UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2001
Commission file number 1-5128
Meredith Corporation
(Exact name of registrant as specified in its charter)
Iowa 42-0410230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1716 Locust Street, Des Moines, Iowa 50309-3023
(Address of principal executive offices) (ZIP Code)
515 - 284-3000
(Registrant's telephone number, including area code)
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 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 January 31, 2002:
Common shares 38,878,841
Class B shares 10,473,753
----------
Total common and class B shares 49,352,594
==========
- 1 -
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31 June 30
Assets 2001 2001
- ------------------------------------------------------------------------------
(In thousands)
Current assets:
Cash and cash equivalents $ 11,189 $ 36,254
Receivables, net 119,087 137,384
Inventories 39,243 32,835
Subscription acquisition costs 46,922 43,237
Broadcast rights 29,473 13,487
Deferred income taxes 19,379 19,262
Supplies and prepaids 13,174 8,623
---------- ----------
Total current assets 278,467 291,082
Property, plant and equipment 366,344 362,072
Less accumulated depreciation (165,890) (158,274)
---------- ----------
Net property, plant and equipment 200,454 203,798
Subscription acquisition costs 32,811 31,947
Broadcast rights 15,106 7,929
Other assets 31,949 33,020
Goodwill and other intangibles (at original
cost less accumulated amortization of
$192,875 on December 31 and $180,229 on June 30) 856,925 869,971
---------- ----------
Total assets $1,415,712 $1,437,747
========== ==========
See accompanying Notes to Interim Condensed Consolidated Financial Statements
- 2 -
(Unaudited)
December 31 June 30
Liabilities and Shareholders' Equity 2001 2001
- ------------------------------------------------------------------------------
(In thousands except share data)
Current liabilities:
Current portion of long-term debt $ 25,000 $ 70,000
Current portion of long-term broadcast
rights payable 32,616 18,600
Accounts payable 38,651 45,976
Accrued taxes and expenses 97,141 105,133
Unearned subscription revenues 130,138 131,697
---------- ----------
Total current liabilities 323,546 371,406
Long-term debt 400,000 400,000
Long-term broadcast rights payable 26,878 17,158
Unearned subscription revenues 103,587 89,605
Deferred income taxes 66,743 59,245
Other noncurrent liabilities 55,654 52,425
---------- ----------
Total liabilities 976,408 989,839
---------- ----------
Shareholders' equity:
Series preferred stock, par value $1 per share
Authorized 5,000,000 shares; none issued -- --
Common stock, par value $1 per share
Authorized 80,000,000 shares; issued and
outstanding 38,870,452 at December 31 and
39,247,701 at June 30 (net of treasury shares,
28,390,340 at December 31 and 27,823,898 at
June 30.) 38,870 39,248
Class B stock, par value $1 per share,
convertible to common stock
Authorized 15,000,000 shares; issued and
outstanding 10,475,525 at December 31 and
10,544,174 at June 30. 10,476 10,544
Retained earnings 396,442 402,393
Accumulated other comprehensive loss (4,793) (1,967)
Unearned compensation (1,691) (2,310)
---------- ----------
Total shareholders' equity 439,304 447,908
---------- ----------
Total liabilities and shareholders' equity $1,415,712 $1,437,747
========== ==========
See accompanying Notes to Interim Condensed Consolidated Financial Statements
- 3 -
Meredith Corporation and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
Three Months Six Months
Ended December 31 Ended December 31
2001 2000 2001 2000
- ------------------------------------------------------------------------------
(In thousands except per share data)
Revenues:
Advertising $129,581 $153,169 $268,422 $302,194
Circulation 63,183 63,336 126,660 127,850
All other 37,051 44,383 73,496 80,866
-------- -------- -------- --------
Total revenues 229,815 260,888 468,578 510,910
-------- -------- -------- --------
Operating costs and expenses:
Production, distribution and edit 98,267 107,576 206,515 218,121
Selling, general & administrative 98,563 93,109 194,215 184,569
Depreciation and amortization 13,473 12,785 27,050 25,624
-------- -------- -------- --------
Total operating costs and expenses 210,303 213,470 427,780 428,314
-------- -------- -------- --------
Income from operations 19,512 47,418 40,798 82,596
Other nonoperating income 2,030 -- 2,030 --
Interest income 113 269 273 478
Interest expense (7,457) (8,469) (14,770) (16,989)
-------- -------- -------- --------
Earnings before income taxes 14,198 39,218 28,331 66,085
Income taxes 5,494 15,177 10,964 25,575
-------- -------- -------- --------
Net earnings $ 8,704 $ 24,041 $ 17,367 $ 40,510
======== ======== ======== ========
Basic earnings per share $ 0.18 $ 0.48 $ 0.35 $ 0.81
======== ======== ======== ========
Basic average shares outstanding 49,353 50,019 49,538 50,146
======== ======== ======== ========
Diluted earnings per share $ 0.17 $ 0.47 $ 0.34 $ 0.79
======== ======== ======== ========
Diluted average shares outstanding 50,612 51,275 50,808 51,398
======== ======== ======== ========
Dividends paid per share $ 0.085 $ 0.080 $ 0.170 $ 0.160
======== ======== ======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements
- 4 -
Meredith Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31 2001 2000
