PINX:MDPEB Meredith Corporation Class B Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
Commission file number 1-5128
 
 
 
MEREDITH CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-0410230
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1716 Locust Street, Des Moines, Iowa
 
50309-3023
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code:  (515) 284-3000

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 [_]
 

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 (Section 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.
Large accelerated filer [X]
Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller reporting company)
Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_]
No [X]
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Shares of stock outstanding at March 31, 2012
 
Common shares
36,093,296

Class B shares
8,738,220

Total common and Class B shares
44,831,516

 
 




 
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
 
Part I - Financial Information
 
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2012, and June 30, 2011
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended March 31, 2012 and 2011
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended March 31, 2012
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and 2011
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
Signature
 
 
 
 
 
 
 
Index to Attached Exhibits
 








PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 

Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

Assets
March 31,
2012
 
June 30,
2011
(In thousands)
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
24,674

 
$
27,721

Accounts receivable, net
 
219,156

 
212,365

Inventories
 
28,227

 
21,529

Current portion of subscription acquisition costs
 
69,259

 
54,581

Current portion of broadcast rights
 
5,666

 
3,974

Other current assets
 
16,618

 
13,568

Total current assets
 
363,600

 
333,738

Property, plant, and equipment
 
462,355

 
459,257

Less accumulated depreciation
 
(264,892
)
 
(272,819
)
Net property, plant, and equipment
 
197,463

 
186,438

Subscription acquisition costs
 
66,295

 
54,286

Broadcast rights
 
1,327

 
1,292

Other assets
 
75,880

 
66,940

Intangible assets, net
 
581,227

 
545,101

Goodwill
 
730,062

 
525,034

Total assets
 
$
2,015,854

 
$
1,712,829

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
50,000

 
$
50,000

Current portion of long-term broadcast rights payable
 
9,864

 
8,548

Accounts payable
 
56,023

 
82,878

Accrued expenses and other liabilities
 
109,084

 
115,735

Current portion of unearned subscription revenues
 
186,529

 
151,831

Total current liabilities
 
411,500

 
408,992

Long-term debt
 
370,000

 
145,000

Long-term broadcast rights payable
 
5,008

 
5,431

Unearned subscription revenues
 
139,002

 
120,024

Deferred income taxes
 
185,775

 
160,709

Other noncurrent liabilities
 
104,293

 
97,688

Total liabilities
 
1,215,578

 
937,844

Shareholders' equity
 
 
 
 
Series preferred stock
 

 

Common stock
 
36,093

 
36,282

Class B stock
 
8,738

 
8,776

Additional paid-in capital
 
54,609

 
58,274

Retained earnings
 
716,314

 
687,816

Accumulated other comprehensive loss
 
(15,478
)
 
(16,163
)
Total shareholders' equity
 
800,276

 
774,985

Total liabilities and shareholders' equity
 
$
2,015,854

 
$
1,712,829


See accompanying Notes to Condensed Consolidated Financial Statements.

1


Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)

 
Three Months
 
Nine Months
Periods Ended March 31,
2012
 
2011
 
2012
 
2011
(In thousands except per share data)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Advertising
$
191,472

 
$
185,210

 
$
559,425

 
$
603,790

Circulation
76,331

 
66,453

 
206,822

 
196,130

All other
77,710

 
87,218

 
235,892

 
247,634

Total revenues
345,513

 
338,881

 
1,002,139

 
1,047,554

Operating expenses
 
 
 
 
 
 
 
Production, distribution, and editorial
136,454

 
134,437

 
401,757

 
414,529

Selling, general, and administrative
159,352

 
142,130

 
437,257

 
432,568

Depreciation and amortization
11,407

 
9,965

 
31,744

 
29,413

Total operating expenses
307,213

 
286,532

 
870,758

 
876,510

Income from operations
38,300

 
52,349

 
131,381

 
171,044

Interest expense, net
(3,283
)
 
(3,147
)
 
(8,899
)
 
(10,009
)
Earnings from continuing operations before income taxes
35,017

 
49,202

 
122,482

 
161,035

Income taxes
(13,848
)
 
(18,026
)
 
(48,092
)
 
(62,700
)
Earnings from continuing operations
21,169

 
31,176

 
74,390

 
98,335

Loss from discontinued operations, net of taxes

 
(339
)
 

 
(1,234
)
Net earnings
$
21,169

 
$
30,837

 
$
74,390

 
$
97,101

 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.47

 
$
0.69

 
$
1.66

 
$
2.16

Discontinued operations

 
(0.01
)
 

 
(0.03
)
Basic earnings per share
$
0.47

 
$
0.68

 
$
1.66

 
$
2.13

Basic average shares outstanding
44,800

 
45,594

 
44,882

 
45,550

 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.47

 
$
0.68

 
$
1.65

 
$
2.14

Discontinued operations

 
(0.01
)
 

 
(0.02
)
Diluted earnings per share
$
0.47

 
$
0.67

 
$
1.65

 
$
2.12

Diluted average shares outstanding
45,296

 
45,998

 
45,141

 
45,888

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.3825

 
$
0.2550

 
$
1.0200

 
$
0.7150


See accompanying Notes to Condensed Consolidated Financial Statements.



2


Meredith Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)

(In thousands except per share data)
Common
Stock - $1
par value
 
Class B
Stock - $1
par value
Additional
Paid-in
Capital
 
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at June 30, 2011
 
$
36,282

 
 
$
8,776

 
$
58,274

 
$
687,816

 
$
(16,163
)
 
$
774,985

Net earnings
 

 
 

 

 
74,390

 

 
74,390

Other comprehensive income, net
 

 
 

 

 

 
685

 
685

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
75,075

Share-based incentive plan transactions
 
399

 
 

 
4,103

 

 

 
4,502

Purchases of Company stock
 
(625
)
 
 
(1
)
 
(15,958
)
 

 

 
(16,584
)
Share-based compensation
 

 
 

 
9,588

 

 

 
9,588

Conversion of Class B to common stock
 
37

 
 
(37
)
 

 

 

 

Dividends paid
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 

 
 

 

 
(36,957
)
 

 
(36,957
)
Class B stock
 

 
 

 

 
(8,935
)
 

 
(8,935
)
Tax benefit from incentive plans
 

 
 

 
(1,398
)
 

 

 
(1,398
)
Balance at March 31, 2012
 
$
36,093

 
 
$
8,738

 
$
54,609

 
$
716,314

 
$
(15,478
)
 
$
800,276


See accompanying Notes to Condensed Consolidated Financial Statements.


