The Reader's Digest Association, Inc.
Media: William Adler, (914) 244-7585 william.adler@rd.com
Investor Relations: Richard Clark, (914) 244-5425 richard.clark@rd.com
Reader's Digest Association Announces 1Q Fiscal 2005 Results;
Includes Previously Announced Change in Expensing of Promotions;
RD North America and International Profits Improve
PLEASANTVILLE, NY, October 28, 2004 - The Reader's Digest
Association, Inc. (NYSE: RDA) today reported a loss of $(0.31)
per share for the first quarter of Fiscal 2004 ended September
30, 2004. Results included a non-cash charge of $(0.17) per
share for amortization of previously deferred magazine promotion
expenses and an estimated $(0.05) per share related to the timing
of expensing first quarter promotion costs as incurred versus
deferring such costs, the company's practice last year. In
Fiscal 2004, the first-quarter loss was $(0.14) per share. The
Fiscal 2005 variance was attributable to the two
promotion-expense items, partly offset by stronger operating
results in both the RD North America and RD International
business segments.
Revenues were $490 million versus $495 million in the Fiscal
2004 quarter. The company reported an operating loss of $(36)
million, which included $(25) million of amortization of
previously deferred magazine promotion expenses and an estimated
$(7) million in promotion expense timing impact. Last year, the
company reported a first-quarter operating loss of $(13)
million.
"Overall, operating results were better than our
expectations and significantly better than last year's when
adjusted for the change to expensing previously deferred
promotion costs as incurred," said Thomas O. Ryder, Chairman and
Chief Executive Officer. "Our core businesses in RD North
America and RD International continue to show increasing
strength. QSP and Books Are Fun are operating in competitive
environments and addressing their respective challenges."
The company's first quarter is historically not the most
significant and typically has a loss as RDA gears up for its fall
and winter selling seasons. Factors contributing to the
year-over-year variance in reported results for the first quarter
include:
- A $3 million increase in operating profits at RD North
America, which improved by 27 percent despite an estimated
incremental $(5) million of timing-related magazine
promotion expense.
- A $2 million increase in operating profits at RD
International, which improved from a loss of $(1) million
despite an estimated incremental $(2) million of
timing-related magazine promotion expense.
- A $(3) million increase in losses at CBS.
- A $1 million improvement in corporate unallocated expense.
- A $(25) million non-cash charge related to amortization of a
portion of the deferred magazine promotion expenses on the
books as of June 30, 2004.
- A $(3) million increase in expenses in other
income/(expense), net, reflecting $4 million in proceeds
from asset sales in prior year results.
Free cash flow (change in cash before the change in total
borrowings, dividends, share repurchases, divestitures and
acquisitions) was a use of $(87) million, versus a use of $(71)
million in the year-ago quarter. The company historically uses
significant cash in the first quarter in preparation for the fall
and winter selling seasons at Books Are Fun (BAF) and QSP. The
increase in use was attributable to timing of working capital and
to incremental cash flow in the Fiscal 2004 quarter from the sale
of Schoolpop, Inc., and LookSmart, Ltd. shares.
As previously announced, effective July 1, 2004 the company
changed its accounting for magazine direct-response promotion
costs and began expensing costs as incurred, versus the previous
practice of deferring and amortizing much of those costs. This
change was precipitated by changes in the company's magazine
business and by new initiatives the company is undertaking. In
connection with this change, a non-cash charge of $(27) million
was taken to reflect amortization of a portion of the total
existing deferred promotion expense balance at June 30 of $(104)
million. The remaining balance of $(77) million, or $(0.49) per
share, will be amortized over Fiscal 2005, with the first-quarter
impact being $(25) million, or $(0.17) per share. All of these
amounts are non-cash. Excluding this amortization, the change is
expected to have a minimal impact on the full fiscal year but
will result in timing differences in year-to-year quarter
comparisons. These timing differences will result in unfavorable
comparisons in the first half and favorable comparisons in the
second.
Other Income and Expense, Net
Other income and expense, net was $(11) million this
quarter, unfavorable by $(3) million compared with last year.
Net interest expense was $(11) million in this quarter and in the
year-ago quarter. The average cost of borrowings this quarter
was 4.8 percent versus 4.0 percent in the year-ago quarter. In
addition, last year's results included a gain of $3 million from
the sale of Schoolpop, Inc. and a gain of $1 million on the sale
of the company's remaining shares in LookSmart, Ltd.
