UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 2002
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-10991
VALASSIS COMMUNICATIONS, INC.
(Exact Name of Registrant
as Specified in its Charter)
Delaware 38-2760940
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
19975 Victor Parkway
Livonia, Michigan 48152
(address of principal executive offices)
Registrant's Telephone Number: (734) 591-3000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
As of November 11, 2002, there were 52,582,850 shares of the Registrant's Common
Stock outstanding.
Part I - Financial Information
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 66,552 $ 10,615
Accounts receivable (less allowance for doubtful
accounts of $2,004 at September 30, 2002 and
$1,051 at December 31, 2001) 139,715 131,777
Inventories:
Raw materials 10,763 13,965
Work in progress 7,743 13,935
Prepaid expenses and other 6,128 7,499
Deferred income taxes 1,479 1,479
Refundable income taxes 4,277
--------- ---------
Total current assets 232,380 183,547
--------- ---------
Property, plant and equipment, at cost:
Land and buildings 27,968 22,960
Machinery and equipment 118,934 120,548
Office furniture and equipment 40,680 31,674
Automobiles 1,167 900
Leasehold improvements 1,996 1,954
--------- ---------
190,745 178,036
Less accumulated depreciation and amortization (118,124) (113,967)
--------- ---------
Net property, plant and equipment 72,621 64,069
--------- ---------
Intangible assets:
Goodwill 152,411 115,756
Other intangibles 84,555 85,347
--------- ---------
236,966 201,103
Less accumulated amortization (123,565) (123,408)
--------- ---------
Net intangible assets 113,401 77,695
--------- ---------
Equity investments and advances to investees 7,781 33,955
Other assets 2,713 3,759
--------- ---------
Total assets $ 428,896 $ 363,025
========= =========
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion long-term debt $ -- $ 2,600
Accounts payable 90,004 82,750
Accrued interest 1,441 3,105
Accrued expenses 32,251 32,846
Progress billings 45,660 51,766
Income taxes payable 4,612 --
--------- ---------
Total current liabilities 173,968 173,067
--------- ---------
Long-term debt 256,106 252,383
Deferred income taxes 3,259 3,259
Commitments and contingencies
Stockholders' deficit:
Preferred stock of $.01 par value. Authorized 25,000,000 shares; no shares
issued or outstanding at September 30, 2002 and December 31, 2001
Common stock of $.01 par value. Authorized 100,000,000 shares; issued
63,013,430 at September 30, 2002 and 62,992,763 at December 31, 2001;
outstanding 52,814,196 at September 30, 2002 and 53,698,382 at
December 31, 2001 630 630
Additional paid-in capital 33,807 24,502
Deferred compensation (1,115) (1,342)
Retained earnings 290,923 191,822
Foreign currency translations (522) (560)
Treasury stock, at cost (10,199,234 shares at September 30, 2002 and
9,294,381 shares at December 31, 2001) (328,160) (280,736)
--------- ---------
Total stockholders' deficit (4,437) (65,684)
--------- ---------
Total liabilities and stockholders' deficit $ 428,896 $ 363,025
========= =========
See accompanying notes to condensed consolidated financial statements.