3


Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended March 31,
2012
 
2011
(In thousands)
 
 
 
Cash flows from operating activities
 
 
 
Net earnings
$
74,390

 
$
97,101

Adjustments to reconcile net earnings to net cash provided by operating activities
 
 
 
Depreciation
23,350

 
21,998

Amortization
8,394

 
7,421

Share-based compensation
9,588

 
7,992

Deferred income taxes
27,511

 
37,730

Amortization of broadcast rights
9,174

 
12,895

Payments for broadcast rights
(10,009
)
 
(14,242
)
Provision for write-down of impaired assets
946

 

Fair value adjustment to contingent consideration
(1,018
)
 

Excess tax benefits from share-based payments
(346
)
 
(427
)
Changes in assets and liabilities
(36,342
)
 
(30,093
)
Net cash provided by operating activities
105,638

 
140,375

Cash flows from investing activities
 
 
 
Acquisitions of businesses
(243,897
)
 
(39,141
)
Additions to property, plant, and equipment
(30,739
)
 
(19,625
)
Other
(781
)
 

Net cash used in investing activities
(275,417
)
 
(58,766
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt
295,000

 
12,500

Repayments of long-term debt
(70,000
)
 
(87,500
)
Purchases of Company stock
(16,584
)
 
(9,724
)
Dividends paid
(45,892
)
 
(32,681
)
Proceeds from common stock issued
4,502

 
7,526

Excess tax benefits from share-based payments
346

 
427

Other
(640
)
 
(51
)
Net cash provided by (used in) financing activities
166,732

 
(109,503
)
Net decrease in cash and cash equivalents
(3,047
)
 
(27,894
)
Cash and cash equivalents at beginning of period
27,721

 
48,574

Cash and cash equivalents at end of period
$
24,674

 
$
20,680


See accompanying Notes to Condensed Consolidated Financial Statements.


4


Meredith Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements
 
(Unaudited)
 


1. Summary of Significant Accounting Policies

Basis of presentation—The condensed consolidated financial statements include the accounts of Meredith Corporation and its wholly owned subsidiaries (Meredith or the Company), after eliminating all significant intercompany balances and transactions. Meredith does not have any off-balance sheet arrangements. The Company's use of special-purpose entities is limited to Meredith Funding Corporation, whose activities are fully consolidated in Meredith's condensed consolidated financial statements.

The condensed consolidated financial statements as of March 31, 2012, and for the three and nine months ended March 31, 2012 and 2011, are unaudited but, in management's opinion, include all normal, recurring adjustments necessary for a fair presentation of the results of interim periods. The year-end condensed consolidated balance sheet data as of June 30, 2011, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements, including the related notes, are condensed and presented in accordance with GAAP. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements, which are included in Meredith's Annual Report on Form 10-K for the year ended June 30, 2011, filed with the United States Securities and Exchange Commission.

Recently Adopted Accounting Standards—In December 2010, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement related to intangibles - goodwill and other, which requires a company to consider whether there are any adverse qualitative factors indicating that an impairment may exist in performing step 2 of the impairment test for reporting units with zero or negative carrying amounts. The Company adopted this pronouncement on July 1, 2011. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

In December 2010, the FASB issued an accounting pronouncement related to business combinations, which requires that when comparative financial statements are presented, revenue and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The disclosure provisions are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. Effective July 1, 2011, the Company adopted this pronouncement, but was not subject to the disclosure requirements in the first nine months of fiscal 2012 due to the immateriality on the condensed consolidated statement of earnings of the acquisitions made by the Company during the period.

Recently Issued Accounting Standards—In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued a deferral of the effective date for the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other requirements of the guidance are not affected by this deferral. Thus the Company will adopt all other requirements of the guidance for our fiscal year beginning July 1, 2012. As this guidance only

5


amends the presentation of the components of comprehensive income, its adoption will not have an impact on the Company’s consolidated financial position or results of operations.

In September 2011, the FASB amended existing guidance related to intangibles - goodwill and other by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. This pronouncement is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We intend to adopt this guidance for our fiscal year beginning July 1, 2012. We do not believe the adoption of this guidance will have a material impact on our financial statements.


2. Acquisitions

Effective July 1, 2011, Meredith acquired 100 percent of the outstanding stock of the EatingWell Media Group (EatingWell). The results of EatingWell's operations have been included in the condensed consolidated financial statements since that date. The EatingWell portfolio includes a bi-monthly magazine, a website, a content licensing and custom marketing program, a Healthy-in-a-Hurry mobile recipe application, and a series of high-quality food and nutrition-related books and cookbooks. The cash purchase price was $28.0 million.

On October 31, 2011, Meredith completed its acquisition of EveryDay with Rachael Ray magazine and its related digital assets (collectively Rachael Ray). In addition, Meredith announced it has finalized a 10-year licensing agreement with Watch Entertainment Inc. for the award-winning brand. The results of Rachael Ray's operations have been included in the condensed consolidated financial statements since that date. The cash purchase price was $4.3 million.

On January 20, 2012, Meredith completed its acquisition of FamilyFun magazine and its related assets, including its special interest publications, as well as the Toy Hopper and other digital magazine application (collectively FamilyFun). The results of FamilyFun's operations have been included in the condensed consolidated financial statements since that date. The cash purchase price was $12.0 million.

Effective March 1, 2012, Meredith acquired 100 percent of the outstanding stock of Allrecipes.com, Inc. Allrecipes.com is the world's largest digital food brand. It currently has a database of more than 500,000 recipes. The Allrecipes.com mobile applications have been downloaded by more than 11 million consumers. It is also the top food recipe channel on YouTube. The results of Allrecipes.com operations have been included in the condensed consolidated financial statements since that date. The cash purchase price was $175.0 million.


6


As of the date of each acquisition, Meredith allocates the purchase price to the assets acquired and liabilities assumed based on their respective fair values. The Company is in the process of obtaining third-party valuations of intangible assets for certain recent acquisitions; thus, provisional measurements of intangible assets, goodwill, and deferred income tax balances have been used and are subject to change. The following table summarizes the total estimated fair values of the assets acquired and liabilities assumed at the various acquisition dates during the nine months ended March 31, 2012.

(in thousands)
 
Accounts receivable
$
12,797

Other current assets
2,803

Property, plant, and equipment
3,862

Noncurrent assets
3,835

Intangible assets
44,690

Total identifiable assets acquired
67,987

Deferred subscription revenue
(44,578
)
Other current liabilities
(4,723
)
Long-term liabilities
(4,442
)
Total liabilities assumed
(53,743
)
Net identifiable assets acquired
14,244

Goodwill
205,067

Net assets acquired
$
219,311


The following table provides details of the acquired intangible assets by acquisition.