Outlook
The company continues to expect full-year Fiscal 2005
earnings per share to be in line with the Previously Announced
Fiscal 2005 Guidance of $0.77 to $0.87, not including
amortization for deferred magazine promotions costs ($(0.49) per
share) and special items (including restructuring charges).
Reconciliation of Previously Announced
Fiscal 2005 Guidance EPS
Previously Announced Fiscal 2005 Guidance $0.77 - $0.87
Add:
Amortization of existing magazine deferred
promotion asset as of June 30, 2004 $(0.49)
-------------
Earnings per share $0.28 - $0.38
=============
Segment Information
Fiscal 2005 Fiscal 2004 Better/
In millions Quarter 1 Quarter 1 (Worse)
(a) (a)
Revenues:
Reader's Digest North America $ 210 $ 210 $ --
Reader's Digest International 215 216 (1)
Consumer Business Services 71 75 (4)
Intercompany eliminations (6) (6) --
----- ----- -----
Total revenues $ 490 $ 495 $ (5)
Operating Profit (Loss):
Reader's Digest North America $ 13 $ 10 $ 3
Reader's Digest International 1 (1) 2
Consumer Business Services (16) (13) (3)
Corporate Unallocated (9) (10) 1
Deferred Promotion Amortization (25) -- (25)
----- ----- -----
Total operating profit/(loss) $ (36) $ (13) $ (23)
(a) Certain amounts do not recalculate due to rounding.
Reader's Digest North America (RDNA)
In the first quarter, revenues for RDNA were $210 million,
flat to last year. Results largely reflect increases at Reiman,
financial services and Canada offset by lower revenues at U.S.
BHE related to a reduction in unprofitable marketing activities
including telemarketing at Reader's Digest Young Families and
planned lower circulation sales at Reader's Digest magazine.
This segment now includes results from the financial services and
Young Families businesses (see "Segment Composition").
Operating profits improved by 27 percent in the quarter to
$13 million despite an estimated incremental $(5) million in
promotion expense timing in the current year's quarter. The
improvement marks the 10th consecutive quarter of year-over-year
gains in profits at RDNA. Profits improved across nearly all
units within the segment. The strongest drivers were improved
profits at Reiman's book business, increased subscriber
profitability at Reader's Digest magazine, a one-time fee in
financial services related to the termination of a partnership
agreement, improved profitability at Young Families, higher
advertising sales at Selecciones, The Family Handyman and
Reader's Digest Large Print, and continued profit improvement at
U.S. BHE.
Reader's Digest International (RDI)
In the first quarter, RDI revenues were $215 million, versus
$216 million in the year-ago period. Operating profits improved
to $1 million, despite an estimated $(2) million in incremental
promotion expense timing, versus a loss of $(1) million in last
year's quarter. Excluding the effects of foreign currency
translation, revenues declined by 8 percent. Profits improved in
most international markets, led by gains in the larger
markets--Germany, Australia, the United Kingdom, France and
Poland. Most markets benefited from lower operating costs and
improved marketing execution. These improvements were partially
offset by further investment in new initiatives launched last
year including new market launches in Romania, Croatia, Slovenia
and Ukraine, which are all performing ahead of internal
expectations. The company also invested in tests of a
Reiman-style magazine in Brazil and a new "English as a Second
Language" product in several markets.
Consumer Business Services (CBS)
Revenues at Consumer Business Services were $71 million in
the quarter, a decline of 5 percent, and the operating loss was
$(16) million versus a loss of $(13) million last year. The
first quarter is typically the smallest for CBS as BAF and QSP
invest in preparation for the fall and winter selling seasons.
Revenues at QSP grew slightly on higher magazine subscription
sales, while operating losses increased, driven by higher
campaign investment and sales force expansion. BAF revenues and
profits were off compared to last year, principally because of
fewer events in schools. The decline in school events reflects
higher sales force turnover, delayed school openings (Labor Day
fell one week later than last year), and school closures because
of hurricanes in the southeastern United States.
