The Daily Magic Formula Stock for 01/29/2009 is Meredith Corp. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is >100%.
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Meredith Corporation is one of the nation's leading media and marketing companies. Meredith began in 1902 as an agricultural publisher. The Company entered the television broadcasting business in 1948. Today Meredith is engaged in magazine and book publishing, television broadcasting, integrated marketing, and interactive media. The Company is incorporated under the laws of the State of Iowa. Our common stock is listed on the New York Stock Exchange under the ticker symbol MDP.
The Company has two operating segments: publishing and broadcasting. Financial information about industry segments can be found in Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 8-Financial Statements and Supplementary Data under Note 14.
The publishing segment focuses on the home and family market. It is a leading publisher of magazines serving women. More than twenty-five subscription magazines, including Better Homes and Gardens , Family Circle , Ladies' Home Journal , Parents , American Baby , Fitness , and More and approximately 150 special interest publications were published in fiscal 2008. The publishing segment also includes book publishing, which has 420 books in print; integrated marketing, which has relationships with some of America's leading companies; a large consumer database; an extensive Internet presence that consists of 26 websites and strategic alliances with leading Internet destinations; brand licensing activities; and other related operations.
The broadcasting segment includes 12 network-affiliated television stations located across the United States (U.S.) and one AM radio station. The television stations consist of six CBS affiliates, three FOX affiliates, two MyNetworkTV affiliates, and one NBC affiliate. The broadcasting segment also includes 20 traditional websites, seven mobile websites, and video related operations.
The Company's largest revenue source is magazine and television advertising. Magazine circulation revenues are generally affected by national and regional economic conditions and competition from other forms of media. Television advertising is seasonal and cyclical to some extent, traditionally generating higher revenues in the second and fourth fiscal quarters and during key political contests, major sporting events, etc. Revenues and operating results can be affected by changes in the demand for advertising and consumer demand for our products. National and local economic conditions affect the magnitude of advertising revenues.
During fiscal 2008, the Company continued to enhance the capabilities of Meredith Integrated Marketing. In October 2007, the Company acquired Directive Corporation, a specialized customer intelligence firm based in Dallas known for its expertise and leadership in database strategy, analytics, and customer asset management. In June 2008, Meredith acquired Big Communications, a leading healthcare marketing communications firm. Big Communications develops custom healthcare communications for more than 20 of the world's leading pharmaceutical, biotech, and managed care companies. Big Communication's innovative marketing and communications programs are delivered via a variety of channels that include print, digital and mobile, and are aimed at pharmaceutical sales forces, caregivers, medical professionals, and patients.
The Company initially undertook a restructuring plan of Meredith Books in the fourth quarter of fiscal 2007. As part of a comprehensive performance improvement initiative, Meredith Books refocused operations on its core content areas of cooking, gardening, remodeling, and decorating on behalf of its own and clients' brands and began placing less emphasis on children's books and non-core titles. In June 2008, Meredith announced it was further focusing the scope of its book operations on titles with the Better Homes and Gardens imprint, as well as certain other licensed brands. These titles fall more within Meredith's core content areas of cooking, gardening, building, and remodeling.
During fiscal 2007, Meredith acquired three online businesses: Genex, an interactive marketing services firm that specializes in online customer relationship marketing; New Media Strategies, an interactive word-of-mouth marketing company; and Healia, a consumer health search engine specializing in finding high quality and personalized health information online. In November 2006, the Company acquired ReadyMade, a multimedia brand targeting adults in their 20s and 30s. The ReadyMade brand includes a do-it-yourself lifestyle magazine, a website, a branded book, branded products such as project plans and kits, and custom marketing operations.
In the last several years, Meredith has expanded its reach from one international license to approximately 15, including recent launches of Better Homes and Gardens China , Parents Indonesia , Fitness Indonesia , and More Indonesia . Other licensing agreements include Better Homes and Gardens Australia , Better Homes and Gardens India , Child India , Parents China , More Canada , Parents Gree ce, and Diabetic Living Spain .
In April 2008, the Company completed the sale of WFLI, a CW affiliate serving the Chattanooga, Tennessee market. Meredith completed the sale of KFXO, a low-power FOX affiliate serving the Bend, Oregon market in May 2007.
In June 2007, Meredith sold an ownership interest in the Living the Country Life brand to Learfield Communications, Inc. (Learfield). Meredith and Learfield then formed a joint venture and contributed their respective ownership interest in the Living the Country Life brand. The joint venture is managed jointly by the two companies under the name Living the Country Life, L.L.C . Meredith maintains a controlling interest in the joint venture.
In March 2007, management committed to a restructuring plan that included the discontinuation of the print operations of Child magazine following the publication of the June/July 2007 issue.
DESCRIPTION OF BUSINESS
Publishing represented 80 percent of Meredith's consolidated revenues in fiscal 2008. Better Homes and Gardens , our flagship brand, continues to account for a significant percentage of revenues and operating profit of the publishing segment and the Company.
We publish approximately 150 special interest publications under approximately 80 titles, primarily under the Better Homes and Gardens brand. The titles are issued from one to eight times annually and sold primarily on newsstands. A limited number of subscriptions are also sold to certain special interest publications. The following titles are published quarterly or more frequently: American Patchwork & Quilting; Beautiful Homes ; Before & After ; Country Gardens ; Creative Home ; Decorating ; Diabetic Living ; Do It Yourself ; Garden Ideas & Outdoor Living ; Heart Healthy Living ; Kitchen and Bath Ideas ; 100 Decorating Ideas Under $100 ; Remodel ; Renovation Style ; and Scrapbooks etc.
Magazine Advertising --Advertising revenues are generated primarily from sales to clients engaged in consumer marketing. Many of Meredith's larger magazines offer regional and demographic editions that contain similar editorial content but allow advertisers to customize their messages to target markets or audiences. The Company sells two primary types of magazine advertising: display and direct-response. Advertisements are either run-of-press (printed along with the editorial portions of the magazine) or inserts (preprinted pages). Most of the publishing segment's advertising revenues are derived from run-of-press display advertising. Meredith 360 o is our strategic marketing unit providing clients and their agencies with access to the vast portfolio of media products and services Meredith has to offer. Our team of creative and marketing experts delivers innovative solutions across multiple media channels that meet each client's unique advertising and promotional requirements.
Magazine Circulation --Subscriptions obtained through direct-mail solicitation, agencies, insert cards, the Internet, and other means are Meredith's largest sources of circulation revenues. All of our subscription magazines except American Baby, Ser Padres, and Successful Farming also are sold by single copy. Single copies sold on newsstands are distributed primarily through magazine wholesalers, who have the right to receive credit from the Company for magazines returned to them by retailers.
Meredith Interactive Media
Meredith Interactive Media has extended many of the Company's magazine brands to the Internet. The two major destination sites are BHG.com and Parents.com . BHG.com , our flagship home and family site, features significant community applications, useful tools, and video anchored by Better.tv. Today the site attracts approximately 5 million unique visitors and averages 80 million page views each month. Parents.com is our portal for our parenthood brands Parents , American Baby , Child , and Family Circle . Our websites provide sources of advertising and other revenues and serve to reduce subscription acquisition costs through online magazine subscription orders.
Other Sources of Revenues
Other revenues are derived from integrated marketing, other custom publishing projects, book sales, ancillary products and services, and brand licensing agreements.
Meredith Integrated Marketing --Meredith Integrated Marketing is the business-to-business arm of the Company and sells a range of customer relationship marketing services including direct, database, custom publishing, digital, and word-of-mouth marketing to corporate customers, providing a revenue source that is independent of advertising and circulation. Sometimes these services are sold in conjunction with Meredith's 85 million-name database of consumers to help clients better target marketing messages according to consumers needs and interests. In fiscal 2008, Meredith acquired two businesses (Directive Corporation and Big Communications) that add complementary skills to further enhance its ability to service clients' growing needs. Fiscal 2008 clients included Kraft, DIRECTV, Nestle, Carnival Cruise Lines, Charming Shoppes, Publix, Honda, and Sony.
Meredith Books --The 420 books Meredith publishes and promotes are directed primarily at the home and family markets. They are published under the Better Homes and Gardens trademark and under licensed trademarks such as The Home Depot books. Meredith also publishes books based on properties of Sandra Lee Semi-HomemadeÂ® and the Food NetworkÂ® and Discovery ChannelÂ® cable networks. The books are sold through retail book and specialty stores, mass merchandisers, and other channels. During fiscal 2008, we published 130 new or revised titles.
