The Daily Magic Formula Stock for 05/13/2008 is Meredith Corp. According to the Magic Formula Investing Web Site, the ebit yield is 14% 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. Over twenty-five subscription magazines, including Better Homes and Gardens , Family Circle , Ladies' Home Journal , Parents , American Baby , Fitness , and More and approximately 180 special interest publications were published in fiscal 2007. The publishing segment also includes book publishing, which has over 400 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 25 websites and strategic alliances with leading Internet destinations; brand licensing activities; and other related operations.
The broadcasting segment includes 13 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, one NBC affiliate, and one CW affiliate. The broadcasting segment also includes 18 websites, including five specialty sites and video related operations.
The Company's largest revenue source is magazine and television advertising. 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 largely affect the magnitude of advertising revenues. Magazine circulation revenues are generally affected by national and regional economic conditions and competition from other forms of media.
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.
During fiscal 2007, Meredith strengthened its consumer and custom marketing interactive capabilities through the acquisition of 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.
Meredith announced in April 2007 the launch of Better.tv ( www.better.tv ), our first broadband network. Better.tv features over 20 channels of video information covering a comprehensive range of topics that include food, family, home, style, remodeling, entertainment, relationships, fitness, and health. Programs and videos featured on Better.tv range in length from two to 30 minutes. In addition to the stand-alone Better.tv Internet site, Better.tv is also available on BHG.com , Meredith's flagship website. BHG.com was relaunched in April 2007 with an enhanced array of Web 2.0 features including videos, recipe wikis, and blogs from 10 editorial contributors.
In June 2007, Meredith sold an ownership stake 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 stakes in the Living the Country Life brand. The joint venture will be 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 company.
In the last three years, Meredith has expanded its reach from one international license to almost 20, 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 , Family Circle Australia , Better Homes and Gardens India , Parents China, Fitness China , More Canada , and Diabetic Living Spain . We also currently have license agreements for several Better Homes and Gardens books in Spain.
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.
The Company undertook a restructuring plan of Meredith Books in the fourth quarter of fiscal 2007. As part of a comprehensive performance improvement initiative, Meredith Books is refocusing operations on its core content areas of cooking, gardening, remodeling, and decorating on behalf of its own and clients' brands. Less emphasis will be placed on children's books and non-core titles.
During the third quarter of fiscal 2007, the Company announced its intent to sell WFLI, our CW affiliate serving the Chattanooga, Tennessee market. Management is currently negotiating the sale of this station.
Meredith completed the sale of KFXO, the low-power FOX affiliate serving the Bend, Oregon market in May 2007.
DESCRIPTION OF BUSINESS
Publishing represented 78 percent of Meredith's consolidated revenues in fiscal 2007. Better Homes and Gardens , our flagship magazine, continues to account for a significant percentage of revenues and operating profit of the publishing segment and the Company.
We publish approximately 180 special interest publications under approximately 80 titles, primarily under the Better Homes and Gardens and Creative Collection brands. The titles are issued from one to six 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: Beautiful Homes ; Before & After ; Country Gardens ; Creative Home ; Decorating ; Diabetic Living ; Do It Yourself ; Garden, Deck & Landscape ; Garden Ideas & Outdoor Living ; Heart Healthy Living ; Kitchen and Bath Ideas ; 100 Decorating Ideas Under $100 ; Quilts and More ; 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 Corporate Sales and Marketing brings together all of the Company's publishing resources to create multi-platform marketing programs 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 source of circulation revenues. All of our subscription magazines except A merican Baby 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. In April 2007, we relaunched BHG.com , our flagship home and family site, adding significant community applications, useful tools, and video anchored by Better.tv. Today the site attracts approximately 5 million unique visitors and averages 75 million page views each month. In July 2007, we completed work on a new online portal, Parents.com , for our parenthood brands. This parenthood portal leverages the editorial strengths of Parents , American Baby , Child , and Family Circle magazines. Our websites provide sources of advertising and other revenues and serve to reduce subscription acquisition costs through online magazine subscription orders. We secured over 2.8 million online orders in fiscal 2007, an increase of nearly 40 percent over the prior year.
Other Sources of Revenues
Other revenues are derived from book sales, integrated marketing, other custom publishing projects, ancillary products and services, and brand licensing agreements.
Meredith Books --The over 400 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 and Scotts Miracle Gro┬« books. Meredith also publishes books based on properties of Sandra Lee Semi-Homemade┬« and the Food Network┬« and Discovery Channel┬« cable networks. The books are sold through retail book and specialty stores, mass merchandisers, and other channels. During fiscal 2007, we published over 100 new or revised titles.
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 2007, Meredith acquired two digital businesses (Genex and New Media Strategies) that add complementary skills to further enhance its ability to service clients' growing online needs. Fiscal 2007 clients included DIRECTV, Nestl├ę, Daimler Chrysler, Carnival Cruise Lines, Charming Shoppes, Publix, Honda, and Sony.