- ---------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net earnings $ 17,367 $ 40,510
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 27,050 25,624
Amortization of broadcast rights 17,821 17,149
Payments for broadcast rights (16,680) (19,346)
Changes in assets and liabilities:
Accounts receivable (net) 18,297 9,575
Inventories (6,408) (6,379)
Supplies and prepayments (5,119) (881)
Subscription acquisition costs (4,549) 2,168
Accounts payable (7,325) (20,231)
Accruals (8,460) (5,458)
Unearned subscription revenues 12,423 (1,269)
Deferred income taxes 9,187 7,340
Other noncurrent liabilities 335 1,027
-------- --------
Net cash provided by operating activities 53,939 49,829
-------- --------
Cash flows from investing activities:
Additions to property, plant, and equipment (10,834) (31,068)
Changes in investments and other 1,235 (4,140)
-------- --------
Net cash used by investing activities (9,599) (35,208)
-------- --------
Cash flows from financing activities:
Long-term debt incurred 15,000 7,370
Repayment of long-term debt (60,000) (10,000)
Proceeds from common stock issued 1,648 2,567
Purchases of company stock (18,421) (20,145)
Dividends paid (8,423) (8,013)
Other 791 588
-------- --------
Net cash used by financing activities (69,405) (27,633)
-------- --------
Net decrease in cash and cash equivalents (25,065) (13,012)
Cash and cash equivalents at beginning of year 36,254 22,861
-------- --------
Cash and cash equivalents at end of period $ 11,189 $ 9,849
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements
- 5 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
a. General
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, which are of a
normal recurring nature and necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year. Readers are referred to the
company's Form 10-K for the year ended June 30, 2001 for complete financial
statements and related notes. Certain prior-year amounts have been
reclassified to conform with current-year presentation.
b. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates.
c. Goodwill and other intangibles
The unamortized portion of intangible assets consisted of the following:
(unaudited)
December 31 June 30
2001 2001
(In thousands) -------- --------
Federal Communications
Commission (FCC) licenses $411,696 $417,434
Goodwill 236,882 240,768
Television network affiliation
agreements 193,170 196,217
All other 15,177 15,552
-------- --------
Total unamortized portion
of intangible assets $856,925 $869,971
======== ========
- 6 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
d. Earnings per share
The following table presents the calculations of earnings per share:
(unaudited) (unaudited)
Three Months Six Months
Ended December 31 Ended December 31
2001 2000 2001 2000
(In thousands except per share) ------- ------- ------- -------
Net earnings $ 8,704 $24,041 $17,367 $40,510
======= ======= ======= =======
Basic average shares outstanding 49,353 50,019 49,538 50,146
Dilutive effect of stock options 1,259 1,256 1,270 1,252
------- ------- ------- -------
Diluted average shares outstanding 50,612 51,275 50,808 51,398
======= ======= ======= =======
Basic earnings per share $ .18 $ .48 $ .35 $ .81
======= ======= ======= =======
Diluted earnings per share $ .17 $ .47 $ .34 $ .79
======= ======= ======= =======
Antidilutive options excluded from the above calculations totaled 1,391,000
options at December 31, 2001 (with a weighted average exercise price of
$37.08) and 1,509,000 options at December 31, 2000 (with a weighted average
exercise price of $35.92).
Options to purchase 128,000 shares were exercised during the six months ended
December 31, 2001 (137,000 options were exercised in the six months ended
December 31, 2000).
2. Nonrecurring Items
In response to a weakening economy and a continued advertising downturn in
fiscal 2001, Meredith took steps to reduce the number of employees through a
one-time, special voluntary early retirement program and additional selective
workforce reductions through attrition, realignments and job eliminations. In
addition, the company wrote-off certain Internet investments. These actions
resulted in a fiscal 2001 net nonrecurring charge of $25.3 million ($15.4
million after-tax) or 30 cents per share for personnel costs, ($18.4 million)
asset write-downs and other ($8.2 million), offset by the reversal of excess
accruals ($1.3 million). The nonrecurring charge resulted in balance sheet
adjustments of $8.5 million and cash payments of $1.1 million in fiscal 2001,
- 7 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
leaving an accrual balance of $15.7 million for personnel costs at June 30,
2001. Details of the activities affecting the accrual since that date follow:
Jun-30-2001 Dec-31-2001
Accrual Cash Other Accrual
Description Balance Payments Adjustments Balance
----------------- -------- -------- -------- --------
(In thousands)
Personnel costs $ 15,716 $ (7,050) $ (139) $ 8,527
======== ======== ======== ========
Payments made during the quarter were for enhanced retirement benefits,
severance and outplacement charges. The other adjustment represents
accelerated amortization of restricted stock. A total of 44 jobs were
eliminated during the first six months of fiscal 2002, in addition to the 155
positions eliminated during fiscal 2001. The majority of the accrued personnel
costs are expected to be paid out over the next 9 months.
