EXHIBIT 99.1
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 1Q Fiscal 2006 Revenues Grow 5 Percent;
Operating Results Improve in All Three Business Segments;
Company Narrows 1Q Loss from Prior Year
PLEASANTVILLE, NY, October 27, 2005 - The Reader's Digest Association, Inc.
(NYSE: RDA) today reported an increase of revenues of 5 percent versus last year
for the first quarter of Fiscal 2006 ended September 30, 2005. The company
significantly narrowed its first quarter loss to $(0.09) per share, versus last
year's 1Q loss of $(0.31) per share. Operating results improved in all three of
its business segments. First quarter results typically reflect seasonal
investment as the company makes expenditures to ramp up for the fall and winter
selling seasons.
Revenues for the Fiscal 2006 quarter were $516 million versus $490 million
a year ago, up 5 percent. The company reported an operating loss of $(9)
million, a $27 million improvement over the loss of $(36) million in the
prior-year quarter. Last year's results included a non-cash charge of $(25)
million, or $(0.17) per share, for amortization of previously deferred magazine
promotion expenses.
"We are very pleased with our results, especially achieving overall
topline growth, a principal objective. Revenues were better than last year's
quarter, driven by improved results in all of our business segments, and segment
operating profits were in line with our expectations," said Thomas O. Ryder,
Chairman and Chief Executive Officer. "This quarter continues the momentum from
our strong fourth quarter as our focus has shifted from stabilization to growth.
RDNA and RDI continue to benefit from a much healthier base business and are now
generating incremental support from investments like new magazine launches and
new country expansion."
Free cash flow (change in cash before the change in total borrowings,
dividends, share repurchases, divestitures and acquisitions) was a use of $(99)
million, versus a use of $(87) 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. The increase also was attributable to higher
management incentive payouts and incremental capital expenditures. The capital
expenditures were for refitting the Pleasantville headquarters following the
sale-leaseback transaction in Fiscal 2005, which resulted in less use of space
and lower operating costs.
Other Income/(Expense), Net
Other Income and (Expense), Net was $(7) million in the Fiscal 2006 first
quarter, compared with $(11) million in the prior-year quarter. As the company
expected, Fiscal 2006 results include a gain on the sale of real estate in
Mexico. Net interest expense was $(9) million in this quarter versus $(11)
million in the year-ago period.
Income Taxes
Income taxes were a benefit of $8 million in the first quarter of Fiscal
2006, reflecting the pre-tax loss and an additional net benefit of $2 million
principally from the resolution of a foreign tax audit. Income taxes were a
benefit of $17 million in the year-ago quarter.
Share Repurchase Program
During the quarter, the company repurchased about 575,000 shares of its
stock at a total cost of $9 million under the $100 million share repurchase
authorization announced in April 2005. As of September 30, the company had
purchased about 985,000 shares of its stock at a cost of $16 million under that
authorization.
Outlook
The company has recently launched a new three-year plan that calls for
consistent top and bottom line growth. The company expects annual revenue growth
in the mid single digits and operating profit growth in the high single to low
double digits during the course of the plan. For the first year of the plan,
Fiscal 2006, the company expects full-year revenues to grow low to mid single
digits on a currency-neutral basis, operating profits to grow in the mid teens,
and earnings per share to be $0.90 to $1.00, in line with previously announced
Fiscal 2006 guidance. Also consistent with prior guidance, the timing of
investment spending and higher direct-mail sales activity relative to last year
will result in a planned shift in profits from the second quarter to the second
half of the year. This should result in slightly lower profits in the second
quarter and higher results in the second half. Additionally, last year's second
quarter included a one-time positive impact of $0.09 per share as a result of
the sales of certain assets and favorable tax audit settlements.
In the first quarter, the company incurred unexpected costs related to the
increase in fuel prices in the United States and the after-effects of Hurricanes
Katrina and Rita. Flood damage in the wake of the hurricanes has shut down
territories of BAF and QSP in the Gulf Coast indefinitely and has interfered
with postal delivery of RD North America direct mail and products. The impact of
these factors was not significant in the first quarter, but will adversely
affect RDA's U.S. businesses in the second quarter.