Production and Delivery
Paper, printing, and postage costs accounted for approximately 44 percent of the publishing segment's fiscal 2007 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 declined approximately 4 percent in fiscal 2007. The price of paper is driven by overall market conditions and is therefore difficult to predict. Management anticipates paper prices will increase over the next year due to tight supplies. 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. The United States Postal Service (USPS) followed a 5.3 percent rate increase in January of 2006 with another increase that was implemented in two parts. Postage on periodicals, which accounts for approximately 75 percent of Meredith's postage costs, was increased effective July 15, 2007. The increase for our other mail items--direct mail, replies, and bills--took effect May 14, 2007. The 2007 increases are expected to add approximately $13.2 million to the Company's annual postage costs. 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. Gaining market share for newer magazines and specialty publications is extremely competitive. Competition is also intense for established titles.
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. While the late night newscast continues to generate the most revenue, early morning broadcasts are also growing news viewers and revenues. We have added local morning newscasts at our Atlanta and Greenville stations and expanded our local morning programming in Nashville, Kansas City, Las Vegas, and Portland during the past year.
The national network affiliations of Meredith's 13 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 April 2010 to December 2016. Affiliation agreements for our two MyNetworkTV affiliates expire at the end of the 2011-2012 broadcast season, the CW affiliation agreement expires at the end of the 2016-2017 broadcast season, and the agreement for our NBC affiliate expires in December 2013. The Company is currently renegotiating a renewal of the affiliation agreements, which expired in June 2007, for our three FOX-affiliated stations. Several of our stations are broadcasting a second programming stream on their digital channel. Our Las Vegas, Phoenix, and Hartford stations are broadcasting a weather channel, our Nashville station is broadcasting Telemundo network programming, and Flint-Saginaw has a MyNetworkTV affiliate that airs Detroit Tiger and Piston games. While Meredith's relations with the networks historically have been excellent, the Company can make no assurances they will remain so over time.
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. We more than doubled our Internet revenues in fiscal 2007. We improved the look of our websites and hired dedicated Internet content employees and Internet sellers at each station to drive more traffic to the sites and generate more revenues. All of our Broadcasting station websites were expanded and enhanced in fiscal 2007. Our television station sites experienced strong growth in average monthly page views, up more than 60 percent, and in unique visitors, up nearly 40 percent.
We also are beginning to see increasing revenues from retransmission fees. Most retransmission fees are from satellite providers, but we are collecting more revenues from smaller cable systems in our markets and expect to receive fees from phone companies entering 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. Over time, we expect retransmission fees to considerably exceed our historical network compensation.
In fiscal 2006, we formed Meredith Video Solutions to take advantage of the broadcasting segment's video production capabilities as another means of capitalizing on magazine content and brand strength. Meredith Video Solutions works across both our publishing and broadcasting operations to turn the wealth of knowledge and information we have at Better Homes and Gardens , Ladies' Home Journal , More , and other magazines into video content. This video content can then be distributed across multiple platforms. Meredith Video Solutions has increased production of broadcast-quality video for use by Meredith's television stations and 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 July 2007. Both video networks offer multiple-themed 'channels' that a visitor can click on to find dozens of short videos on related subjects. In September 2007, Meredith Video Solutions will begin producing our BETTER television show, which has been very successful in Portland and Las Vegas. The show will be aired on eight Meredith stations and a handful of non-Meredith stations.
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 regulation by the Federal Communications Commission (FCC) under the Communications Act of 1934 as amended (Communications Act) and the rules and policies of the FCC (FCC Regulations). Among other things, the FCC allots channels for television and 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 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 has the power to impose penalties, including license revocations, for violations of its rules or the Communications Act.
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, 2007, the Company's television household coverage was less than eight percent (per the FCC calculation method).
Stephen M. Lacy --President and Chief Executive Officer (2006-present) and a director of the Company since 2004. Formerly President and Chief Operating Officer (2004 - 2006), President-Publishing Group (2000-2004), President-Interactive and Integrated Marketing Group (2000), and Vice President-Chief Financial Officer (1998-2000). Age 53.
John H. (Jack) Griffin, Jr. --President-Publishing Group (2004-present). Formerly President-Magazine Group (2003-2004). From 1999 to 2003, Mr. Griffin served as President of Parade Publications, Inc. and Publisher of Parade magazine. Age 47.
Paul A. Karpowicz --President-Broadcasting Group (2005-present). Prior to joining Meredith, Mr. Karpowicz spent 16 years with LIN Television Corporation and in 1994 was named Vice President-Television for LIN's 23 properties in 14 markets. Mr. Karpowicz served on LIN's Board of Directors from 1999 to 2005. Age 54.
Suku V. Radia --Vice President-Chief Financial Officer (2000-present). Age 56.
John S. Zieser --Chief Development Officer/General Counsel and Secretary (2006-present). Formerly Vice President-Corporate Development/General Counsel and Secretary (2004-2006), Vice President-Corporate and Employee Services/General Counsel and Secretary (2002-2004), and Vice President-General Counsel and Secretary (1999-2002). Age 48.
MANAGEMENT DISCUSSION FROM LATEST 10K
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, books, custom publications, websites, 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 13 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 2007, publishing accounted for 78 percent of the Company's $1.6 billion in revenues while broadcasting revenues contributed 22 percent.