Meredith also recorded a nonrecurring charge in fiscal 2000 related to the
closing of certain operations that no longer fit the company's business
objectives. The charge totaled $23.1 million ($19.1 million after tax) or 36
cents per share for asset write-downs ($16.8 million), contractual obligations
($3.8 million) and personnel costs ($2.5 million). The personnel costs related
to the termination of 29 employees, all of whom had left the company by June
30, 2001. Fiscal 2000 activity related to this charge consisted of noncash
balance sheet adjustments of $18.5 million and cash payments of $1.4 million.
During fiscal 2001 additional cash payments of $1.1 million were made and $1.3
million of the accrual was deemed no longer necessary and was reversed. The
reversal reduced the amount of the nonrecurring charge recorded in fiscal 2001.
The result was an accrual balance of $0.9 million at June 30, 2001. Since that
date, cash payments totaling $0.1 million have been made, reducing the accrual
to $0.8 million at December 31, 2001. The remaining accrual balance relates
primarily to contractual obligations and will be settled over the next two
fiscal years.
3. Inventories
Major components of inventories are summarized below. Of total inventory
values shown, approximately 26 percent and 31 percent are under the LIFO method
at December 31, 2001 and June 30, 2001, respectively.
- 8 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
(unaudited)
December 31 June 30
2001 2001
(In thousands) ------- -------
Raw materials $12,343 $13,480
Work in process 25,535 20,830
Finished goods 8,317 6,477
------- -------
46,195 40,787
Reserve for LIFO cost valuation (6,952) (7,952)
------- -------
Total $39,243 $32,835
======= =======
4. Derivative Financial Instruments
At December 31, 2001, Meredith had interest rate swap contracts to pay
fixed-rates of interest (average 5.5 percent) and receive variable-rates of
interest (average 3-month LIBOR rate of 1.9 percent) on $192 million notional
amount of indebtedness. This resulted in approximately 85 percent of
Meredith's underlying variable-rate debt being subject to fixed interest rates.
The swap contracts expire in May 2002 and June 2004. The notional amount
varies over the terms of the contracts. The average notional amount of
indebtedness outstanding under the contracts is $195 million in fiscal 2002,
$166 million in fiscal 2003 and $132 million in fiscal 2004.
The fair market value of the interest rate swap contracts was a liability of
$6.4 million at December 31, 2001. Assuming no change in interest rates, the
estimated amount of the loss expected to be reclassified into earnings over the
next 12 months is $3.3 million. The net gain or loss on the ineffective
portion of these interest rate swap contracts was not material in any period.
5. Comprehensive Income
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. The
company's comprehensive income includes foreign currency translation
adjustments and changes in the fair market value of interest rate swap
contracts in addition to net earnings. Fiscal 2001 comprehensive income also
included a cumulative-type transition net gain for the adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and subsequent amendments, of $2.5 million. Total
comprehensive income (in thousands) for the three-month periods ended December
31, 2001 and 2000, was $9,573 and $23,187, respectively. Total comprehensive
income for the six-month periods ended December 31, 2001 and 2000, was $14,541
and $41,088, respectively.
- 9 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
6. Segment Information
(unaudited) (unaudited)
Three Months Six Months
Ended December 31 Ended December 31
------------------- -------------------
2001 2000 2001 2000
(In thousands) -------- -------- -------- --------
Revenues
Publishing $160,804 $182,259 $343,213 $367,144
Broadcasting 69,011 78,629 125,365 143,766
-------- -------- -------- --------
Total revenues $229,815 $260,888 $468,578 $510,910
======== ======== ======== ========
Operating profit
Publishing $ 13,768 $ 29,666 $ 39,304 $ 58,076
Broadcasting 10,357 21,453 10,416 31,596
Unallocated corporate expense (4,613) (3,701) (8,922) (7,076)
-------- -------- -------- --------
Income from operations $ 19,512 $ 47,418 $ 40,798 $ 82,596
======== ======== ======== ========
Depreciation and amortization
Publishing $ 2,797 $ 2,223 $ 5,560 $ 4,432
Broadcasting 10,058 9,903 20,191 19,851
Unallocated corporate 618 659 1,299 1,341
-------- -------- -------- --------
Total depreciation
and amortization $ 13,473 $ 12,785 $ 27,050 $ 25,624
======== ======== ======== ========
EBITDA
Publishing $ 16,565 $ 31,889 $ 44,864 $ 62,508
Broadcasting 20,415 31,356 30,607 51,447
Unallocated corporate (3,995) (3,042) (7,623) (5,735)
-------- -------- -------- --------
Total EBITDA $ 32,985 $ 60,203 $ 67,848 $108,220
======== ======== ======== ========
Meredith Corporation is a diversified media company primarily focused on the
home and family marketplace. Based on products and services, the company has
established two reportable segments: publishing and broadcasting. The
publishing segment includes magazine and book publishing, integrated marketing,
interactive media, database-related activities, brand licensing, and other
related operations. The broadcasting segment includes the operations of 12
network-affiliated television stations. There are no material intersegment
- 10 -
MEREDITH CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
transactions. There have been no changes in the basis of segmentation or the
measurement of segment profit since June 30, 2001.