(in thousands)
EatingWell
Rachael Ray
FamilyFun
Allrecipes.com
Total
Intangible assets
 
 
 
 
 
subject to amortization
 
 
 
 
 
Advertiser relationships
$
270

$

$

$
3,600

$
3,870

Customer lists
130




130

Developed content
2,220


3,700

5,100

11,020

Other

3,000



3,000

Total
2,620

3,000

3,700

8,700

18,020

Intangible assets not
 
 
 
 
 
subject to amortization
 
 
 
 
 
Internet domain names
920




920

Trademarks
4,150

4,500

5,500

11,600

25,750

Total
5,070

4,500

5,500

11,600

26,670

Intangible assets, total
$
7,690

$
7,500

$
9,200

$
20,300

$
44,690


The EatingWell customer lists have a 2 year useful life, the advertiser relationships have a 2.5 year useful life, and the majority of the developed content has a 10 year useful life. The Rachael Ray other intangible asset has a 2.6 year useful life. FamilyFun's developed content has a 2 year useful life. For Allrecipes.com, the advertiser relationships have a 9 year useful life and the developed content has an 8.5 year useful life. All useful lives have been provisionally assigned pending the finalization of the third-party valuations.

For all acquisitions, goodwill is attributable primarily to expected synergies and the assembled workforces. As noted earlier, the fair value of the acquired assets and liabilities is provisional pending receipt of the final valuation reports.

7



Eating Well and Allrecipes.com are subject to legal and regulatory requirements, including but not limited to those related to taxation, in each of the jurisdictions in which they operate. The Company has conducted a preliminary assessment of liabilities arising in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisitions for all identified liabilities in accordance with the business combinations guidance. However, the Company is continuing its review of these matters during the measurement period, and if new information about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized or any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized.

The impact of the acquisitions is not material to the Company's results of operations; therefore, pro forma financial information has not been provided. Acquisition related costs were expensed by the Company in the period in which they were incurred. The Company recorded $2.6 million in acquisition charges in the first nine months of fiscal 2012, with $2.5 million of this being recorded in the third quarter of fiscal 2012. These costs are included in the selling, general and administrative line in the Condensed Consolidated Statement of Earnings.

In fiscal 2011, the Company acquired the remaining 80.01 percent of the outstanding common shares of The Hyperfactory Limited International (Hyperfactory). At the time of acquisition, the Company recorded $7.1 million in contingent consideration. During the fourth quarter of fiscal 2011, the Company recognized a non-cash credit to operations of $6.3 million, reducing the estimated contingent consideration payable. During the third quarter of fiscal 2012, the Company recognized a non-cash credit to operations of $1.0 million to write-off the remaining estimated contingent consideration payable as the Company does not expect to owe any additional amounts related to this acquisition. These credits were recorded in the selling, general, and administrative expense line on the Condensed Consolidated Statements of Earnings.


3.  Discontinued Operations

The fiscal 2011 loss from discontinued operations represents the operating results, net of taxes, of ReadyMade magazine. The revenues and expenses of ReadyMade magazine, along with associated taxes, were removed from continuing operations and reclassified into a single line item amount on the Condensed Consolidated Statement of Earnings titled loss from discontinued operations, net of taxes, as follows:

Periods Ended March 31, 2011
Three Months
 
Nine Months
(In thousands except per share data)
 
 
 
Revenues
$
1,850

 
$
4,459

Costs and expenses
(2,405
)
 
(6,482
)
Loss before income taxes
(555
)
 
(2,023
)
Income taxes
216

 
789

Loss from discontinued operations
$
(339
)
 
$
(1,234
)
Loss from discontinued operations per share:
 
 
 
Basic
$
(0.01
)
 
$
(0.03
)
Diluted
(0.01
)
 
(0.02
)



8


4. Inventories

Major components of inventories are summarized below. Of total net inventory values shown, 35 percent are under the last-in first-out (LIFO) method at March 31, 2012, and 46 percent at June 30, 2011.

(In thousands)
March 31,
2012
 
June 30,
2011
Raw materials
$
17,476

 
$
15,633

Work in process
15,210

 
11,723

Finished goods
1,877

 
1,609

 
34,563

 
28,965

Reserve for LIFO cost valuation
(6,336
)
 
(7,436
)
Inventories
$
28,227

 
$
21,529



5. Intangible Assets and Goodwill

Intangible assets consist of the following:
 
March 31, 2012
 
 
June 30, 2011
(In thousands)
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Noncompete agreements
$
240

 
$
(229
)
 
$
11

 
 
$
480

 
$
(424
)
 
$
56

Advertiser relationships
22,270

 
(17,857
)
 
4,413

 
 
18,400

 
(15,772
)
 
2,628

Customer lists
11,460

 
(7,133
)
 
4,327

 
 
11,330

 
(5,889
)
 
5,441

Other
15,750

 
(1,887
)
 
13,863

 
 
4,450

 
(3,256
)
 
1,194

Local media
 
 
 
 
 
 
 
 
 
 
 
 
Network affiliation agreements
218,559

 
(111,419
)
 
107,140

 
 
218,559

 
(107,750
)
 
110,809

Total
$
268,279

 
$
(138,525
)
 
129,754

 
 
$
253,219

 
$
(133,091
)
 
120,128

Intangible assets not
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
 
 
 
 
1,916

 
 
 
 
 
 
1,166

Trademarks
 
 
 
 
150,481

 
 
 
 
 
 
124,731

Local media
 
 
 
 
 
 
 
 
 
 
 
 
FCC licenses
 
 
 
 
299,076

 
 
 
 
 
 
299,076

Total
 
 
 
 
451,473

 
 
 
 
 
 
424,973

Intangible assets, net
 
 
 
 
$
581,227

 
 
 
 
 
 
$
545,101


Amortization expense was $8.4 million for the nine months ended March 31, 2012. Annual amortization expense for intangible assets is expected to be as follows: $11.9 million in fiscal 2012, $11.2 million in fiscal 2013, $10.0 million in fiscal 2014, $7.4 million in fiscal 2015, and $6.3 million in fiscal 2016.

For certain acquisitions consummated prior to July 1, 2009, the sellers are entitled to contingent payments should the acquired operations achieve certain financial targets generally based on earnings before interest and taxes, as defined in the respective acquisition agreements. None of the contingent consideration is dependent on the continued employment of the sellers. As of March 31, 2012, the Company estimates that future aggregate contingent payments for such acquisitions will be $2.4 million, which is the maximum amount of contingent

9


payments the sellers may receive. The additional purchase consideration, if any, will be recorded as additional goodwill on our Condensed Consolidated Balance Sheet when the contingencies are resolved. For the nine months ended March 31, 2011, the Company recognized $8.6 million, which increased goodwill. No additional consideration was accrued in the nine-month period ended March 31, 2012.