Segment Information
Fiscal 2006 Fiscal 2005 Better/
In millions Quarter 1 (a) Quarter 1 (a) (Worse) (a)
Revenues:
Reader's Digest North America $ 228 $ 226 $ 2
Reader's Digest International 235 215 20
Consumer Business Services 60 55 5
Intercompany Eliminations (6) (6) --
----- ----- -----
Total revenues $ 516 $ 490 $ 26
Operating Profit (Loss):
Reader's Digest North America $ 16 $ 16 $ --
Reader's Digest International 1 1 1
Consumer Business Services (18) (19) 1
Corporate Unallocated (9) (9) --
Deferred Promotion Amortization -- (25) 25
----- ----- -----
Total operating loss $ (9) $ (36) $ 27
(a) Certain amounts do not recalculate due to rounding.
Reader's Digest North America (RDNA)
In the first quarter, revenue for RDNA was $228 million, up 1 percent over
last year. Results for the quarter reflect revenue increases at Reiman, US BHE
and Canada. These gains were partly offset by lower revenues at Reader's Digest
magazine and Financial Services, the latter reflecting a one-time fee in last
year's results because of the termination of a partnership agreement. Growth at
Reiman was driven by the continued success of new magazines Backyard Living,
Cooking for 2, and Birds & Blooms Extra, all of which continue to perform ahead
of plan. Revenues at US BHE grew over last year led by higher sales at
Children's Publishing and the continued success of the book "Extraordinary Uses
for Ordinary Things," which has generated about 250,000 orders in the United
States, principally via non-sweepstakes direct mail. RD Canada continues to
contribute to revenue growth at RDNA, driven this quarter by higher sales of Our
Canada magazine and improved customer fulfillment of BHE products. RDNA results
were moderately affected by Hurricane Katrina, which interfered with magazine
and BHE promotions as well as the delivery of products.
Operating profits were $16 million in the quarter, up 1 percent over last
year. The principal driver of the year-over-year change in profits was a $6
million reduction in acquisition-related amortization associated with Reiman,
and higher profit at US BHE and Canada. These gains were offset by start-up
costs associated with Taste of Home Entertaining and the new magazine Every Day
with Rachael Ray, the absence of last year's termination fee in Financial
Services, and continued investment in new magazine launches.
Reader's Digest International (RDI)
In the first quarter, RDI revenues were $235 million, up 9 percent, and
operating profits of $1 million doubled versus the year-ago period. Excluding
the effects of foreign currency translation, revenues increased by 6 percent.
Revenues improved in most markets around the world, led by double-digit
gains in France, Russia, Australia, Asia, and Brazil. Gains primarily reflect
improved execution, a more stable customer base, and strong product and
promotion flow. Further driving topline growth were solid contributions from the
four new markets launched last year, Romania, Croatia, Slovenia, and Ukraine.
These markets continue to exceed expectations adding both revenues and profits
to RDI results.
Operating profits improved in the majority of markets led by the United
Kingdom, Germany, Asia, Mexico and Brazil. Also contributing to the profit
improvement were businesses in several new countries where RDI recently launched
operations. These gains were partly offset by the costs of developing new
businesses and testing new Reiman-style magazines, and by increased
customer-acquisition investments.
In September, the company launched businesses in Bosnia and Serbia.
Initial results were excellent for the first publishing offer, the book
"Discovering Wonders of the World." RDA's Central Europe organization now covers
nine countries and publishes in eight languages. During the first quarter, the
division also readied the new Romanian edition of Reader's Digest magazine,
which launches today. The magazine is the 49th edition of Reader's Digest in its
20th language.
Consumer Business Services (CBS)
In the first quarter of Fiscal 2006, revenues at CBS were $60 million, an
improvement of 9 percent over last year. Operating losses were $(18) million,
slightly favorable to the year-ago period. Revenue growth was driven by gains at
both BAF and QSP, whose revenues improved by 8 percent and 10 percent,
respectively. The first quarter is typically the smallest for CBS, as its two
businesses invest in preparation for the fall and winter selling seasons.
At BAF, operating losses increased on 8 percent higher revenues. Revenue
gains were principally driven by the timing of school campaigns in this year's
quarter versus last year. Corporate sales at BAF continued to be negatively
affected by outside recruiting of its independent sales representatives.