EBITDA is defined as earnings from continuing operations before interest,
taxes, depreciation and amortization. EBITDA is often used to analyze and
compare companies on the basis of operating performance and cash flow. EBITDA
is not adjusted for all noncash expenses or for working capital, capital
expenditures and other investment requirements. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. In addition, the
calculation of EBITDA and similarly titled measures may vary between companies.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion presents the key factors that have affected the
company's business in the second quarter and first six months of fiscal 2002
and fiscal 2001. This commentary should be read in conjunction with the
consolidated financial statements presented elsewhere in this report and with
the company's Form 10-K for the year ended June 30, 2001. All per-share
amounts refer to diluted earnings per share and are computed on a post-tax
basis.
This section, and management's public commentary from time to time, may contain
certain forward-looking statements that are subject to risks and uncertainties.
The words "expect," "anticipate," "believe," "likely," "will," and similar
expressions generally identify forward-looking statements. These statements
are based on management's current knowledge and estimates of factors affecting
the company's operations. Readers are cautioned not to place undue reliance on
such forward looking-information as actual results may differ materially from
those currently anticipated. Readers are referred to the company's Form 10-K
for the year ended June 30, 2001, for a discussion of such factors.
- 11 -
Results of Operations
Three Months Six Months
Ended December 31 Ended December 31
Description 2001 2000 2001 2000
-------------------------- -------- -------- -------- --------
(In thousands)
Total revenues $229,815 $260,888 $468,578 $510,910
======== ======== ======== ========
Income from operations $ 19,512 $ 47,418 $ 40,798 $ 82,596
======== ======== ======== ========
Net earnings $ 8,704 $ 24,041 $ 17,367 $ 40,510
======== ======== ======== ========
Diluted earnings per share $ 0.17 $ 0.47 $ 0.34 $ 0.79
======== ======== ======== ========
Other data:
Earnings before
special items $ 7,460 $ 24,041 $ 16,123 $ 40,510
======== ======== ======== ========
Diluted earnings per share
before special items $ 0.15 $ 0.47 $ 0.32 $ 0.79
======== ======== ======== ========
Fiscal 2002 second quarter net earnings were $8.7 million, or 17 cents per
share. This included the one-time receipt of $2.0 million ($1.2 million
after-tax or 2 cents per share) from the demutualization of an insurance
company with which Meredith holds policies. Excluding that nonrecurring item,
earnings for the quarter were $7.5 million, or 15 cents per share, compared to
prior-year second quarter net earnings of $24.0 million, or 47 cents per share.
For the six months ended December 31, 2001, net earnings were $17.4 million, or
34 cents per share. Excluding the nonrecurring item previously noted, earnings
were $16.2 million, or 32 cents per share compared to net earnings of $40.5
million, or 79 cents per share, in the prior-year period. The earnings decline
in both the quarter and six-month period resulted primarily from a decline in
advertising revenues. Net earnings were also affected by increased magazine
subscription acquisition costs due to the timing of direct mail efforts. The
decline in Meredith's operating earnings was partially offset by lower net
interest expense which resulted primarily from lower levels of debt
outstanding. The weighted-average number of shares outstanding declined 1
percent in both periods due to company share repurchases.
Second quarter revenues were $229.8 million compared to prior-year second
quarter revenues of $260.9 million. Revenues for the six months ended December
31, 2001 were $468.6 million versus $510.9 million in the prior-year period.
Adjusting for the impact of discontinued magazine titles, comparable prior-year
revenues were $252.8 million in the quarter and $496.9 million for the
six-month period. Both magazine and broadcasting advertising revenues were
- 12 -
affected by a nationwide slowdown in the demand for advertising. In addition,
broadcasting advertising revenues declined due to the absence of political
revenues, which were significant in the prior-year due to the November 2000
elections, and due to several days of commercial-free news coverage of the
September 11 terrorist attacks. Revenues from book publishing and integrated
marketing operations were also down reflecting lower sales volumes due to the
ongoing weakness in the United States economy.
Operating costs and expenses decreased 2 percent in the second quarter and were
down slightly for the six-month period compared to the respective prior-year
periods. Production, distribution and editorial costs decreased 9 percent in
the quarter and 5 percent in the year-to-date period. The declines were due to
the absence of costs for discontinued titles, volume-related declines in
manufacturing and paper costs, and lower paper prices. Partially offsetting
these favorable variances were higher postal rates, increased amortization of
programming rights and, additionally in the six-month period, higher book
editorial costs attributable to the timing of new releases. Selling, general
and administrative expenses increased 6 percent in the second quarter and 5
percent in the six months ended December 31, 2001. Higher subscription
acquisition costs, due to the timing of mailings, were the single largest
factor accounting for the increases. These expense increases were partially
offset by lower costs attributable to the absence of discontinued titles.