Brand Licensing --During the last two years Meredith has worked with leading companies to significantly extend the reach of the Better Homes and Gardens brand. In fiscal 2007, Meredith reached a licensing agreement with Universal Furniture International to create a full line of wooden furniture and upholstered products for living rooms, bedrooms, and dining rooms. We expanded this successful licensing agreement to introduce a fourth collection in the line in fiscal 2008.
In fiscal 2008, the Company entered into a long-term agreement to license the Better Homes and Gardens brand to Realogy Corporation. Realogy, owner of brands such as CENTURY 21Â®, Coldwell BankerÂ® and ERAÂ®, is building a new residential real estate franchise system based on the Better Homes and Gardens brand. It launched in July 2008. Meredith will receive ongoing royalty payments from Realogy based on a percentage of sales from the Better Homes and Gardens Real Estate franchise system. In addition, Realogy has agreed to purchase advertising in Meredith titles and to market Meredith magazine subscriptions through the Better Homes and Garden Real Estate franchise system.
In October 2007, Meredith announced a multi-year licensing agreement with Wal-Mart Stores, Inc. for the design, marketing, and retailing of a wide range of home products based on the Better Homes and Gardens brand. This is in addition to an existing - and recently extended - line of outdoor and garden products. This new line of home products is expected to be available exclusively in Wal-Mart stores in the fall of 2008. Merchandise to be developed includes items in popular home categories such as bedding and throws, bath accessories, dinnerware and kitchen textiles, and decorative pillows. Additionally, the Company recently reached an agreement with Wal-Mart for an expansion of the line deeper into bath, bedding, and outdoor categories. These additional products will be available in the fall of 2009.
The Company continues to pursue brand extensions that will serve consumers and advertisers alike and extend the reach and vitality of our brands.
Production and Delivery
Paper, printing, and postage costs accounted for approximately 40 percent of the publishing segment's fiscal 2008 operating expenses.
The major raw materials essential to the publishing segment are coated publication and book-grade papers. Meredith direct-purchases all of the paper for its magazine production and its custom publishing business and a majority of the paper for its book production. Average paper prices were lower in the first half of fiscal 2008 as compared to the same period in fiscal 2007, but were higher in the second half of fiscal 2008. While overall average paper prices were only 3 percent higher for the full fiscal 2008 year, they were 14 percent higher in the fourth quarter of fiscal 2008. The price of paper is driven by overall market conditions and is therefore difficult to predict. Management anticipates paper prices will continue to rise and fiscal 2009 average paper prices will be approximately 25 percent higher than fiscal 2008 average prices. The Company has contractual agreements with major paper manufacturers to ensure adequate supplies for planned publishing requirements.
Meredith has printing contracts with several major domestic printers for all of its magazine titles. The Company has a contract with a major U.S. printer for the majority of its book titles. Other titles are manufactured on a title-by-title basis by either domestic or foreign printers.
Because of the large volume of magazine and subscription promotion mailings, postage is a significant expense of the publishing segment. We continually seek the most economical and effective methods for mail delivery including cost-saving strategies that leverage worksharing opportunities offered within the postal rate structure. Postage on periodicals accounts for approximately 75 percent of Meredith's postage costs, while other mail items--direct mail, replies, and bills-- accounts for approximately 25 percent. The United States Postal Service (USPS) has implemented rate increases in each of Meredith's last three fiscal years. A 5 percent rate increase in January of 2006 was followed by another increase that was implemented in two parts. Postage on periodicals was increased effective July 15, 2007. The increase for our other mail items took effect May 14, 2007. The latest increase of approximately 3 percent was effective May 12, 2008. The next rate increase is anticipated to be in May 2009. Fiscal 2008 postage expense increased 4 percent over fiscal 2007 costs. As a cost containment measure, during fiscal 2008, the Company changed the form of our direct mail to obtain better postage rates. Meredith continues to work with others in the industry and through trade organizations to encourage the USPS to implement efficiencies and contain rate increases. We cannot, however, predict future changes in the efficiency of the USPS and postal rates or the impact they will have on our publishing business.
Fulfillment services for Meredith's publishing segment are provided by third parties. National magazine newsstand distribution services are provided by a third party through multi-year agreements.
Publishing is a highly competitive business. The Company's magazines, books, and related publishing products and services compete with other mass media, including the Internet, and with many other leisure-time activities. Competition for advertising dollars is based primarily on advertising rates, circulation levels, reader demographics, advertiser results, and sales team effectiveness. Competition for readers is based principally on price, editorial content, marketing skills, and customer service. While competition is intense for established titles, gaining readership for newer magazines and specialty publications is extremely competitive.
Advertising is the principal source of revenue for the broadcasting segment. The stations sell commercial time to both local/regional and national advertisers. Rates for spot advertising are influenced primarily by the market size, number of in-market broadcasters, audience share, and audience demographics. The larger a station's share in any particular daypart, the more leverage a station has in setting advertising rates. As the market fluctuates with supply and demand, so does a station's rates. Most national advertising is sold by independent representative firms. The sales staff at each station generates local/regional advertising revenues.
Typically 30 to 40 percent of a market's television advertising revenue is generated by local newscasts. Station personnel are continually working to grow their news ratings, which in turn will augment revenues. We continue to use the power of our local brands by increasing the number of newscasts we produce. In the past year we have expanded late night newscasts in Portland and Las Vegas, added afternoon newscasts in Portland, and increased the volume of the news reporting that we do on our local websites.
The national network affiliations of Meredith's 12 television stations influence advertising rates. Generally, a network affiliation agreement provides a station the exclusive right to broadcast network programming in its local service area. In return, the network has the right to sell most of the commercial advertising aired during network programs. Network-affiliated stations generally pay networks for certain programming such as professional football. The Company's FOX affiliates pay the FOX network for additional advertising spots in prime-time programming.
The Company's affiliation agreements for its six CBS affiliates have expiration dates that range from November 2010 to April 2016. Affiliation agreements for our two MyNetworkTV affiliates expire at the end of the 2011-2012 broadcast season; the FOX affiliation agreements expire at the end of the 2011-2012 broadcast season; and the agreement for our NBC affiliate expires in December 2013. While Meredith's relations with the networks historically have been excellent, the Company can make no assurances they will remain so over time.
The Federal Communications Commission (FCC) has permitted broadcast television station licensees to use their digital spectrum for a wide variety of services such as high-definition television programming, audio, data, and other types of communication, subject to the requirement that each broadcaster provide at least one free video channel equal in quality to the current technical standards. Several of our stations are broadcasting a second programming stream on their digital channel. Our Las Vegas, Phoenix, and Hartford stations currently broadcast a weather channel, our Nashville station broadcasts Telemundo network programming, and Flint-Saginaw has a MyNetworkTV affiliate.
The costs of locally produced programming and purchased syndicated programming are significant. Syndicated programming costs are based largely on demand from stations in the market and can fluctuate significantly. The Company continues to increase its locally produced news and entertainment programming to control content and costs and to attract advertisers.
Meredith has been successful in creating nontraditional revenue streams in the broadcasting segment. Our unique Cornerstone programs differentiate Meredith from other local television broadcasters. These programs leverage our publishing brands by packaging content from our magazines with print and on-air advertising from local advertisers. Following the expansion and enhancement of all of our Broadcasting station websites in fiscal 2007, we launched seven mobile websites in fiscal 2008. Internet revenues increased 45 percent in fiscal 2008. Total annual page views doubled, and unique visitors were up more than 300 percent. Videos played increased more than 30 percent.
We continue to see increasing revenues from retransmission fees. Most retransmission fees are from satellite providers, but we are starting to collect more revenues from cable systems in our markets and will expect to receive fees from phone companies as they enter the local cable market as well. Most of our retransmission consent agreements with major cable operators expire during fiscal 2009. Thus a full year of revenues from renegotiated agreements will be reflected in our fiscal 2010 financial statements.
Meredith Video Solutions, formed in fiscal 2006, has continued to increase production of broadcast-quality video for use by Meredith's television stations and our broadcasting and publishing websites, and is producing custom video for clients as well. In fiscal 2007, Meredith Video Solutions launched Better.tv, our first broadband video network, and then launched Parents.tv in fiscal 2008. Both video networks offer multiple-themed 'channels' that a visitor can click on to find dozens of short videos on related subjects. Both are now available on Sprint cell phones and have been syndicated to digital networks.