However, the schools division rebounded from intense competition last year and
recorded increased sales and a net increase in the number of sales
representatives.
At QSP, both revenues and profits improved over last year. Revenue gains
were driven by higher gift and food sales. Fiscal 2006 first quarter results
benefited from several actions taken over the past year to improve service and
increase account retention and student participation. Operating losses improved
in the quarter because of higher sales volumes and improved operating
efficiencies.
Corporate Unallocated
Corporate unallocated expenses were $(9) million in the quarter, flat
versus 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 stock and executive
compensation programs. Lower facility-related costs and other expense savings
were offset by increased costs associated with the expensing of stock options
and lower pension income.
Non-GAAP Financial Measures
The company publicly reports its financial information in accordance with
United States generally accepted accounting principles (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 2006 2005
Reported change in cash per cash flow $ 18 $ (15)
statement (see Table 4)
Change in total borrowings (136) (78)
Dividends 10 5
Share repurchases 9 --
Debt financing fees -- 1
----- -----
Free Cash Flow Use $ (99) $ (87)
===== =====
- 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.
The company will host a conference call with financial analysts to discuss
the company's first quarter results on Thursday, October 27, 2005 at 8:30 a.m.
EDT. 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
The company reports business results in three segments:
- Reader's Digest North America - Reader's Digest magazine in the United
States; Reader's Digest (in English and French versions) and Our Canada
magazines in Reader's Digest Canada; Reiman Media Group, including
magazines Backyard Living, Birds & Blooms, Cooking for 2, Country, Country
Discoveries, Country Woman, Farm & Ranch Living, Light & Tasty, Quick
Cooking, Reminisce and Taste of Home, the largest-circulation U.S. food
magazine, as well as books, cooking schools, country tours and other
enterprises; American Woodworker, Every Day with Rachael Ray, Reader's
Digest Large Print Edition, The Family Handyman, and U.S. Selecciones
magazines; Reader's Digest Young Families; Trade Publishing, comprising
adult and children's trade books; 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, the leading display marketer
in North America selling books, gifts and other items; QSP, Inc. and QSP
Canada, market-leading schools and youth fundraising companies.
- 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 Reader's Digest Young Families
products; Reader's Digest magazine (globally published in 49 editions and
20 languages), Special Interest magazines in the Czech Republic; The
Family Handyman in Australia; Books Are Fun operations in 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, 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 Operations
(In millions, except per share data)
(unaudited)
Three-month period ended
September 30, 2005 and 2004 (A)
Fiscal Year Better/
2006 2005 (Worse)
Revenues $516.4 $490.0 5%
Product, distribution and editorial expenses (221.0) (203.0) (9%)
Promotion, marketing and administrative expenses (304.8) (322.9) 6%
------ ------ ---
Operating loss (B) (9.4) (35.9) 74%
Other (expense) income, net (6.7) (11.0) 39%
------ ------ ---
Loss before income tax benefit (16.1) (46.9) 66%
Income tax benefit 7.9 16.6 52%
------ ------ ---
Net loss ($8.2) ($30.3) 73%
====== ====== ===
Basic and diluted loss per share:
Weighted average common shares outstanding 97.4 97.3
Basic and diluted loss per share ($0.09) ($0.31) N/M
====== ====== ===
Dividends per common share $0.10 $0.05 --
Amounts may not recalculate due to rounding
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2005
and 2004 are the first fiscal quarters of fiscal year 2006 and fiscal year 2005, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year.
(B) Operating loss for the three-month period ended September 30, 2004 includes deferred promotion
amortization expense of $(25.4) million
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, 2005 and 2004 (A)
Fiscal Year
Better/
2006 2005 (Worse)
Revenues
Reader's Digest North America $227.7 $226.2 1%
Reader's Digest International 235.0 214.8 9%
Consumer Business Services 59.8 54.9 9%
Intercompany eliminations (B) (6.1) (5.9) (3%)
------ ------ ---
Total Revenues $516.4 $490.0 5%
====== ====== ===
Operating profit (loss)
Reader's Digest North America $16.0 $15.8 1%
Reader's Digest International 1.4 0.7 100%
Consumer Business Services (18.0) (18.5) 3%
Corporate unallocated (C) (8.7) (8.5) (2%)
------ ------ ---
($9.4) ($10.5) 10%
Deferred promotion amortization (D) -- (25.4) N/M
------ ------ ---
Total operating loss ($9.4) ($35.9) 74%
====== ====== ===
Amounts may not recalculate due to rounding
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2005
and 2004 are the first fiscal quarters of fiscal year 2006 and fiscal year 2005, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year.