Unallocated corporate expenses, which represent general corporate overhead
expenses not attributable to the operating groups, increased to $4.6 million in
the second quarter and to $8.9 million for the six-month period from $3.7
million and $7.1 million in the respective prior-year periods. The increases
reflected higher consulting expenses and the impact of the reversal of a
maintenance accrual in the prior-year period. The increase in consulting
expenses related to a review of vendor relationships and an analysis of
opportunities for process improvements.
Meredith recorded a nonrecurring charge of $25.3 million in fiscal 2001
primarily for costs related to a reduction in workforce and the write-down of
certain assets. In addition, the company recorded a charge of $9.9 million for
the write-down of certain broadcast programming rights to net realizable value
in fiscal 2001. The workforce reduction program and the programming write-down
were expected to result in the reduction of certain costs in fiscal 2002. The
anticipated savings were achieved, but as expected these savings were largely
offset by other cost increases.
The Company's effective tax rate in the second quarter and six-month period was
38.7 percent, the same as the prior-year second quarter and fiscal year.
Looking forward, while the advertising recession continues, it appears to be
less severe in the third fiscal quarter than the second quarter. Through
February 1, 2002, third quarter comparable magazine advertising pages were down
in the high-single digits on a percentage basis, while comparable magazine
advertising revenues were down in the mid-single digits. Third quarter
advertising bookings at the company's television stations were down in the low-
single digits on a percentage basis as of that date. Television advertising
bookings are as of a point in time and actual results may differ. The
continuing uncertainty and volatility of the economic climate make precise
- 13 -
guidance difficult. Management has reasonably good visibility for third
quarter magazine advertising revenues, but the outlook for the remainder of the
business is less clear. However, based on currently available information,
management believes the First Call consensus estimate of 28 cents per share for
the fiscal third quarter is achievable. This estimate excludes any impact of
changes in accounting for goodwill and other intangibles. Meredith will adopt
new accounting standards regarding the accounting for goodwill and other
intangibles in the fiscal year ended June 30, 2003.
Interactive Media -- The following table presents supplemental data regarding
the results of the company's interactive media operations. These operations
are an integral part of the company's Publishing and Broadcasting Groups and
are included in the reported results of those segments. To date, most of the
company's Internet activities have been in the Publishing Group. The results
are pro-forma and are presented for informational purposes only. The results
do not attempt to reflect how the operations would have been reported had they
been a stand-alone business.
Three Months Six Months
Ended December 31 Ended December 31
Description 2001 2000 2001 2000
---------------- -------- -------- -------- --------
(In thousands)
Total revenues $ 1,047 $ 1,541 $ 1,999 $ 2,611
======== ======== ======== ========
Operating loss $(1,609) $ (1,901) $(3,108) $ (3,782)
======== ======== ======== ========
Second quarter interactive media revenues decreased to $1.0 million from $1.5
million in the prior-year quarter. In the six months ended December 31, 2001,
interactive media revenues were $2.0 million compared to $2.6 million in the
prior-year period. The declines reflected lower advertising revenues.
Interactive media incurred operating losses of $1.6 million in the second
quarter and $3.1 million in the first half of fiscal 2002. This compares to
operating losses of $1.9 million and $3.8 million in the respective prior-year
periods. The reduction of the operating losses resulted from savings
associated with the online acquisition of magazine subscriptions and other cost
reduction efforts.
- 14 -
Publishing
- ----------
Three Months Six Months
Ended December 31 Ended December 31
Description 2001 2000 2001 2000
---------------- -------- -------- -------- --------
(In thousands)
Revenues
Advertising $ 62,335 $ 75,990 $146,407 $161,618
Circulation 63,183 63,336 126,660 127,850
Other 35,286 42,933 70,146 77,676
-------- -------- -------- --------
Total revenues $160,804 $182,259 $343,213 $367,144
======== ======== ======== ========
Operating profit $ 13,768 $ 29,666 $ 39,304 $ 58,076
======== ======== ======== ========
Publishing revenues were $160.8 million compared to $182.3 million in the
prior-year second quarter. For the six months ended December 31, 2001,
revenues were $343.2 million versus $367.1 million in the prior-year period.
Excluding the impact of discontinued properties, comparable prior-year revenues
were $174.2 million for the quarter and $353.2 million for the six months.
Discontinued properties include Golf for Women, Family Money and Mature Outlook
magazines and the Better Homes and Gardens syndicated television show. The
following discussion excludes the prior-year revenues of these discontinued
properties.