Changes in the carrying amount of national media goodwill were as follows:

Nine Months Ended March 31,
2012
 
2011
(In thousands)
 
 
 
Balance at beginning of period
$
525,034

 
$
489,334

Acquisitions
205,067

 
25,249

Other
(39
)
 

Balance at end of period
$
730,062

 
$
514,583



6. Restructuring Accrual

Changes in the Company's restructuring accrual were as follows:

Nine Months Ended March 31,
2012
 
2011
(In thousands)
 
 
 
Balance at beginning of period
$
8,042

 
$
5,538

Severance accrual
9,955

 

Vacated leased space accruals
2,703

 

Cash payments
(6,576
)
 
(2,258
)
Reversal of excess accrual
(592
)
 

Balance at end of period
$
13,532

 
$
3,280


In March 2012, management committed to a performance improvement plan related primarily to business realignments that included selected workforce reductions. In connection with this plan, in the third quarter of fiscal 2012, the Company recorded a pre-tax restructuring charge of $13.8 million including severance and benefit costs of $10.0 million related to the involuntary termination of employees, accruals for vacated lease space of $2.7 million, the write-off of deferred subscription acquisition costs of $0.7 million and other miscellaneous write-offs of $0.4 million. The majority of severance costs will be paid out over the next 12 months. The Company also recorded $0.6 million in reversals of excess restructuring reserves accrued in prior fiscal years. The restructuring charge and credit for the reversal of excess restructuring reserves are recorded in the selling, general, and administrative line in the Condensed Consolidated Statement of Earnings.


10


7. Long-term Debt

Long-term debt consists of the following:

(In thousands)
March 31,
2012
 
June 30,
2011
Variable-rate credit facilities
 
 
 
Asset-backed bank facility of $100 million, due 4/25/2013
$
75,000

 
$
70,000

Revolving credit facility of $150 million, due 6/16/2013
20,000

 

 
 
 
 
Private placement notes
 
 
 
5.04% senior notes, due 6/16/2012
50,000

 
50,000

6.70% senior notes, due 7/13/2013
50,000

 
50,000

7.19% senior notes, due 7/13/2014
25,000

 
25,000

2.62% senior notes, due 3/1/2015
50,000

 

3.04% senior notes, due 3/1/2016
50,000

 

3.04% senior notes, due 3/1/2017
50,000

 

3.04% senior notes, due 3/1/2018
50,000

 

Total long-term debt
420,000

 
195,000

Current portion of long-term debt
(50,000
)
 
(50,000
)
Long-term debt
$
370,000

 
$
145,000


In connection with the asset-backed bank facility, Meredith entered into a revolving agreement to sell all of its rights, title, and interest in the majority of its accounts receivable related to advertising and miscellaneous revenues to Meredith Funding Corporation, a special-purpose entity established to purchase accounts receivable from Meredith. At March 31, 2012, $152.9 million of accounts receivable net of reserves was outstanding under the agreement. Meredith Funding Corporation in turn may sell receivable interests to a major national bank. In consideration of the sale, Meredith receives cash and a subordinated note, bearing interest at the prime rate, 3.25 percent at March 31, 2012, from Meredith Funding Corporation. The agreement is structured as a true sale under which the creditors of Meredith Funding Corporation will be entitled to be satisfied out of the assets of Meredith Funding Corporation prior to any value being returned to Meredith or its creditors. The accounts of Meredith Funding Corporation are fully consolidated in Meredith's condensed consolidated financial statements.


8. Fair Value Measurement

We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize upon disposition.

The fair value hierarchy consists of three broad levels of inputs that may be used to measure fair value, which are described below:

Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3
Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates.


11


The carrying amount and estimated fair value of broadcast rights payable were $14.9 million and $14.5 million, respectively, as of March 31, 2012, and $14.0 million and $13.5 million, respectively, as of June 30, 2011. The fair value of broadcast rights payable was determined using the present value of expected future cash flows discounted at the Company's current borrowing rate.

The carrying amount and estimated fair value of long-term debt were $420.0 million and $423.7 million, respectively, as of March 31, 2012, and $195.0 million and $205.1 million, respectively, as of June 30, 2011. The fair value of long-term debt was determined using the present value of expected future cash flows using borrowing rates currently available for debt with similar terms and maturities.


9. Pension and Postretirement Benefit Plans

The following table presents the components of net periodic benefit costs:

 
Three Months
 
 
Nine Months
Periods Ended March 31,
2012
 
2011
 
 
2012
 
2011
(In thousands)
 
 
 
 
 
 
 
 
Pension benefits
 
 
 
 
 
 
 
 
Service cost
$
2,359

 
$
2,412

 
 
$
7,077

 
$
7,235

Interest cost
1,497

 
1,324

 
 
4,491

 
3,972

Expected return on plan assets
(2,504
)
 
(2,172
)
 
 
(7,512
)
 
(6,516
)
Prior service cost amortization
92

 
93

 
 
276

 
279

Actuarial loss amortization
401

 
1,167

 
 
1,203

 
3,500

Net periodic benefit costs
$
1,845

 
$
2,824

 
 
$
5,535

 
$
8,470

 
 
 
 
 
 
 
 
 
Postretirement benefits
 
 
 
 
 
 
 
 
Service cost
$
113

 
$
119

 
 
$
339

 
$
357

Interest cost
240

 
198

 
 
720

 
594

Prior service cost amortization
(134
)
 
(184
)
 
 
(402
)
 
(552
)
Actuarial loss amortization
15

 

 
 
45

 

Net periodic benefit costs
$
234

 
$
133

 
 
$
702

 
$
399



10. Comprehensive Income

Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. The Company's comprehensive income includes net earnings and changes in prior service cost and net actuarial losses from pension and postretirement benefit plans. Total comprehensive income for the three months ended March 31, 2012 and 2011, was $21.4 million and $31.5 million, respectively. Total comprehensive income for the nine months ended March 31, 2012 and 2011, was $75.1 million and $99.1 million, respectively.



12


11. Earnings per Share

The following table presents the calculations of earnings per share:

 
Three Months
 
 
Nine Months
Periods Ended March 31,
2012
 
2011
 
 
2012
 
2011
(In thousands except per share data)
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
21,169

 
$
31,176

 
 
$
74,390

 
$
98,335

Basic average shares outstanding
44,800

 
45,594

 
 
44,882

 
45,550

Dilutive effect of stock options and equivalents
496

 
404

 
 
259

 
338

Diluted average shares outstanding
45,296

 
45,998

 
 
45,141

 
45,888

Earnings per share from continuing operations
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.47

 
$
0.69

 
 
$
1.66

 
$
2.16

Diluted earnings per share
0.47

 
0.68

 
 
1.65

 
2.14


For the three months ended March 31, 2012 and 2011, antidilutive options excluded from the above calculations totaled 3,364,000 (with a weighted average exercise price of $45.98) and 5,947,000 (with a weighted average exercise price of $39.04), respectively. For the nine months ended March 31, 2012 and 2011, antidilutive options excluded from the above calculations totaled 4,713,000 (with a weighted average exercise price of $41.05) and 5,964,000 (with a weighted average exercise price of $39.07), respectively.