(B) 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.
(C) 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 stock 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.
(D) 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, 2005 and June 30, 2005
(In millions)
(unaudited)
September 30, June 30,
2005 2005
Assets
Cash and cash equivalents $ 55.2 $ 37.7
Accounts receivable, net 285.8 233.9
Inventories, net 215.8 162.4
Prepaid and deferred promotion costs 60.5 53.8
Prepaid expenses and other current assets 160.3 144.9
-------- --------
Total Current Assets 777.6 632.7
Property, plant and equipment, net 119.1 119.3
Goodwill 881.2 880.9
Other intangible assets, net 134.5 137.8
Prepaid pension assets 313.0 307.9
Other noncurrent assets 100.9 102.0
-------- --------
Total Assets $2,326.3 $2,180.6
======== ========
Liabilities and Stockholders' Equity
Loans and notes payable $ 20.9 $ --
Accounts payable 137.2 109.8
Accrued expenses 250.7 267.4
Income taxes payable 4.9 34.5
Unearned revenues 429.7 395.5
Other current liabilities 12.0 12.4
-------- --------
Total Current Liabilities 855.4 819.6
Long-term debt 674.0 559.2
Unearned revenues 143.0 133.0
Accrued pension 120.1 121.5
Postretirement and postemployment benefits other than pensions 96.3 96.7
Other noncurrent liabilities 95.1 84.4
-------- --------
Total Liabilities 1,983.9 1,814.4
Capital stock 30.4 21.2
Paid-in capital 197.0 206.8
Retained earnings 1,203.1 1,221.6
Accumulated other comprehensive loss (80.8) (84.1)
Treasury stock, at cost (1,007.3) (999.3)
-------- --------
Total Stockholders' Equity 342.4 366.2
-------- --------
Total Liabilities and Stockholders' Equity $2,326.3 $2,180.6
======== ========
Table 4 of 4
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three-month periods ended September 30, 2005 and 2004
(In millions)
(unaudited)
Three-month period ended
September 30, (A)
2005 2004
Cash flows from operating activities
Net loss ($8.2) ($30.3)
Depreciation and amortization 9.4 15.1
Amortization of debt issuance costs 0.4 1.0
Stock-based compensation 3.5 3.1
Net gain on sales of certain assets (2.5) --
Changes in current assets and liabilities
Accounts receivable, net (50.7) (36.6)
Inventories, net (53.0) (52.4)
Unearned revenues 32.8 19.2
Accounts payable and accrued expenses 10.7 1.3
Other, net (51.0) (33.5)
Changes in noncurrent assets and liabilities 15.8 28.6
----- ------
Net change in cash due to operating activities (92.8) (84.5)
----- ------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 3.4 0.1
Purchases of intangible assets (0.5) --
Capital expenditures (6.3) (3.2)
----- ------
Net change in cash due to investing activities (3.4) (3.1)
----- ------
Cash flows from financing activities
Proceeds from borrowings, net 135.8 85.8
Repayments of term loan -- (8.0)
Dividends paid (10.1) (5.2)
Cash paid for financing fees -- (0.5)
Treasury stock repurchases (9.4) --
Proceeds from employee stock purchase plan and exercise
of stock options 0.6 0.1
Other, net (3.7) 0.0
----- ------
Net change in cash due to financing activities 113.2 72.2
----- ------
Effect of exchange rate changes on cash 0.5 0.7
----- ------
Net change in cash and cash equivalents 17.5 (14.7)
----- ------
Cash and cash equivalents at beginning of period 37.7 50.3
----- ------
Cash and cash equivalents at end of period $55.2 $35.6
===== ======
(A) RDA reports on a fiscal year beginning July 1. The three-month periods ended September 30, 2005
and 2004 are the first fiscal quarters of fiscal year 2006 and fiscal year 2005, respectively. Operating
results for any interim period are not necessarily indicative of the results for an entire year.