Comparable magazine advertising revenues decreased 13 percent in the quarter
and were down 5 percent year-to-date. All first quarter magazine issues had
closed advertising sales prior to September 11 and therefore the impact of the
terrorists attacks was evident in the second fiscal quarter advertising
revenues. Advertising pages and revenues were down at nearly all titles.
Average net revenues per page also declined at most titles, but the change was
not as significant as the decline in the number of advertising pages. Better
Homes and Gardens and Ladies' Home Journal, the company's two largest
circulation titles, reported advertising page percentage declines in the
mid-single digits and mid-teens, respectively, in the second quarter. Declines
at the mid-size and smaller books were generally in the mid-teens or higher.
Notable exceptions were MORE magazine and the Special Interest Publications,
which both reported increases in advertising pages in the second quarter. MORE
benefited from two issues in the quarter versus one in the prior-year quarter
due to an increase in the frequency of issues.
Total magazine advertising pages were down 9 percent on a comparable basis in
the quarter. Weaker categories included home and building and pharmaceuticals
advertising. Even in the difficult market, the larger magazines posted gains
in several categories including food and beverages, direct response and
apparel.
Comparable magazine circulation revenues increased 5 percent from the
prior-year quarter and 3 percent in the six-month period. The growth reflected
increased newsstand sales of Special Interest Publications and craft titles.
- 15 -
Other publishing revenues were down 16 percent in the quarter and 8 percent in
the year-to-date period on a comparable basis. Sales volumes were down in both
the book publishing and integrated marketing businesses. Management believes
the declines were a result of the general economic downturn.
Publishing operating profit was $13.8 million in the fiscal 2002 second quarter
compared to $29.7 million in the prior-year second quarter. For the six months
ended December 31, 2001, publishing operating profit was $39.3 million versus
$58.1 million in the prior-year period. The decline resulted primarily from
lower advertising revenues and increased subscription acquisition costs. Also
contributing were volume-related declines in book publishing and integrated
marketing operating profits and higher postal rates. Book operating profits in
the six-month period were also affected by an increase in editorial costs
associated with the timing of new title releases. Partially offsetting these
cost increases was the benefit of lower magazine paper prices. Average paper
prices were approximately 8 percent lower in the quarter and 6 percent lower in
the six-month period than a year earlier.
The increase in subscription acquisition costs, which totaled $6.2 million in
the second quarter and $8.4 million in the six-month period, reflected a
previously disclosed shift in the timing of promotional mailings toward the
first half of the fiscal year. Comparable subscription acquisition costs in
fiscal 2002 are expected to be about the same as costs in fiscal 2001.
However, decisions to raise magazine rate bases, test new products or
accelerate mailings prior to the June 30, 2002 proposed postal rate increase
could lead to higher total subscription acquisition costs in fiscal 2002.
Looking forward, the paper market is expected to remain soft but postal rates
are expected to increase. Meredith will benefit from lower paper prices as a
result of contracts entered into effective January 1, 2002. Average paper
prices in the third quarter of fiscal 2002 are expected to be down in the low
teens on a percentage basis from a year earlier. Regarding postal rates, the
United States Postal Service has proposed average rate increases of
approximately 10 percent for periodicals effective June 30, 2002. As proposed,
these rate increases will affect postal costs in the first quarter of fiscal
2003.
- 16 -
Broadcasting
- ------------ Three Months Six Months
Ended December 31 Ended December 31
Description 2001 2000 2001 2000
---------------- -------- -------- -------- --------
(In thousands)
Revenues
Advertising $ 67,246 $ 77,179 $122,015 $140,576
Other 1,765 1,450 3,350 3,190
-------- -------- -------- --------
Total revenues $ 69,011 $ 78,629 $125,365 $143,766
======== ======== ======== ========
Operating profit $ 10,357 $ 21,453 $ 10,416 $ 31,596
======== ======== ======== ========
Fiscal 2002 second quarter revenues were $69.0 million, down 12 percent from
prior-year second quarter revenues of $78.6 million. In the first half of
fiscal 2002, revenues were $125.4 million, down 13 percent from $143.8 million
in the prior-year period. The revenue declines reflected the ongoing weakness
of the television advertising market, the effect of the September 11 terrorist
attacks and the absence of political revenues recorded in the prior-year due to
the biennial nature of elections. Net political revenues totaled $10.8 million
in the fiscal 2001 second quarter and $14.2 million in the first half of fiscal
2001. Excluding political advertising, revenues were up nearly 2 percent in
the second quarter and down 4 percent for the six months.
Television advertising revenues have been weak across the industry for several
quarters. The terrorist attacks on September 11 had an immediate worsening
effect on those revenues. Meredith's September advertising revenues, which had
been pacing flat with the prior year, ended the month down 20 percent. Part of
the decline resulted from the stations' commercial-free news coverage for
several days following September 11, as well as the impact of the postponement
of the immediately following weekend's sporting events. The balance of the
decline reflected the dramatic slowdown in advertising following the attacks.