In September 2007, Meredith Video Solutions began producing our BETTER television show. BETTER is an hour-long daily lifestyle television program that runs across our station group. It is also currently syndicated to three non-Meredith stations, and 21 additional non-Meredith markets are scheduled to begin airing the show later in calendar 2008. Content from the BETTER show is also repurposed online at www.better.tv and www.parents.tv.
In December 2007, Meredith parenthood video content launched across Comcast Corp.'s cable systems on a new video on demand channel branded Parents TV that reaches more than 12 million households. More than 600,000 videos were downloaded in fiscal 2008. Meredith and Comcast share the advertising revenues.
In fiscal 2008, we introduced a new program called Job Connections in our Kansas City market. It takes advantage of the power and reach of our local television stations and their Web sites to meet the employment recruiting needs of local businesses. The Kansas City pilot was successful, and we are rolling it out across our group in fiscal 2009, beginning with Atlanta and Las Vegas.
Meredith's television stations and radio station compete directly for advertising dollars and programming in their respective markets with other local television stations, radio stations, and cable and satellite television providers. Other mass media providers such as newspapers and their websites are also competitors. Advertisers compare market share, audience demographics, and advertising rates and take into account audience acceptance of a station's programming, whether local, network, or syndicated.
Television and radio broadcasting operations and ownership are subject to limitations under the Communications Act of 1934, as amended (Communications Act), and the Federal Communications Commission's (FCC) rules and policies (FCC Regulations). Among other things, the FCC allots channels for television and FM radio broadcasting; determines the particular frequencies, locations, and operating power of television and radio stations; issues, renews, and modifies station licenses; determines whether to approve changes in ownership or control of station licenses; regulates certain equipment used by stations; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, program content, employment practices, and business of stations; and enforces these requirements through its power to impose penalties, including license revocations, for violations of the Communications Act and FCC Regulations.
Television broadcast licenses are granted for eight-year periods. The Communications Act directs the FCC to renew a broadcast license if the station has served the public interest and is in substantial compliance with the provisions of the Communications Act and FCC Regulations. Management believes the Company is in substantial compliance with all applicable provisions of the Communications Act and FCC Regulations and knows of no reason why Meredith's broadcast station licenses will not be renewed. In early 2003, Congress enacted a national television ownership cap that allows one entity to own an unlimited number of television stations, provided these stations together do not reach more than 39 percent of U.S. television households. As of June 30, 2008, the Company's television household coverage was less than eight percent (per the FCC calculation method).
In June 2003, the FCC adopted several significant changes to its media ownership restrictions. These changes eased restrictions on the combination of television stations, radio stations, and newspapers that a single entity could own in a local market. In September 2003, a federal appeals court stayed the effective date of these new media ownership regulations and, in June 2004, remanded certain aspects of the June 2003 action to the FCC for further proceedings and continued the stay. In June 2005, the U.S. Supreme Court declined to review the appellate court's decision. In July 2006, the FCC commenced a proceeding to address the issues raised by the appellate court and to embark upon other possible revisions to the ownership rules. In December 2007, the FCC adopted a decision that revised its newspaper/broadcast cross-ownership rule to permit a degree of same-market newspaper/ broadcast ownership based on certain presumptions, criteria, and limitations. The FCC at that time made no changes to the currently effective local radio ownership rules (as modified by the 2003 decision) or the radio/television cross-ownership rule (as modified in 1999). Also in December 2007, the FCC adopted rules to promote diversification of broadcast ownership, including revisions to its ownership attribution rules. The FCC's media ownership rules, including the modifications adopted in December 2007, are subject to further court appeals, various petitions for reconsideration before the FCC and possible actions by Congress. We cannot predict the impact of any of these developments on our business. In particular, we cannot predict the ultimate outcome of the FCC's media ownership proceedings or their effects on our ability to acquire broadcast stations in the future or to continue to freely transfer stations that we currently own. Moreover, we cannot predict the impact of future reviews or any other agency or legislative initiatives upon the FCC's broadcast rules.
The Communications Act and the FCC also regulate relationships between television broadcasters and cable and satellite television providers. Under these provisions, most cable systems must devote a specified portion of their channel capacity to the carriage of the signals of local television stations that elect to exercise this right to mandatory carriage. Alternatively, television stations may elect to restrict cable systems from carrying their signals without their written permission, referred to as retransmission consent. Congress and the FCC have established and implemented generally similar market-specific requirements for mandatory carriage of local television stations by satellite television providers when those providers choose to provide a market's local television signals.
On February 1, 2006, Congress passed the Digital Television Transition and Public Safety Act (DTV Act), and set February 17, 2009, as the end of free, over-the-air, analog broadcast service from full power television stations. Most full power television stations will continue broadcasting both analog and digital programming until February 17, 2009. After that date, owners of analog televisions receiving broadcast programming from the over-the-air signals of full power television stations will need to connect converter boxes to their television sets, replace their analog televisions with new digital televisions, or subscribe to pay television service from a cable or satellite provider. The federal government is subsidizing the cost of digital-to-analog converter boxes.
All of the Company's television stations with the exception of WSHM, which is a low-power station and therefore not subject to these requirements, are currently transmitting DTV signals on their assigned digital channels.
In 2006, Sprint Nextel Corporation (Nextel) was granted the right from the FCC to claim from broadcasters in each market across the country the 1.9 GHz spectrum to use for an emergency communications system. In order to claim this signal, Nextel must replace all analog equipment currently using this spectrum with digital equipment. All broadcasters have agreed to use the digital substitute that Nextel will provide. The transition is being completed on a market-by-market basis. During the fourth quarter of fiscal 2008, we recorded a $1.8 million pre-tax gain that represents the difference between the fair value of the digital equipment we received and the book value of the analog equipment we exchanged. As the equipment is exchanged in other markets, we expect to record additional gains in fiscal 2009.
Nominees for Election as Class I Directors
Terms to Expire in 2011
Nominee Age Year
as a Director Principal Occupation, Business Experience,
and Other Information
Alfred H. Drewes 53 2007 Senior Vice President and Chief Financial Officer, The Pepsi Bottling Group, Inc. (manufacturer and distributor of Pepsi-Cola products), June 2001 to present.
David J. Londoner 71 2001 General Partner, The North River Company (family investment partnership), 1995 to present.
Philip A. Marineau 61 1998 President and Chief Executive Officer (retired), Levi Strauss & Co. (worldwide brand apparel company), September 1999 to November 2006. Mr. Marineau is Chair of Shutterfly, Inc. and a director of Global Consumer Acquisition Corp.
MANAGEMENT DISCUSSION FROM LATEST 10K
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) consists of the following sections:
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies
Accounting and Reporting Developments
MD&A should be read in conjunction with the other sections of this Form 10-K, including Item 1-Business , Item 6-Selected Financial Data , and Item 8-Financial Statements and Supplementary Data . MD&A contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Item 1A-Risk Factors .
Meredith is one of the nation's leading media and marketing companies, one of the leading magazine publishers serving women, and a broadcaster with television stations in top markets such as Atlanta, Phoenix, and Portland. Each month we reach more than 85 million American consumers through our magazines, websites, books, custom publications, and television stations. Our businesses serve well-defined readers and viewers, deliver the messages of advertisers, and extend our brand franchises and expertise to related markets. Our products and services distinguish themselves on the basis of quality, customer service, and value that can be trusted.
Meredith operates two business segments. Publishing consists of magazine and book publishing, integrated marketing, interactive media, database-related activities, brand licensing, and other related operations. Broadcasting consists of 12 network-affiliated television stations, one radio station, related interactive media operations, and video related operations. Both segments operate primarily in the U.S. and compete against similar media and other types of media on both a local and national basis. In fiscal 2008, publishing accounted for 80 percent of the Company's $1.6 billion in revenues while broadcasting revenues contributed 20 percent.
Meredith is committed to building value for its shareholders. We have three primary growth strategies. The first is to maximize the performance of our core Publishing and Broadcasting businesses, which provide the bulk of our revenues and profits. This includes increasing the performance of our existing portfolio of magazines and television stations, as well as making selective acquisitions that will help us better serve existing audiences, as well as new ones. Reaching women in the early stages of home ownership and parenting is especially critical on the magazine front. On the television side, we are focused on improving ratings and share for our newscasts, aggressively selling the improved ratings, creating additional revenue sources, and managing costs.