In the nine months ended March 31, 2012 and 2011, options were exercised to purchase 44,700 and 168,650 common shares, respectively.


12. Segment Information

Meredith is a diversified media company focused primarily on the home and family marketplace. On the basis of products and services, the Company has established two reportable segments: national media and local media. There have been no changes in the basis of segmentation since June 30, 2011. There are no material intersegment transactions.

There are two principal financial measures reported to the chief executive officer for use in assessing segment performance and allocating resources. Those measures are operating profit and earnings from continuing operations before interest, taxes, depreciation, and amortization (EBITDA). Operating profit for segment reporting, disclosed below, is revenues less operating costs excluding unallocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods, primarily number of employees. Unallocated corporate expenses are corporate overhead expenses not directly attributable to the operating groups. In accordance with authoritative guidance on disclosures about segments of an enterprise and related information, EBITDA is not presented below.


13


The following table presents financial information by segment:

 
Three Months
 
 
Nine Months
Periods Ended March 31,
2012
 
2011
 
 
2012
 
2011
(In thousands)
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
National media
$
267,603

 
$
267,886

 
 
$
770,530

 
$
803,084

Local media
77,910

 
70,995

 
 
231,609

 
244,470

Total revenues
$
345,513

 
$
338,881

 
 
$
1,002,139

 
$
1,047,554

 
 
 
 
 
 
 
 
 
Operating profit
 
 
 
 
 
 
 
 
National media
$
23,330

 
$
48,467

 
 
$
95,131

 
$
130,297

Local media
22,654

 
13,281

 
 
60,867

 
68,558

Unallocated corporate
(7,684
)
 
(9,399
)
 
 
(24,617
)
 
(27,811
)
Income from operations
$
38,300

 
$
52,349

 
 
$
131,381

 
$
171,044

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
National media
$
4,615

 
$
3,346

 
 
$
11,808

 
$
10,035

Local media
6,299

 
6,109

 
 
18,463

 
17,853

Unallocated corporate
493

 
510

 
 
1,473

 
1,525

Total depreciation and amortization
$
11,407

 
$
9,965

 
 
$
31,744

 
$
29,413




14


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations



EXECUTIVE OVERVIEW

Meredith Corporation is the leading media and marketing company serving American women. Meredith features multiple well-known national brands - including Better Homes and Gardens, Parents, Family Circle, Allrecipes.com, Ladies' Home Journal, Fitness, More, American Baby, EveryDay with Rachael Ray, and FamilyFun - with local television brands in fast growing markets. Meredith is the industry leader in creating content in key consumer interest areas such as home, family, food, health and wellness, and self-development. Meredith uses multiple distribution platforms - including print, television, digital, mobile, tablets, and video - to give consumers content they desire and to deliver the messages of its advertising and marketing partners. Additionally, Meredith uses its many assets to create powerful custom marketing solutions for many of the nation's top brands and companies.

Meredith operates two business segments. The national media group consists of magazine publishing, interactive media, integrated marketing, brand licensing, database-related activities, and other related operations. The local media group consists of 12 network-affiliated television stations, one radio station, related interactive media operations, and video-related operations. Both segments operate primarily in the U.S. and compete against similar media and other types of media on both a local and national basis. National media accounted for 77 percent of the Company's $1.0 billion in revenues in the first nine months of fiscal 2012 while local media revenues represented 23 percent.


NATIONAL MEDIA

Advertising revenues made up 46 percent of national media's first nine months' revenues. These revenues were generated from the sale of advertising space in the Company's magazines and websites to clients interested in promoting their brands, products, and services to consumers. Circulation revenues accounted for 27 percent of national media's first nine months' revenues. Circulation revenues result from the sale of magazines to consumers through subscriptions and by single copy sales on newsstands, primarily at major retailers and grocery/drug stores. The remaining 27 percent of national media's revenues came from a variety of activities that included the sale of integrated marketing products and services and books as well as brand licensing and other related activities. National media's major expense categories are production and delivery of publications and promotional mailings and employee compensation costs.


LOCAL MEDIA

Local media derives the vast majority of its revenues—88 percent in the first nine months of fiscal 2012—from the sale of advertising, both on the air and on our stations' websites. The remainder comes from television retransmission fees, television production services and products, and other services. Political advertising revenues are cyclical in that they are significantly greater during biennial election campaigns (which take place primarily in odd-numbered fiscal years) than at other times. Local media's major expense categories are employee compensation and programming costs.


FIRST NINE MONTHS FISCAL 2012 FINANCIAL OVERVIEW

Meredith completed several strategic acquisitions including the March 2012 acquisition of Allrecipes.com, Inc.; the January 2012 acquisition of FamilyFun and its related assets, including its special interest publications, as well as the Toy Hopper and other digital magazine applications; the October 2011

15


acquisition of EveryDay with Rachael Ray magazine and its related digital assets; and the July 2011 acquisition of EatingWell Media Group. In addition, in October 2011, Meredith invested in iris Nation Worldwide Limited (iris), a leading global marketing company.

In February 2012, the Company entered into a $200 million note purchase agreement. Proceeds were used for the acquisition of the stock of Allrecipes.com, Inc. and for general corporate purposes.

National media revenues decreased 4 percent primarily reflecting declines in magazine advertising and integrated marketing revenues. National media operating profit decreased 27 percent primarily due to restructuring charges recorded in the third quarter as discussed below and due to declines in operating profits of our integrated marketing, interactive media, and magazine operations. In addition, the national media group recorded $2.6 million in acquisition costs that were expensed in the period.

Local media revenues and operating profit decreased 5 percent and 11 percent, respectively. Meredith recorded $30.8 million less in political advertising revenues in the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011, due to the normal cyclical nature of political advertising. Partially offsetting this decline was a 6 percent increase in non-political advertising and a 3 percent decrease in operating costs.

In the third quarter of fiscal 2012, management committed to a performance improvement plan related primarily to business realignments that included selected workforce reductions. In connection with this plan, the Company recorded a pre-tax restructuring charge of $13.8 million. This charge includes $10.0 million for severance and benefit costs, vacated lease accruals of $2.7 million, other miscellaneous write‑downs of $1.1 million.

Diluted earnings per share from continuing operations decreased 23 percent to $1.65 from $2.14 in the prior-year first nine months.


