UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--------- Exchange Act of 1934
For the Quarterly Period Ended March 31, 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 Number)
Incorporation or Organization)
19975 Victor Parkway
Livonia, Michigan 48152
(address of principal executive offices)
Registrant's Telephone Number: (734) 591-3000
-----------------------------------------------
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 May 9, 2002, there were 53,262,900 shares of the Registrant's Common Stock
outstanding.
1
Part I - Financial Information
------------------------------
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
March 31, December 31,
Assets 2002 2001
------ ------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 38,353 $ 10,615
Accounts receivable (less allowance for doubtful
accounts of $1,432 at March 31, 2002 and $1,051 at
December 31, 2001) 112,101 131,777
Inventories:
Raw materials 10,660 13,965
Work in progress 9,674 13,935
Prepaid expenses and other 7,880 7,499
Deferred income taxes 1,479 1,479
Refundable income taxes 4,277
---------- ---------
Total current assets 180,147 183,547
Property, plant and equipment, at cost:
Land and buildings 27,934 22,960
Machinery and equipment 118,042 120,548
Office furniture and equipment 32,123 31,674
Automobiles 1,018 900
Leasehold improvements 1,958 1,954
---------- ---------
181,075 178,036
Less accumulated depreciation and amortization (110,190) (113,967)
---------- ---------
Net property, plant and equipment 70,885 64,069
---------- ---------
Intangible assets:
Goodwill 115,756 115,756
Other intangibles 85,591 85,347
---------- --------
201,347 201,103
Less accumulated amortization (123,461) (123,408)
---------- ---------
Net intangible assets 77,886 77,695
---------- ---------
Equity investments and advances to investees 37,830 33,955
Other assets 3,235 3,759
---------- ---------
Total assets $ 369,983 $363,025
========== =========
See accompanying notes to condensed consolidated financial statements.
2
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
Liabilities and Stockholders' Deficit March 31, 2002 December 31, 2001
------------------------------------- -------------- -----------------
(unaudited)
Current liabilities:
Current portion long-term debt $ -- $ 2,600
Accounts payable 69,596 82,750
Accrued interest 1,442 3,105
Accrued expenses 21,886 32,846
Progress billings 43,849 51,766
Income taxes payable 11,715 --
--------- ---------
Total current liabilities 148,488 173,067
--------- ---------
Long-term debt 253,533 252,383
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 March 31, 2002 and
December 31, 2001
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 63,052,527 at March 31, 2002 and 62,992,763
at December 31, 2001; outstanding 53,699,823 at
March 31, 2002 and 53,698,382 at December 31, 2001 630 630
Additional paid-in capital 103,300 99,116
Deferred compensation (1,993) (1,342)
Retained earnings 224,398 191,822
Foreign currency translations (613) (560)
Treasury stock, at cost (9,352,704 shares at March 31, 2002 and
9,294,381 shares at December 31, 2001) (361,019) (355,350)
--------- ---------
Total stockholders' deficit (35,297) (65,684)
--------- ---------
Total liabilities and stockholders' deficit $ 369,983 $ 363,025
========= =========
NOTE: The balance sheet at December 31, 2001 has been derived from the
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Income
(dollars in thousands, except share data)
(unaudited)
Quarter Ended
March 31, March 31,
2002 2001
---------------- ----------------
Revenues:
Net sales $203,772 $227,729
Other 1,003 81
---------------- ----------------
Total revenues 204,775 227,810
---------------- ----------------
Cost and expenses:
Cost of products sold 126,816 145,060
Selling, general and administrative 22,176 23,598
Loss on investments 1,031 625
Amortization of intangible assets 53 856
Interest 3,222 5,713
---------------- ----------------
Total costs and expenses 153,298 175,852
---------------- ----------------
Earnings before income taxes 51,477 51,958
Income taxes 18,900 19,500
---------------- ----------------
Net earnings $ 32,577 $ 32,458
================ ================
Net earnings per common share, basic $ .60 $ .61
================ ================
Net earnings per common share, diluted $ .60 $ .60
================ ================
Shares used in computing net earnings per share, basic 53,876,265 53,525,738
================ ================
Shares used in computing net earnings per share, diluted 54,526,871 54,426,201
================ ================
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Quarter Ended
----------------------------------
March 31, March 31,
2002 2001
---------------- ---------------
Cash flows from operating activities:
Net earnings $32,577 $32,458
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of intangibles 2,597 3,306
Amortization of bond discount 1,150 -
Provision for losses on accounts receivable 381 375
Gain on sale of property, plant and equipment (806) (70)
Losses on equity investments 1,031 626
Stock-based compensation charge 490 623
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable 19,295 (761)
Inventories 7,566 (762)
Prepaid expenses and other (814) 4,089
Other liabilities --- (1,201)
Other assets 281 (734)
Accounts payable (13,156) (13,984)