Our second strategy is to further expand our online and video footprint to meet emerging consumer desires. This entails a significant commitment to expanding our online businesses. We continue to build our presence online, driving revenue growth across our interactive properties. In fiscal 2008, we launched a super-portal - Parents.com - to serve as the launch pad for all of our online activities in the pregnancy and parenthood sectors. We also made additional investments in our flagship Better Homes and Gardens site, BHG.com . Also in fiscal 2008, we introduced two broadband channels - Better.TV and Parents.TV. Both are programmed by our Broadcasting business and sold by our Publishing segment. The content is created by Meredith Video Solutions, a division of our Broadcasting Group focused on video content creation and syndication. We also greatly enhanced all of our television station web sites.
Our third strategy is to grow non-advertising revenue streams. In fiscal 2008, we significantly expanded our footprint in two areas of our Publishing Group. The first was Meredith Integrated Marketing, which saw revenues increase nearly 50 percent and profit grow more than 70 percent. Over the last couple of years, we have grown this business from purely a custom publisher into a full-scale custom marketing agency with expansive digital skills. In fiscal 2008, we added two new companies to Meredith Integrated Marketing's portfolio. The first was Directive Corporation, a leading database marketing specialist. The second was Big Communications, a leading digital healthcare online marketing firm. Our second growth area is brand licensing. In fiscal 2008, we entered into large-scale licensing agreements with Wal-Mart stores for a line of Better Homes and Gardens branded house and garden products, and with Realogy Corp. on a Better Homes and Gardens branded residential real estate franchise. Finally, a third piece of our non-advertising growth strategy is growing retransmission fees paid to our television stations by cable, satellite, and phone companies that retransmit their broadcast signals. We increased these fees more than 50 percent in fiscal 2008.
Advertising revenues made up 50 percent of fiscal 2008 publishing revenues. These revenues were generated from the sale of advertising space in the Company's magazines and on websites to clients interested in promoting their brands, products, and services to consumers. Changes in advertising revenues tend to correlate with changes in the level of economic activity in the U.S. Indicators of economic activity include changes in the level of gross domestic product, consumer spending, housing starts, unemployment rates, auto sales, and interest rates. Circulation levels of Meredith's magazines, reader demographic data, and the advertising rates charged relative to other comparable available advertising opportunities also affect the level of advertising revenues.
Circulation revenues accounted for 25 percent of fiscal 2008 publishing revenues. Circulation revenues result from the sale of magazines to consumers through subscriptions and by single copy sales on newsstands, primarily at major retailers and grocery/drug stores. In the short term, subscription revenues, which accounted for 72 percent of circulation revenues, are less susceptible to economic changes because subscriptions are generally sold for terms of one to three years. The same economic factors that affect advertising revenues also can influence consumers' response to subscription offers and result in lower revenues and/or higher costs to maintain subscriber levels over time. A key factor in Meredith's subscription success is our industry-leading database. It contains approximately 85 million entries that include information on about three-quarters of American homeowners, providing an average of 700 data points for each name. The size and depth of our database is a key to our circulation model and allows more precise consumer targeting. Newsstand revenues are more volatile than subscription revenues and can vary significantly month to month depending on economic and other factors.
The remaining 25 percent of publishing revenues came from a variety of activities that included the sale of integrated marketing services and books as well as brand licensing, product sales, and other related activities. Meredith Integrated Marketing offers integrated promotional, database management, relationship, and direct marketing capabilities for corporate customers, both in printed and digital forms. These revenues generally are affected by changes in the level of economic activity in the U.S. including changes in the level of gross domestic product, consumer spending, unemployment rates, and interest rates.
Publishing's major expense categories are production and delivery of publications and promotional mailings and employee compensation costs. Paper, postage, and production charges represented 39 percent of the segment's operating expenses in fiscal 2008. The price of paper can vary significantly year to year on the basis of worldwide demand and supply for paper in general and for specific types of paper used by Meredith. While average paper prices were only 3 percent higher for fiscal 2008 as compared to fiscal 2007, we anticipate prices will continue to rise and average paper prices will be approximately 25 percent higher in fiscal 2009. The production of our publications is outsourced to printers. We typically have multi-year contracts for the production of our magazines, a practice which reduces price fluctuations over the contract term. Postal rates are dependent on the operating efficiency of the USPS and on legislative mandates imposed on the USPS. The USPS increased rates most recently in May 2008. This came after a two-part increase in mid calendar 2007 and an increase in early calendar 2006. Meredith works with others in the industry and through trade organizations to encourage the USPS to implement efficiencies and contain rate increases.
Employee compensation, which includes benefits expense, represented 22 percent of publishing's operating expenses in fiscal 2008. Compensation expense is affected by salary and incentive levels, the number of employees, the costs of our various employee benefit plans, and other factors. The remaining 39 percent of fiscal 2008 publishing expenses included costs for magazine newsstand and book distribution, advertising and promotional efforts, and overhead costs for facilities and technology services.
Broadcasting derives almost all of its revenues-97 percent in fiscal 2008-from the sale of advertising both over the air and across our stations' websites. The remainder comes from television retransmission fees, television production services, and other services.
The stations sell advertising to both local/regional and national accounts. Political advertising revenues are cyclical in that they are significantly greater during biennial election campaigns (which take place primarily in odd-numbered fiscal years) than at other times. In fiscal 2006, the Company launched Meredith Video Solutions, which produces video content for Meredith stations, non-Meredith stations, and online distribution. Meredith has also developed its Cornerstone program to leverage our publishing brands. The program packages material from our national magazines with local advertising to create customized mini-magazines delivered to targeted customers in the markets our television stations serve. We have generated additional revenues from Internet activities and programs focused on local interests such as community events and college and professional sports.
Changes in advertising revenues tend to correlate with changes in the level of economic activity in the U.S. and in the local markets in which we operate stations, and with the cyclical changes in political advertising discussed previously. Indicators of economic activity include changes in the level of gross domestic product, consumer spending, unemployment rates, auto sales, and interest rates. Programming content, audience share, audience demographics, and the advertising rates charged relative to other available advertising opportunities also affect advertising revenues. On occasion, unusual events necessitate uninterrupted television coverage and will adversely affect spot advertising revenues.
Broadcasting's major expense categories are employee compensation and programming costs. Employee compensation represented 50 percent of broadcasting's operating expenses in fiscal 2008, and is affected by the same factors noted for publishing. Programming rights amortization expense represented 11 percent of this segment's fiscal 2008 expenses. Programming expense is affected by the cost of programs available for purchase and the selection of programs aired by our television stations. Sales and promotional activities, costs to produce local news programming, and general overhead costs for facilities and technical resources accounted for most of the remaining 39 percent of broadcasting's fiscal 2008 operating expenses.
FISCAL 2008 FINANCIAL OVERVIEW
Publishing revenues were flat in fiscal 2008; operating profits declined 12 percent. Results reflect the following charges recorded by the publishing segment in the fourth quarter: a $19.4 million pre-tax charge related to the further repositioning of its book operation, a $2.5 million pre-tax severance charge for other publishing reductions in workforce, and a $3.0 million pre-tax bad debt expense of associated with a customer's bankruptcy filing.
Broadcasting revenues declined 8 percent, primarily reflecting the absence of a net $27.7 million in net political advertising revenues at our television stations. Broadcasting operating profit decreased 27 percent.
We acquired Directive Corporation, a specialized customer intelligence firm known for its expertise and leadership in database strategy, analytics, and customer asset management, and Big Communications, a leading healthcare marketing communications firm.
Diluted earnings per share declined 15 percent to $2.83 from $3.31 in fiscal 2007.
We generated $256.0 million in operating cash flows in fiscal 2008. We invested $73.6 million in strategic acquisitions and we spent $29.6 million on capital improvements. We used $150.4 million to repurchase 3.2 million shares of our common stock. The quarterly dividend was increased 16 percent from 18.5 cents per share to 21.5 cents per share effective with the March 2008 payment.
Following are descriptions of the significant acquisitions and accounting changes that have affected the comparability of Meredith's results of operations over the last three fiscal years. Also included is a discussion of our rationale for the use of financial measures that are not in accordance with accounting principles generally accepted in the United States of America (GAAP), or non-GAAP financial measures, and a discussion of the trends and uncertainties that affected our businesses. Following the Overview is an analysis of the results of operations for the publishing and broadcasting segments and an analysis of our consolidated results of operations for the last three fiscal years.