Corporate Unallocated
Corporate unallocated expenses were $(9) million in the
quarter versus $(10) million in the year-ago quarter. Corporate
unallocated expenses include the cost of governance and other
centrally managed expenses, as well as the accounting for U.S.
pension plans, post-retirement healthcare costs, and executive
compensation programs. The favorable variance for the quarter
was attributable to higher pension income from the company's U.S.
pension plans, partially offset by higher employee related
costs.
Non-GAAP Financial Measures
The company publicly reports its financial information in
accordance with accounting principles generally accepted in the
United States (GAAP). To facilitate external analysis of the
company's operating performance, the company also presents
financial information that may be considered "non-GAAP financial
measures" under Regulation G and related reporting requirements
promulgated by the Securities and Exchange Commission. Non-GAAP
financial measures should be evaluated in conjunction with, and
are not a substitute for, GAAP financial measures. The following
non-GAAP financial measures included in this release are used by
the company in its internal analysis of the business.
- Free Cash Flow (change in cash before the change in total
borrowings, dividends, share repurchases, divestitures and
acquisitions) - Free cash flow is presented to provide
period-to-period cash flow trends generated by the business
before any discretionary, finance-related uses/sources of
cash. It is used by management to reconcile the change in
net debt from period to period. Certain amounts do not
recalculate due to rounding.
Reconciliation of Free Cash Flow, Q1 Fiscal Q1 Fiscal
in millions 2005 2004
Reported change in cash per cash flow $(15) $ 11
statement (see Table 4)
Less:
Change in total borrowings 78 87
Dividends
Debt financing fees (1) --
Free Cash Flow (Use) Source $(87) $(71)
- Net Debt (total borrowings less cash and cash equivalents) -
Net debt is one of management's measures of leverage and is
an approximate measure of the company's debt less amounts
the company has the capacity to repay. The company
typically manages its cash and debt by using any "excess"
cash (i.e., cash in excess of a desired on-hand amount) to
make principal payments on its outstanding debt.
- Previously Announced Fiscal 2005 Guidance (earnings per
share before the effects of the change in accounting for
magazine deferred promotion costs and special items,
including restructuring charges) - The Previously Announced
Fiscal 2005 Guidance represented the company's full-year
earnings per share guidance, excluding final resolution of
the treatment of its existing magazine deferred promotion
asset (which was not determinable at that time), and special
items (including restructuring charges). Subsequent to this
date, the company finalized the accounting for magazine
deferred promotion costs. Previously Announced Fiscal 2005
Guidance is presented to facilitate an understanding of the
impact of the company's change in magazine deferred
promotion accounting on its guidance. Management uses
Fiscal 2005 Guidance to assess the company's actual
performance relative to its full-year expectations on a
per-share basis. A reconciliation of this amount is
included in the "Outlook" section, above.
The company will host a conference call with financial
analysts to discuss the company's first quarter results on
Thursday, October 28, 2004 at 8:30 a.m. EST. The company invites
investors to listen to the webcast of the conference call at the
company's Investor Relations Web site, www.rd.com/investors.
This will also include a reconciliation of non-GAAP financial
measures that may be disclosed on the conference call or from
time to time in other oral, webcast or broadcast public
announcements by the company. A transcript of the conference
call will be posted on www.rd.com/investors.
Segment Composition
Effective with the first quarter of Fiscal 2005, the company
moved two small businesses, Reader's Digest Young Families and
financial services, from Consumer Business Services to the
Reader's Digest North America segment to reflect a change in
management responsibility. Prior-year results for these segments
have been restated for comparability.
The company reports business results in three segments:
- Reader's Digest North America - Reader's Digest magazine in
the United States and Canada; Reiman Media Group, including
magazines Taste of Home, Light & Tasty, Quick Cooking,
Backyard Living, Cooking for 2, Birds & Blooms, Country,
Country Woman, Country Discoveries, Reminisce, and Farm &
Ranch, as well as books, cooking schools, country tours and
other enterprises; The Family Handyman, American Woodworker,
Reader's Digest Large Print Edition and U.S. Selecciones
magazines; Reader's Digest Young Families; financial
services marketing alliances; and Select Editions, series
and general books, health and home books, and music and
video products in the United States and Canada.
- Consumer Business Services - Books Are Fun, a display
marketer in North America selling books, gifts and other
items; QSP, Inc. and QSP Canada, schools and youth
fundraising companies; and Trade Publishing, comprising
adult and children's trade books.