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
Quarter Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Net sales $ 214,224 $ 197,360 $ 620,565 $ 642,282
Other 65 1,048 1,834 1,213
----------- ----------- ----------- -----------
Total revenues 214,289 198,408 622,399 643,495
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold 135,113 127,578 386,516 406,483
Selling, general and administrative 24,679 21,018 69,145 67,746
Loss on investments -- 1,623 1,709 2,935
Writedown of impaired assets -- 6,062 -- 6,062
Amortization of intangible assets 52 860 157 2,574
Interest 3,403 3,739 9,971 14,271
----------- ----------- ----------- -----------
Total costs and expenses 163,247 160,880 467,498 500,071
----------- ----------- ----------- -----------
Earnings before income taxes 51,042 37,528 154,901 143,424
Income taxes 18,300 12,817 55,800 52,517
----------- ----------- ----------- -----------
Net earnings before extraordinary items 32,742 24,711 99,101 90,907
Extraordinary loss, net of tax -- (1,285) -- (1,285)
----------- ----------- ----------- -----------
Net earnings $ 32,742 $ 23,426 $ 99,101 $ 89,622
=========== =========== =========== ===========
Net earnings per common share before
extraordinary loss, basic $ 0.62 $ 0.46 $ 1.85 $ 1.70
=========== =========== =========== ===========
Net earnings per common share before
extraordinary loss, diluted $ 0.61 $ 0.45 $ 1.83 $ 1.67
=========== =========== =========== ===========
Net earnings per common share, basic $ 0.62 $ 0.44 $ 1.85 $ 1.67
=========== =========== =========== ===========
Net earnings per common share, diluted $ 0.61 $ 0.43 $ 1.83 $ 1.65
=========== =========== =========== ===========
Shares used in computing net earnings per
share, basic 53,118,782 53,791,838 53,442,166 53,583,513
=========== =========== =========== ===========
Shares used in computing net earnings per
share, diluted 53,655,548 54,590,276 54,094,917 54,479,891
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended
---------------------
Sept. 30, Sept. 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net earnings $ 99,101 $ 89,622
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of intangibles 8,130 9,991
Amortization of bond discount 3,473 1,523
Writedown of impaired assets -- 6,062
Provision for losses on accounts receivable 1,285 211
Gain on sale of property, plant and equipment (724) (225)
Losses on equity investments 1,709 2,935
Stock-based compensation charge 1,336 1,845
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable (7,440) (4,922)
Inventories 9,394 (924)
Prepaid expenses and other (2,178) 3,303
Other liabilities -- (1,681)
Other assets 3,852 (1,817)
Accounts payable 7,168 (20,786)
Accrued expenses and interest 2,991 (11,913)
Income taxes 13,936 18,254
Progress billings (6,106) 1,406
-------- ---------
Total adjustments 36,826 3,262
-------- ---------
Net cash provided by operating activities 135,927 92,884
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (13,310) (13,570)
Proceeds from sale of property, plant and equipment 968 1,238
Investments in and advances to affiliated companies (9,623) (23,525)
Acquisition of remaining interest of RMG, net of cash acquired (2,905) --
Payments of additional purchase price for acquisition of PreVision (8,000) --
Other 40 (37)
-------- ---------
Net cash used in investing activities (32,830) (35,894)
-------- ---------
Cash flows from financing activities:
Repayment of long-term debt -- (14,261)
Borrowings of long-term debt -- 150,000
Net payments under revolving line of credit (2,600) (186,800)
Repurchase of common stock (69,999) (38,250)
Proceeds from the issuance of common stock 25,439 31,797
-------- ---------
Net cash used in financing activities (47,160) (57,514)
-------- ---------
Net increase/(decrease) in cash 55,937 (524)
Cash at beginning of period 10,615 11,140
-------- ---------
Cash at end of period $ 66,552 $ 10,616
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,469 $ 16,710
Cash paid during the period for income taxes $ 41,866 $ 33,860
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 1,391 $ 1,617
See accompanying notes to condensed consolidated financial statements.
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the information contained
herein reflects all adjustments necessary for a fair presentation of the
information presented. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily indicative
of results to be expected for the fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts for 2001 have been reclassified to conform to current period
classifications.
2. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires an entity to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the related long-lived asset. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
does not expect the adoption of SFAS No. 143 to have a material effect on its
financial position or results of operations.
During August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121 and
provisions of APB Opinion No. 30 for the disposal of segments of a business. The
statement creates one accounting model, based on the framework established in
Statement No. 121, to be applied to all long-lived assets including discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted the provisions of SFAS No. 144 as of January 1,
2002, and it did not have an effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement applies to costs
associated with an exit activity that does not involve an entity newly acquired
in a business combination or with a disposal activity covered by SFAS No. 144.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to
have a material effect on its financial position or results of operations.