Accrued expenses and interest (4,210) (8,877)
Income taxes 18,946 16,992
Progress billings (7,917) 3,416
---------------- ---------------
Total adjustments 24,834 3,038
---------------- ---------------
Net cash provided by operating activities 57,411 35,496
---------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (9,488) (1,955)
Proceeds from sale of property, plant and equipment 934 155
Investments in and advances to affiliated companies (4,907) (6,413)
Payments of additional purchase price for acquisition of PreVision (8,000) -
Other (53) (136)
---------------- ---------------
Net cash used in investing activities
(21,514) (8,349)
---------------- ---------------
Cash flows from financing activities:
Net payments under revolving line of credit (2,600) (21,300)
Repurchase of common stock (21,376) (8,307)
Proceeds from the issuance of common stock 15,817 816
---------------- ---------------
Net cash used in financing activities
(8,159) (28,791)
---------------- ---------------
Net increase/(decrease) in cash 27,738 (1,644)
Cash at beginning of period 10,615 11,140
---------------- ---------------
Cash at end of period $38,353 $ 9,496
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,393 $ 7,175
Cash paid during the period for income taxes $ 9 $ 2,508
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 1,121 $ 1,560
See accompanying notes to condensed consolidated financial statements.
5
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 August 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 October 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.
6
3. Adoption of SFAS No. 141 and 142
During July 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 entered into after September 30, 2001 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 is in the process of performing the first step of
testing for impairment by utilizing the discounted cash flow method and does not
anticipate any impairment of goodwill or intangible assets with indefinite
lives.
Intangible assets as of March 31, 2002 are comprised of (dollars in thousands):
Intangible Accumulated Unamortized Weighted
Assets, at Amortization at Balance at Average Useful
Cost March 31, 2002 March 31, 2002 Life (in years)
---------- --------------- -------------- ---------------
Amortizable intangible assets $ 52,455 $ (50,657) $ 1,798 11.9
Non-amortizable intangible assets:
Goodwill 115,756 (51,545) 64,211
The Valassis name and other 32,100 (20,759) 11,341
Other 1,036 (500) 536
-------- --------- -------
Total non-amortizable intangible assets 148,892 (72,804) 76,088
-------- --------- -------
Total $201,347 $(123,461) $77,886
======== ========= =======
Amortizable intangible assets include a non-compete agreement and corporate
logos and a fully amortized pressroom operating system. The associated
amortization expense for the three months ended March 31, 2002 was $53,000.
Amortization expense is expected to be $212,000 for each of the next five
succeeding years including the current year.
7
The reported net income in the first quarter of 2001 would have increased to
$33.0 million, if adjusted to exclude goodwill and intangible amortization. The
following table presents actual results of operations for the first quarter 2002
and a reconciliation of reported net income to the adjusted net income for the
first quarter of 2001:
Quarter ended
March 31, March 31,
2002 2001
--------- ---------
Net income:
Reported net income $32,577 $32,458
Add back: goodwill and intangible amortization, after tax - 502
------- -------
$32,577 $32,960
======= =======
Basic earnings per share:
Reported net income $0.60 $0.61
Add back: goodwill and intangible amortization - 0.01
------- -------
$0.60 $0.62
======= =======
Diluted earnings per share:
Reported net income $0.60 $0.60
Add back: goodwill and intangible amortization - 0.01
------- -------
$0.60 $0.61
======= =======
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. The jury found Sunflower liable
for misappropriating the Company's trade secrets and inducing an individual to
breach his duty of loyalty to the Company. The Company will request that the
judge enter a judgment on the verdict. On April 5, 2002, after a series of
post-trial motions, the Court entered a total judgment of approximately $5.4
million. 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.
8
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 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)
- 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 threshold 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 March 31
------------- ---------------------------------------------------
FSI Cluster-Targeted All Others* Total
------- ---------------- ----------- -----
2002
----
Revenues from external customers $148.4 $37.8 $17.6 $203.8
Intersegment revenues - - - -
Depreciation/amortization $1.8 $0.5 $0.3 $2.6
Segment profit $46.2 $3.8 $0.5 $50.5
2001
----
Revenues from external customers $159.0 $54.6 $14.1 $227.7
Intersegment revenues - - - -
Depreciation/amortization $2.6 $0.5 $0.2 $3.3
Segment profit $46.2 $6.1 ($0.4) $51.9
* Segments below the quantitative thresholds are primarily attributable to
three segments of the Company. Those include a customer relationship
marketing business, 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.
