Vertis Communications ("Vertis" or the "Company"), a leading provider of targeted advertising, media and marketing solutions, announced results for the three and six months ended June 30, 2008.
Revenue
Revenue for the second quarter of 2008 was $312.0 million versus $332.1 million in the second quarter of 2007, a decline of 6.1 percent. Revenue in the Advertising Inserts segment was lower as expected due to reduced volume as a result of the increasing cost of newsprint and other paper grades, increased transportation costs due to rising fuel prices and general economic conditions adversely affecting retail customers. The overall pricing, which includes product, customer and equipment mix, in the segment was slightly unfavorable for the quarter as excess industry capacity continues to cause price pressure, and added to the decline. Volume in the Direct Mail segment was up in the second quarter however, product mix was unfavorable resulting in approximately 2.7 percent lower revenue in the segment.
On a year-to-date basis, revenue was $615.7 million, a decrease of $47.1 million or 7.1 percent, from revenue of $662.8 million in the first six months of 2007. The decrease was primarily driven by the overall market conditions noted above.
Net Loss
Net loss during the second quarter of 2008 was $40.9 million compared to a $19.7 million net loss in the second quarter of 2007. Through June 30, 2008, the net loss amounted to $81.8 million versus $44.9 million in the corresponding period in 2007. The primary drivers in the increased loss for the quarter are fees associated with the financial restructuring of the Company of $12.5 million, increases in operational restructuring costs of $0.9 million and the impacts of the decline in volumes noted above. On a year-to-date basis the fees related to our financial restructuring amounted to $16.8 million and increases in operational restructuring costs amounted to $7.6 million. Through the first half of the year, expected volume declines in Advertising Inserts, partially offset by improved pricing, combined with the impact of reduced revenue in the Direct Mail segment to contribute to the loss. The Company continued its investment in lean and continuous improvement aimed at improving productivity and performance as well as upgrading quality and customer service which resulted in some near term increased costs. The benefits of these actions are primarily reflected in cost of production. Additionally, the Company is focusing on improving our sales organization by adding new sales resources.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
EBITDA in the second quarter of 2008 declined to $7.4 million from $27.4 million for the same period in 2007. This decrease relates primarily to the increases in the restructuring related costs of $13.4 million described above. Adjusted EBITDA was $23.1 million in the second quarter of 2008, a decline of $7.4 million, or 24.3 percent, from Adjusted EBITDA of $30.5 million in 2007. This decline was primarily due to reduced volume.
On a year-to-date basis, EBITDA declined to $14.5 million in 2008 versus $48.7 million in 2007. This decrease relates primarily to the increases in the restructuring related costs of $24.4 million described above combined with reduced volume. Adjusted EBITDA amounted to $42.9 million for in 2008 versus $55.1 million in 2007.
See below for a reconciliation of EBITDA and Adjusted EBITDA to net loss, which is the most comparable measure under accounting principles generally accepted in the United States ("GAAP").
Cash and Liquidity
The Company ended the quarter with $1.5 million in cash and debt of $1,192.1 million. In addition, the off-balance sheet accounts receivable facility stood at $80.1 million. The Company ended the quarter with $20.6 million available under its $250 million senior credit facility.
As previously announced, Vertis has received final court approval of its $380 million debtor-in-possession (DIP) financing being provided by General Electric Capital Corporation, as administrative agent and collateral agent for itself and other financial institutions. This facility replaces the senior credit facility and the off-balance sheet accounts receivable facility and will provide the necessary liquidity through the Chapter 11 process.
Additional information on the results discussed above is available in the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008.
Restructuring, Reorganization and Merger
As previously announced on July 15, 2008, as a result of the strong support received for the company's prepackaged plan of reorganization (the "Plan"), the Company instituted the second phase of its strategy and commenced voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code to seek confirmation of the Plan. The focal point of the Plan continues to be the agreement between Vertis and American Color Graphics, two of the largest printing and premedia companies in North America, to merge American Color's operations into Vertis' nationwide marketing and printing services platform. The merger will allow both companies to enrich their core manufacturing capabilities relevant to the production of advertising inserts and newspaper products. It will also enable them to make available an unprecedented scope of premedia and workflow solutions to their customers. A confirmation hearing as to the Plan is scheduled for August 26, 2008.
Management Comments
Mike DuBose, chairman and chief executive officer, commented, "The financial results are essentially consistent with our expectations. The residual impacts to our current performance from the issues prior to 2007 are being overcome each day as the Company builds momentum from the turnaround plan the new management team put in place last year. Although the economic and competitive pressures remain difficult and we have been temporarily hampered by the impacts of the financial restructuring, our initiatives are advancing positively, including improvements in operational efficiency, quality, management processes, customer service and sales management. We continue to see progress winning back customers as well as with new customer wins."