3. Adoption of SFAS No. 141 and 142
During June 2001, the FASB issued two statements, SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", that
amend APB Opinion No. 16, "Business Combinations," and supersede APB Opinion No.
17, "Intangible Assets." The two statements modify the method of accounting for
business combinations and address the accounting for intangible assets. As of
January 1, 2002, the Company adopted the provisions of both SFAS No. 141 and
SFAS No. 142. The adoption of SFAS No. 141 did not have any effect on the
Company's financial statements.
The provisions of SFAS No. 142 allow the Company to cease amortization of
goodwill and other intangible assets with indefinite lives. However, goodwill
and other intangibles are subject to annual impairment tests in which impairment
is defined as fair market value less than the carrying value of the asset on the
financial statements. SFAS No. 142 requires the Company to test all goodwill and
other intangible assets with indefinite lives for impairment within six months
of implementation. The Company has performed the first step of testing for
impairment by utilizing the discounted cash flow method which does not indicate
any impairment of goodwill or intangible assets with indefinite lives. We are
currently investigating a possible indicator of impairment of goodwill within
our Customer Relationship Marketing segment.
On July 1, 2002, the Company exercised its option to acquire the remaining
shares of Relationship Marketing Group, Inc. ("RMG") for $4.5 million. As a
result, the Company's interest in Valassis Relationship Marketing Systems, LLC
("VRMS") was increased to 87.96%. Effective July 1, 2002, the Company's
consolidated financials include the financials of VRMS. An additional
reclassification was made on the Company's balance sheet for $31.1 million from
"Equity Investments and Advances to Investees" to "Goodwill" for previous
investments. The Company is in the process of completing its purchase accounting
and conducting further analysis of the associated goodwill.
Intangible assets as of September 30, 2002 are comprised of (dollars in
thousands):
Accumulated Unamortized Weighted
Intangible Amortization Balance at Average
Assets, at at Sept. 30, Sept. 30, Useful Life
Cost 2002 2002 (in years)
---------- ------------ ----------- -----------
Amortizable intangible assets $ 52,455 $ (50,762) $ 1,693 11.9
Non-amortizable intangible assets:
Goodwill:
FSI 65,401 (47,144) 18,257
Cluster-Targeted 4,195 (209) 3,986
All Others (includes ROP and Customer
Relationship Marketing) 82,815 (4,691) 78,124
The Valassis name and other 32,100 (20,759) 11,341
-------- --------- --------
Total non-amortizable intangible assets 184,511 (72,803) 111,708
-------- --------- --------
Total $236,966 $(123,565) $113,401
======== ========= ========
Amortizable intangible assets include a non-compete agreement, corporate logos
and a fully amortized pressroom operating system. The associated amortization
expense for the nine months ended September 30, 2002 was approximately $157,000.
Amortization expense is expected to be approximately $210,000 for each of the
next five succeeding years including the current year.
The following table presents actual results of operations for the third quarter
2002 and nine months ended September 30, 2002 and a reconciliation of reported
net income to the adjusted net income for the same periods of 2001:
Quarter ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net earnings:
Reported net earnings $32,742 $23,426 $99,101 $89,622
Add back: goodwill and
intangible amortization, after tax -- 566 -- 1,572
------- ------- ------- -------
$32,742 $23,992 $99,101 $91,194
======= ======= ======= =======
Basic earnings per share:
Reported net income $ 0.62 $ 0.44 $ 1.85 $ 1.67
Add back: goodwill and
intangible amortization -- 0.01 -- 0.03
------- ------- ------- -------
$ 0.62 $ 0.45 $ 1.85 $ 1.70
======= ======= ======= =======
Diluted earnings per share:
Reported net income $ 0.61 $ 0.43 $ 1.83 $ 1.65
Add back: goodwill and
intangible amortization -- 0.01 -- 0.03
------- ------- ------- -------
$ 0.61 $ 0.44 $ 1.83 $ 1.68
======= ======= ======= =======
4. Contingencies
On July 27, 2001 a federal court jury returned a verdict against Dennis D.