ACQUISITIONS

During fiscal 2012, Meredith completed several strategic acquisitions including the March 2012 acquisition of Allrecipes.com; the January 2012 acquisition of FamilyFun and its related assets, including its special interest publications, as well as the Toy Hopper and other digital magazine applications; the October 2011 acquisition of EveryDay with Rachael Ray magazine and its related digital assets; and the July 2011 acquisition of EatingWell Media Group. Collectively, these acquisitions are referred to as the "Current Year Acquisitions." The results of these acquisitions have been included in the Company's consolidated operating results since their respective acquisition dates. See Note 2 to the condensed consolidated financial statements for further information.


DISCONTINUED OPERATIONS

In fiscal 2011, the Company discontinued the operations of ReadyMade magazine. The revenues and expenses, along with associated taxes, were reclassified from continuing operations into a single line item amount on the Condensed Consolidated Statements of Earnings titled loss from discontinued operations, net of taxes. Unless stated otherwise, as in the section titled Discontinued Operations, all of the information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations.


USE OF NON-GAAP FINANCIAL MEASURES

These condensed consolidated financial statements, including the related notes, are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Our analysis of local media results includes references to earnings before interest, taxes, depreciation, and amortization (EBITDA). EBITDA

16


and EBITDA margin are non-GAAP measures. We use EBITDA along with operating profit and other GAAP measures to evaluate the financial performance of our local media segment. EBITDA is a common measure of performance in the broadcasting industry and is used by investors and financial analysts, but its calculation may vary among companies. Local media EBITDA is not used as a measure of liquidity, nor is it necessarily indicative of funds available for our discretionary use.

We believe the non-GAAP measures used in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contribute to an understanding of our financial performance and provide an additional analytic tool to understand our results from core operations and to reveal underlying trends. These measures should not, however, be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.


RESULTS OF OPERATIONS

Three Months Ended March 31,
2012
 
2011
 
Change

(In thousands except per share data)
 
 
 
 
 
Total revenues
$
345,513

 
$
338,881

 
2
 %
Operating expenses
307,213

 
286,532

 
7
 %
Income from operations
$
38,300

 
$
52,349

 
(27
)%
Earnings from continuing operations
$
21,169

 
$
31,176

 
(32
)%
Net earnings
21,169

 
30,837

 
(31
)%
Diluted earnings per share from continuing operations
0.47

 
0.68

 
(31
)%
Diluted earnings per share
0.47

 
0.67

 
(30
)%

Nine Months Ended March 31,
2012
 
2011
 
Change
(In thousands except per share data)
 
 
 
 
 
Total revenues
$
1,002,139

 
$
1,047,554

 
(4
)%
Operating expenses
870,758

 
876,510

 
(1
)%
Income from operations
$
131,381

 
$
171,044

 
(23
)%
Earnings from continuing operations
$
74,390

 
$
98,335

 
(24
)%
Net earnings
74,390

 
97,101

 
(23
)%
Diluted earnings per share from continuing operations
1.65

 
2.14

 
(23
)%
Diluted earnings per share
1.65

 
2.12

 
(22
)%

The following sections provide an analysis of the results of operations for the national media and local media segments and an analysis of the consolidated results of operations for the three and nine months ended March 31, 2012, compared with the prior-year periods. This commentary should be read in conjunction with the interim condensed consolidated financial statements presented elsewhere in this report and with our Annual Report on Form 10-K for the year ended June 30, 2011.



17


NATIONAL MEDIA

National media operating results were as follows:

Three Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Advertising revenue
$
122,977

 
$
120,997

 
2
 %
Circulation revenue
76,331

 
66,453

 
15
 %
Other revenue
68,295

 
80,436

 
(15
)%
Total revenues
267,603

 
267,886

 
 %
Operating expenses
(244,273
)
 
(219,419
)
 
11
 %
Operating profit
$
23,330

 
$
48,467

 
(52
)%
Operating profit margin
8.7
%
 
18.1
%
 
 

Nine Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Advertising revenue
$
354,614

 
$
378,851

 
(6
)%
Circulation revenue
206,822

 
196,130

 
5
 %
Other revenue
209,094

 
228,103

 
(8
)%
Total revenues
770,530

 
803,084

 
(4
)%
Operating expenses
(675,399
)
 
(672,787
)
 
 %
Operating profit
$
95,131

 
$
130,297

 
(27
)%
Operating profit margin
12.3
%
 
16.2
%
 
 

In the following discussion, references to comparable results for the three months ended March 31, 2012, and the first nine months of fiscal 2012 as compared to the prior-year periods exclude the impact of the Current Year Acquisitions that occurred during fiscal 2012.

Revenues
National media advertising revenues increased 2 percent in the third quarter of fiscal 2012 and decreased 6 percent for the nine-month period. Magazine advertising revenues decreased 2 percent in the third quarter and 8 percent for the first nine months of fiscal 2012. Total advertising pages increased in the low-single digits on a percentage basis in the third quarter, while they decreased in the mid-single digits in the first nine months of fiscal 2012. On a comparable basis, magazine advertising revenues decreased 10 percent in the third quarter and 11 percent for the first nine months of fiscal 2012 as total advertising pages decreased in the high-single digits on a percentage basis in both periods. Among our core advertising categories, non-prescription drugs and media and entertainment showed strength while demand was weaker for the prescription drug and retail categories. Online advertising revenues in our interactive media operations increased 70 percent in the third quarter and 9 percent in the first nine months of fiscal 2012. On a comparable basis, online advertising revenues increased over 20 percent in the third quarter and declined 9 percent in the first nine months of fiscal 2012.

Magazine circulation revenues increased 15 percent in the third quarter and 5 percent in the first nine months of fiscal 2012. Comparable magazine circulation revenues increased 2 percent in the third quarter as both subscription and newsstand revenues increased slightly. For the nine-month period, comparable magazine circulation revenues declined 1 percent as both subscription and newsstand revenues decreased slightly.

Other revenues decreased 15 percent in the third quarter and 8 percent in the first nine months of fiscal 2012. Meredith Xcelerated Marketing (MXM) revenues were down approximately 20 percent in the third quarter. MXM revenues were down in the low teens for the first nine months of fiscal 2012. The decline in MXM revenues is primarily due to certain clients of MXM scaling back programs. While brand licensing revenues were down in the mid-single digits in the third quarter of fiscal 2012, they were flat for the nine-month period.

18


Operating Expenses
National media operating expenses increased 11 percent in the third quarter and were flat in the nine-month period. On a comparable basis, national media operating expenses increased 2 percent in the third quarter and decreased 4 percent in the nine-month period. Performance-based incentive accruals, paper, and postage declined in both periods primarily due to the decrease in advertising pages. The decrease in the volume of paper used was partially offset by a mid-single digit increase in average paper prices for the nine-month period. For the third quarter, average paper prices were flat. In accord with MXM's revenues, marketing production expenses also declined. While circulation expenses increased in the third quarter, they declined 1 percent for the first nine months of fiscal 2012. In addition, the Company recorded $2.6 million in acquisition cost in the first nine months of fiscal 2012, with $2.5 million of this being recorded in the third quarter.