In June 2008, Meredith acquired Big Communications. In October 2007, we acquired Directive Corporation. In January 2007, the Company acquired Genex and New Media Strategies. The operations of the acquired properties have been included in the Company's consolidated operating results since their respective acquisition dates. See Note 2 to the consolidated financial statements for further information.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company adopted FIN 48 on July 1, 2007. See Notes 1 and 6 to the consolidated financial statements for additional information related to income tax expense.
In March 2007, management committed to a restructuring plan that included the discontinuation of the print operations of Child magazine following the publication of the June/July 2007 issue. In April 2008, the Company completed the sale of WFLI, a CW affiliate serving the Chattanooga, Tennessee market and in May 2007, Meredith completed the sale of KFXO, the low-power FOX affiliate serving the Bend, Oregon market. Unless stated otherwise, as in the section titled Discontinued Operations, all of the information contained in MD&A relates to continuing operations. Therefore, results of Child magazine, KFXO, and WFLI are excluded for all periods covered by this report.
Use of Non-GAAP Financial Measures
Our analysis of broadcasting segment results includes references to earnings from continuing operations before interest, taxes, depreciation, and amortization (EBITDA). EBITDA and EBITDA margin are non-GAAP measures. We use EBITDA along with operating profit and other GAAP measures to evaluate the financial performance of our broadcasting segment. EBITDA is a common alternative measure of performance in the broadcasting industry and is used by investors and financial analysts, but its calculation may vary among companies. Broadcasting segment EBITDA is not used as a measure of liquidity, nor is it necessarily indicative of funds available for our discretionary use.
We believe the non-GAAP measures used in MD&A contribute to an understanding of our financial performance and provide an additional analytic tool to understand our results from core operations and to reveal underlying trends. These measures should not, however, be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Trends and Uncertainties
Advertising demand is the Company's key uncertainty, and its fluctuation from period to period can have a material effect on operating results. Advertising revenues accounted for 60 percent of total revenues in fiscal 2008. Other significant uncertainties that can affect operating results include fluctuations in the cost of paper, postage rates and, over time, television programming rights. The Company's cash flows from operating activities, its primary source of liquidity, is adversely affected when the advertising market is weak or when costs rise. One of our priorities is to manage our businesses prudently during expanding and contracting economic cycles to maximize shareholder return over time. To manage the uncertainties inherent in our businesses, we prepare monthly internal forecasts of anticipated results of operations and monitor the economic indicators mentioned in the Executive Overview. See Item 1A-Risk Factors in this Form 10-K for further discussion.
The following discussion reviews operating results for our publishing segment, which includes magazine and book publishing, integrated marketing, interactive media, database-related activities, brand licensing, and other related operations. The publishing segment contributed 80 percent of Meredith's revenues and 71 percent of the combined operating profit from publishing and broadcasting operations in fiscal 2008.
Magazine advertising revenue was flat in fiscal 2008. Though magazine advertising revenues increased 10 percent in the first half of the fiscal year, they declined 9 percent in the second half. For the fiscal year, total advertising pages were down in the low-single digits on a percentage basis, with most titles showing declines. The exceptions to this were our parenthood, Hispanic, and special interest titles. Our parenthood titles ( Parents and American Baby ) showed gains of approximately 10 percent in both combined ad pages and ad revenues. Our special interest publications also continued to show increases in ad pages but showed declines in ad revenues. For our Hispanic titles ( Siempre Mujer and Ser Padres ), ad pages and revenues were up strongly in fiscal 2008. Ad pages were down in the mid-single digits on a percentage basis and ad revenues were down in the low-single digits for our women's service titles ( Better Homes and Gardens , Family Circle , and Ladies' Home Journal ). Ad pages for More and Fitness both declined in the high-single digits on a percentage basis, while ad revenues were flat for the fiscal year. Combined advertising pages and revenues for our home decorating titles ( Country Home and Traditional Home ) declined approximately 10 percent. Combined advertising pages and revenues for the remaining three titles ( Midwest Living , Successful Farming , and Wood ) were up in the low-single digits. Among core advertising categories, food and beverage, retail, and financial and government services showed strength while demand was weaker for prescription and non-prescription drugs, home, and direct response.
Online advertising revenues in our interactive media operations contribute a small, but growing, percentage of total publishing advertising revenues. Similar to magazine advertising, online advertising revenues were up significantly (more than 30 percent) in the first half of fiscal 2008, but showed weakness in the second half of fiscal 2008 (down 6 percent). Overall online advertising increased 14 percent for the fiscal year.
Magazine advertising revenues increased 2 percent in fiscal 2007. Though magazine advertising revenues declined 1 percent in the first half of the fiscal year, they increased 5 percent in the second half. Total advertising pages were up in the low-single digits on a percentage basis with considerable variability in advertising performance among titles. Continued strong gains in special interest publications were more than offset by ongoing weakness in our parenthood titles. Combined ad pages and ad revenues for our women's service titles were up in the mid-single digits on a percentage basis. Ad pages for More were up in the mid-teens while ad revenues were up about 25 percent. For our Hispanic titles, ad pages and revenues were up strongly in fiscal 2007. Fitness ad pages and revenues were down in the mid-single digits; however, there were two fewer issues in fiscal 2007 than in fiscal 2006. Combined advertising pages and revenues for our home decorating titles declined in the high-single digits on a percentage basis. Combined advertising pages and revenues for the remaining three titles were down in the mid-to-high single digits. Among core advertising categories, pharmaceutical, food and beverage, household supplies, and non-prescription remedies showed strength while demand was weaker for toiletries and cosmetics, financial services, automotive, and consumer electronics and technology. In fiscal 2007, online advertising revenues increased almost 50 percent due to increased market demand.
Magazine circulation revenues were down 7 percent in fiscal 2008, reflecting declines in both subscription and newsstand revenues. Subscription revenues were down in the mid-single digits on a percentage basis while newsstand revenues were down approximately 10 percent. The continued decrease in subscription revenues was anticipated due to a series of previously announced strategic initiatives taken to improve long-term subscription contribution including the Company selling fewer subscriptions to Ladies' Home Journal due to the reduction in its rate base in January 2007 and the Company's ongoing initiative to move the readers of Family Circle , Parents , and Fitness to our direct-to-publisher circulation model. The decrease in newsstand revenues is primarily due to a change in the mix of and a reduction in the number of special interest publications published in fiscal 2008 as compared to the prior year.
Magazine circulation revenues decreased 7 percent in fiscal 2007, reflecting declines in both subscription and newsstand revenues. Subscription revenues were down in the mid-single digits while newsstand revenues were down in the high-single digits. The strategic initiatives that affected fiscal 2008 also were the primary reason for the decrease in subscription revenues in fiscal 2007. The decrease in newsstand revenues in fiscal 2007 was primarily due to the lowering of the newsstand price of Family Circle in the third quarter of the prior year and to two fewer issues of Fitness as compared to the prior year due to its reduction in frequency from 12 issues annually to 11 annually and because of the changing of its on-sale dates.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Meredith Corporation (Meredith or the Company) is one of the nation's leading media and marketing companies, one of the leading magazine publishers serving women, and a broadcaster with television stations in top markets such as Atlanta, Phoenix, and Portland. Each month we reach more than 85 million American consumers through our magazines, books, custom publications, websites, and television stations.
Meredith operates two business segments. Publishing consists of magazine and book publishing, integrated marketing, interactive media, database-related activities, brand licensing, and other related operations. Broadcasting consists of 12 network-affiliated television stations, one radio station, related interactive media operations, and video related operations. Both segments operate primarily in the United States (U. S.) and compete against similar media and other types of media on both a local and national basis. Publishing accounted for 81 percent of the Company's $370.4 million in revenues in the first three months of fiscal 2009 while broadcasting revenues totaled 19 percent.
Advertising revenues made up 49 percent of publishing's first quarter revenues. These revenues were generated from the sale of advertising space in the Company's magazines and on websites to clients interested in promoting their brands, products, and services to consumers. Circulation revenues accounted for 25 percent of publishing's fiscal 2009 first three months' revenues. Circulation revenues result from the sale of magazines to consumers through subscriptions and by single copy sales on newsstands, primarily at major retailers and grocery/drug stores. The remaining 26 percent of publishing revenues came from a variety of activities that included the sale of books and integrated marketing services as well as brand licensing, and other related activities. Publishing's major expense categories are production and delivery of publications and promotional mailings and employee compensation costs.