"As we continue with the capital structure improvement phase of our turnaround we are comfortable with the strong foundation that has been established over the past year, however we are continuing to identify opportunities for additional cost reductions and growth" DuBose said.
Conference Call
Vertis will be holding a conference call on Friday, August 15, 2008 at 11:00 a.m. EDT, to discuss earnings for the three and six months ended June 30, 2008. Mike DuBose, chairman and chief executive officer, will host the conference call at 800.462.3053 or 1.706.902.2200 for international callers and the passcode confirmation 59281780. A recording of the call will be available for review for one week at 800.642.1687 or 1.706.645.9291 for international callers.
Financial Highlights
Following is a summary of Vertis' results for the three and six months ended June 30, 2008 and 2007.
Vertis, Inc. | |||||||||||||||||
 |  | Three Months Ended |  | Six Months Ended | |||||||||||||
June 30, | June 30, | ||||||||||||||||
(Dollars in millions) | 2008 |  | 2007 | 2008 |  | 2007 | |||||||||||
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Revenue | $ | 312.0 | $ | 332.1 | $ | 615.7 | $ | 662.8 | |||||||||
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Operating Income | $ | (4.2 | ) | $ | 15.6 | $ | (9.4 | ) | $ | 25.4 | |||||||
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Net Loss | $ | (40.9 | ) | $ | (19.7 | ) | $ | (81.8 | ) | $ | (44.9 | ) | |||||
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EBITDA | $ | 7.4 | $ | 27.4 | $ | 14.5 | $ | 48.7 | |||||||||
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Adjusted EBITDA | $ | 23.1 | $ | 30.5 | $ | 42.9 | $ | 55.1 | |||||||||
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For definitions of EBITDA and Adjusted EBITDA, see "Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures" below.
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
The following table reconciles the differences between Vertis' net loss as determined under GAAP, EBITDA and Adjusted EBITDA.
Vertis, Inc. | |||||||||||||||||
 | Three Months Ended |  | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||||
(Dollars in millions) | 2008 |  | 2007 | 2008 |  | 2007 | |||||||||||
 | |||||||||||||||||
Net Loss | $ | (40.9 | ) | $ | (19.7 | ) | $ | (81.8 | ) | $ | (44.9 | ) | |||||
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Add: | |||||||||||||||||
Interest expense, net | 35.0 | 33.3 | 69.2 | 66.2 | |||||||||||||
Tax expense (benefit) | 0.2 | 0.3 | 0.2 | ||||||||||||||
Depreciation and amortization |  | 13.1 |  |  | 13.8 |  |  | 26.8 |  |  | 27.2 |  | |||||
 | |||||||||||||||||
EBITDA | $ | 7.4 | $ | 27.4 | $ | 14.5 | $ | 48.7 | |||||||||
Add: | |||||||||||||||||
Operational restructuring charges | 2.2 | 1.3 | 9.8 | 2.2 | |||||||||||||
Loss on sale of accounts receivable | 1.3 | 1.7 | 2.5 | 3.5 | |||||||||||||
Loss on sale of property, plant & equipment | (0.4 | ) | 0.7 | (1.0 | ) | 1.0 | |||||||||||
Management fees (non-cash) | 0.3 | 0.3 | 0.6 | 0.6 | |||||||||||||
Financial restructuring charges (included in SG&A) | 12.5 | 16.8 | |||||||||||||||
Other |  | (0.2 | ) |  | (0.9 | ) |  | (0.3 | ) |  | (0.9 | ) | |||||
 | |||||||||||||||||
Adjusted EBITDA | $ | 23.1 |  | $ | 30.5 |  | $ | 42.9 |  | $ | 55.1 |  | |||||
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Note:
EBITDA represents the sum of net loss, net interest expense, income taxes, depreciation and amortization of intangible assets. Adjusted EBITDA is used in calculating covenant compliance under the Company's credit agreements. Adjusted EBITDA is defined as EBITDA excluding restructuring charges and certain non-cash charges as well as fees on our accounts receivable facility. EBITDA and Adjusted EBITDA are not measures of financial performance in accordance with GAAP. You should not consider them as alternatives to net loss as a measure of operating performance. Our calculation of EBITDA and Adjusted EBITDA may be different from the calculations used by other companies and therefore comparability may be limited. We present EBITDA to provide additional information regarding our performance and because it is a measure by which we gauge our profitability. In addition, information concerning Adjusted EBITDA is being presented because it reflects important components included in the financial covenants of the Company's credit agreements. The most comparable measure to EBITDA and Adjusted EBITDA in accordance with GAAP is net loss.
