VCI-2012.3.31-10Q
Table of Contents


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, 2012
 
¨
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
Incorporation or Organization)
 
(IRS Employer Identification Number)
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x
As of May 1, 2012 there were 42,759,940 shares of the Registrant’s Common Stock outstanding.


Table of Contents


VALASSIS COMMUNICATIONS, INC.
Index to Quarterly Report on Form 10-Q
Quarter Ended March 31, 2012 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


Table of Contents


PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(U.S. dollars in thousands)
(unaudited)
 
 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
107,199

 
$
101,971

Accounts receivable, net (Note 1)
417,010

 
448,320

Inventories (Note 1)
33,936

 
41,120

Prepaid expenses and other
26,853

 
37,655

Total current assets
584,998

 
629,066

Property, plant and equipment, net (Note 1)
146,689

 
148,905

Goodwill (Note 2)
636,471

 
636,471

Other intangible assets, net (Note 2)
210,457

 
213,613

Other assets
15,062

 
16,392

Total assets
$
1,593,677

 
$
1,644,447

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion long-term debt (Note 3)
$
15,000

 
$
15,000

Accounts payable
281,873

 
334,378

Progress billings
44,131

 
39,975

Accrued expenses (Note 4)
65,291

 
98,409

Total current liabilities
406,295

 
487,762

Long-term debt (Note 3)
583,810

 
587,560

Deferred income taxes
67,154

 
67,404

Other non-current liabilities
52,264

 
52,187

Total liabilities
1,109,523

 
1,194,913

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock ($0.01 par value; 25,000,000 shares authorized; no shares issued or outstanding at March 31, 2012 and December 31, 2011)
—

 
—

Common stock ($0.01 par value; 100,000,000 shares authorized; 65,394,999 and 65,398,539 shares issued at March 31, 2012 and December 31, 2011, respectively; 42,904,300 and 42,347,368 shares outstanding at March 31, 2012 and December 31, 2011, respectively)
654

 
654

Additional paid-in capital
113,577

 
123,881

Retained earnings
1,047,987

 
1,021,566

Accumulated other comprehensive income
2,721

 
2,775

Treasury stock, at cost (22,490,699 and 23,051,171 shares at March 31, 2012 and December 31, 2011, respectively
(680,785
)
 
(699,342
)
Total stockholders’ equity
484,154

 
449,534

Total liabilities and stockholders’ equity
$
1,593,677

 
$
1,644,447



See accompanying notes to condensed consolidated financial statements.
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Income
(U.S. dollars in thousands, except per share data)
(unaudited)
 
        
 
Three Months Ended

March 31,
 
2012
 
2011
Revenues
$
518,585

 
$
546,979

Costs and expenses:
 
 
 
Cost of sales
388,894

 
408,577

Selling, general and administrative
77,617

 
78,427

Amortization expense
3,156

 
3,156

Total costs and expenses
469,667

 
490,160

Earnings from operations
48,918

 
56,819

Other expenses and income:
 
 
 
Interest expense
7,054

 
9,775

Interest income
(58
)
 
(139
)
Loss on extinguishment of debt (Note 3)
—

 
13,352

Other income, net
(697
)
 
(876
)
Total other expenses, net
6,299

 
22,112

Earnings before income taxes
42,619

 
34,707

Income tax expense (Note 1)
16,198

 
13,296

Net earnings
$
26,421

 
$
21,411

 
 
 
 
Net earnings per common share, basic (Note 7)
$
0.63

 
$
0.43

 
 
 
 
Net earnings per common share, diluted (Note 7)
$
0.60

 
$
0.41

 
 
 
 
Weighted-average common shares outstanding, basic (Note 7)
42,114

 
49,929

 
 
 
 
Weighted-average common shares outstanding, diluted (Note 7)
44,045

 
52,333



See accompanying notes to condensed consolidated financial statements.
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
(unaudited)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Net earnings
$
26,421

 
$
21,411

Other comprehensive income, net of tax:
 
 
 
Unrealized changes in fair value of cash flow hedges
(404
)
 
(137
)
Unrealized changes in fair value of available-for-sale securities
—

 
(150
)
Realized losses on cash flow hedges reclassified from AOCI into earnings
—

 
779

Foreign currency translation adjustment
350

 
865

Total other comprehensive income (loss)
$
(54
)
 
$
1,357

Comprehensive income
$
26,367

 
$
22,768



See accompanying notes to condensed consolidated financial statements.
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(unaudited)

 
Three Months Ended
 
March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings
$
26,421

 
$
21,411

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,710

 
15,729

Amortization of debt issuance costs
518

 
478

Provision for losses on accounts receivable
543

 
931

Loss on extinguishment of debt
—

 
2,782

Gain (loss) on derivatives, net
(178
)
 
1,076

(Gain) loss on sale of property, plant and equipment
(79
)
 
40

Stock-based compensation expense
2,287

 
1,912

Deferred income taxes
1,004

 
1,944

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
30,767

 
53,429

Inventories
7,184

 
2,334

Prepaid expenses and other
10,939

 
1,351

Other assets
873

 
(1,352
)
Accounts payable
(52,505
)
 
(43,914
)
Progress billings
4,156

 
(7,255
)
Accrued expenses
(31,629
)
 
(30,610
)
Other non-current liabilities
(637
)
 
(2,320
)
Total adjustments
(12,047
)
 
(3,445
)
Net cash provided by operating activities
14,374

 
17,966

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(9,265
)
 
(5,024
)
Proceeds from sale of property, plant and equipment
79

 
20

Proceeds from sale of available-for-sale securities
—

 
1,494

Net cash used in investing activities
(9,186
)
 
(3,510
)
Cash flows from financing activities:
 
 
 
Borrowings of long-term debt
—

 
260,000

Repayments of long-term debt
(3,750
)
 
(243,989
)
Debt issuance costs
—

 
(4,880
)
Repurchases of common stock
(1,366
)
 
(45,530
)
Proceeds from issuance of common stock
5,685

 
3,133

Net cash provided by (used in) financing activities
569

 
(31,266
)
Effect of exchange rate changes on cash and cash equivalents
(529
)
 
1,066

Net increase (decrease) in cash and cash equivalents
5,228

 
(15,744
)
Cash and cash equivalents at beginning of period
101,971

 
245,935

Cash and cash equivalents at end of period
$
107,199

 
$
230,191

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
11,192

 
$
12,819

Cash paid during the period for income taxes
$
7,630

 
$
8,445

Non-cash financing activities:
 