Broadcasting derives almost all of its revenues-96 percent in the first three months of fiscal 2009-from the sale of advertising, both on the air and on our stations' websites. The remainder comes from television retransmission fees, television production services, and other services. Political advertising revenues are cyclical in that they are significantly greater during biennial election campaigns (which take place primarily in odd-numbered fiscal years) than at other times. Broadcasting's major expense categories are employee compensation and programming costs.
FIRST QUARTER FISCAL 2009 FINANCIAL OVERVIEW
* Both magazine and broadcasting advertising revenues were affected by a nationwide slowdown in the demand for advertising. As a result, publishing revenues and operating profit decreased 9 percent and 40 percent, respectively; broadcasting revenues and operating profit declined 6 percent and 21 percent, respectively.
* Other revenues increased a strong 16 percent reflecting growth in revenues in our integrated marketing operation and in broadcasting retransmission fees. Other revenues increased from 17 percent of revenues in the first quarter of fiscal 2008 to 22 percent of revenues in the first quarter of fiscal 2009.
* Diluted earnings per share declined 40 percent to $0.41 from prior-year first quarter earnings of $0.68.
* We spent $15.8 million to repurchase 581,000 shares of our common stock.
In fiscal 2008, the Company completed the sale of WFLI, the CW affiliate serving the Chattanooga, Tennessee market. Loss from discontinued operations represents the operating results, net of taxes, of WFLI. The revenues and expenses, along with associated taxes, were removed from continuing operations and reclassified into a single line item amount on the Condensed Consolidated Statements of Earnings titled loss from discontinued operations, net of taxes. Unless stated otherwise, as in the section titled Discontinued Operations, all of the information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations.
USE OF NON-GAAP FINANCIAL MEASURES
These consolidated financial statements, including the related notes, are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Our analysis of broadcasting segment results includes references to earnings from continuing operations before interest, taxes, depreciation, and amortization (EBITDA). EBITDA and EBITDA margin are non-GAAP measures. We use EBITDA along with operating profit and other GAAP measures to evaluate the financial performance of our broadcasting segment. EBITDA is a common measure of performance in the broadcasting industry and is used by investors and financial analysts, but its calculation may vary among companies. Broadcasting segment EBITDA is not used as a measure of liquidity, nor is it necessarily indicative of funds available for our discretionary use.
We believe the non-GAAP measures used in Management's Discussion and Analysis of Financial Condition and Results of Operations contribute to an understanding of our financial performance and provide an additional analytic tool to understand our results from core operations and to reveal underlying trends. These measures should not, however, be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
The following sections provide an analysis of the results of operations for the publishing and broadcasting segments and an analysis of the consolidated results of operations for the three months ended September 30, 2008, compared with the prior-year period. This commentary should be read in conjunction with the interim condensed consolidated financial statements presented elsewhere in this report and with the Company's Annual Report on Form 10-K for the year ended June 30, 2008.
Declines in advertising revenue and circulation revenue of 18 percent and 8 percent, respectively, more than offset a 14 percent increase in other revenue.
While magazine advertising pages and revenues were down at nearly all titles, average net revenue per page grew at most titles. Overall average net revenue per page increased 3 percent in the first quarter. Total magazine advertising pages were down 21 percent in the quarter; magazine advertising revenues were down 19 percent. Among our core advertising categories, toiletries and cosmetics showed strength while demand was weaker for most other categories. Online advertising revenues in our interactive media operations declined 8 percent due to the slowdown in demand.
Magazine circulation revenues decreased 8 percent, reflecting a decline of 3 percent in subscription revenue and a decline of 20 percent in newsstand revenues. The continued decrease in subscription revenues was anticipated due to the Company's ongoing initiative to move Family Circle , Parents , and Fitness to our direct-to-publisher circulation model. These three titles accounted for the entire decrease in subscription revenues. The decrease in newsstand revenues is primarily due to a decline in the newsstand revenues of Family Circle due to rack spending, a change in the mix of and a reduction in the number of special interest publications and craft titles, and a weaker newsstand market that affected our large and mid-size books' newsstand revenues.
Integrated marketing revenues increased 45 percent in the quarter due to the acquisition of Big Communications in June 2008, and growth in the traditional and on-line integrated marketing operations from expanding certain relationships. Revenues from other sources, such as magazine royalties and licensing, also increased in the first quarter of fiscal 2009. The introduction of the Better Homes and Gardens line of home products, available now exclusively at Wal-Mart, fueled this growth. These increases were partially offset by decreases in book revenues in Meredith Retail. Book revenues declined over 40 percent as compared to the prior year first quarter primarily due to a significant reduction in the number of new book releases. As previously announced, our book business is now focusing operations on its core content areas of cooking, gardening, remodeling, and decorating on behalf of our owned and clients' brands. As a result of the changes in integrated marketing, brand licensing, and book operations, other publishing revenues increased 14 percent in the first quarter of fiscal 2009.
Publishing operating costs decreased 3 percent. Paper, processing, postage and other delivery expenses, subscription acquisition costs, book manufacturing costs, and amortization expense declined in the quarter. Decreases in paper consumption due to a decline in advertising pages sold more than offset increases in paper prices of 22 percent. These costs reductions were partially offset by a higher inventory LIFO reserve and increased depreciation expense. Employee compensation costs were up as a result of higher staff levels due to the integrated marketing acquisitions and higher compensation levels due to annual merit increases, while performance-based incentive expense declined. Integrated marketing production expenses also increased due to the growth in integrated marketing revenues.
Publishing operating profit decreased 40 percent. Declines in operating profit in our magazine operations, interactive operations and book business more than offset strong operating profit growth from our integrated marketing operations. Magazine circulation contribution declined less than 3 percent for the quarter; circulation contribution margin was higher in the quarter. Management believes the declines in our magazine and interactive operations were a result of the general economic downturn.
Broadcasting revenues declined 6 percent. Net political advertising revenues totaled $5.9 million in the current quarter compared with $1.1 million in net political advertising revenues in the prior-year quarter. Fluctuations in political advertising revenues at our stations and throughout the broadcasting industry generally follow the biennial cycle of election campaigns. Political advertising displaces a certain amount of non-political advertising; therefore, the revenues are not entirely incremental. Non-political advertising revenues decreased 15 percent. As compared to the prior year, local non-political advertising declined 13 percent while national non-political advertising decreased 20 percent. Online advertising, a small but growing percentage of broadcasting advertising revenues, increased more than 20 percent as compared to the prior-year. Online advertising revenues were flat as compared to the prior-year quarter.
Broadcasting costs decreased 2 percent in the first quarter of fiscal 2009 primarily due to a credit to expenses for a gain on the Sprint Nextel Corporation equipment exchange. This gain represents the difference between the fair value of the digital equipment we received and the book value of the analog equipment we exchanged. Lower performance-based incentive accruals and share-based compensation, depreciation expense, machinery repairs and maintenance, legal expenses, and advertising and promotion expenses were offset by higher employee compensation costs, bad debt expense, and studio production expenses.
Broadcasting operating profit declined 21 percent compared with the prior-year period. The decline reflected weakened economic conditions and their effect on non-political advertising revenues.
Supplemental Disclosure of Broadcasting EBITDA
Meredith's broadcasting EBITDA is defined as broadcasting segment operating profit plus depreciation and amortization expense. EBITDA is not a GAAP financial measure and should not be considered in isolation or as a substitute for GAAP financial measures.
Unallocated corporate expenses decreased 23 percent as decreases in performance-based incentive expenses and Meredith Foundation charitable contributions more than offset increases in pension costs, legal expenses, share-based compensation, and consulting fees. The increase in share-based compensation is due to certain employees becoming retirement eligible in the current fiscal year and thus their share-based compensation expense is being fully expensed during the current fiscal year.
First quarter production, distribution, and editorial costs decreased 1 percent. Declines in paper, processing, postage and other delivery expenses, and book manufacturing more than offset increases in integrated marketing production expenses, LIFO reserve expense, and broadcasting production expenses.
First quarter selling, general, and administrative expenses decreased 4 percent primarily due to declines in performance-based incentive accruals, Meredith Foundation charitable contributions, and subscription acquisition costs. Partially offsetting these declines were increases in pension costs, legal expenses, consulting fees, and bad debt expense.