Vertis, Inc. and Subsidiaries (Debtor and Debtor-in-Possession as of July 15, 2008) | |||||||
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Condensed Consolidated Balance Sheets | |||||||
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In thousands, except share and per share amounts | |||||||
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June 30, | December 31, | ||||||
2008 | 2007 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 1,519 | $ | 6,217 | |||
Accounts receivable, net | 84,251 | 84,267 | |||||
Inventories | 47,922 | 42,776 | |||||
Maintenance parts, net | 20,484 | 20,291 | |||||
Prepaid expenses and other current assets |  | 16,477 |  |  | 10,366 |  | |
Total current assets | 170,653 | 163,917 | |||||
Property, plant and equipment, net (1) | 310,676 | 328,026 | |||||
Deferred financing costs, net | 6,353 | 9,629 | |||||
Other intangible assets | 1,897 | 2,659 | |||||
Other assets, net |  | 19,333 |  |  | 23,935 |  | |
Total assets | $ | 508,912 |  | $ | 528,166 |  | |
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LIABILITIES AND STOCKHOLDER'S DEFICIT | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 107,746 | $ | 136,758 | |||
Compensation and benefits payable | 41,208 | 39,733 | |||||
Accrued interest | 71,048 | 13,889 | |||||
Current portion of long-term debt | 901,483 | 165,454 | |||||
Other current liabilities |  | 21,879 |  |  | 25,784 |  | |
Total current liabilities | 1,143,364 | 381,618 | |||||
Due to parent | 5,092 | 3,277 | |||||
Long-term debt | 290,644 | 987,118 | |||||
Other long-term liabilities |  | 26,687 |  |  | 31,236 |  | |
Total liabilities |  | 1,465,787 |  |  | 1,403,249 |  | |
 | |||||||
Stockholder's deficit: | |||||||
Common stock - authorized 3,000 shares; $0.01 par value; issued and outstanding 1,000 shares | |||||||
 | |||||||
Contributed capital | 409,689 | 409,689 | |||||
Accumulated deficit | (1,361,808 | ) | (1,279,960 | ) | |||
Accumulated other comprehensive loss |  | (4,756 | ) |  | (4,812 | ) | |
Total stockholder's deficit |  | (956,875 | ) |  | (875,083 | ) | |
Total liabilities and stockholder's deficit | $ | 508,912 |  | $ | 528,166 |  | |
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(1) Net of accumulated depreciation of $623.5 million and $610.5 million, respectively | |||||||
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Vertis, Inc. and Subsidiaries(Debtor and Debtor-in-Possession as of July 15, 2008) | |||||||||
Condensed Consolidated Statements of Operations | |||||||||
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In thousands |  |  |  |  |  | ||||
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Three Months Ended June 30, | 2008 | 2007 | |||||||
(Unaudited) | |||||||||
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Revenue | $ | 311,994 |  | $ | 332,130 |  | |||
Operating expenses: | |||||||||
Costs of production | 253,006 | 265,473 | |||||||
Selling, general and administrative | 47,939 | 35,989 | |||||||
Restructuring charges | 2,158 | 1,290 | |||||||
Depreciation and amortization of intangibles |  | 13,128 |  |  | 13,767 |  | |||
Total operating expenses |  | 316,231 |  |  | 316,519 |  | |||
Operating (loss) income |  | (4,237 | ) |  | 15,611 |  | |||
Other expenses: | |||||||||
Interest expense, net | 34,990 | 33,340 | |||||||
Other, net |  | 1,494 |  |  | 1,951 |  | |||
Total other expenses |  | 36,484 |  |  | 35,291 |  | |||
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Loss before income tax expense | (40,721 | ) | (19,680 | ) | |||||
Income tax expense |  | 146 |  |  | 47 |  | |||
Net loss | $ | (40,867 | ) | $ | (19,727 | ) | |||
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Vertis, Inc. and Subsidiaries (Debtor and Debtor-in-Possession as of July 15, 2008) | |||||||||
Condensed Consolidated Statements of Operations |  |  |  | ||||||
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In thousands |  |  |  |  |  | ||||
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Six Months Ended June 30, |  | 2008 |  |  | 2007 |  | |||
(Unaudited) | |||||||||
 | |||||||||
Revenue | $ | 615,699 |  | $ | 662,796 |  | |||
Operating expenses: | |||||||||
Costs of production | 496,657 | 534,565 | |||||||
Selling, general and administrative | 91,786 | 73,439 | |||||||
Restructuring charges | 9,849 | 2,201 | |||||||
Depreciation and amortization of intangibles |  | 26,819 |  |  | 27,227 |  | |||
Total operating expenses |  | 625,111 |  |  | 637,432 |  | |||
Operating (loss) income |  | (9,412 | ) |  | 25,364 |  | |||
Other expenses: | |||||||||
Interest expense, net | 69,196 | 66,225 | |||||||
Other, net |  | 2,917 |  |  | 3,913 |  | |||
Total other expenses |  | 72,113 |  |  | 70,138 |  | |||
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Loss before income tax expense | (81,525 | ) | (44,774 | ) | |||||
Income tax expense |  | 323 |  |  | 153 |  | |||
Net loss | $ | (81,848 | ) | $ | (44,927 | ) | |||
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Vertis, Inc. and Subsidiaries (Debtor and Debtor-in-Possession as of July 15, 2008) | |||||||