 
 
Stock issued under stock-based compensation plans
$
—

 
$
1,193



See accompanying notes to condensed consolidated financial statements.
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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)



1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 (“GAAP”) 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 GAAP 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 Valassis Communications, Inc. (“Valassis,” “we,” and “our”) Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).
Significant Accounting Policies
Accounts Receivable
The allowance for doubtful accounts was $7.3 million and $6.9 million as of March 31, 2012 and December 31, 2011, respectively.
Income Taxes
We are required to adjust our effective tax rate each quarter to be consistent with our estimated annual effective tax rate. We are also required to record the tax impact of certain unusual or infrequently occurring items, including the effects of changes in tax laws or rates, in the interim period in which they occur. The effective tax rate during a particular quarter may be higher or lower as a result of the timing of actual earnings versus annual projections.
Inventories
Inventories are accounted for at the lower of cost, determined on a first in, first out (“FIFO”) basis, or market. Inventories included on the condensed consolidated balance sheets consisted of:

(in thousands of U.S. dollars)
March 31,
2012
 
December 31,
2011
Raw materials
$
24,935

 
$
28,075

Work in progress
9,001

 
13,045

Inventories
$
33,936

 
$
41,120


Property, Plant and Equipment
The following table summarizes the costs and ranges of useful lives of the major classes of property, plant and equipment and the total accumulated depreciation related to property, plant and equipment, net included on the condensed consolidated balance sheets:

 
Useful Lives
 
March 31, 2012
 
December 31, 2011
 
(in years)
 
(in thousands of U.S. dollars)
Land, at cost
N/A
 
$
7,186

 
$
7,167

Buildings, at cost
10 - 30
 
37,793

 
37,511

Machinery and equipment, at cost
3 - 20
 
225,175

 
217,764

Office furniture and equipment, at cost
3 - 10
 
238,512

 
236,994

Leasehold improvements, at cost
5 - 10
 
28,672

 
28,563

 
 
 
537,338

 
527,999

Less accumulated depreciation
 
 
(390,649
)
 
(379,094
)
Property, plant and equipment, net
 
 
$
146,689

 
$
148,905


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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill included on the condensed consolidated balance sheets consisted of:

(in thousands of U.S. dollars)
March 31,
2012
 
December 31,
2011
Shared Mail
$
534,184

 
$
534,184

Neighborhood Targeted
5,325

 
5,325

Free-standing Inserts
22,357

 
22,357

International, Digital Media & Services
74,605

 
74,605

Goodwill
$
636,471

 
$
636,471


The components of other intangible assets, net included on the condensed consolidated balance sheets consisted of:

 
March 31, 2012
 
December 31, 2011
(in thousands of U.S. dollars)
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Weighted
Average
Remaining
Useful Life
(in years)
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Weighted
Average
Remaining
Useful Life (in years)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Mailing lists, non compete agreements and other
$
40,457

 
$
(10,399
)
 
$
30,058

 
14.9
 
$
40,457

 
$
(9,894
)
 
$
30,563

 
15.1
Customer relationships
140,000

 
(47,242
)
 
92,758

 
8.7
 
140,000

 
(44,591
)
 
95,409

 
9.0
Total
$
180,457

 
(57,641
)
 
122,816

 
 
 
$
180,457

 
(54,485
)
 
125,972

 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Valassis name, tradenames, trademarks and other
 
 
 
 
87,641

 
 
 
 
 
 
 
87,641

 
 
Other intangible assets, net
 
 
 
 
$
210,457

 
 
 

 
 
 
$
213,613

 
 


3. LONG-TERM DEBT
Long-term debt included on the condensed consolidated balance sheets consisted of:
(in thousands of U.S. dollars)
March 31,
2012
 
December 31,
2011
Senior Secured Revolving Credit Facility
$
50,000

 
$
50,000

Senior Secured Term Loan A
288,750

 
292,500

Senior Secured Convertible Notes due 2033, net of discount
60

 
60

6 5/8% Senior Notes due 2021
260,000

 
260,000

Total debt
598,810

 
602,560

Current portion long-term debt
15,000

 
15,000

Long-term debt
$
583,810

 
$
587,560


Senior Secured Credit Facility
General
On June 27, 2011, we entered into a senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders jointly arranged by J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBS Securities Inc. (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility and related loan documents replaced and terminated our prior credit agreement, dated as of March 2, 2007, as amended (the “Prior Senior Secured Credit Facility”), by and among Valassis, Bear Stearns Corporate Lending Inc., as Administrative Agent, and a syndicate of lenders jointly arranged by Bear, Stearns & Co. Inc. and Banc of America Securities LLC. In connection with the termination of the

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Prior Senior Secured Credit Facility, all obligations and rights under the related guarantee, security and collateral agency agreement, dated as of March 2, 2007, as amended (the “Prior Security Agreement”), by Valassis and certain of its domestic subsidiaries signatory thereto, as grantors, in favor of Bear Stearns Corporate Lending Inc., in its capacity as collateral agent for the benefit of the Secured Parties (as defined in the Prior Security Agreement), were also simultaneously terminated.
 
