprised of NCH Marketing Services, Valassis Canada, Promotion Watch
and in-store. International & Services reported revenues of $29.0
million for the second quarter, up 5.1%, due to higher coupon clearing
volumes in the United States and the United Kingdom, and our in-store
initiative. Segment profits were $1.9 million, down 13.6% from the
prior year quarter, driven by a decline in profits of Valassis Canada
and incremental costs of approximately $543,000 aimed at improving
efficiencies in our European operations. Excluding the costs associated
with this project, segment profits for the quarter were $2.4 million,
up 9.1% over the prior year quarter.
-- ADVO: ADVO revenues for the second quarter were $351.5 million, down
9.1% from the second calendar quarter of 2006. During the second
calendar quarter of 2007, ADVO had one less week than the second
calendar quarter of 2006 resulting from ADVO's historical 52/53 week
accounting cycle. Excluding this extra week, revenues were down 4.6%
and packages were down 0.5%. As a result of eliminating packages with
higher percentages of unused postage, unused postage as a percentage of
base postage decreased 1.1 percentage points from the prior year
quarter. Advertising pieces were down 5.5% due to the reduction in
packages, a reduction in Missing Child Card pieces (driven by the shift
from a detached address label to printing the consumer address on the
wrap) and a decline in insert volume resulting from grocery customer
consolidation. As a result, pieces per package were down 5.4% for the
quarter. Revenue per thousand pieces was up slightly due to the
reduction in the lower priced Missing Child Card product and the
partial quarter impact of the postal rate pass-through, offset in part
by a shift to lighter weight products from the grocery customer
category. The progress made in improving the ADVO cost structure and
optimizing packages/profiles resulted in the shared mail gross margin
percentage increasing to 22.6%, versus 21.4% in the prior year second
quarter and 18.4% for the first quarter of 2007. Segment profit was
$19.4 million for the quarter.
Segment Results Summary
Quarter Ended June 30,
Revenue by Segment (in millions) 2007 2006 % Change
Free-standing Insert $98.7 $117.0 -15.6%
Neighborhood Targeted(1) $120.2 $101.8 18.1%
Household Targeted $12.7 $14.2 -10.6%
International & Services $29.0 $27.6 5.1%
ADVO(2) $351.5 n/a n/a
Total Revenue $612.1 $260.6 134.9%
Quarter Ended June 30,
Segment Profit (in millions) 2007 2006 % Change
Free-standing Insert $5.4 $20.8 -74.0%
Neighborhood Targeted(1) $14.5 $8.9 62.9%
Household Targeted $0.5 $0.1 400.0%
International & Services $1.9 $2.2 -13.6%
ADVO(2) $19.4 n/a n/a
Total Segment Profit $41.7 $32.0 30.3%
(1) Effective Jan. 1, 2007, the Neighborhood Targeted includes the Run of
Press business.
(2) Valassis acquired ADVO on March 2, 2007.
Conference Call Information
Valassis will hold an investor call today to discuss its second-quarter results at 11 a.m. (EDT). The call-in number is (800) 218-0530. The call will simulcast on Valassis' Web site, at http://www.valassis.com/, and replay through Aug. 13, 2007 at (800) 405-2236, pass code 11072110. This earnings release and the webcast will be archived on Valassis' Web site under "Investor."
About Valassis
Valassis is the nation's leading marketing services company, offering unique and diverse media plans with the most comprehensive product and customer portfolio in the industry. The company offers products and services including: newspaper-delivered promotions such as inserts, sampling, polybags and on-page advertisements; shared mail; direct mail; in-store marketing; direct-to-door advertising and sampling; Internet-delivered marketing; loyalty marketing software; coupon and promotion clearing; promotion planning; and analytic services. We reach over 60 million households through weekly newspaper distribution and 90% of U.S. homes through shared mail distribution. The company has relationships with more than 15,000 advertisers worldwide in various industries, representing 96 of the top 100 U.S. advertisers. With global headquarters in Livonia, Michigan, the company employs approximately 7,500 associates in 22 states and nine countries and is widely recognized for its associate and corporate citizenship programs. Valassis companies include ADVO, Inc., Valassis Canada, Promotion Watch, Valassis Relationship Marketing Systems, LLC and NCH Marketing Services, Inc. For additional information, visit the company Web site at http://www.valassis.com/.