Condensed Consolidated Statements of Cash Flows |  | ||||||
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In thousands |  |  |  | ||||
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Six Months Ended June 30, | 2008 | 2007 | |||||
(Unaudited) | |||||||
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Cash Flows from Operating Activities: | |||||||
Net loss | $ | (81,848 | ) | $ | (44,927 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
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Depreciation and amortization | 26,819 | 27,227 | |||||
Amortization of deferred financing costs | 3,608 | 3,449 | |||||
Accretion of long-term debt discount | 1,978 | 1,981 | |||||
Fixed asset impairment | 2,556 | ||||||
Gain on sale leaseback | (321 | ) | |||||
Provision for doubtful accounts | 506 | 219 | |||||
Other, net | (732 | ) | 1,023 | ||||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in accounts receivable | (490 | ) | 47,941 | ||||
(Increase) decrease in inventories | (5,146 | ) | 205 | ||||
Decrease in prepaid expenses and other assets | (1,843 | ) | (596 | ) | |||
Increase (decrease) in accrued interest | 57,159 | (272 | ) | ||||
Decrease in accounts payable and other liabilities |  | (44,469 | ) |  | (10,025 | ) | |
Net cash (used in) provided by operating activities |  | (42,223 | ) |  | 26,225 |  | |
Cash Flows from Investing Activities: | |||||||
Capital expenditures | (13,900 | ) | (32,796 | ) | |||
Software development costs capitalized | (1,252 | ) | (364 | ) | |||
Proceeds from sale of property, plant and equipment | 5,062 | 245 | |||||
Acquisition of business, net of cash acquired |  |  | (203 | ) | |||
Net cash used in by investing activities |  | (10,090 | ) |  | (33,118 | ) | |
Cash Flows from Financing Activities: | |||||||
Net borrowings (repayments) under revolving credit facility | 37,574 | (23,743 | ) | ||||
Borrowing under term loan | 50,000 | ||||||
Deferred financing costs | (331 | ) | (1,769 | ) | |||
Increase (decrease) in outstanding checks drawn on controlled disbursement accounts | |||||||
10,377 | (17,224 | ) | |||||
Advances to parent |  | (61 | ) |  | (71 | ) | |
Net cash provided by financing activities | 47,559 | 7,193 | |||||
Effect of exchange rate changes on cash |  | 56 |  |  | 20 |  | |
Net (decrease) increase in cash and cash equivalents | (4,698 | ) | 320 | ||||
Cash and cash equivalents at beginning of year |  | 6,217 |  |  | 5,710 |  | |
Cash and cash equivalents at end of period | $ | 1,519 |  | $ | 6,030 |  | |
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About American Color Graphics
American Color Graphics ("ACG") is one of North America's largest and most experienced full-service premedia and print companies, with eight print locations across the continent, a TMC facility, six regional premedia centers, photography studios nationwide and a growing roster of customer managed service sites. Expert in a full range of products such as retail, newspapers, direct mail, catalog, publication, packaging, book, comic, and commercial products, ACG has been an innovative industry leader for over 80 years. The company provides solutions and services such as asset management, photography, and digital workflow solutions that improve the effectiveness of advertising and drive revenues for their customers. For more information, visit www.americancolor.com.
About Vertis Communications
Vertis Communications is a premier provider of print advertising and direct marketing solutions to America's leading retail and consumer services companies. Vertis delivers marketing programs that create strategic value for clients by using proprietary customer research, database targeting technologies, premedia and media services, combined with its world-class printing expertise. Headquartered in Baltimore with over 100 locations in the U.S., Vertis Communications has been recognized as one of Fortune magazine's "Most Admired Companies" in advertising and marketing. For more information, visit www.vertisinc.com.
This press release and conference call may contain forward-looking statements. The words "believes, "anticipates,"expects, "estimates,"plans, "intends," and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may cause these differences include fluctuations in the cost of raw materials we use, changes in the advertising, marketing and information services markets, the financial condition of our customers, actions by our competitors, changes in the legal or regulatory environment, general economic and business conditions in the U.S. and other countries, and changes in interest and foreign currency exchange rates.
Consequently, you should consider any such forward-looking statements only as our current plans, estimates, and beliefs. Even if those plans, estimates, or beliefs change because of future events or circumstances, we decline any obligation to publicly update or revise any such forward-looking statements.