Garberg & Associates, Inc. d/b/a The Sunflower Group (Sunflower) awarding the
Company $16.6 million which included damages for past and future lost profits.
The lawsuit, brought by the Company against Sunflower in February of 1999,
asserted that Sunflower wrongfully obtained proprietary information from the
Company's newspaper delivered sampling business. On April 5, 2002, after a
series of post-trial motions, the Court granted remittitur and entered a total
judgment of approximately $5.4 million. On August 30, 2002, the Court vacated
its judgment after remittitur and ordered a new trial on damages. A reasonable
estimation of the Company's ultimate recovery can not be made at this time and
the Company has not recorded any amount in its financial statements.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
5. Segment Reporting
The Company's products are broken into three types, as follows:
1. Mass-Distributed Products - products which provide mass reach at low
cost, including:
- Free-standing inserts (FSI) - four color booklets containing
promotions from multiple advertisers distributed through Sunday
newspapers
- Run-of-press (ROP) - on-page newspaper advertising and promotions
2. Cluster-Targeted Products - products targeted around geographic and
demographic clusters, including:
- Solo newspaper inserts
- Newspaper-delivered product sampling/advertising
3. One-to-One Products - products and services that pinpoint individuals
to build loyalty to a brand, including:
- Customer Relationship Marketing (which includes PreVision and
VRMS)
- Promotion Watch - security consulting
- Non-consolidated investments in one-to-one promotion companies
The Company has two reportable segments, Free-Standing Inserts (FSIs) and
Cluster-Targeted Products and three segments which do not meet the quantitative
thresholds for reporting separately -- ROP, Customer Relationship Marketing and
Promotion Watch. These segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies and caters to a different
customer base.
(in millions) Three Months Ended September 30
------------- ----------------------------------------
Cluster-
FSI Targeted All Others* Total
------ -------- ----------- ------
2002
----
Revenues from external customers $146.0 $43.7 $24.5 $214.2
Intersegment revenues -- -- -- --
Depreciation/amortization 2.2 0.5 0.1 2.8
Segment profit/(loss) $ 47.0 $ 4.1 $(0.1) $ 51.0
2001
----
Revenues from external customers $141.0 $37.3 $19.1 $197.4
Intersegment revenues -- -- -- --
Depreciation/amortization 2.4 0.5 0.5 3.4
Segment profit/(loss) $ 39.7 $ 3.0 $(6.2) $ 36.5
* Segments below the quantitative thresholds are primarily attributable to
three segments of the Company. Those include customer relationship
marketing businesses, a run-of-press business, and a promotion security
service. None of these segments has met any of the quantitative thresholds
for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
Three Months Ended September 30,
--------------------------------
2002 2001
----- -----
Profit for reportable segments $50.7 $42.7
Profit/(loss) for other segments 0.3 (6.2)
Unallocated amounts:
Interest income -- 1.0
Other income
----- -----
Earnings before taxes $51.0 $37.5
===== =====
Domestic and foreign revenues for each of the three-month periods ended
September 30 were as follows:
2002 2001
------ ------
United States $213.1 $197.4
Canada 1.2 1.0
------ ------
Total $214.3 $198.4
====== ======
(in millions) Nine Months Ended September 30
------------- ----------------------------------------
Cluster-
FSI Targeted All Others* Total
------ -------- ----------- ------
2002
----
Revenues from external customers $435.6 $126.6 $58.4 $620.6
