By Trevor Shackelford November 17, 2006 -- Valassis (NYSE: VCI) announced financial results for the third quarter recently. The company reported quarterly revenues of $248.9 million, down 6.5%, from $266.1 million reported in the third quarter of 2005. Third quarter net earnings were $6.6 million, or $0.14 in earnings per share (EPS). Earnings were $19.0 million, or $0.40 EPS, prior to $12.4 in charges and ADVO transaction-related costs. After these charges, diluted EPS was $0.14 per share on $6.6 million in net earnings, compared to EPS of $0.42 and net earnings of $21.3 million last year. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • 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. • 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. • 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. • Earnings from operations in the third quarter were $23.0 million, down 31.1%, from $33.5 million in the third quarter a year ago. • Valassis was also recognized for its outstanding achievement in print with two Silver and seven Pewter Gold Ink Awards. The Gold Ink competition is North America's most prestigious print competition and is co-sponsored by Printing Impressions and Publishing Executive magazines. Nearly 1,500 printed pieces across 50 categories were entered in this year's competition. Winning entries exhibited superior color quality, technical difficulty and overall visual effect. Segment Performance Market Delivered Free-standing Insert (FSI) Segment 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) Segment 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) Segment Neighborhood targeted products 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 Segment 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 Segment 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. Guidance Alan F. Schultz, chairman, president and CEO, said, "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." Raine Radar FSI pricing has not recovered as Valassis had hoped. Pricing continues to languish, and therefore so do earnings. The company had a tough quarter, well short of expectations, but the company has a plan for improvement. It remains to be seen if this plan of diversifying revenue streams and enhancing profit margins (conceivably through cost control measures) will lead to real results for the company, but without a strong recovery to FSI pricing, the company will need something else to generate positive momentum. Q & A 1. The company said they did see some operating leverage in the sampling area. This was mainly due to an increase in business. 2. The company says to expect revenues to be down again in the fourth quarter because it looks like they are seeing a trend that revenues are more e-based than margin-based. 3. Valassis announced that it has been chosen by the Michigan Business & Professional Association as one of "Metropolitan Detroit's 101 Best and Brightest Companies to Work For." Sponsored by the largest small business trade association in Michigan, the award honors companies in southeastern Michigan that acknowledge employees as their greatest asset. 4. The company firmly believes that producing their own print is far superior to outsourcing print. The benefits include a lower cost of paper and higher quality of paper. Valassis will continue to use their own equipment for printing and only outsource print need when absolutely necessary. 5. Schultz said that they have lowered prices in some aspects of the business and they have gained numerous customers because of this. 6. In looking at restoring margin in the FSI business, there are no “big gaps” with respect to which customers get special or lowered pricing, according to Valassis. Pricing is based on the category and competition within the category for each new customer.