The Senior Secured Credit Facility consists of:
•
a five-year term loan A in an aggregate principal amount equal to $300.0 million, with principal repayable in quarterly installments at a rate of 5.0% during each of the first two years from issuance, 10.0% during the third year from issuance, 15.0% during the fourth year from issuance and 11.25% during the fifth year from issuance, with the remaining 53.75% due at maturity (the “Term Loan A”);
•
a five-year revolving credit facility in an aggregate principal amount of $100.0 million (the “Revolving Line of Credit”), including $15.0 million available in Euros, Pounds Sterling or Canadian Dollars, $50.0 million available for letters of credit and a $20.0 million swingline loan subfacility, of which $50.0 million was drawn at closing and remains outstanding as of March 31, 2012 (exclusive of outstanding letters of credit described below); and
•
an incremental facility pursuant to which, prior to the maturity of the Senior Secured Credit Facility, we may incur additional indebtedness in an amount up to $150.0 million under the Revolving Line of Credit or the Term Loan A or a combination thereof, subject to certain conditions, including receipt of additional lending commitments for such additional indebtedness. The terms of the incremental facility will be substantially similar to the terms of the Senior Secured Credit Facility, except with respect to the pricing of the incremental facility, the interest rate for which could be higher than that for the Revolving Line of Credit and the Term Loan A.
We used the initial borrowing under the Revolving Line of Credit, the proceeds from the Term Loan A and existing cash of $120.0 million to repay the $462.2 million outstanding under our Prior Senior Secured Credit Facility (reflecting all outstanding borrowings thereunder), to pay accrued interest with respect to such loans and to pay the fees and expenses related to the Senior Secured Credit Facility.
All borrowings under our Senior Secured Credit Facility, including, without limitation, amounts drawn under the Revolving Line of Credit, are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of March 31, 2012, we had approximately $40.1 million available under the Revolving Line of Credit portion of our Senior Secured Credit Facility (after giving effect to the reductions in availability pursuant to $9.9 million in standby letters of credit outstanding as of March 31, 2012).
Interest and Fees
Borrowings under our Senior Secured Credit Facility bear interest, at our option, at either the alternate base rate (defined as the higher of the prime rate announced by the Administrative Agent, the federal funds effective rate or one-month LIBOR, in each case, plus an applicable interest rate margin) (the “Base Rate”) or at the Eurodollar Rate (one-, two-, three- or six-month LIBOR, at our election, as defined in the credit agreement governing the Senior Secured Credit Facility), except for borrowings made in alternate currencies which may not accrue interest based upon the alternate base rate, in each case, plus an applicable interest rate margin. The applicable margins are currently 0.75% per annum for Base Rate loans and 1.75% per annum for Eurodollar Rate loans. The margins applicable to the borrowings under our Senior Secured Credit Facility may be adjusted based on our consolidated leverage ratio, with 1.00% being the maximum Base Rate margin and 2.00% being the maximum Eurodollar Rate. See Note 7, Derivative Financial Instruments and Fair Value Measurements, for discussion regarding our various interest rate swap agreements.
Guarantees and Security
Our Senior Secured Credit Facility is guaranteed by certain of our existing and future domestic restricted subsidiaries pursuant to a Guarantee and Collateral Agreement. In addition, our obligations under our Senior Secured Credit Facility and the guarantee obligations of the subsidiary guarantors are secured by first priority liens on substantially all of our and our subsidiary guarantors’ present and future assets and by a pledge of all of the equity interests in our domestic subsidiary guarantors and 65% of the capital stock of certain of our existing and future foreign subsidiaries.
 
The Guarantee and Collateral Agreement also secures our Senior Secured Convertible Notes due 2033 on an equal and ratable basis with the indebtedness under our Senior Secured Credit Facility to the extent required by the indenture governing such notes.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Prepayments
The Senior Secured Credit Facility also contains a requirement that we make mandatory principal prepayments on the Term Loan A and Revolving Line of Credit in certain circumstances, including, without limitation, with 100% of the aggregate net cash proceeds from certain asset sales, casualty events or condemnation recoveries (in each case, to the extent not otherwise used for reinvestment in our business or related business and subject to certain other exceptions). The Senior Secured Credit Facility further provides that, subject to customary notice and minimum amount conditions, we may make voluntary prepayments without payment of premium or penalty.
Covenants
Subject to customary and otherwise agreed upon exceptions, our Senior Secured Credit Facility contains affirmative and negative covenants, including, but not limited to:
•
the payment of other obligations;
•
the maintenance of organizational existences, including, but not limited to, maintaining our property and insurance;
•
compliance with all material contractual obligations and requirements of law;
•
limitations on the incurrence of indebtedness;
•
limitations on creation and existence of liens;
•
limitations on certain fundamental changes to our corporate structure and nature of our business, including mergers;
•
limitations on asset sales;
•
limitations on restricted payments, including certain dividends and stock repurchases and redemptions;
•
limitations on capital expenditures;
•
limitations on any investments, provided that certain “permitted acquisitions” and strategic investments are allowed;
•
limitations on optional prepayments and modifications of certain debt instruments;
•
limitations on modifications to organizational documents;
•
limitations on transactions with affiliates;
•
limitations on entering into certain swap agreements;
•
limitations on negative pledge clauses or clauses restricting subsidiary distributions;
•
limitations on sale-leaseback and other lease transactions; and
•
limitations on changes to our fiscal year.
Our Senior Secured Credit Facility also requires us to comply with:
•
a maximum consolidated leverage ratio, as defined in our Senior Secured Credit Facility (generally, the ratio of our consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the most recent four quarters), of 3.50:1.00; and
•
a minimum consolidated interest coverage ratio, as defined in our Senior Secured Credit Facility (generally, the ratio of our consolidated EBITDA to consolidated interest expense for the most recent four quarters), of 3.00:1.00.
The following table shows the required and actual financial ratios under our Senior Secured Credit Facility as of March 31, 2012:

 
Required Ratio
 
Actual Ratio
Maximum consolidated leverage ratio
No greater than 3.50:1.00
 
1.92:1.00
Minimum consolidated interest coverage ratio  
No less than 3.00:1.00
 
10.58:1.00

In addition, we are required to give notice to the administrative agent and the lenders under our Senior Secured Credit Facility of defaults under the facility documentation and other material events, make any new wholly-owned domestic subsidiary (other than an immaterial subsidiary) a subsidiary guarantor and pledge substantially all after-acquired property as collateral to secure our and our subsidiary guarantors’ obligations in respect of the facility.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Events of Default
Our Senior Secured Credit Facility contains customary events of default, including upon a change in control. If such an event of default occurs, the lenders under our Senior Secured Credit Facility would be entitled to take various actions, including in certain circumstances increasing the effective interest rate and accelerating the amounts due under our Senior Secured Credit Facility.
8 1/4% Senior Notes due 2015
On January 13, 2011, we commenced a cash tender offer and consent solicitation to purchase any and all of our outstanding 8 1/4% Senior Notes due 2015 (the “2015 Notes”) and to amend the indenture governing the 2015 Notes (the "2015 Indenture") to eliminate substantially all of the restrictive covenants and certain events of default. We used the net proceeds from the 2021 Notes (described below) to fund the purchase of the 2015 Notes, the related consent payments pursuant to the tender offer and consent solicitation, and the subsequent redemption of the 2015 Notes that were not tendered and remained outstanding after the expiration of the tender offer and consent solicitation. We recognized a pre-tax loss on extinguishment of debt of $13.4 million during the three months ended March 31, 2011, which represents the difference between the aggregate purchase price and the aggregate principal amount of the 2015 Notes purchased and the write-off of related capitalized debt issuance costs.
6 5/8% Senior Notes due 2021
On January 28, 2011, we issued in a private placement $260.0 million aggregate principal amount of our 6 5/8% Senior Notes due 2021 (the “2021 Notes”). The net proceeds were used to fund the purchase of the outstanding 2015 Notes and the related consent payments in a concurrent tender offer and consent solicitation as described above and the redemption of the remaining outstanding 2015 Notes. We capitalized related debt issuance costs of approximately $5.1 million, which are being amortized over the term of the 2021 Notes.
Interest on the 2021 Notes is payable every six months on February 1 and August 1. The 2021 Notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of our existing and future domestic restricted subsidiaries on a senior unsecured basis.
In July 2011, in accordance with the terms of the registration rights agreement between us and the initial purchasers of the 2021 Notes, we completed an exchange offer to exchange the original notes issued in the private placement for a like principal amount of exchange notes registered under the Securities Act of 1933, as amended. An aggregate principal amount of $260.0 million, or 100%, of the original notes were exchanged for exchange notes in the exchange offer. The exchange notes are substantially identical to the original notes, except that the exchange notes are not subject to certain transfer restrictions.
The 2021 Notes were issued under an indenture with Wells Fargo Bank, National Association, as trustee (the “2021 Indenture”). Subject to a number of exceptions, the 2021 Indenture restricts our ability and the ability of our restricted subsidiaries (as defined in the 2021 Indenture) to incur or guarantee additional indebtedness, transfer or sell assets, make certain investments, pay dividends or make distributions or other restricted payments, create certain liens, merge or consolidate, repurchase stock, create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us and enter into transactions with affiliates.
 
We may redeem all or a portion of the 2021 Notes at our option at any time prior to February 1, 2016, at a redemption price equal to 100% of the principal amount of 2021 Notes to be redeemed, plus a make-whole premium as described in the 2021 Indenture, plus accrued and unpaid interest to the redemption date, if any. At any time on or after February 1, 2016, we may redeem all or a portion of the 2021 Notes at our option at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below:

Year
 
Percentage
2016
 
103.313%
2017
 
102.208%
2018
 
101.104%
2019 and thereafter
 
100.000%


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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


In addition, we must pay accrued and unpaid interest to the redemption date, if any. On or prior to February 1, 2014, we may also redeem at our option up to 35% of the principal amount of the outstanding 2021 Notes with the proceeds of certain equity offerings at the redemption price specified in the 2021 Indenture, plus accrued and unpaid interest to the date of redemption, if any. Upon the occurrence of a change of control, as defined in the 2021 Indenture, we must make a written offer to purchase all of the 2021 Notes for cash at a purchase price equal to 101% of the principal amount of the 2021 Notes, plus accrued and unpaid interest to the date of repurchase, if any.
Additional Provisions
The indenture governing the Senior Secured Convertible Notes due 2033 contains a cross-default provision which becomes applicable if we default under any mortgage, indenture or instrument evidencing indebtedness for money borrowed by us and the default results in the acceleration of such indebtedness prior to its express maturity, and the principal amount of any such accelerated indebtedness aggregates in excess of $25.0 million. The 2021 Indenture contains a cross-default provision which becomes applicable if we (a) fail to pay the stated principal amount of any of our indebtedness at its final maturity date, or (b) default under any of our indebtedness and the default results in the acceleration of indebtedness, and, in each case, the principal amount of any such indebtedness, together with the principal amount of any other such indebtedness under which there has been a payment default or the maturity of which has been so accelerated, aggregates $50.0 million or more. Our credit agreement contains a cross-default provision which becomes applicable if we (a) fail to make any payment under any indebtedness for money borrowed by us (other than the obligations under such credit agreement) in an aggregate outstanding principal amount of at least $50.0 million or, (b) otherwise default under any such indebtedness, or trigger another event which causes such indebtedness to become due or to be repurchased, prepaid, defeased or redeemed or become subject to an offer to repurchase, prepay, defease or redeem such indebtedness prior to its stated maturity.

Subject to applicable limitations in our Senior Secured Credit Facility and indentures, we may from time to time repurchase our debt in the open market, through tender offers, through exchanges for debt or equity securities, by exercising rights to call, by satisfying put obligations, or in privately negotiated transactions or otherwise.
Covenant Compliance
As of March 31, 2012, we were in compliance with all of our indenture and Senior Secured Credit Facility covenants.


4. ACCRUED EXPENSES
Accrued expenses included on the condensed consolidated balance sheets consisted of:

(in thousands of U.S. dollars)
March 31,
2012
 
December 31,
2011
Accrued interest
$
2,998

 
$
7,205

Accrued compensation and benefits
30,117

 
55,030

Other accrued expenses
32,176

 
36,174

Accrued expenses
$
65,291

 
$
98,409


5. COMMITMENTS AND CONTINGENCIES
The application and interpretation of applicable state sales tax laws to certain of our products is uncertain. Accordingly, we may be exposed to additional sales tax liability to the extent various state jurisdictions determine that certain of our products are subject to such jurisdictions’ sales tax. As of March 31, 2012, we have recorded a liability of $7.5 million, reflecting our best estimate of our potential sales tax liability.
In addition to the above matter, we are 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 effect on our financial position, results of operations or liquidity.



10
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


6. EARNINGS PER SHARE
Earnings per common share data were as follows:

 
Three Months Ended
 
March 31,
(in thousands, except per share data)
2012
 
2011
Net earnings
$
26,421

 
$
21,411

Weighted-average common shares outstanding, basic
42,114

 
49,929

Shares issued on exercise of dilutive options
4,894

 
6,693

Shares purchased with assumed proceeds of options and unearned restricted shares
(2,965
)
 
(4,293
)
Shares contingently issuable
2

 
4

Weighted-average common shares outstanding, diluted
44,045

 
52,333

Net earnings per common share, diluted
$
0.60

 
$
0.41

Anti-dilutive options excluded from calculation of weighted-average common shares outstanding, diluted
3,486

 
2,565



7. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
We are exposed to market risks arising from adverse changes in foreign exchange rates and interest rates. We manage these risks through a variety of strategies which include the use of derivatives. Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify or have not been designated as hedges and are marked to market through earnings. The notional amounts of derivative financial instruments and related fair values measured on a recurring basis and included in the condensed consolidated balance sheets were as follows:

 
Notional Amounts
 
Fair Values
 
 
(in millions of U.S. dollars)
March 31,
2012
 
December 31,
2011
 
March 31,
2012
 
December 31,
2011
 
Balance Sheet Location
Derivatives designated as cash flow hedging instruments:
Interest rate swap contract
$
186.3

 
$
186.3

 
$
(5.3
)
 
$
(4.6
)
 
Other non-current liabilities
Derivatives not receiving hedge accounting treatment:
Interest rate swap contract
100.0

 
140.0

 
(0.4
)
 
(0.8
)
 
Accrued expenses
Foreign exchange contracts
9.8

 
11.7

 
0.1

 
(1.0
)
 
Prepaid expenses and other/Accrued expenses
Total derivative financial instruments
$
296.1

 
$
338.0

 
$
(5.6
)
 
$
(6.4
)
 
 

The fair values of our interest rate swap contracts and foreign exchange contracts are determined based on third-party valuation models and observable foreign exchange forward contract rates, respectively, both of which represent Level 2 fair value inputs.

11
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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the impact of derivative financial instruments on the condensed consolidated financial statements for the indicated period:

 
Three Months Ended
 
March 31,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
(in millions of U.S. Dollars)
Amount of Pre-tax Gain
(Loss) Recognized in
Earnings*
 
Amount of Pre-tax Loss
Recognized in OCI
 
Amount of Pre-tax Loss
Reclassified from AOCI
into Earnings*
Derivatives designated as cash flow hedging instruments:
Interest rate swap contract
$
—

 
$
—

 
$
0.7

 
$
0.2

 
$
—

 
$
(1.3
)
Derivatives not receiving hedge accounting treatment:
Interest rate swap contracts
$
(0.1
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Foreign exchange contracts
1.1

 
0.2

 
—

 
—

 
—

 
—

 
$
1.0

 
$
0.2

 
$
0.7

 
$
0.2

 
$
—

 
$
(1.3
)

 *
Amounts recognized in earnings related to interest rate swap contracts are included in interest expense in the unaudited condensed consolidated statements of income and amounts recognized in earnings related to foreign exchange contracts are included in cost of sales in the unaudited condensed consolidated statements of income.

Interest Rate Swaps
On December 17, 2009, we entered into an interest rate swap agreement with an initial notional amount of $300.0 million to fix three-month LIBOR at 2.005%, for an effective rate of 4.255%, including the applicable margin, for an equivalent portion of our variable rate debt under our Prior Senior Secured Credit Facility. The effective date of this agreement was December 31, 2010. The notional amount of $300.0 million amortizes by $40.0 million at the end of every quarter until it reaches $100.0 million for the quarter ending June 30, 2012, the expiration date. The swap was designated as, and qualified as, a cash flow hedge through the termination of the Prior Senior Secured Credit Facility on June 27, 2011. This interest rate swap remains in effect and changes in the fair value of this swap subsequent to the termination of hedge accounting have been, and will continue to be recognized in earnings as a component of interest expense until the swap expires.
On July 6, 2011, we entered into an interest rate swap agreement with an initial notional amount of $186.3 million. The effective date of this agreement is June 30, 2012, the expiration date of our existing interest rate swap. Under the swap agreement, we are required to make quarterly payments at a fixed interest rate of 1.8695% per annum to the counterparty on an amortizing notional amount in exchange for receiving variable payments based on the three-month LIBOR interest rate for the same notional amount. After giving effect to the swap agreement, our effective interest rate for the notional amount, based on the current applicable margin under our Senior Secured Credit Facility, will be 3.6195% per annum. The initial notional amount of $186.3 million. amortizes quarterly by (i) $2,812,500 from the effective date through the quarter ending September 30, 2013, (ii) $5,625,000 from September 30, 2013 through the quarter ending September 30, 2014, and (iii) $8,437,500 from September 30, 2014 until June 30, 2015, the expiration date of the agreement. The swap is designated as and qualifies as a cash flow hedge.
Foreign Currency
Currencies to which we have exposure are the Mexican peso, Canadian dollar, British pound, Polish zloty and Euro. Currency restrictions are not expected to have a significant effect on our cash flows, liquidity, or capital resources. We purchase the Mexican peso and Polish zloty under two to twelve-month forward foreign exchange contracts to stabilize the cost of production. As of March 31, 2012, we had a commitment to purchase $9.0 million in Mexican pesos and $0.8 million in Polish zlotys over the next year.

12
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Long-Term Debt
The estimated fair market value of our long-term debt was $3.0 million above carrying value as of March 31, 2012 and $25.0 million below carrying value as of December 31, 2011. Our 2021 Notes are traded in an active market with the fair value determined based on quoted active market prices. Borrowings under our Senior Secured Credit Facility are not traded in an active market and are valued based on an implied price derived from industry averages and relative loan performance.
 
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents and accruals approximate fair value due to the near-term maturity of these instruments.

8. REPURCHASES OF COMMON STOCK
The following table summarizes our repurchases of common stock during the indicated periods:

 
Three Months Ended
 
March 31,
in thousands, except per share data
2012
 
2011
Shares repurchased
59

 
1,623

Aggregate repurchase price
$
1,366

 
$
45,530

Average price paid per share
$
23.10

 
$
28.06


As of March 31, 2012, we had authorization to repurchase an additional 1.4 million shares of our common stock under the share repurchase program approved by our Board of Directors.

9. SEGMENT REPORTING
Our segments meeting the quantitative thresholds to be considered reportable are Shared Mail, Neighborhood Targeted and Free-standing Inserts (“FSI”). All other lines of business fall below a materiality threshold and are, therefore, combined together in an “other” segment named International, Digital Media & Services. These business lines include NCH Marketing Services, Inc., Valassis Canada, Inc., Promotion Watch, direct mail, analytics, digital and in-store. Our reportable segments are strategic business units that offer different products and services and are subject to regular review by our chief operating decision-maker. They are managed separately because each business requires different executional strategies and caters to different client marketing needs.
The accounting policies of the segments are the same as those described in the 2011 Form 10-K and Note 1, Basis of Presentation and Significant Accounting Policies. We evaluate reportable segment performance based on segment profit, which we define as earnings from operations excluding unusual or infrequently occurring items. Assets and nonoperating expenses are not allocated to reportable segments and are not used to assess the performance of a reportable segment.
 