Intersegment revenues -- -- -- --
Depreciation/amortization 6.4 1.5 0.2 8.1
Segment profit $138.8 $ 12.0 $ 2.3 $153.1
2001
----
Revenues from external customers $447.4 $143.7 $51.3 $642.4
Intersegment revenues -- -- -- --
Depreciation/amortization 7.0 1.5 1.5 10.0
Segment profit/(loss) $132.1 $ 16.5 $(6.4) $142.2
* Segments below the quantitative thresholds are primarily attributable to
three segments of the Company. Those include customer relationship
marketing businesses, a run-of-press business, and a promotion security
service. None of these segments has met any of the quantitative thresholds
for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
Nine Months Ended September 30,
-------------------------------
2002 2001
------ ------
Profit for reportable segments $150.8 $148.6
Profit/(loss) for other segments 2.3 (6.4)
Unallocated amounts:
Interest income 0.3 0.1
Other income 1.5 1.1
------ ------
Earnings before taxes $154.9 $143.4
====== ======
Domestic and foreign revenues for each of the nine-month periods ended September
30 were as follows:
2002 2001
------ ------
United States $618.5 $639.6
Canada 3.9 3.9
------ ------
Total $622.4 $643.5
====== ======
6. Earnings Per Share
Earnings per common share ("EPS") data were computed as follows:
Three Months
Ended September 30,
-------------------
2002 2001
------- -------
Net Earnings $32,742 $23,426
======= =======
Basic EPS:
Weighted average common shares outstanding 53,119 53,792
======= =======
Earnings per common share - basic
Before extraordinary item $ 0.62 $ 0.46
Extraordinary item $ 0.00 (0.02)
------- -------
Total $ 0.62 $ 0.44
======= =======
Diluted EPS:
Weighted average common shares outstanding 53,119 53,792
Weighted average shares purchased on exercise
of dilutive options 4,537 4,166
Shares purchased with proceeds of options (4,058) (3,418)
Shares contingently issuable 58 50
------- -------
Shares applicable to diluted earnings 53,656 54,590
======= =======
Earnings per common share - diluted
Before extraordinary item $ 0.61 $ 0.45
Extraordinary item -- (0.02)
------- -------
Total $ 0.61 $ 0.43
======= =======
Nine Months
Ended September 30,
-------------------
2002 2001
------- -------
Net Earnings $99,101 $89,622
======= =======
Basic EPS:
Weighted average common shares outstanding 53,442 53,584
======= =======
Earnings per common share - basic
Before extraordinary item $ 1.85 $ 1.70
Extraordinary item (0.03)
------- -------
Total $ 1.85 $ 1.67
======= =======
Diluted EPS:
Weighted average common shares outstanding 53,442 53,584
Weighted average shares purchased on exercise
of dilutive options 5,350 4,480
Shares purchased with proceeds of options (4,755) (3,634)
Shares contingently issuable 58 50
------- -------
Shares applicable to diluted earnings 54,095 54,480
======= =======
Earnings per common share - diluted
Before extraordinary item $ 1.83 $ 1.67
Extraordinary item -- (0.02)
------- -------
Total $ 1.83 $ 1.65
======= =======
Unexercised employee stock options to purchase 327,564 shares and 376,529 shares
of the Company's common stock as of September 30, 2002 and for the three month
and nine month periods, respectively, were not included in the computations of
diluted EPS because the options exercise prices were greater than the average
market price of the Company's common stock during the respective periods.
7. Subsequent Event
On November 1, 2002, the Company replaced its existing revolving line of credit
with a $125 million revolving credit facility pursuant to an agreement with
Standard Federal Bank, N.A., Comerica Bank, Harris Trust and Savings Bank and
Fifth Third Bank (collectively, the "Banks") with Standard Federal Bank, N.A.