Depreciation and amortization expenses decreased 10 percent primarily due to the customer list intangibles acquired with the acquisition of certain titles from Gruner + Jahr Printing & Publishing Co. in fiscal 2006 being fully amortized in fiscal 2008.
Income from Operations
Income from operations decreased 38 percent in the first quarter of fiscal 2009 reflecting weakened economic conditions and their effect on advertising revenues in the quarter partially offset by strong growth in the integrated marketing business and reduced operating expenses.
Net Interest Expense
Net interest expense declined to $5.3 million in the fiscal 2009 first quarter compared with $5.8 million in the comparable prior-year quarter due to lower average interest rates. Average long-term debt outstanding was approximately $470 million in both the current and prior year quarter.
Our effective tax rate was 42.0 percent in the first quarter of fiscal 2009 as compared to 39.0 percent in the prior-year first quarter. While the effective rate is expected to fluctuate quarter to quarter, on a full year basis the Company estimates its fiscal 2009 annual effective tax rate will be approximately 39.5 percent. The Company projects the effective tax rate for the year and then, based upon projected operating income for each quarter, raises or lowers the tax expense recorded in that quarter to reflect the projected tax rate.
Earnings from Continuing Operations and Earnings per Share from Continuing Operations
Earnings from continuing operations were $18.6 million ($0.41 per diluted share), a decrease of 44 percent from fiscal 2008 first quarter earnings from continuing operations of $33.5 million ($0.68 per diluted share). The decline primarily reflected weakened economic conditions and their effect on advertising revenues and an increased effective tax rate partially offset by strong growth in the integrated marketing business and reduced operating expenses.
In April 2008, the Company completed its sale of WFLI, the CW affiliate serving the Chattanooga, Tennessee market. Loss from discontinued operations represents the operating results, net of taxes, of WFLI. For fiscal 2008, the revenues and expenses, along with associated taxes, were removed from continuing operations and reclassified into a single line item on the Condensed Consolidated Statement of Earnings titled loss from discontinued operations.
Net Earnings and Earnings per Share
Net earnings were $18.6 million ($0.41 per diluted share) in the quarter ended September 30, 2008, down 44 percent from $33.4 million ($0.68 per diluted share) in the comparable prior-year quarter. The decline in the quarter reflected primarily weakened economic conditions and their effect on advertising revenues partially offset by strong growth in the integrated marketing business. In addition, lower net earnings were partially offset by the accretive effect of the reduction in Meredith's average diluted shares outstanding. Average basic shares outstanding decreased 5 percent as a result of our ongoing share repurchase program and average diluted shares outstanding decreased 7 percent as a result of our share repurchase program and lower dilutive effects from potential common stock equivalents.
Hi. Good morning everyone. Before our chief executive Steve Lacy begins our presentation this morning, Iâ€™ll take care of a few housekeeping items. In our remarks, we will include statements that are considered forward-looking within the meaning of federal securities laws. Forward-looking statements are based on managementâ€™s current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.
A description of certain of those risks and uncertainties can be found in our earnings release issued today and in certain of our SEC filings. The company undertakes no obligation to update any forward-looking statements. We will refer to non-GAAP measures which in combination with GAAP results provide additional analytic tools to understand our operations. Tables that reconcile non-GAAP measures to GAAP results are posted on Meredithâ€™s website and in our earnings release. A transcript of this call will also be posted to our website. And with that, Steve will begin the presentation.
Thank you very much Mike and good morning everyone. Before I begin with our formal remarks, Iâ€™d like to take just a moment and introduce our new Chief Financial Officer, Joe Ceryanec. Joe started with Meredith last week and brings both strong financial and operational experience, having served as Chief Financial Officer for McLeod USA.
Good morning everybody.
Weâ€™re very glad that Joe has joined our team and Iâ€™m sure youâ€™ll all enjoy meeting with and working with Joe as we move forward.
For our presentation today, Iâ€™ll start with a brief financial recap of the first fiscal quarter of 2009, offer some thoughts on the current state of the environment and how Meredith is responding, provide more detail on our operating performance by group, provide a financial outlook, and then weâ€™ll be happy to answer any questions that you might have.
Fiscal 2009â€™s first quarter earnings per share were $0.41 and revenues were 370 million, in line with expectations. This compares to fiscal 2008 first quarter earnings per share of $0.68 on revenues of $404 million.
The weak calendar 2008 advertising environment intensified across our businesses in the first fiscal quarter, impacting revenue and profit performance. We expect this weakness to continue at least until we begin to access our customers calendar 2009 advertising budgets.
It has particularly impacted ad categories that have long been staples of the American economy including food, home, automotive, and pharmaceuticals. These categories have consistently outpaced advertising industry growth rates and weâ€™re confident they will service well over the longer term.
We believe these market place trends are fundamentally cyclical, not structural. Data related to advertising spending and consumer media usage supports this position. As an example, Consumer Magazine increased their share of total advertising spending to 6.7%, according to annual research recently released by Verona, Suhler, Stevenson. Thatâ€™s the highest revenue share for magazines as an industry since calendar of 2000.
Additionally, our consumer audiences continue to grow across our publishing, broadcasting, online, and video platforms. In the most recent Media Mark research and intelligence report, magazines as an industry increased their total consumer audience by 2% over the prior year. At Meredith, we increased our total audience by 4% and eight of the ten Meredith magazines that MRI measured increased their audience as well.
In broadcasting, several Meredith television stations, including key markets such as Phoenix, Nashville, and Kansas City reported significant increases in new viewership in the most recent ratings book. Additionally better our nationally syndicated show, produced by Meredith Video Solutions, has tripled its reach to 30% of all US television households.
Online unique visitors and page views are on the rise across our websites and broadband channels, both up more than 15% so far in calendar â€˜08. Additionally, the number of videos screened and downloaded across our sites is up nearly 35% in calendar â€™08 as well.
To capture a higher share of advertising revenues in the current environment, we put in place several new sales and marketing programs. These include cross-platform sales by Meredith 360, and branded local initiatives in our television markets including job connections and better health. Iâ€™ll provide more detail on these programs in just a few moments.
These new activities are designed to take advantage of Meredithâ€™s vast reach to 85 million unduplicated American consumers, highlight the operational efficiency that our scale affords, and showcase our capabilities at delivering our expert content across multiple media platforms. Our message to clients is simple and straightforward using our trusted brands, Meredith can effectively deliver your marketing message to large and targeted audiences at a very competitive rate.
At this time, we continue to pursue strategies to grow our non-advertising sources of revenue driven by continued strong performance from Meredith Integrated Marketing and our brand licensing activities. Both of these businesses have experienced rapid growth and Iâ€™ll discuss our latest initiative in more detail in just a few moments.
Given the current economic environment, weâ€™re putting increased emphasis on aggressively managing expenses across the company. Despite 22% higher paper prices, total company expenses declined 3% in the quarter. Excluding acquisitions, total company expenses declined 5%.
At Meredith, we have a solid balance sheet, conservative debt levels, and a low cost to funds, and adequate liquidity supported by strong free cash flow. Meredith has maintained a strong financial position for years, and its even more important in this period of economic uncertainty.
Now letâ€™s turn to operating performance, beginning with our publishing activities. As I just mentioned, businesses that operate in several of our largest endemic advertising categories, such as food and beverage, prescription and non-prescription drugs, and home have been greatly impacted by the current economic downturn. Combined, Meredith magazine advertising revenues in these categories declined over 25% in our first quarter according to Publishers Information Bureau Data.
We put increased emphasis on diversifying our advertising categories, and that strategy has partially offset year-to-date weakness. According to PIB, Meredith increased advertising revenues and outperformed the industry in several noncore categories in the quarter including beauty, travel, entertainment, and apparel. Combined advertising revenues in these categories increased more than 25% in the first quarter of fiscal â€™09 compared to the prior year period.
Weâ€™ve also achieved growth in advertising revenue per magazine page, which was up approximately 3% in the first quarter of fiscal 2009. We were able to maintain our price disciplines thanks to a very detailed and aggressive pricing strategy. It enables us to sell our space at the best price in the market for the very significant audiences we deliver.
Turning to circulation, profit contribution and related margin for our subscription activities increased in the first quarter. Initial, direct mail response rates and renewals are either stable or growing across our portfolio of magazine titles. Total circulation revenues declined due to softer retail sales and Meredithâ€™s plan to publish fewer newsstand only special interest titles.