In the third quarter of fiscal 2012, the national media group recorded $9.9 million for severance and benefit costs, vacated lease accruals of $1.6 million, the write-off of deferred subscription acquisition costs of $0.7 million, and other miscellaneous write-downs and accruals of $0.4 million. Partially offsetting these charges was a $0.6 million reversal of excess restructuring accrual previously recorded by the national media segment and a $1.0 million reduction in contingent consideration payable. These items were reported as increases and decreases, as appropriate, in selling, general, and administrative expenses.

Operating Profit
National media operating profit declined 52 percent in the third quarter of fiscal 2012 and 27 percent in the nine-month period compared with the respective prior-year periods. Comparable national media operating profit decreased 55 percent in the third quarter and 29 percent in the first nine months of fiscal 2012. The declines in operating profit were primarily due to restructuring charges and acquisition costs recorded in the third quarter as discussed above and due to declines in operating profit in our integrated marketing, interactive media, and magazine operations.


LOCAL MEDIA

Local media operating results were as follows:

Three Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising revenues
$
66,652

 
$
63,531

 
5
 %
Political advertising revenues
1,843

 
682

 
170
 %
Other revenues
9,415

 
6,782

 
39
 %
Total revenues
77,910

 
70,995

 
10
 %
Operating expenses
(55,256
)
 
(57,714
)
 
(4
)%
Operating profit
$
22,654

 
$
13,281

 
71
 %
Operating profit margin
29.1
%
 
18.7
%
 
 

Nine Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising revenues
$
201,311

 
$
190,655

 
6
 %
Political advertising revenues
3,500

 
34,284

 
(90
)%
Other revenues
26,798

 
19,531

 
37
 %
Total revenues
231,609

 
244,470

 
(5
)%
Operating expenses
(170,742
)
 
(175,912
)
 
(3
)%
Operating profit
$
60,867

 
$
68,558

 
(11
)%
Operating profit margin
26.3
%
 
28.0
%
 
 


19


Revenues
Local media revenues increased 10 percent in the third quarter and declined 5 percent in the first nine months of fiscal 2012. Non-political advertising revenues grew 5 percent in the third quarter and 6 percent for the first nine months of fiscal 2012. Local non-political advertising revenues increased 6 percent in the third quarter and 5 percent for the first nine months of fiscal 2012. National non-political advertising increased 1 percent as compared to the prior-year quarter and 4 percent compared to the prior-year first nine months. Net political advertising revenues totaled $1.8 million in the third quarter and $3.5 million in the first nine months of the current fiscal year compared with $0.7 million in the prior-year third quarter and $34.3 million in the prior-year nine-month period. Fluctuations in political advertising revenues at our stations and throughout the broadcasting industry generally follow the biennial cycle of election campaigns. Political advertising displaces a certain amount of non-political advertising; therefore, the revenues are not entirely incremental. Online advertising, a small but growing percentage of non-political advertising revenues, increased almost 70 percent in the third quarter and more than 50 percent in the nine-month period as compared to the prior year.

Other revenue increased 39 percent in the third quarter and 37 percent in the first nine months of fiscal 2012 primarily reflecting Meredith's management of Peachtree TV (WPCH-TV) in Atlanta, which began in late March 2011.

Operating Expenses
Local media operating expenses decreased 4 percent in the third quarter of fiscal 2012 and 3 percent in the nine-month period primarily due to lower film amortization, bad debt, and production expenses. While legal services expenses declined in the third quarter, they increased in the nine-month period as compared to the prior year. Partially offsetting the decreases were a vacated lease accrual of $1.1 million and a severance and benefits accrual of $0.1 million recorded in the third quarter of fiscal 2012 in connection with the restructuring charges.

Operating Profit
Local media operating profit increased 71 percent in the third quarter reflecting increases in all categories of revenues and a reduction in operating expenses. Local media operating profit declined 11 percent in the first nine months compared with the prior-year period primarily reflecting lower revenues due to the cyclical nature of political advertising partially offset by growth in non-political revenues and lower operating expenses.

Supplemental Disclosure of Local Media EBITDA
Meredith's local media EBITDA is defined as local media segment operating profit plus depreciation and amortization expense. EBITDA is not a GAAP financial measure and should not be considered in isolation or as a substitute for GAAP financial measures. See the discussion of management's rationale for the use of EBITDA in the preceding Executive Overview section. Local media EBITDA and EBITDA margin were as follows:

Three Months Ended March 31,
2012
 
2011
(In thousands)
 
 
 
Revenues
$
77,910

 
$
70,995

Operating profit
$
22,654

 
$
13,281

Depreciation and amortization
6,299

 
6,109

EBITDA
$
28,953

 
$
19,390

EBITDA margin
37.2
%
 
27.3
%

Nine Months Ended March 31,
2012
 
2011
(In thousands)
 
 
 
Revenues
$
231,609

 
$
244,470

Operating profit
$
60,867

 
$
68,558

Depreciation and amortization
18,463

 
17,853

EBITDA
$
79,330

 
$
86,411

EBITDA margin
34.3
%
 
35.3
%

20


UNALLOCATED CORPORATE EXPENSES

Unallocated corporate expenses are general corporate overhead expenses not attributable to the operating groups. These expenses were as follows:

Unallocated Corporate Expenses
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Three Months Ended March 31,
$
7,684

 
$
9,399

 
(18
)%
Nine Months Ended March 31,
24,617

 
27,811

 
(11
)%

Unallocated corporate expenses decreased 18 percent in the third quarter and 11 percent in the first nine months of fiscal 2012. For the fiscal 2012 third quarter and nine-month period, performance-based incentive accruals, pension expense, consulting fees, medical costs, and investment spending on tablet platforms declined compared to the prior-year periods. Charitable contributions expense declined in the first nine months of fiscal 2012, but was flat in the third quarter of fiscal 2012. While building rent decreased in the third quarter, it increased in the first nine months of fiscal 2012 due to the acceleration in the first quarter of fiscal 2012 of lease expense on vacated leased properties related to a move to new space in New York.