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Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table sets forth, by segment, revenues, depreciation/amortization and segment profit for the indicated periods:

 
Three Months Ended
 
March 31,
(in millions of U.S. dollars)
Shared Mail
 
Neighborhood
Targeted
 
FSI
 
International,
Digital Media &
Services
 
Total
2012
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
328.1

 
$
72.2

 
$
76.3

 
$
42.0

 
$
518.6

Intersegment revenues
$
4.5

 
$
13.0

 
$
10.0

 
$
—

 
$
27.5

Depreciation/amortization
$
8.3

 
$
1.1

 
$
3.2

 
$
2.1

 
$
14.7

Segment profit (loss)1
$
42.4

 
$
(1.6
)
 
$
5.4

 
$
2.7

 
$
48.9

2011
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
322.6

 
$
90.1

 
$
89.2

 
$
45.1

 
$
547.0

Intersegment revenues
$
4.5

 
$
9.3

 
$
9.8

 
$
0.1

 
$
23.7

Depreciation/amortization
$
10.0

 
$
1.0

 
$
3.0

 
$
1.7

 
$
15.7

Segment profit1
$
42.1

 
$
1.9

 
$
7.4

 
$
5.4

 
$
56.8

 
 
 
 
 
 
 
 
 
 
1 Total segment profit is equivalent to Earnings from operations for the three months ended March 31, 2012 and 2011.

Domestic and foreign revenues were as follows:

 
Three Months Ended
 
March 31,
(in millions of U.S. dollars)
2012
 
2011
United States
$
506.2

 
$
534.9

Foreign
12.4

 
12.1

Revenues
$
518.6

 
$
547.0


Domestic and foreign long-lived assets (property, plant and equipment, net) were as follows:

(in millions of U.S. dollars)
March 31,
2012
 
December 31,
2011
United States
$
138.4

 
$
140.7

Foreign
8.3

 
8.2

Property, plant and equipment, net
$
146.7

 
$
148.9




14
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


10. GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services. The 2021 Notes issued by Valassis (referred to for purposes of this note only as the “Parent Company”) are guaranteed by substantially all of the Parent Company’s domestic wholly-owned subsidiaries (collectively, the “Guarantor Subsidiaries”) on a senior unsecured basis. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Parent Company and has guaranteed the 2021 Notes on a joint and several, full and unconditional basis, subject to certain customary exceptions. Pursuant to the terms of the 2021 Indenture, the Guarantor Subsidiaries are subject to release under certain customary conditions as described below. Non-wholly-owned subsidiaries, joint ventures, partnerships and foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of these obligations. Substantially all of the Guarantor Subsidiaries also guarantee the Parent Company’s Senior Secured Credit Facility.

The 2021 Indenture provides for a Guarantor Subsidiary to be automatically and unconditionally released and discharged from its guarantee obligations in certain circumstances, including:

•
The sale or other transfer or disposition of all of the Guarantor Subsidiary's capital stock to any person that is not an affiliate of the Parent Company;
•
The sale or other transfer of all or substantially all the assets or capital stock of a Guarantor Subsidiary, by way of merger, consolidation or otherwise, to any person that is not an affiliate of the Parent Company;
•
If a Guarantor Subsidiary ceases to be a “Domestic Restricted Subsidiary” for purposes of the indenture covenants; and
•
Legal defeasance or covenant defeasance of the indenture obligations when provision has been made for them to be fully satisfied.



15
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Balance Sheet
March 31, 2012
(in thousands of U.S. dollars)

 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
77,346

 
$
5,936

 
$
23,917

 
$
—

 
$
107,199

Accounts receivable, net
105,446

 
287,803

 
23,761

 
—

 
417,010

Inventories
26,060

 
7,873

 
3

 
—

 
33,936

Prepaid expenses and other (including intercompany)
1,080,077

 
2,379,564

 
1,457

 
(3,434,245
)
 
26,853

Total current assets
1,288,929

 
2,681,176

 
49,138

 
(3,434,245
)
 
584,998

Property, plant and equipment, net
21,947

 
123,093

 
1,649

 
—

 
146,689

Goodwill
27,684

 
601,798

 
6,989

 
—

 
636,471

Other intangible assets, net
11,552

 
198,905

 
—

 
—

 
210,457

Investments
569,779

 
24,225

 
—

 
(590,982
)
 
3,022

Intercompany note receivable (payable)
357,635

 
(357,499
)
 
(136
)
 
—

 
—

Other assets
9,152

 
5,030

 
(2,142
)
 
—

 
12,040

Total assets
$
2,286,678

 
$
3,276,728

 
$
55,498

 
$
(4,025,227
)
 
$
1,593,677

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion, long-term debt
$
15,000

 
$
—

 
$
—

 
$
—

 
$
15,000

Accounts payable and intercompany payable
1,126,693

 
2,578,120

 
11,305

 
(3,434,245
)
 
281,873

Progress billings
20,390

 
10,798

 
12,943

 
—

 
44,131

Accrued expenses
30,140

 
27,967

 
7,184

 
—

 
65,291

Total current liabilities
1,192,223

 
2,616,885

 
31,432

 
(3,434,245
)
 
406,295

Long-term debt
583,810

 
—

 
—

 
—

 
583,810

Deferred income taxes
(3,091
)
 
74,241

 
(3,996
)
 
—

 
67,154

Other non-current liabilities
29,582

 
17,914

 
4,768

 
—

 
52,264

Total liabilities
1,802,524

 
2,709,040

 
32,204

 
(3,434,245
)
 
1,109,523

Stockholders’ equity
484,154

 
567,688

 
23,294

 
(590,982
)
 
484,154

Total liabilities and stockholders’ equity
$
2,286,678

 
$
3,276,728

 
$
55,498

 
$
(4,025,227
)
 
$
1,593,677



16
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Balance Sheet
December 31, 2011
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
68,887

 
$
7,543

 
$
25,541

 
$
—

 
$
101,971

Accounts receivable, net
123,558

 
302,096

 
22,666

 
—

 
448,320

Inventories
32,159

 
8,958

 
3

 
—

 
41,120

Prepaid expenses and other (including intercompany)
1,157,263

 
1,993,450

 
23,217

 
(3,136,275
)
 
37,655

Total current assets
1,381,867

 
2,312,047

 
71,427

 
(3,136,275
)
 