Safe Harbor and Forward-Looking Statements
Certain statements found in this document constitute "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 the actual results, performance or achievements of the Company 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 the Company's existing competitors; new competitors in any of the Company's businesses; a shift in customer preference for different promotional materials, strategies or coupon delivery methods; an unforeseen increase in the Company's paper or postal costs; changes which affect the businesses of the Company's customers and lead to reduced sales promotion spending; challenges and costs of achieving synergies and cost savings in connection with the ADVO acquisition and integrating ADVO's operations may be greater than expected; the Company's substantial indebtedness, and its ability to incur additional indebtedness, may affect the Company's financial health; certain covenants in the Company's debt documents could adversely restrict the Company's financial and operating flexibility; fluctuations in the amount, timing, pages and weight, and kinds of advertising pieces from period to period, due to a change in the Company's customers' promotional needs, inventories and other factors; the Company's failure to attract and retain qualified personnel may affect its business and results of operations; a rise in interest rates could increase the Company's borrowing costs; the outcome of ADVO's pending shareholder lawsuits; possible governmental regulation or litigation affecting aspects of the Company's business; and general economic conditions, whether nationally or in the market areas in which the Company conducts its business, may be less favorable than expected. These and other risks and uncertainties related to the Company's business are described in greater detail in its filings with the United States Securities and Exchange Commission, including the Company's reports on Forms 10-K and 10-Q, and the foregoing information should be read in conjunction with these filings. The Company disclaims 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.
Consolidated Balance Sheets
(in thousands)
Assets June 30, Dec. 31,
2007 2006
Current assets:
Cash and cash equivalents $135,831 $52,619
Auction-rate securities - 102,533
Accounts receivable 456,973 339,079
Inventories 36,665 25,834
Refundable income taxes 11,615 3,957
Deferred income taxes 18,050 1,789
Other 23,752 16,681
Total current assets 682,886 542,492
Property, plant and equipment, at cost 487,964 262,876
Less accumulated depreciation (174,733) (153,490)
Net property, plant and equipment 313,231 109,386
Intangible assets 1,217,374 208,689
Less accumulated amortization (78,500) (75,280)
Net intangible assets 1,138,874 133,409
Investments 6,802 4,899
Other assets 29,658 11,240
Total assets $2,171,451 $801,426
VALASSIS COMMUNICATIONS, INC.
Consolidated Balance Sheets, Continued
(in thousands)
Liabilities and Stockholders' Equity June 30, Dec. 31,
2007 2006
Current liabilities:
Accounts payable and accruals $412,975 $312,962
Progress billings 51,253 49,258
Total current liabilities 464,228 362,220
Long-term debt 1,363,473 259,931
Other liabilities 11,186 8,195
Deferred income taxes 139,876 3,506
Stockholders' equity:
Common stock 633 633
Additional paid-in capital 47,754 44,225
Retained earnings 655,270 638,209
Treasury stock (520,227) (520,227)
Accumulated other comprehensive gain 9,258 4,734
Total stockholders' equity 192,688 167,574
Total liabilities and stockholders' equity $2,171,451 $801,426
VALASSIS COMMUNICATIONS, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Quarter Quarter
Ended Ended
June 30, June 30, %
2007 2006 Change
Revenue $612,147 $260,593 + 134.9%
Costs and expenses:
Costs of products sold 472,822 197,972 + 138.8%
Selling, general and administrative 96,364 30,515 + 215.8%
Amortization 2,312 138 + 1575.4%
Total costs and expenses 571,498 228,625 + 150.0%
Operating income 40,649 31,968 + 27.2%
Other expenses and income:
Interest expense 25,228 2,216 + 1038.4%
Other (income) and expenses (1,485) (728) + 104.0%
Total other expenses and (income) 23,743 1,488 + 1495.6%
Earnings before income taxes 16,906 30,480 - 44.5%
Income taxes 7,130 10,791 - 33.9%
Net earnings $9,776 $19,689 - 50.3%
Net earnings per common share, diluted $0.20 $0.41 - 51.2%