CONSOLIDATED

Consolidated Operating Expenses
Consolidated operating expenses were as follows:

Three Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
136,454

 
$
134,437

 
2
%
Selling, general, and administrative
159,352

 
142,130

 
12
%
Depreciation and amortization
11,407

 
9,965

 
14
%
Operating expenses
$
307,213

 
$
286,532

 
7
%

Nine Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
401,757

 
$
414,529

 
(3
)%
Selling, general, and administrative
437,257

 
432,568

 
1
 %
Depreciation and amortization
31,744

 
29,413

 
8
 %
Operating expenses
$
870,758

 
$
876,510

 
(1
)%

Production, distribution, and editorial costs increased 2 percent as compared to the prior-year quarter and decreased 3 percent as compared to the prior-year first nine months. On a comparable basis, production, distribution, and editorial costs decreased 5 percent in the third quarter and 6 percent as compared to the prior-year first nine months. Declines in national media paper, postage, and marketing production costs and local media production and film amortization contributed to the reductions in both periods.

Selling, general, and administrative expenses increased 12 percent in the third quarter and 1 percent in the first nine months of fiscal 2012. Comparable selling, general, and administrative expense increased 5 percent in the third quarter and decreased 2 percent as compared to the prior-year first nine months. For both the third quarter and nine-month period, performance-based incentive accruals, pension costs, consulting fees, and medical costs declined. Charitable contributions expense declined in the first nine months of fiscal 2012, but was flat in the third quarter of fiscal 2012. While building rent decreased in the third quarter, it increased in the first nine months of fiscal 2012 due to the acceleration in the first quarter of fiscal 2012 of lease expense on vacated leased properties related to a

21


move to new space. In addition, the Company recorded $2.6 million in acquisition costs in the first nine months of fiscal 2012, with $2.5 million of this being recorded in the third quarter. In the third quarter of fiscal 2012, the Company recorded $10.0 million for severance and benefit costs, vacated lease accruals of $2.7 million, the write-off of deferred subscription acquisition costs of $0.7 million, and other miscellaneous write-downs of $0.4 million related to business realignments. Partially offsetting these charges was a $0.6 million reversal of excess restructuring accrual previously recorded by the national media segment and a $1.0 million reduction in contingent consideration payable.

Depreciation and amortization expense increased 14 percent in the third quarter of fiscal 2012 and 8 percent in the nine-month period as compared to the prior-year periods. On a comparable basis, depreciation and amortization increased 4 percent in the third quarter and 3 percent during the first nine months of fiscal 2012. These increases are primarily due to depreciation on the leasehold improvements and fixed assets in new leased property in New York.

Income from Operations
Income from operations decreased 27 percent in the third quarter and 23 percent in the first nine months of fiscal 2012. Comparable income from operations decreased 30 percent in the third quarter and 25 percent in the first nine months of fiscal 2012. Local media operating profit showed strong growth in the third quarter. However, for the third quarter and the first nine months of fiscal 2012, operating profits were weaker in our integrated marketing, magazine, and interactive media operations. For the nine-month period, lower political revenues due to the cyclical nature of political advertising also contributed to the decline.

Net Interest Expense
Net interest expense increased to $3.3 million in the fiscal 2012 third quarter compared with $3.1 million in the comparable prior-year quarter. For the nine months ended March 31, 2012, net interest expense was $8.9 million versus $10.0 million in the comparable prior-year period. Average long-term debt outstanding was $335 million in the third quarter of fiscal 2012 and $277 million for the nine-month period compared with $230 million in the prior year third quarter and $263 million in the prior year nine-month period. The Company's approximate weighted average interest rate was 4.3 percent in the first nine months of fiscal 2012 and 5.1 percent in the first nine months of fiscal 2011.

Income Taxes
Our effective tax rate was 39.5 percent in the third quarter of fiscal 2012 and 39.3 percent in the first nine months of fiscal 2012 as compared to 36.6 percent in the third quarter of fiscal 2011 and 38.9 percent in the first nine months of fiscal 2011.

Earnings from Continuing Operations and Earnings per Share from Continuing Operations
Earnings from continuing operations were $21.2 million ($0.47 per diluted share), a decrease of 32 percent from fiscal 2011 third quarter earnings from continuing operations of $31.2 million ($0.68 per diluted share). For the nine months ended March 31, 2012, earnings from continuing operation were $74.4 million ($1.65 per diluted share), a decrease of 24 percent from prior-year nine month earnings from continuing operations of $98.3 million ($2.14 per diluted share). Local media operating profit showed strong growth in the third quarter. However, for the third quarter and nine-month period, the declines primarily reflect weaker operating profits in our integrated marketing, magazine, and interactive media operations. For the nine-month period, lower political revenues due to the cyclical nature of political advertising also contributed to the decline.


22


Discontinued Operations
The fiscal 2011 loss from discontinued operations represents the operating results, net of taxes, of ReadyMade magazine. The revenues and expenses of ReadyMade magazine, along with associated taxes, were removed from continuing operations and reclassified into a single line item amount on the Condensed Consolidated Statements of
Earnings titled loss from discontinued operations, net of taxes, as follows:

Periods Ended March 31, 2011
Three Months

 
Nine Months

(In thousands except per share data)
 
 
 
Revenues
$
1,850

 
$
4,459

Costs and expenses
(2,405
)
 
(6,482
)
Loss before income taxes
(555
)
 
(2,023
)
Income taxes
216

 
789

Loss from discontinued operations
$
(339
)
 
$
(1,234
)
Loss from discontinued operations per share:
 
 
 
Basic
$
(0.01
)
 
$
(0.03
)
Diluted
(0.01
)
 
(0.02
)

Net Earnings and Earnings per Share
Net earnings were $21.2 million ($0.47 per diluted share) in the quarter ended March 31, 2012, down 31 percent from $30.8 million ($0.67 per diluted share) in the comparable prior-year quarter. For the nine months ended March 31, 2012, earnings were $74.4 million ($1.65 per diluted share), a decrease of 23 percent from prior-year nine month earnings of $97.1 million ($2.12 per diluted share). Local media operating profit showed strong growth in the third quarter. However, for the third quarter and first nine months of fiscal 2012, the declines primarily reflect weaker operating profits in our integrated marketing, magazine, and interactive media operations. For the nine-month period, lower political revenues due to the cyclical nature of political advertising also contributed to the decline. These declines were partially offset by the lack of a loss from discontinued operations in the current fiscal year. Both average basic and diluted shares outstanding decreased in the quarter and the nine-month period due to repurchases of common shares.


LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended March 31,
2012
 
2011
 
Change

(In thousands)
 
 
 
 
 
Net earnings
$
74,390

 
$
97,101

 
(23
)%
Cash flows from operating activities
$
105,638

 
$
140,375

 
(25
)%
Cash flows used in investing activities
(275,417
)
 
(58,766
)
 
369
 %
Cash flows provided by (used in) financing activities
166,732

 
(109,503
)
 
(252
)%
Net decrease in cash and cash equivalents
$
(3,047
)
 
$
(27,894
)
 
(89
)%

OVERVIEW

Meredith's primary source of liquidity is cash generated by operating activities. Debt f