- Reader's Digest International - Products sold in more than
60 countries outside the United States and Canada,
including: Select Editions, series and general books, music,
video and Young Families products; Reader's Digest magazine
in 48 editions and 19 languages, Special Interest magazines
in the Czech Republic; The Family Handyman in Australia;
Books Are Fun operations in France, Mexico and Spain; and
financial services marketing partnerships and other
initiatives in more than 30 countries.
The Reader's Digest Association, Inc. is a global publisher
and direct marketer of products that inform, enrich, entertain
and inspire people of all ages and cultures around the world.
Global headquarters are located at Pleasantville, New York. The
company's main Web site is www.rd.com.
This release may include "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and
uncertainties that could cause actual future results and
occurrences to differ materially from the forward-looking
statements. The Reader's Digest Association, Inc.'s filings with
the Securities and Exchange Commission, including its reports on
Forms 10-K, 10-Q and 8-K, contain a discussion of additional
factors that could affect future results and occurrences.
Reader's Digest does not undertake to update any forward-looking
statements.
Table 1 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Statements of Income
(In millions, except per share data)
(unaudited)
Three-month period ended
September 30, 2004 and 2003 (A)
Fiscal Year Better/
2005 2004 (Worse)
Revenues $490.0 $494.7 (1%)
Product, distribution and editorial expenses (203.0) (208.3) 3%
Promotion, marketing and administrative expenses (322.9) (299.9) (8%)
Other operating items, net -- -- --
------ ------ ----
Operating loss (35.9) (13.5) N/M
Other income and (expense), net (B) (11.0) (7.6) (45%)
------ ------ ----
Loss before income tax benefit (46.9) (21.1) N/M
Income tax benefit (provision) 16.6 7.6 N/M
------ ------ ----
Net loss ($30.3) ($13.5) N/M
====== ====== ====
Basic and diluted loss per share:
Weighted average common shares outstanding 97.3 97.0
Basic and diluted loss per share ($0.31) ($0.14) N/M
====== ====== ====
Dividends per common share $0.05 $0.05 --
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2004
and 2003 are the first fiscal quarters of fiscal year 2005 and fiscal year 2004, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year.
(B) Other (expense) income, net for the three-month period ended September 30, 2003, included a $2.7 million
gain from the company's share of the proceeds from the merger of Schoolpop, Inc. and a $0.8 million gain on
the sale of its remaining shares in LookSmart, Ltd.
N/M - Not meaningful.
Table 2 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Revenues and Operating Profit by Operating Segments
(In millions)
(unaudited)
Three-month period ended
September 30, 2004 and 2003 (A)
Fiscal Year
Restated (B) Better/
2005 2004 (Worse)
Revenues
Reader's Digest North America $209.7 $210.0 --
Reader's Digest International 214.8 215.8 --
Consumer Business Services 71.4 75.3 (5%)
Intercompany eliminations (C) (5.9) (6.4) 8%
------ ------ ---
Total Revenues $490.0 $494.7 (1%)
====== ====== ===
Operating profit (loss)
Reader's Digest North America $13.2 $10.4 27%
Reader's Digest International 0.7 (1.2) 158%
Consumer Business Services (15.9) (12.7) (25%)
Corporate unallocated (D) (8.5) (10.0) 15%
------ ------ ---
($10.5) ($13.5) 22%
Deferred promotion amortization (E) (25.4) -- N/M
------ ------ ---
Total operating loss ($35.9) ($13.5) N/M
====== ====== ===
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2004
and 2003 are the first fiscal quarters of fiscal year 2005 and fiscal year 2004, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year.
(B) The results for fiscal 2004 have been restated for the movement of the Young Families and Financial
Services businesses from the Consumer Business Services segment to the Reader's Digest North America
segment.
(C) In the normal course of business, the company's segments enter into transactions with one another.
These intercompany transactions are recorded by each segment at amounts as if the transactions were with
third parties and, therefore, affect segment performance. Operating segment revenues, above, are presented
gross before intercompany eliminations. However, intercompany revenues and associated
expenses are eliminated in consolidation and are not reflected in the company's consolidated results.
