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Valassis Reports Revenues of $248.9 Million in the Q3

Friday, October 27, 2006

Press release from the issuing company

LIVONIA, Mich., Oct. 26 -- Valassis, the leading company in marketing services and Connective Media, today announced financial results for the third quarter ended Sept. 30, 2006. The company reported quarterly revenues of $248.9 million, down 6.5% from the third quarter of 2005. Third-quarter net earnings were $6.6 million, or $0.14 in earnings per share (EPS). Earnings prior to $10.1 million (net of tax) in charges related to the proposed acquisition of ADVO and the subsequent lawsuit to rescind the agreement and $2.3 million (net of tax) of non-recurring charges taken in the third quarter were $19.0 million, or $0.40 in EPS. "While we have made important progress in some areas of our business, year-to-date, our 2006 performance has fallen short of expectations," said Alan F. Schultz, Valassis Chairman, President and CEO. "Clearly, the free- standing insert (FSI) industry continues to be very price competitive, and in fact, the revenue and profit decline in this segment of our business in Q3 is entirely attributable to pricing. This competitive pricing environment will also negatively impact 2007 FSI revenue and profitability. "Accordingly, we have refocused our efforts on our Strategic Growth Initiative, which has been geared toward attaining sustainable growth and the enhancement of shareholder value. We are confident in and committed to this plan for growth, which addresses four key strategies designed to: grow and diversify our revenue base; restore and enhance profit margins across all business units; leverage data, technology and analytics to enhance our competitive advantage; and enrich and evolve our strong traditions and culture," Schultz added. (1) During the third quarter of 2006, the following charges related to the proposed acquisition of ADVO and the subsequent lawsuit to rescind the merger agreement were incurred: $8.2 million, net of tax, related to the termination of a swap contract and the premium on a swaption contract both entered into in contemplation of the financing of the proposed ADVO transaction pursuant to a merger agreement which Valassis is now seeking to rescind; and $1.9 million, net of tax, in legal and professional costs related to the proposed ADVO transaction and subsequent lawsuit to rescind. (2) Costs related to the close-down of both the French agency business and the eSettlement business unit of NCH. (3) Excludes the pro-forma effect of stock option expense; including this expense, earnings for the three months ended Sept. 30, 2005 would have been $18.9 million and EPS would have been $0.38, while earnings for the nine months ended Sept. 30, 2005 would have been $69.1 million and EPS would have been $1.36. (4) EPS, prior to ADVO transaction-related costs and non-recurring items, is considered by management to be a more comparable measure of the company's performance versus prior years and is consistent with the information used to develop the earnings guidance shared with investors. -- SG&A expense for the third quarter of 2006 includes $6.4 million in costs related to the close-down of both the French agency business and the eSettlement business unit of NCH and expenses related to the proposed ADVO acquisition and subsequent efforts to rescind the merger agreement. Without these charges, SG&A expense was down 3.9% to $32.2 million compared to the third quarter of 2005 due to reductions in headcount and incentive compensation expenses, partially offset by the inclusion of $1.4 million in stock option expense in accordance with FAS123R. -- Cash and auction-rate securities at the end of the quarter were $167.5 million. -- The company's debt position, net of cash and auction-rate securities, was $92.4 million at quarter-end. -- On Oct. 2, 2006 Valassis paid a cash settlement in the amount of $11.3 million in connection with the termination of a $400 million interest-rate swap contract. In addition, Valassis did not exercise its $400 million interest-rate swaption contract which expired Sept. 28, 2006 for which it paid a premium of approximately $1.0 million. Both of these contracts were entered into as a bridge hedge for a portion of the acquisition financing related to the proposed ADVO transaction pursuant to a merger agreement which Valassis is now seeking to rescind. These charges have been included in interest expense during the quarter ended Sept. 30, 2006. In addition, on Sept. 28, 2006, the company replaced its bridge hedge by entering into a new $400 million swaption contract. The premium paid for the new swaption was approximately $2.1 million, representing the maximum cost to be recognized as interest expense as the swaption is marked to market over the reporting period through Feb. 28, 2007. For further details, refer to the Form 8-K filed by Valassis with the Securities and Exchange Commission on Oct. 5, 2006. -- Capital expenditures through the first nine months of 2006 were $8.4 million in comparison to $22.0 million for the first nine months of 2005. The company expects capital expenditures to be substantially less than the $20 million level originally forecasted for 2006. Business Segment Discussion -- Market Delivered Free-standing Insert (FSI): Co-op FSI revenues for the third quarter were $105.9 million, down 7.1% from the third quarter of 2005. This decrease was due to a reduction in FSI pricing compared to the third quarter of 2005. As expected, Valassis' FSI market share during the third quarter of 2006 was up modestly versus the first half of 2006. Management noted that FSI cost of goods sold was down by approximately 3% for the quarter on a cost per thousand (CPM) basis due to reductions in media insertion rates and the cost of paper. -- Market Delivered Run of Press (ROP): ROP revenues, generated from the brokering of advertising space on behalf of newspapers, were down 17.4% in the third quarter to $24.6 million due to a change in mix to more fee-based business versus margin-based business. While ROP revenues were down, the company earned $4.4 million in profit for ROP for the quarter, an increase of 104.4% over the third quarter of 2005. -- Neighborhood Targeted Products (Cluster Targeted): Neighborhood Targeted product revenues decreased 10.0% for the quarter to $79.0 million. This segment continued to be impacted by a pullback in spending due to industry consolidations in the telecommunications and appliance manufacturing industries, and the reduction in spending of a specialty retail customer. As expected, the company had a strong quarter in the sampling business. -- Household Targeted Products (1 to 1): Household Targeted product revenues were flat for the third quarter at $12.6 million, as a result of securing new business to offset the loss of revenue associated with the discontinuance of PreVision's agency business. The Household Targeted product segment continued to be profitable. -- International & Services: International & Services revenues are comprised of NCH Marketing Services, Valassis Canada and Promotion Watch. International & Services reported revenues of $26.8 million for the third quarter, up 22.4%, driven by increased revenue from the French media business and Valassis Canada. During the quarter, the company recognized a $1.7 million non-recurring charge, net of tax, related to the close-down of the French agency business as it continues to transition to a media-based business model. The company also closed down the eSettlement unit of NCH with an associated $0.6 million non-recurring charge, net of tax. Outlook "Regarding our current 2006 EPS guidance range of $1.60 to $1.80 per share, we still have some selling time left in the year and some hard work to do to get to the low end of this range, excluding transaction costs and other, one-time charges," said Schultz. "Additionally, several factors, including the pending outcome of the ADVO litigation and continuing negotiations of the remaining FSI business to be contracted for 2007, suggest that now is not the best time to provide 2007 EPS guidance. At the same time, we believe existing contracts and those currently in negotiation are expected to lead to a pricing decline next year, similar to the one experienced in 2006, which is approximately 10 percent," Schultz concluded.

 

 

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