Weighted average shares outstanding,
diluted 47,880 47,863 + 0.0%
Supplementary Data
Amortization $2,312 $138
Depreciation 15,564 3,542
Capital expenditures 6,610 2,552
VALASSIS COMMUNICATIONS, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Six Months Six Months
Ended Ended
June 30, June 30, %
2007 2006 Change
Revenue $973,451 $508,238 + 91.5%
Costs and expenses:
Costs of products sold 751,839 383,241 + 96.2%
Selling, general and administrative 150,890 63,255 + 138.5%
Amortization 3,220 278 + 1058.3%
Total costs and expenses 905,949 446,774 + 102.8%
Operating income 67,502 61,464 + 9.8%
Other expenses and income:
Interest expense 35,847 5,071 + 606.9%
Other (income) and expenses (3,663) (2,082) + 75.9%
Total other expenses and (income) 32,184 2,989 + 976.7%
Earnings before income taxes 35,318 58,475 - 39.6%
Income taxes 14,309 20,729 - 31.0%
Net earnings $21,009 $37,746 - 44.3%
Net earnings per common share, diluted $0.44 $0.79 - 44.3%
Weighted average shares outstanding,
diluted 47,879 47,812 + 0.1%
Supplementary Data
Amortization $3,220 $278
Depreciation 22,062 7,081
Capital expenditures 12,225 4,386
VALASSIS COMMUNICATIONS, INC.
Reconciliation of Non-GAAP Measures
Quarter Ended June 30, 2007
(in thousands)
Reconciliation of Net Earnings to Adjusted EBITDA and Cash Flow from
Operations
Three Months Six Months
Ended Ended
June 30, June 30,
2007 2007
Net Earnings - GAAP $9,776 $21,009
plus: Income taxes 7,130 14,309
Interest and other expense, net 23,743 32,184
Depreciation and amortization 17,876 25,282
EBITDA $58,525 $92,784
Acquisition/litigation-related
expenses 1,082 1,987
Stock-based compensation
expense (SFAS No. 123R) 1,777 3,530
Amortization of customer
contract incentive 1,215 2,430
Asset write-off charge - 1,460
Restructuring costs 543 543
Adjusted EBITDA $63,142 $102,734
Interest and other expense, net (23,743) (32,184)
Income taxes (7,130) (14,309)
Acquisition/litigation-related
expenses (1,082) (1,987)
Restructuring costs (543) (543)
Changes in operating assets
and liabilities (73) 42,996
Cash Flow from Operations $30,571 $96,707
Reconciliation of Net Earnings to Adjusted Free Cash Flow
Three Months Six Months
Ended Ended
June 30, June 30,
2007 2007
Net Earnings $9,776 $21,009
Depreciation 15,564 22,062
Amortization 2,312 3,220
Acquisition/litigation-related expenses 1,082 1,987
Stock-based compensation
expense (SFAS No. 123R) 1,777 3,530
Amortization of customer
contract incentive 1,215 2,430
Asset write-off charge - 1,460
Capital expenditures (6,610) (12,225)
Adjusted Free Cash Flow $25,116 $43,473
*We define adjusted EBITDA as net earnings before net interest and related expenses, income taxes, depreciation, amortization, acquisition/litigation- related expenses, stock-based compensation expense associated with SFAS No. 123R, amortization of a customer contract incentive and other non-cash charges. We define adjusted free cash flow as net earnings plus depreciation, amortization, stock-based compensation expense, acquisition/litigation-related expenses and other non-cash items, less capital expenditures. Adjusted EBITDA and adjusted free cash flow 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 adjusted EBITDA and adjusted free cash flow may be useful in assessing our operating performance and our ability to meet our debt service requirements. However, these non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, operating income, cash flow 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 does 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 does not reflect the impact of earnings or charges
resulting from matters we consider not to be indicative of our ongoing
operations;
-- adjusted free cash flow does not represent our residual cash flow
available for discretionary expenditures since we have mandatory debt
service requirements and other required expenditures that are not
deducted from adjusted free cash flow;
-- adjusted free cash flow does not capture debt repayment and/or the
receipt of proceeds from the issuance of debt; 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 a comparative measure correspondingly decreases.
Because of these limitations, adjusted EBITDA and adjusted free cash flow 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 as a supplement.