Excluding political revenues, the company's stations have since seen some
recovery in local revenues while national advertising revenues continue to lag.
In the second quarter, local advertising revenues increased 8 percent compared
to prior-year second quarter, excluding political revenues. Management
believes the stations' sales improvement initiatives and a focus on generating
new business have contributed to the growth in local revenues. National
advertising revenues, excluding political, were down 11 percent for the group.
While total advertising revenues were down at most of the company's stations,
WOFL-Orlando and WGCL-Atlanta reported advertising revenue growth in both the
quarter and six-month period in spite of the challenging advertising market.
Operating profit was $10.4 million in the second quarter compared to $21.5
million in the prior-year second quarter. In the first half of fiscal 2002,
operating profit was also $10.4 million versus $31.6 million in the first half
of fiscal 2001. The declines resulted primarily from lower advertising
revenues. Operating costs increased 3 percent in the quarter and 2 percent in
the six-month period. The cost increases reflected higher amortization of
programming rights, increased payroll costs related to the expansion of news
programming and higher employee benefit costs. News costs are expected to be
comparable beginning in the third quarter of fiscal 2002.
- 17 -
Liquidity and Capital Resources
Percent
Six Months ended December 31 2001 2000 Change
---------------------------- --------- --------- -------
(In thousands)
Net earnings $ 17,367 $ 40,510 (57)%
========= ========= =====
Cash flows from operations $ 53,939 $ 49,829 8 %
========= ========= =====
Cash flows used by investing $ (9,599) $ (35,208) 73 %
========= ========= =====
Cash flows used by financing $ (69,405) $ (27,633) (151)%
========= ========= =====
Net decrease in cash
and cash equivalents $ (25,065) $ (13,012) (12)%
========= ========= =====
EBITDA $ 67,848 $ 108,220 (37)%
========= ========= =====
Cash and cash equivalents decreased by $25.1 million in the first six months of
fiscal 2002 compared to a decrease of $13.0 million in the corresponding
prior-year period. The decline primarily reflected increased use of cash for
the repayment of debt, partially offset by lower spending for property, plant
and equipment. Cash provided by operating activities increased from $49.8
million to $53.9 million in the current period in spite of a decline in net
earnings. The increase in cash provided by operations resulted from favorable
changes in working capital accounts. Those changes included an increase in
unearned subscription revenues due to the timing of mailings, favorable changes
in accounts payable due to the timing of required cash outflows and
revenue-related declines in accounts receivable balances.
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and excludes the nonrecurring income from the demutualization of
an insurance company. EBITDA is often used to analyze and compare companies on
the basis of operating performance and cash flow. EBITDA in the first six
months of fiscal 2002 decreased 37 percent from the prior-year period due
primarily to the advertising revenue-related decline in operating results.
EBITDA is not adjusted for all noncash expenses or for working capital, capital
expenditures and other investment requirements. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. In addition, the
calculation of EBITDA and similarly titled measures may vary between companies.
At December 31, 2001, debt outstanding consisted of $225 million outstanding
under two variable-rate bank credit facilities and $200 million outstanding in
- 18 -
fixed-rate unsecured senior notes issued to five insurance companies. Funds
for the payment of interest and principal on the debt are expected to be
provided by cash generated from future operating activities and debt
refinancing. The debt agreements include certain financial covenants related
to debt levels and coverage ratios. As of December 31, 2001, the company was
in compliance with all debt covenants.
Meredith is in the midst of a comprehensive review of refinancing alternatives
with respect to its current debt structure in light of the favorable interest
environment and the expiring revolving debt facility. Meredith expects to
complete this review prior to the maturity of the variable rate revolving
credit facility due on May 31, 2002. Meredith anticipates that the refinancing
will extend maturity dates, take advantage of the current favorable long-term
interest rates and provide the company additional financing flexibility in the
short-term. The effect on interest expense is not expected to be material.
These estimates are based on certain assumptions about the new debt structure,
current interest rates and the current availability of credit. All of these
factors are subject to change.
Meredith uses interest rate swap contracts to manage interest cost and risk
associated with possible increases in variable interest rates. The swap
contracts expire in May 2002 and June 2004. The notional amount varies over
the remaining terms of the contracts. The company is exposed to credit-related
losses in the event of nonperformance by counterparties to financial
instruments. Management does not expect any counterparties to fail to meet
their obligations given the strong creditworthiness of the counterparties to
the agreements. The weighted-average interest rate on debt outstanding at
December 31, 2001, was approximately 6.2 percent.
As part of Meredith's ongoing share repurchase program, the company spent $18.4
million to repurchase an aggregate of 584,000 shares of Meredith Corporation
common stock at then current market prices in the first six months of fiscal
2002. This compares with spending of $20.1 million for the repurchase of an
aggregate of 677,000 shares in the corresponding prior-year period. The
company expects to continue to repurchase shares from time to time in the
foreseeable future, subject to market conditions. As of December 31, 2001, the
number of shares authorized for future repurchase was approximately 1.9 million
shares. The status of this program is reviewed at each quarterly Board of
Directors meeting.
