Valassis Reports Net Earnings Increase, Revenue Decline
LIVONIA, MI—Oct. 29, 2009—Valassis (NYSE: VCI) today announced financial results for the third quarter ended Sept. 30, 2009. It reported quarterly revenue of $544.1 million, a decrease of 3.5% from $563.7 million for the prior year quarter. The quarterly revenue decline would have been 2.8% excluding revenue of $3.8 million from divested and discontinued businesses in the prior year quarter.
Third-quarter net earnings was $13.8 million compared to a loss of $5.2 million for the prior year quarter. Earnings per share (EPS) for the quarter was $0.28 compared to a loss of $0.11 for the prior year quarter. Net earnings for the quarter includes non-cash interest expense of $2.8 million ($1.7 million net of taxes), or $0.04 per share, related to the fair value of the interest rate swap contracts. For the third quarter of 2009, adjusted EBITDA* was $63.9 million, an increase of 82.0% compared to $35.1 million for the prior year quarter.
"We continue to outperform most media companies and are beginning to see signs of revenue stability," said Alan F. Schultz, Valassis Chairman, President and Chief Executive Officer. "Evidenced by a growing body of research, there is a permanent change in the mindset of today's shopper. We believe this deal-seeking lifestyle is a long-term phenomenon which favors our value-oriented media."
Some additional highlights include:
Cost Management: Our cost management plan continues to be on track for 2009. Third-quarter 2009 selling, general and administrative (SG&A) costs were $90.7 million, which includes $2.5 million (an $0.8 million increase) in legal costs related to the News America lawsuits and a $3.9 million increase in incentive-based compensation, including option expense, compared to prior year quarter SG&A costs of $93.9 million.
Capital Expenditures: Capital expenditures for the third quarter of 2009 were $4.9 million, and we expect full-year 2009 expenditures of approximately $20 million.
Liquidity: Third-quarter 2009 cash flows from operating activities was $14.0 million with a decrease in debt of $40.9 million. Year to date, we have paid down $150.1 million in debt. As of Sept. 30, 2009, our net debt position was $941.6 million. During the quarter, we completed four "modified Dutch" auctions in which we repurchased and retired $39.3 million of our outstanding term loan B and delayed draw term loans under our senior secured credit facility at an average discount of 2.6% to par resulting in an after-tax net gain of $0.4 million.
Interest Expense: Cash interest expense for the quarter was $19.3 million compared to $23.0 million for the prior year quarter, a decrease of 16.1%. Total interest expense for the third quarter decreased by $0.8 million from the prior year quarter and includes $2.8 million of non-cash interest expense related to the fair value of the interest rate swap contracts.
News America Lawsuits: As announced on July 23, 2009, a Wayne County Circuit Court jury awarded Valassis $300 million for compensatory damages in the first of three lawsuits against News America Incorporated ("News America"). This award accumulates interest on a compounding basis beginning March 9, 2007. Our Federal trial against News America is scheduled for Feb. 2, 2010 in the U.S. District Court, Eastern District of Michigan.
Settlement of (ADVO) Shareholder Lawsuit: On Oct. 28, 2009, the parties to the securities class action Kelleher v. ADVO, Inc. et al. entered into an agreement providing for the settlement of the action and filed papers seeking preliminary approval of the settlement agreement in the U.S. District Court for the District of Connecticut. The settlement is subject to approval by the court, and the settlement amount of $12.5 million will be paid from the proceeds of ADVO's directors and officers' insurance policy, with no adverse impact to our financial statements. The complaint alleged that certain former ADVO executives, who left the company at the time of the ADVO merger, made false and misleading statements concerning ADVO's business and financial results in connection with the proposed merger with Valassis.
Given our current outlook and assuming no increased volatility in marketers' ad spend, we are increasing full-year 2009 adjusted EBITDA* guidance to be between $255 million and $265 million from $245 million. We expect to provide full-year 2010 guidance in December 2009.
"We are once again raising guidance as our employees' continued cost management and optimization efforts have exceeded our expectations," said Robert L. Recchia, Valassis Executive Vice President and Chief Financial Officer. "As we begin to see signs of revenue stabilizing, we believe that our cost structure positions us well for earnings growth as we enter 2010."
Business Segment Discussion
Shared Mail: Revenue for the third quarter of 2009 was $319.5 million, down 2.3% compared to the prior year quarter primarily resulting from a reduction in unprofitable packages. Segment profit for the quarter was $29.6 million, up 124.2% compared to the prior year quarter due to effective cost management, including package optimization efforts, newspaper alliances and SG&A reductions.
Neighborhood Targeted Products: Revenue for the third quarter of 2009 was $92.0 million, down 14.0% compared to the prior year quarter revenue of $107.0 million. Preprints revenue remained strong and was up 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 wireless and financial verticals. Revenue in Sampling was down due to its cyclical nature. Segment profit for the quarter was $3.9 million, down 22.0% compared to $5.0 million for the prior year quarter. The decline in segment profit for the quarter was due primarily to the decline in revenue.
Free-standing Inserts (FSI): Revenue for the third quarter of 2009 was $92.6 million, up 1.3% compared to the prior year quarter. This was due to an industry unit volume increase of approximately 3.4% as the FSI continues to be an important medium for marketers who need to reach deal-seeking consumers. Segment profit for the quarter was $2.3 million, compared to $0.2 million in the prior year quarter due to increased unit volume and reduced costs. Management noted that our profit improvement in the FSI segment is primarily due to our cost management efforts. At the same time, the FSI business remains dramatically depressed from historical levels due to the unfair tying, bundling and leveraging of in-store products into FSI negotiations by our competitor, News America, as the jury unanimously found in our recent lawsuit against News America.
International, Digital Media & Services: Revenue for the third quarter was $40.0 million, up 4.4% compared to the prior year quarter. Excluding revenue from previously announced divested and discontinued operations of $3.8 million and a $0.9 million impact of currency fluctuations, revenue was up 18.6% compared to the prior year quarter. Segment profit for the quarter was $6.9 million compared to a loss of $4.0 million in the prior year quarter due primarily to the increase in U.S. coupon clearing volume and the discontinuance of underperforming businesses. According to NCH Marketing Services, Inc. (our coupon-processing and analytics subsidiary), year-to-date reports show consumer packaged goods coupon distribution up 11% and coupon redemption up 23% compared to the same period last year.
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® 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.