9
Reconciliations to consolidated financial statement totals are as follows:
Three Months Ended March 31,
----------------------------
2002 2001
------- -------
Profit for reportable segments $50.0 $52.3
Profit for other segments 0.5 (0.4)
Unallocated amounts:
Interest income - 0.1
Other income 1.0 -
----- -----
Earnings before taxes $51.5 $52.0
===== =====
Domestic and foreign revenues for each of the three-month periods ended March 31
were as follows:
2002 2001
------ ------
United States $202.7 $226.6
Canada 1.1 1.2
------ ------
Total $203.8 $227.8
====== ======
4. Earnings Per Share
Earnings per common share ("EPS") data was computed as follows:
Three Months Ended
March 31,
----------------------
2002 2001
---- -----
(in thousands except for
per share amounts)
Net earnings $32,577 $32,458
======= =======
Basic EPS:
Weighted average common shares outstanding 53,876 53,526
======= =======
Earnings per common share - basic $0.60 $0.61
======= =======
Diluted EPS:
Weighted average common shares outstanding 53,876 53,526
Weighted average shares purchased on exercise of dilutive options 5,366 4,350
Shares purchased with proceeds of options (4,731) (3,500)
Shares contingently issuable 16 50
------- -------
Shares applicable to diluted earnings 54,527 54,426
======= =======
Earnings per common share - diluted $0.60 $0.60
======= =======
10
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
Net sales decreased 10.5% from $227.7 million for the first quarter of 2001 to
$203.8 million for the first quarter of 2002. Free-standing insert (FSI)
revenues were down from $159.0 million for the quarter ended March 31, 2001 to
$148.4 million for the same quarter of 2002. This decrease is primarily due to a
loss in market share, as a result of the Company's attempted price increase not
taking hold. Revenues for cluster-targeted products decreased 30.8% to $37.8
million for the quarter driven primarily by continued increased competition of
commercial printers in solo inserts and decreases in new product introductions
in the sampling/advertising polybag programs. Net sales included an 85.1%
increase in ROP (Run-of-Press) sales attributable to additional sales focus and
technological resources, as well as increased demand for this product.
Gross profit margin was 37.8% in the first quarter of 2002, up from 36.3% in the
first quarter of 2001. The increase is largely due to decreases in paper costs
for the quarter.
Selling, general and administrative expenses decreased 6.0% from $23.6 million
in the first quarter of 2001 to $22.2 million in the first quarter of 2002. This
decrease is primarily the result of the Company's cost containment program
implemented in the second half of 2001.
Amortization expense of intangible assets and goodwill decreased from $856,000
to $53,000 in the first quarter ended March 31, 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 $0.01 in the three months ended March 31,
2002.
Net earnings were $32.6 million for the first quarter of 2002 versus $32.5
million for the same period last year.
11
Financial Condition, Liquidity and Sources of Capital
The Company's liquidity requirements arise mainly from its working capital
needs, primarily accounts receivable and 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 $38.4 million at March 31, 2002 versus $10.6
million at December 31, 2001. The increase in cash and cash equivalents was the
result of cash provided by operating activities of $57.4 million, and cash used
in investing activities and financing activities of $21.5 million and $8.2
million, respectively, in the first quarter of 2002.
Cash flow from operating activities increased from $35.5 million at March 31,
2001 to $57.4 million at March 31, 2002, primarily due to a $19.3 million
decrease in accounts receivable and a $7.6 million decrease in inventories. The
decrease in accounts receivable represents a return to a normalized receivable
balance as of March 31, 2002 as compared to a relatively higher balance as of
December 31, 2001. Inventories decreased as of March 31, 2002, primarily due to
a decrease in the price of paper.
Net cash used in investing activities was $21.5 million up from $8.3 million in
2001. Capital expenditures increased $7.5 million due to timing of payments on
the addition of a new printing press. Additionally, 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 Valassis
Relationship Marketing Systems, LLC ("VRMS") of $4.9 million during the first
quarter of 2002. The Company intends to exercise its option to acquire an
additional 50% of VRMS for $4.5 million as of July 1, 2002.
As of March 31, 2002, the Company's debt was $253.5 million, which consists of
$100 million of its 6-5/8% Senior Notes due 2009 and $153.5 million of Zero
Coupon Convertible Notes due 2021. The Company has $125.0 million available
under its revolving credit facility.
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 March 31, 2002, the Company had authorization to repurchase 4.9 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.
12
Capital Expenditures - The Company operates three printing facilities. Capital
expenditures were $9.5 million for the three month period ended March 31, 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.
13
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Form 8-K
The Company did not file any current report on Form 8-K during the three
months ended March 31, 2002.
14
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: May 10, 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.
15