Meredith Integrated Marketing delivered another outstanding quarter where operating profit rose 30%. Results were primarily driven by strong performance in the core custom publishing business, along with increased contributions from acquisitions made over the last two years.
Integrated Marketing continues to thrive, as clients desire more measurable returns on their marketing investments. Our core custom publishing skills and new capabilities weâ€™ve added through acquisitions make us well positioned to win new business and increase the scope of our existing programs over time.
The latest example is the launch of a new custom marketing program for Suzuki that includes data based analytics along with direct marketing services. In addition, weâ€™re creating a custom publication for Suzuki owners called F-Live that will be delivered this fall. We continue to expand our important relationship with Kraft and its food and family service brand. Weâ€™ve added many new elements since winning our initial assignment of publishing a custom magazine that reaches millions of consumers. Today weâ€™re engaged in circulation consulting and data based activities as well. Weâ€™re also producing digital, video, and e-marketing campaigns.
Brand licensing operating profit rose more than 30% in the first quarter of fiscal 2009, reflecting the strength of our consumer brands and our successes at extending our brands beyond traditional media. Weâ€™ve recently announced multiple licensing agreements to extend Parents, More, and Diabetic Living brands in seven international regions including Italy, Mexico, Brazil, and Thailand. These new alliances bring Meredithâ€™s global reach to more than 25 agreements in 40 countries. Weâ€™ll continue to secure new licensing agreements for our publishing brands outside the United States, driven primarily by a growing middle class and increased home ownership in developing countries.
Last month, more than 550 Better Homes and Gardens branded home related products were introduced at Walmart stores across the country. The collection represents the largest extension of the Better Homes and Gardenâ€™s brand to date in its history. Weâ€™re pleased with the quality presentation and scope of the merchandise to date. In addition to the significant shelf space Walmart stores have dedicated to the Better Homes and Gardenâ€™s brand, there will also be 12 Better Homes and Gardenâ€™s branded end-caps on the main entry aisle in all stores during the key holiday retail sales period. This program is being promoted by an extensive, multi-platform marketing and advertising campaign that Walmart is currently executed.
Additionally, weâ€™ve reached an agreement with Walmart to expand the home product line that builds on this initial launch. It includes more bedding and bath items, as well as additional outdoor and garden related products. Items from the expanded line are expected to be in Walmart stores during the balance of calendar 2009.
These multiple brand extension initiatives are receiving increased national recognition. Earlier this month, the Better Homes and Gardenâ€™s brand was named by the trade publication Ad Week, to the number one spot on its 2008 brand leaderâ€™s list. Along with the strength of the core magazine, factors that contributed to this honor included our Walmart agreement, the Better Homes and Gardenâ€™s license with Universal Furniture, Better Homes and Gardenâ€™s branded real estate, the re-launch and continued success of BHG.com, the Better Dot TV Broadband Channel, the expanding Better daily syndicated television show, and of course, the increased international magazine additions.
Now letâ€™s turn to our broadcasting group performance. Ongoing industry wide weakness in core television advertising categories including automotive, professional services, restaurants, and retail impacted broadcasting performance in the quarter. Combined advertising revenues in these categories declined nearly 20%.
Political advertising helped offset some of this weakness. First quarter net political advertising revenues were 6 million, as expected, compared to about a million dollars in the year ago quarter. Unlike many of our peers, we did not significantly benefit from the summer Olympics. Our lone NBC station in Nashville generated about a million dollars in Olympic related advertising revenues.
Meredith Broadcasting Group is also putting increased emphasis on building nontraditional and emerging categories. These include entertainment, electronics, travel, and utilities. Combined ad revenues from these categories increased more than 15% in the quarter. Additionally, we continue to develop new revenue streams and share best practices across the group. For example, our station for selling product integration and local programming, all stations are also doing sponsored live remotes from local businesses and schools. These are helping us gain more viewers and attract advertising from new to television clients.
Weâ€™ve implemented our successful job connections program across our station group. Job connections takes advantage of the power and reach of our local stations and websites to help local businesses recruit new employees.
Better Health is a new multiplatform sales program launched this month in our Hartford, Nashville, Portland, and Atlanta markets. The program combines health content from our trusted publishing brands with internet and spot advertising, cornerstone features, and weekly segments on our Better Television Show. Healthcare providers in our local markets purchased exclusive rights and serve as the featured experts on the Better Health Program.
Turning to ratings, many of our stations enhanced their news position in the important adults, age 25 to 54 demographic during the July book. Several stations posted gains in the evening and late news including Phoenix, Nashville, Kansas City, and Las Vegas. Our gains in ratings and market share are key to commanding higher revenues for advertising spots.
Meredith Video Solutions, while still in the investment phase, doubled revenues during the first fiscal quarter of 2009. Better, the syndicated daily television show debuted in 30 new markets in September and now reaches over 40 markets in total across the country. Earlier this month, we reached agreements with stations in three top 20 markets including San Francisco, Cleveland, and Denver. We anticipate gaining clearance for the Better Show in additional markets before the end of the calendar year. Retransmission fees more than doubled from a year ago to $3 million in the first quarter of fiscal â€™09. We have agreements with our largest carriers expiring in December of â€™08. We expect retransmission fees will grow to at least $15 million annually by fiscal 2010.
Turning now to our financial structure, weâ€™re well positioned to weather the current softness in advertising and turbulence in the financial markets, gaining advertising market share, and maintaining the ability to make acquisitions and investments as opportunities arise with a strong balance sheet, with a low level of debt, and our exercising aggressive expense management across the company. Total debt was $465 million and the weighted average interest rate was approximately 4.5% as of September 30. The debt to EBITDA ratio was a conservative 1.6 to 1. Meredith has repurchased approximately 750,000 shares in fiscal 2009 to date, leaving 1.6 million shares remaining under existing share repurchase authorization.
Unallocated corporate expenses in the quarter declined to 6.4 million, due primarily to the timing of management incentive accruals. Meredith expects unallocated corporate expenses to approximate $30 million in fiscal 2009, primarily reflecting higher non-cash pension expense. Capital expenditures during the quarter increased to 10 million due primarily to the completion of broadcasting related projects that were initiated in the prior year. Meredith expects capital expenditures to approximate 30 million in fiscal 2009.
Many of our largest advertisers continue to face a challenging economic environment. The resulting advertising weakness, partially offset by political advertising at our television stations, will impact the companyâ€™s performance at least through the second quarter of fiscal 2009. In addition, operating results will continue to be impacted by significantly higher paper prices. Itâ€™s difficult to predict the duration of the current advertising downturn. Itâ€™s equally difficult to forecast how advertising budgets which generally reset with the start of the new calendar year, will change as we begin to access them in calendar 2009.
Currently, fiscal 2009 second quarter publishing advertising revenues are down in the high teens, compared to 8% growth in the second quarter of fiscal 2008. Broadcasting non-political advertising pacings are currently in the high 20â€™s compared to 6% growth in the second quarter of fiscal 2008. We expect approximately $15 million in net political advertising revenues at our television stations in the second fiscal quarter, in line with earlier expectations.
Paper prices in the second fiscal quarter will be approximately 20% higher than a year ago. Our average tax rate will approximate 41.8% in the second quarter and 39.5% for the full fiscal 2009.
Currently, we expect full fiscal year 2009 earnings per share of $2.50 to $2.85 per share. Second quarter earnings per share expected to range from $0.47 to $0.52 per share.
To conclude with our formal remarks this morning, Meredith possesses a very solid foundation and is well positioned to build share holder value over time. We have a powerful portfolio of highly profitable media brands and assets. We possess a strong and growing connection with the American consumer, particularly women who make the overwhelming majority of purchasing decisions in the American household.
We have a balance revenue mix; 60% from advertising sources and 40% from non-advertising sources of revenue. Many of our non-advertising sources including integrated marketing and brand licensing are experiencing rapid growth and posses more upside potential.
Weâ€™re continuing aggressive expense management practices in times of uncertainty and continue to generate significant free cash-flow, have a conservative balance sheet and modest levels of debt at a low-cost to fund.
At Meredith, we have a proven track record of out-performing our respective industry in growing market share. Once again, we believe the current trend are cyclical in nature and not structural as it relates to our industry or Meredith in particular. Weâ€™re confident that weâ€™ll manage through this challenging time and emerge in even a stronger competitive position.
Thank you for your attention and now weâ€™ll be happy to answer any questions that you might have this morning.