acting as Agent for the Banks (the "Revolving Credit Agreement".) The Revolving
Credit Agreement matures in November 2006 and contains a provision whereby the
Company may request an increase in the line of credit to up to $175 million. The
floating-rate interest is calculated on either a Eurocurrency-based rate or a
prime rate. The Revolving Credit Agreement contains general covenants, including
without limitation, a fixed charge coverage ratio, a funded debt to EBITDA ratio
and non-financial covenants.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks and
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements and to cause future results to differ from our
operating results in the past. Such factors include, among others, the
following: a new competitor in the Company's core free-standing insert business
and consequent price war, which has occurred in the past when a new competitor
entered the market; new technology that would make free-standing inserts less
attractive; a shift in customer preference for different promotional materials,
promotional strategies or coupon delivery methods, including in-store
advertising systems and other forms of coupon delivery; an increase in the
Company's paper costs, a significant cost component of the Company's business;
or economic disruptions caused by terrorist activity, armed conflict or changes
in general economic conditions, or economic changes which affect the business of
our customers and lead to reduced sales promotion spending. The Company
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Results of Operations
Three Months Ended September 30, 2002 and September 30, 2001
Net sales increased 8.5% to $214.2 million for the third quarter of 2002 from
$197.4 million for the third quarter of 2001. Free-standing insert (FSI)
revenues were $146.0 million for the quarter ended September 30, 2002 up 3.5%
from the same quarter last year. The increase is primarily a result of industry
growth and market share compared with the year-ago period. Revenues for
cluster-targeted products increased 17.2% to $43.7 million for the quarter. The
increase is attributed to stronger sales of solo inserts while
sampling/advertising polybag sales continued to be soft due to fewer new
customer product introductions. Net sales included $13.6 million in ROP
(run-of-press) sales, representing a 44.7% increase from the third quarter of
2001. This increase is attributable to enhanced capabilities and expansion in
business with both new and existing customers.
Gross profit margin increased to 36.9% in the third quarter of 2002, up from
35.7% in the third quarter of 2001. The increase is largely due to a decrease in
paper costs for the current quarter. The Company has successfully placed the
majority of its paper requirements under multi-year contracts, providing
long-term cost stability.
Selling, general and administrative expenses increased 17.4% from $21.0 million
in the third quarter of 2001 to $24.7 million in the third quarter of 2002. This
increase is primarily the result of the consolidation of the financial results
of VRMS beginning July 1, 2002. VRMS was previously accounted for as an equity
investment. The remaining increase is primarily driven by performance based
compensation programs.
During the third quarter of 2001, the Company took a charge of $6.1 million
relating to the closedown of Save.com, its formerly 50% owned investment.
Amortization expense of intangible assets and goodwill decreased from $0.9
million to $0.1 million in the third quarter ended September 30, 2002. The
reduction is the result of the Company's adoption of SFAS No. 142 for which the
effect on earnings per share was an increase of $.01 in the three months ended
September 30, 2002.
During the third quarter of 2001, the Company retired $15.8 million in aggregate
principal amount of its 9.55% Senior Notes due 2003. In connection with this
retirement, the Company paid a premium in an amount equal to $2.0 million.
Accordingly, the Company incurred extraordinary charges of $1.3 million (net of
tax).
Earnings before extraordinary items were $32.7 million for the third quarter of
2002 versus $24.7 million for the same period last year.
Nine Months Ended September 30, 2002 and September 30, 2001
For the nine months ended September 30, 2002, net sales decreased 3.4% to $620.6
million from $642.3 million for the comparable period in 2001. Free-standing
insert (FSI) revenues were down from $447.4 million for the first nine months of
2001 to $435.6 million for the first nine months of 2002. This decrease is
primarily the result of a reduction of average price as compared to the first
nine months of 2001. Cluster-targeted revenues decreased 11.9% to $126.6 million
for the nine months ended September 30, 2002. The decrease is driven primarily
by decreases in new customer product introductions by clients which adversely
affects sampling/advertising polybag programs. Net sales included $30.1 million
in ROP (run-of-press) sales, which represents a 40.0% increase from the same
period last year. This increase is attributable to enhanced capabilities and
increased demand.
Gross margin increased to 37.9% for the first nine months of 2002, from 36.8%
for the same period in 2001. The increase is largely due to decreases in paper
costs during 2002. The Company has successfully placed the majority of its paper
requirements under multi-year contracts, providing long-term cost stability.
Selling, general and administrative expenses increased 2.1% to $69.1 million for
the nine months ended September 30, 2002 from $67.7 million during the
comparable 2001 period. This increase is primarily the result of the
consolidation of the results of VRMS as of July 1, 2002.
During the third quarter of 2001, the Company took a charge of $6.1 million
relating to the closedown of Save.com, its formerly 50% owned investment.