Dividends paid in the first six months of fiscal 2002 were $8.4 million, or 17
cents per share, compared with $8.0 million, or 16 cents per share, paid in the
prior-year period.
Spending for property, plant and equipment decreased to $10.8 million from
$31.1 million in the first six months of fiscal 2001. The decline reflected
higher spending in the prior-year period for the purchase of replacement
aircraft and associated facilities, construction of a new broadcasting facility
for the Atlanta television station and the purchase of equipment for the
introduction of local news programming at the Portland television station. The
broadcasting segment anticipates spending between $11 and $15 million over the
next 9 months for the initial transition to digital technology at six stations.
- 19 -
Five of the company's stations have already made this initial transition. The
company has no other material commitments for capital expenditures. Funds for
capital expenditures are expected to be provided by cash from operating
activities or, if necessary, borrowings under credit agreements.
At this time, management expects that cash on hand, internally-generated cash
flow and debt from credit agreements will provide funds for any additional
operating and recurring cash needs (e.g., working capital, cash dividends) for
the foreseeable future.
Other Matters -- In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets." Meredith will adopt this standard, as required,
effective July 1, 2002. The FASB also issued SFAS No. 141, "Business
Combinations," in July 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
It also specifies criteria that must be met for the recognition of intangible
assets separate from goodwill. Upon adoption of SFAS No. 142, Meredith will be
required to evaluate its existing intangible assets and make any necessary
reclassifications in order to conform to these new criteria. The effects of
adopting these standards, if any, are not quantifiable at this time.
- 20 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The company is subject to certain market risks as a result of the use of
financial instruments. The market risk inherent in the company's financial
instruments subject to such risks is the potential market value loss arising
from adverse changes in interest rates. Readers are referred to Item 7a,
"Quantitative and Qualitative Disclosures About Market Risk," of the company's
Form 10-K for the year ended June 30, 2001 for a more complete discussion of
these risks.
At December 31, 2001, Meredith had outstanding $225 million in variable-rate
long-term debt and $200 million in fixed-rate long-term debt. The company uses
interest rate swap contracts to effectively convert a substantial portion of
its variable-rate debt to fixed-rate debt. Therefore, there is no material
earnings or liquidity risk associated with the company's variable-rate debt and
the related interest rate swap contracts. The fair market value of the
variable-rate debt approximates the carrying amount due to the periodic
resetting of interest rates. The fair market value of the interest rate swaps
is the estimated amount, based on discounted cash flows, the company would pay
or receive to terminate the swap contracts. A 10 percent decrease in interest
rates would result in a $7.8 million cost to terminate the swap contracts
compared to the current cost of $6.4 million at December 31, 2001.
There is no earnings or liquidity risk associated with the company's fixed rate
debt. The fair market value of the debt, based on discounted cash flows using
borrowing rates currently available for debt with similar terms and maturities,
varies with changes in interest rates. A 10 percent decrease in interest rates
would result in a fair market value of ($209.7 million) compared to the current
fair market value of ($205.3 million) at December 31, 2001.
There has been no material change in the market risk associated with broadcast
rights payable since June 30, 2001.
- 21 -
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on November 12, 2001, at the
Company's headquarters in Des Moines, Iowa.
(b) The name of each director elected at the Annual Meeting is shown under
Item 4.(c)(1). The other directors whose terms of office continued after
the meeting were: Herbert M. Baum, Frederick B. Henry, William T. Kerr,
Robert E. Lee, Philip A. Marineau, Nicholas L. Reding and Jack D. Rehm.
(c)(1) Proposal 1: Election of four Class III directors for terms expiring in
2004 and the election of one Class I director for a term expiring in
2002. Each nominee was elected in uncontested elections by the votes
cast as follows:
Number of shareholder votes*
----------------------------
For Withheld
----------- ----------
Class III directors
Mary Sue Coleman 125,115,641 1,350 593
Mell Meredith Frazier 125,021,388 1,444,846
Joel W. Johnson 125,019,830 1,446,404
E.T. Meredith III 125,022,249 1,443,985
Class I director
David J. Londoner 125,678,292 787,942
*As specified on the proxy card, if no vote For or Withhold was
specified, the shares were voted For the election of the named
director.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K
During the second quarter of fiscal 2002, the company filed a report on
Form 8-K on October 29, 2001, reporting under Item 5 the text of a news
release dated October 29, 2001, reporting earnings for the quarter ended
September 30, 2001 and the script of a conference call concerning that news
release.
Also during the second quarter of fiscal 2002, the company filed a report
on Form 8-K on December 6, 2001, reporting under Item 5 the text of a
management presentation at UBS Warburg Media Conference on December 6,
2001.
- 22 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEREDITH CORPORATION
Registrant
(Suku V. Radia)
Suku V. Radia
Vice President - Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: February 7, 2002
- 23 -