(D) Corporate unallocated expenses include the cost of governance and other centrally managed expenses,
as well as the accounting for U.S. pension plans, post-retirement healthcare costs, and
executive compensation programs which are not allocated to the operating segments. Governance and
centrally managed expenses include costs such as corporate finance and general management, investor and
public relations, legal, treasury, and any related information technology and facility costs utilized
by these departments.
(E) The deferred promotion amortization of $(25.4) million reflects the expensing of the deferred
magazine promotion asset as of June 30, 2004.
N/M - Not meaningful.
Table 3 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2004 and June 30, 2004
(In millions)
(unaudited)
September 30, June 30,
2004 2004
Assets
Cash and cash equivalents $ 35.6 $ 50.3
Accounts receivable, net 269.6 229.0
Inventories 205.8 152.0
Prepaid and deferred promotion costs 108.0 106.9
Prepaid expenses and other current assets 188.0 152.1
-------- --------
Total current assets 807.0 690.3
Property, plant and equipment, net 155.0 155.8
Goodwill 1,009.8 1,009.5
Other intangible assets, net 164.5 173.9
Other noncurrent assets 393.5 413.2
-------- --------
Total assets $2,529.8 $2,442.7
======== ========
Liabilities and Stockholders' Equity
Loans and notes payable $ 177.2 $ 83.9
Accounts payable 119.0 110.6
Accrued expenses 264.6 268.7
Income taxes payable 16.4 15.5
Unearned revenue 426.3 403.4
Other current liabilities 10.9 10.2
-------- --------
Total current liabilities 1,014.4 892.3
Postretirement and postemployment benefits other than pensions 116.8 119.5
Unearned revenues 138.6 129.3
Long-term debt 622.2 637.7
Other noncurrent liabilities 203.0 200.8
-------- --------
Total liabilities 2,095.0 1,979.6
Capital stock 12.6 17.8
Paid-in capital 206.9 210.1
Retained earnings 1,295.0 1,330.4
Accumulated other comprehensive (loss) income (84.7) (89.4)
Treasury stock, at cost (995.0) (1,005.8)
-------- --------
Total stockholder's equity 434.8 463.1
-------- --------
Total liabilities and stockholder's equity $2,529.8 $2,442.7
======== ========
Table 4 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three-month periods ended September 30, 2004 and 2003
(In millions)
(unaudited)
Three-month period ended
September 30, (A)
2004 2003
Cash flows from operating activities
Net loss ($30.3) ($13.5)
Depreciation and amortization 15.1 16.1
Magazine deferred promotion charge 25.4 --
Amortization of debt issuance costs 1.0 1.3
Stock-based compensation 3.1 2.9
Net gain on marketable securities and sales of certain
assets -- (3.5)
Changes in current assets and liabilities
Accounts receivable, net (36.6) (25.6)
Inventories (52.4) (45.6)
Unearned revenues 19.2 29.1
Accounts payable and accrued expenses 1.3 2.4
Other, net (38.3) (63.7)
Changes in noncurrent assets and liabilities 8.0 31.0
------ ------
Net change in cash due to operating activities (84.5) (69.1)
------ ------
Cash flows from investing activities
Proceeds from maturities and sales of marketable securities -- 0.8
--
Purchases of marketable securities and investments -- (1.3)
--
Proceeds from other long-term investments -- 2.7
Proceeds from sales of property, plant and equipment 0.1 0.1
Capital expenditures (3.2) (4.0)
------ ------
Net change in cash due to investing activities (3.1) (1.7)
------ ------
Cash flows from financing activities
Proceeds / (repayments) of revolving credit and short-term
debt, net 85.8 105.0
Repayments of term loan (8.0) (18.1)
Dividends paid (5.2) (5.2)
Payments of debt financing costs (0.5) --
Proceeds from employee stock purchase plan and exercise
of stock options 0.1 --
Other, net -- --
------ ------
Net change in cash due to financing activities 72.2 81.7
------ ------
Effect of exchange rate changes on cash 0.7 0.5
------ ------
Net change in cash and cash equivalents (14.7) 11.4
------ ------
Cash and cash equivalents at beginning of period 50.3 51.3
------ ------
Cash and cash equivalents at end of period $35.6 $62.7
====== ======
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2004
and 2003 are the first fiscal quarters of fiscal year 2005 and fiscal year 2004, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year. In some instances,
prior year amounts have been reclassified to conform to the current year presentation.