Amortization expense of intangible assets and goodwill decreased from $2.6
million to $.2 million for the nine months ended September 30, 2002. The
reduction is the result of the Company's adoption of SFAS No. 142 for which the
effect on earnings per share was an increase of $.03 in the nine months ended
September 30, 2002, versus the same period last year.
During the third quarter of 2001, the Company retired $15.8 million in aggregate
principal amount of its 9.55% Senior Notes due 2003. In connection with this
retirement, the Company paid a premium in an amount equal to $2.0 million.
Accordingly, the Company incurred extraordinary charges of $1.3 million (net of
tax).
Earnings before extraordinary items were $99.1 million for the nine months ended
September 30, 2002 versus $90.9 million for the same period last year.
Financial Condition, Liquidity and Sources of Capital
The Company's liquidity requirements arise mainly from its working capital
needs, primarily accounts receivable, inventory and debt service requirements.
The Company does not offer financing to its customers. FSI customers are billed
for 75% of each order eight weeks in advance of the publication date and are
billed for the balance immediately prior to the publication date. The Company
inventories its work in progress at cost while it accrues progress billings as a
current liability at full sales value. Although the Company receives
considerable payments from its customers prior to publication of promotions,
revenue is recognized only upon publication dates. Therefore, the progress
billings on the balance sheet include any profits in the related receivables and
accordingly, the Company can operate with low, or even negative, working
capital.
Cash and cash equivalents totaled $66.6 million at September 30, 2002 versus
$10.6 million at December 31, 2001. This was the result of cash provided by
operating activities of $135.9 million, and cash used in investing activities
and financing activities of $32.8 million and $47.2 million, respectively,
during the first nine months of 2002.
Cash flow provided by operating activities increased to $135.9 million for the
nine months ended September 30, 2002, primarily due to increased earnings and
also a $9.4 million decrease in inventories, as a result of a decrease in the
cost of paper. Additionally, a return to a normalized accounts payable balance
attributed to $7.2 million of operating cash flow.
Net cash used in investing activities was $32.8 million. The Company paid $8.0
million in a contingent purchase price payment for PreVision in the first
quarter of 2002. The Company made advances to and investments in VRMS of $9.6
million during the first nine months of 2002. On July 1, 2002, the Company
exercised its option to acquire the remaining shares of RMG for $4.5 million
($2.9 million, net of cash acquired).
As of September 30, 2002, the Company's debt balance is $256.1, which consists
of $100.0 million of its 6-5/8% Senior Notes due 2009 and $156.1 million of Zero
Coupon Convertible Notes due 2021. On November 1, 2002, the Company replaced its
existing revolving line of credit with a $125 million revolving credit facility
pursuant to an agreement with Standard Federal Bank, N.A., Comerica Bank, Harris
Trust and Savings Bank and Fifth Third Bank (collectively, the "Banks") with
Standard Federal Bank, N.A. acting as Agent for the Banks (the "Revolving Credit
Agreement".) The Revolving Credit Agreement matures in November 2006 and
contains a provision whereby the Company may request an increase in the line of
credit to up to $175 million.
The Company intends to use cash generated by operations to meet interest and
principal repayment obligations, for general corporate purposes, to reduce its
indebtedness, make acquisitions and from time to time to repurchase stock
through the Company's stock repurchase program.
As of September 30, 2002, the Company had authorization to repurchase an
additional 3.6 million shares of its common stock under its existing share
repurchase program.
Management believes that the Company will generate sufficient funds from
operations and will have sufficient lines of credit available to meet currently
anticipated liquidity needs, including interest and required payments of
indebtedness.
Capital Expenditures - The Company operates three printing facilities. Capital
expenditures were $13.3 million for the nine month period ended September 30,
2002, largely representing the addition of a new printing press. Management
expects future capital expenditure requirements of approximately $15 million
over each of the next three to five years to meet increased capacity needs and
to replace or rebuild equipment as required. It is expected that equipment will
be purchased using funds provided by operations.
Business Outlook for 2003
The following statements are based on current expectations. These statements are
forward looking and actual results may differ materially.
