Valassis Reports Earnings Growth on Lower RevenuesFebruary 22, 2010
* As announced in December 2009, we entered into an interest rate swap agreement effective Dec. 31, 2010 fixing $300 million of the variable rate debt under our senior secured credit facility at an effective rate of 3.76% per annum (compared to the current effective swap rate of 6.78% which expires on Dec. 31, 2010). The notional amount of $300 million amortizes by $40 million per quarter through June 30, 2012.
* As of Dec. 31, 2009 our debt covenant cushions were 48.7% for our senior secured leverage covenant and 41.1% for our interest coverage covenant. As previously stated, the full $500 million in settlement proceeds will be included in consolidated EBITDA under our senior secured credit facility for the calculation of debt covenants in 2010.
• Interest Expense: Cash interest expense for the quarter was $19.3 million compared to $22.8 million for the prior year quarter, a decrease of 15.4%.
• Settlement Agreement with News America: On Feb. 4, 2010, we entered into a settlement agreement with News America Marketing dismissing all outstanding litigation and releasing all related existing and potential claims against each other as of the date of the agreement. As part of the settlement, on Feb. 4, 2010, we received a cash payment of $500 million, and we entered into a 10-year shared mail distribution agreement which provides for the sale by Valassis of shared mail services to News America on specified terms. In connection with the settlement, we are working with the Court, under the Honorable Judge Arthur J. Tarnow, on a set of procedures to handle future disputes among the parties with respect to conduct at issue in the litigation. The precise timing and format of the relief rests with the Court.
(1) Effective Jan. 1, 2009, we adopted the requirements of Financial Accounting Standards Board Accounting Standards Codification 470-20, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)", (ASC 470-20) which requires retrospective application. This adoption of ASC 470-20 had no effect on the current period. Previously reported net earnings and EPS for the year ended Dec. 31, 2008 have been reduced by $2.2 million and $0.05, respectively, as the result of recognizing incremental non-cash interest expense of $3.3 million during that period. In May 2008, we repurchased approximately 99.95% of our convertible debt.
We expect value-oriented media to maintain a positive position as more consumers adopt a savings-oriented lifestyle. We reiterate 2010 guidance of approximately $280 million in adjusted EBITDA*, $2.48 in diluted cash EPS*, and $25 million in capital expenditures. When we announce first-quarter 2010 earnings, we expect to update 2010 annual guidance for diluted cash EPS* based on how the aforementioned settlement proceeds are deployed.
Business Segment Discussion
• Shared Mail: Revenue for the fourth quarter of 2009 was $335.1 million, flat compared to the prior year quarter. Segment profit for the quarter was $38.4 million, up 68.4% compared to the prior year quarter. Full-year 2009 segment revenue was $1,279.1 million, down 6.7% from full-year 2008. Full-year 2009 segment profit was $110.2 million, up 22.8% from full-year 2008. The increase in segment profit for the fourth quarter and the full-year 2009 is due to effective cost management, including package optimization efforts, newspaper alliances and SG&A reductions.
• Neighborhood Targeted Products: Revenue for the fourth quarter of 2009 was $141.1 million, down 8.3% compared to the prior year quarter. Newspaper Inserts revenue remained strong and was up 25% for the quarter as a result of our cross-selling efforts. Run-of-Press revenue was down related to reduced client ad spend within the financial vertical. Segment profit for the quarter was $12.1 million, up 10.0% compared to the prior year quarter. Full-year 2009 segment revenue was $444.7 million, down 5.2% from full-year 2008. Full-year 2009 segment profit was $36.3 million, down 6.4% from full-year 2008 due primarily to the decline in revenue.
• Free-standing Inserts (FSI): Revenue for the fourth quarter of 2009 was $83.2 million, down 9.1% compared to the prior year quarter. This was due to continued pricing declines and one less custom co-op program during the quarter. Segment profit for the quarter was $3.6 million, up 80% compared to the prior year quarter primarily due to an increase of 3.2% in industry volume and reduced costs. Full-year 2009 segment revenue was $361.4 million, down 2.4% from full-year 2008. Full-year 2009 segment profit was $11.5 million, up 538.9% from full-year 2008. Industry units were up 3.9% for full-year 2009, as a result of marketers' continued response to consumer demand for value-oriented media.
• International, Digital Media & Services: Revenue for the fourth quarter was $45.6 million, up 3.9% compared to the prior year quarter. Excluding revenue from previously announced divested and discontinued operations of $2.1 million in the prior year quarter, revenue was up 9.1%. Segment profit for the quarter was $7.8 million, up 105.3% compared to the prior year quarter due primarily to record increases in U.S. coupon clearing volume. According to NCH Marketing Services, Inc. (our coupon-processing and analytics subsidiary), 2009 consumer packaged goods coupon distribution was up 11% and coupon redemption was up 23% compared to the prior year. Full-year 2009 segment revenue was $159.0 million, down 7.4% from full-year 2008. Excluding $23.7 million of 2008 revenue from discontinued businesses, full-year 2009 revenue was up 7.4% compared to full-year 2008. Segment profit for full-year 2009 was $25.0 million compared to $0.6 million in full-year 2008, which included restructuring charges of $2.5 million.
Conference Call Information
We will hold an investor call today to discuss our fourth quarter and year-end 2009 results at 11 a.m. (ET). The call-in number is (877) 941-8609 (please reference conference #4195229). The call will be simulcast on our Web site at http://www.valassis.com/ and a telephonic replay of the call will be available through March 8, 2010 at (800) 406-7325, pass code 4195229. This earnings release and the webcast will be archived on our Web site 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, depreciation, amortization, stock-based compensation expense, non-recurring restructuring and severance costs and any cash proceeds received as a result of the News America settlement. We define diluted cash EPS as net earnings plus depreciation, amortization and stock-based compensation expense, less capital expenditures and any cash proceeds received as a result of the News America settlement, divided by weighted shares outstanding.
Adjusted EBITDA 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 adjusted EBITDA and diluted cash EPS may be useful in assessing our operating performance and our ability to meet our debt service requirements. In addition, adjusted EBITDA is 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 diluted cash EPS, as defined above, provides 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 does 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 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.
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 interactive offering — redplum.com — consumers will 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(R) 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/ or http://www.redplum.com/.