629,066

Property, plant and equipment, net
24,790

 
122,565

 
1,550

 
—

 
148,905

Goodwill
23,584

 
605,898

 
6,989

 
—

 
636,471

Other intangible assets, net
11,558

 
202,055

 
—

 
—

 
213,613

Investments
547,366

 
21,385

 
—

 
(565,261
)
 
3,490

Intercompany note receivable (payable)
359,649

 
(333,683
)
 
(25,966
)
 
—

 
—

Other assets
9,710

 
5,271

 
(2,079
)
 
—

 
12,902

Total assets
$
2,358,524

 
$
2,935,538

 
$
51,921

 
$
(3,701,536
)
 
$
1,644,447

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion, long-term debt
$
15,000

 
$
—

 
$
—

 
$
—

 
$
15,000

Accounts payable and intercompany payable
1,210,296

 
2,246,381

 
13,976

 
(3,136,275
)
 
334,378

Progress billings
15,952

 
10,358

 
13,665

 
—

 
39,975

Accrued expenses
52,675

 
38,543

 
7,191

 
—

 
98,409

Total current liabilities
1,293,923

 
2,295,282

 
34,832

 
(3,136,275
)
 
487,762

Long-term debt
587,560

 
—

 
—

 
—

 
587,560

Deferred income taxes
(2,840
)
 
74,241

 
(3,997
)
 
—

 
67,404

Other non-current liabilities
30,347

 
20,887

 
953

 
—

 
52,187

Total liabilities
1,908,990

 
2,390,410

 
31,788

 
(3,136,275
)
 
1,194,913

Stockholders’ equity
449,534

 
545,128

 
20,133

 
(565,261
)
 
449,534

Total liabilities and stockholders’ equity
$
2,358,524

 
$
2,935,538

 
$
51,921

 
$
(3,701,536
)
 
$
1,644,447



17
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2012
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Revenues
$
171,291

 
$
430,014

 
$
17,382

 
$
(100,102
)
 
$
518,585

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
145,142

 
283,095

 
11,928

 
(51,271
)
 
388,894

Selling, general and administrative
20,370

 
102,794

 
3,284

 
(48,831
)
 
77,617

Amortization expense
6

 
3,150

 
—

 
—

 
3,156

Total costs and expenses
165,518

 
389,039

 
15,212

 
(100,102
)
 
469,667

Earnings from operations
5,773

 
40,975

 
2,170

 
—

 
48,918

Other expenses and income:
 
 
 
 
 
 
 
 
 
Interest expense
7,054

 
—

 
—

 
—

 
7,054

Interest income
(22
)
 
—

 
(36
)
 
—

 
(58
)
Intercompany interest
(8,967
)
 
8,967

 
—

 
—

 
—

Other expenses (income), net
(144
)
 
(616
)
 
63

 
—

 
(697
)
Total other expenses (income), net
(2,079
)
 
8,351

 
27

 
—

 
6,299

Earnings before income taxes
7,852

 
32,624

 
2,143

 
—

 
42,619

Income tax expense
2,418

 
13,360

 
420

 
—

 
16,198

Equity in net earnings of subsidiaries
20,987

 
1,723

 
—

 
(22,710
)
 
—

Net earnings
$
26,421

 
$
20,987

 
$
1,723

 
$
(22,710
)
 
$
26,421

Other comprehensive income (loss)
(54
)
 
350

 
350

 
(700
)
 
(54
)
Comprehensive income
$
26,367

 
$
21,337

 
$
2,073

 
$
(23,410
)
 
$
26,367



18
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2011
(in thousands of U.S. dollars)

 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Revenues
$
198,166

 
$
429,268

 
$
17,369

 
$
(97,824
)
 
$
546,979

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
166,337

 
277,832

 
12,319

 
(47,911
)
 
408,577

Selling, general and administrative
24,514

 
100,378

 
3,448

 
(49,913
)
 
78,427

Amortization expense
6

 
3,150

 
—

 
—

 
3,156

Total costs and expenses
190,857

 
381,360

 
15,767

 
(97,824
)
 
490,160

Earnings from operations
7,309

 
47,908

 
1,602

 
—

 
56,819

Other expenses and income:
 
 
 
 
 
 
 
 
 
Interest expense
9,775

 
—

 
—

 
—

 
9,775

Interest income
(118
)
 
—

 
(21
)
 
—

 
(139
)
Intercompany interest
(11,197
)
 
11,197

 
—

 
—

 
—

Loss on extinguishment of debt
13,352

 
—

 
—

 
—

 
13,352

Other expenses (income), net
(227
)
 
(789
)
 
140

 
—

 
(876
)
Total other expenses, net
11,585

 
10,408

 
119

 
—

 
22,112

Earnings (loss) before income taxes
(4,276
)
 
37,500

 
1,483

 
—

 
34,707

Income tax expense
325

 
12,464

 
507

 
—

 
13,296

Equity in net earnings of subsidiaries
26,012

 
976

 
—

 
(26,988
)
 
—

Net earnings
$
21,411

 
$
26,012

 
$
976

 
$
(26,988
)
 
$
21,411

Other comprehensive income
1,357

 
865

 
865

 
(1,730
)
 
1,357

Comprehensive income
$
22,768

 
$
26,877

 
$
1,841

 
$
(28,718
)
 
$
22,768


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Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2012
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Net cash provided by (used in) operating activities
$
35,072

 
$
(19,760
)
 
$
(938
)
 
$
—

 
$
14,374

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Additions to property, plant and equipment
(2,372
)
 
(6,736
)
 
(157
)
 
—

 
(9,265
)
Proceeds from sale of property, plant and equipment
79

 
—

 
—

 
—

 
79

Net cash used in investing activities
(2,293
)
 
(6,736
)
 
(157
)
 
—

 
(9,186
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Cash provided by (used in) intercompany activity
(24,889
)
 
24,889

 
—

 
—

 
—

Repayments of long-term debt
(3,750
)
 
—

 
—

 
—

 
(3,750
)
Repurchases of common stock
(1,366
)
 
—

 
—

 
—

 
(1,366
)
Proceeds from issuance of common stock
5,685

 
—

 
—

 
—

 
5,685

Net cash provided by (used in) by financing activities
(24,320
)
 
24,889

 
—

 
—

 
569

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(529
)
 
—

 
(529
)
Net increase (decrease) in cash and cash equivalents
8,459

 
(1,607
)
 
(1,624
)
 