.. FSI revenues are expected to be down 12% - 16%, due primarily to a
reduction in market share and resultant slight decline in price. FSI margin
percentage is projected to be down only slightly, due to efficiencies
driven by a reduction in the 2003 published date schedule, which will
include 40 dates, versus 44 in 2002. The Company expects that it will
publish 8 custom co-ops (FSIs sponsored by a single corporation) in both
2002 and 2003. FSI circulation is expected to remain flat with 2002.
.. ROP revenues are expected to be up 10% - 15%, due to additional sales
resources that have been added and are successfully in place. ROP margin
percentages are projected to be flat.
.. Cluster targeted product revenues are expected to be up 10% - 15%, with
flat margins as a percent of revenues. Solo insert revenue is projected to
increase due to an expanded customer base. Polybag sampling/advertising is
expected to grow as a result of more new customer product introductions.
.. One-to-one revenues are expected to be up 25% - 30%. The Company expects
growth in all four of the product lines that comprise one-to-one.
.. Cost of goods sold is expected to be down by a low single-digit percentage.
The Company has placed over 85% of its FSI paper requirements for the year
under long term contracts, providing a stable cost environment for this
commodity. SG&A is expected to be up 5% - 8%, due primarily to the
consolidation of VRMS for the full year.
.. Free cash flow is projected to be between $100 million - $110 million for
the year. Capital expenditures will be approximately $15 million.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that in certain circumstances affect amounts reported in the
accompanying consolidated financial statements. The U.S. Securities and Exchange
Commission ("SEC") has defined a company's most critical accounting policies as
the ones that are most important to the portrayal of the Company's financial
condition and results of operations, and which require the company to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition, we
have identified the critical accounting policies and estimates addressed below.
We also have other key accounting policies, which involve the use of estimates,
judgments and assumptions. For additional information see Note 2, "Significant
Accounting Policies", of our Annual Report on Form 10-K for the year ended
December 31, 2001. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates.
Impairment of Long-Lived Assets - Long-lived assets historically have been
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to future net cash flows estimated to be generated by such assets. If
such assets are considered to be impaired, the impairment to be recognized is
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. We are currently investigating a possible indicator of impairment of
goodwill within our Customer Relationship Marketing segment. As described in
Note 3, "Adoption of SFAS No. 141 and 142" of this Form 10-Q, the accounting
treatment for goodwill and other intangible assets changed effective January 1,
2002.
Other Matters - The Company does not have off-balance sheet arrangements,
financings, or other relationships with unconsolidated entities or other
persons, also known as "special purpose entities."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes since December 31, 2001 in the Company's exposure
to market risk.
Item 4. Controls and Procedures
Within the 90 days prior to the filing of this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's Disclosure Committee, including the Chief
Executive Officer and Chief Financial Officer, of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
Part II - Other
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.25 Credit Agreement dated as of November 1, 2002 among Valassis
Communications, Inc. and various financial institutions and Standard
Federal Bank, N.A., as Administrative Agent and Lead Arranger with
Harris Trust and Savings Bank, as Syndication Agent and Comerica
Bank, as Documentation Agent.
99.1 Section 906 Certification from Alan F. Schultz
99.2 Section 906 Certification from Robert L. Recchia
b. Form 8-K
(1) The Company filed a report on Form 8-K, dated July 1, 2002, announcing
that it increased its ownership in VRMS to 87.96%.
(2) The Company filed a report on Form 8-K, dated August 14, 2002,
containing the certifications of the Company's officers, pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2002
Valassis Communications, Inc.
(Registrant)
By: /s/ Robert L. Recchia
----------------------------------------
Robert L. Recchia
Executive Vice President and Chief Financial
Officer
Signing on behalf of the Registrant and as
principal financial and accounting officer.
CERTIFICATION
I, Alan F. Schultz, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valassis
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Alan F. Schultz
-----------------------
Alan F. Schultz
Chief Executive Officer
CERTIFICATION
I, Robert L. Recchia, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valassis
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert L. Recchia
-----------------------
Robert L. Recchia
Chief Financial Officer