—

 
5,228

Cash and cash equivalents at beginning of period
68,887

 
7,543

 
25,541

 
—

 
101,971

Cash and cash equivalents at end of period
$
77,346

 
$
5,936

 
$
23,917

 
$
—

 
$
107,199



20
Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2011
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Net cash provided by operating activities
$
1,048

 
$
16,834

 
$
84

 
$
—

 
$
17,966

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Additions to property, plant and equipment
(2,703
)
 
(2,285
)
 
(36
)
 
—

 
(5,024
)
Proceeds from sale of property, plant and equipment
20

 
—

 
—

 
—

 
20

Proceeds from sale of available-for-sale securities
1,494

 
—

 
—

 
—

 
1,494

Net cash used in investing activities
(1,189
)
 
(2,285
)
 
(36
)
 
—

 
(3,510
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Cash provided by (used in) intercompany activity
17,594

 
(17,594
)
 
—

 
—

 
—

Borrowings of long-term debt
260,000

 
—

 
—

 
—

 
260,000

Repayments of long-term debt
(243,989
)
 
—

 
—

 
—

 
(243,989
)
Debt issuance costs
(4,880
)
 
—

 
—

 
—

 
(4,880
)
Repurchases of common stock
(45,530
)
 
—

 
—

 
—

 
(45,530
)
Proceeds from issuance of common stock
3,133

 
—

 
—

 
—

 
3,133

Net cash used in financing activities
(13,672
)
 
(17,594
)
 
—

 
—

 
(31,266
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
1,066

 
—

 
1,066

Net increase (decrease) in cash and cash equivalents
(13,813
)
 
(3,045
)
 
1,114

 
—

 
(15,744
)
Cash and cash equivalents at beginning of period
211,933

 
8,026

 
25,976

 
—

 
245,935

Cash and cash equivalents at end of period
$
198,120

 
$
4,981

 
$
27,090

 
$
—

 
$
230,191



21
Table of Contents


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
This document contains "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 our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: price competition from our existing competitors; new competitors in any of our businesses; a shift in client preferences for different promotional materials, strategies or coupon delivery methods, including, without limitation, as a result of declines in newspaper circulation and/or increased competition from new media formats including digital; an unforeseen increase in paper or postal costs; changes which affect the businesses of our clients and lead to reduced sales promotion spending, including, without limitation, a decrease of marketing budgets which are generally discretionary in nature and easier to reduce in the short-term than other expenses; our substantial indebtedness, and ability to refinance such indebtedness, if necessary, and our ability to incur additional indebtedness, may affect our financial health; the financial condition, including bankruptcies, of our clients, suppliers, senior secured credit facility lenders or other counterparties; certain covenants in our debt documents could adversely restrict our financial and operating flexibility; fluctuations in the amount, timing, pages, weight and kinds of advertising pieces from period to period, due to a change in our clients' promotional needs, inventories and other factors, including, without limitation, high levels of coupon redemption rates; our failure to attract and retain qualified personnel may affect our business and results of operations; a rise in interest rates could increase our borrowing costs; possible governmental regulation or litigation affecting aspects of our business; clients experiencing financial difficulties, or otherwise being unable to meet their obligations as they become due, could affect our results of operations and financial condition; uncertainty in the application and interpretation of applicable state sales tax laws may expose us to additional sales tax liability; and general economic conditions, whether nationally, internationally, or in the market areas in which we conduct our business, including the adverse impact of the ongoing economic downturn on the marketing expenditures and activities of our clients and prospective clients as well as our vendors, with whom we rely on to provide us with quality materials at the right prices and in a timely manner. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional risks include, but are not limited to, those risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2011, or the 2011 Form 10-K, and other filings by us with the United States Securities and Exchange Commission, or the SEC.

Overview
Valassis is one of the nation’s leading media and marketing services companies, offering unparalleled reach and scale to more than 15,000 advertisers. Our 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 our digital offering, including redplum.com and save.com, consumers can find compelling national and local deals online.
Our products and services are positioned to help our clients reach their customers through mass-delivered or targeted programs. We provide our clients with blended media solutions, including shared mail, newspaper, in-store and digital delivery. We offer the only national shared mail distribution network in the industry. We utilize a proprietary patent pending targeting tool that provides our clients with multi-media recommendations and optimization. We are committed to providing innovative marketing solutions to maximize the efficiency and effectiveness of promotions for our clients and to deliver value to consumers how, when and where they want.
Our results for the three months ended March 31, 2012 were adversely impacted by the continuation of reduced advertising spending by clients in the consumer packaged goods (“CPG”) vertical, which began in the third quarter of 2011, across many of our products (the “reduction in CPG programs”). This reduction has occurred in response to the $500 million increase in 2011 in the cost of coupon redemptions paid by CPGs to retailers as compared to 2010.

22
Table of Contents


Consolidated Results of Operations
The following table sets forth our consolidated results of operations for the periods indicated:

 
Three Months Ended
 
March 31,
(in millions of U.S. dollars, except per share data)
2012
 
2011
Revenues:
 
 
 
Shared Mail
$
328.1

 
$
322.6

Neighborhood Targeted
72.2

 
90.1

Free-standing Inserts
76.3

 
89.2

International, Digital Media & Services
42.0

 
45.1

Total revenues
518.6

 
547.0

Cost of sales
388.9

 
408.6

Gross profit
129.7

 
138.4

Selling, general and administrative
77.6

 
78.4

Amortization expense
3.2

 
3.2

Earnings from operations
48.9

 
56.8

Other expenses and income:
 
 
 
Interest expense, net
7.0

 
9.6

Loss on extinguishment of debt
—

 
13.4

Other income, net
(0.7
)
 
(0.9
)
Total other expenses, net
6.3

 
22.1

Earnings before income taxes
42.6

 
34.7

Income tax expense
16.2

 
13.3

Net earnings
$
26.4

 
$
21.4

 
 
 
 
Net earnings per common share, diluted
$
0.60

 
$
0.41

 
 
 
 
Weighted-average common shares outstanding, diluted
44,045

 
52,333


Revenues
We reported revenues of $518.6 million and $547.0 million for the three months ended March 31, 2012 and 2011, respectively, a decrease of 5.2%. This decline in revenues was due primarily to an approximately $28.0 million aggregate reduction in CPG programs affecting many of our products and the absence of custom co-op programs within our Free-standing Inserts ("FSI") segment during the three months ended March 31, 2012.
Cost of Sales
Cost of sales was $388.9 million and $408.6 million&#