Meredith is committed to building value for its shareholders. We have three primary growth strategies. The first is to increase our online presence and develop new revenue streams. This strategy entails a significant commitment to expanding our online businesses. We continue to build our presence online, driving revenue growth across our interactive properties. Our web-based corporate marketing activity continues to grow as we cultivate existing client relationship opportunities while expanding our capabilities through online marketing acquisitions. The second strategy is to expand our powerful publishing base by broadening our magazine portfolio, extending and developing our brands, capturing the potential in the Hispanic market, and expanding our custom marketing businesses. Our primary focus has been on acquiring properties targeted at women between the ages of 30 and 40. Topics of interest to this age group include fitness, health, and parenting. The third strategy is to strengthen our broadcasting business by improving ratings and share especially for newscasts, aggressively selling the improved ratings, creating additional revenue sources, and managing costs. We continue to create a strong local news culture, which is driving ratings and audience share gains. Key to our broadcasting strategy is expanding our local presence and maximizing local advertising revenues. An emphasis is locally produced programming, which is generally more profitable than either syndicated or network programming.
We continued to execute these strategies in fiscal 2007. In November 2006, the Company acquired ReadyMade, a multimedia brand targeting adults in their 20s and 30s. Meredith also strengthened its consumer and custom marketing interactive capabilities through the acquisition of 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 firm; and Healia, a consumer health search engine specializing in finding high quality and personalized health information online. In April 2007, Meredith launched Better.tv, our first broadband network; in July 2007, we launched Parents.tv.
Advertising revenues made up 50 percent of fiscal 2007 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 27 percent of fiscal 2007 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 70 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 about three-quarters of American homeowners, providing an average of 700 data points on each name. This size and depth 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 23 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, 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 the same economic factors that affect advertising revenues.
Publishing's major expense categories are production and delivery of publications and promotional mailings and employee compensation costs. Paper, postage, and production charges represented approximately 44 percent of the segment's operating expenses in fiscal 2007. 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. 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 in 2006 followed by a two-part increase in 2007. 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 approximately 21 percent of publishing's operating expenses in fiscal 2007. 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 35 percent of fiscal 2007 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-98 percent in fiscal 2007-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.
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. 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 49 percent of broadcasting's operating expenses in fiscal 2007 and is affected by the same factors noted for publishing. Programming rights amortization expense represented 12 percent of this segment's fiscal 2007 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 2007 operating expenses.
FISCAL 2007 FINANCIAL HIGHLIGHTS
Company revenues increased 3 percent. Record political advertising revenues at our television stations countered declines in publishing's circulation revenues.
Broadcasting revenues and operating profit increased 11 percent and 20 percent, respectively. Publishing revenues increased 2 percent while operating profits were up 3 percent.
In March 2007, Management committed to a restructuring plan that included the discontinuation of the print operations of Child magazine. In connection with this plan, the Company recorded pre-tax restructuring charges of $12.1 million including the write-down of various assets of Child magazine of $5.4 million, personnel costs of $3.5 million, vacated lease space accrual of $3.0 million, and other accruals of $0.2 million.
A non-cash impairment charge of $2.8 million was recorded in March 2007 to reduce goodwill and other identifiable intangible assets of our broadcast station in Chattanooga to their fair value less cost to sell based on the planned sale of the station.
During the fourth quarter, the Company recorded a pre-tax restructuring charge of $3.4 million attributable to refocusing its book operations. As part of a comprehensive performance improvement initiative, Meredith Books is refocusing operations on its core content areas of cooking, gardening, remodeling, and decorating on behalf of its own and clients' brands. Less emphasis will be placed on children's books and non-core titles.
An income tax benefit of $9.4 million was recognized in the third quarter as a result of the resolution of a tax contingency related to a loss on the sale of stock in Craftways, a business sold in fiscal 2003.
Diluted earnings per share increased 16 percent to $3.31 from $2.86 in fiscal 2006.
We generated $210.5 million in operating cash flows in fiscal 2007. We invested $30.3 million in strategic acquisitions, and we spent $42.6 million on capital improvements. We reduced long-term debt $90.0 million and spent $58.7 million to repurchase approximately 1.1 million shares of our common stock. The quarterly dividend was increased 16 percent from 16 cents per share to 18.5 cents per share effective with the March 2007 payment.
RESULTS OF OPERATIONS
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 January 2007, Meredith acquired Genex and New Media Strategies. In April 2006, the Company acquired O'Grady Meyers, and on July 1, 2005, Meredith purchased Parents (including its related special interest publications, Baby and Expecting ), Family Circle, Fitness, Child , and Ser Padres (collectively referred to as the G+J Consumer Titles). 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.
Share-based compensation is accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). The Company adopted SFAS 123R effective October 1, 2004, using the modified retrospective transition method. As a result, in fiscal 2005, we recorded a cumulative effect of a change in accounting principle of $1.5 million ($0.9 million after tax), or $0.02 per share, to reduce compensation expense recognized in previous periods for the estimated forfeitures of outstanding awards. See Note 10 to the consolidated financial statements for additional information related to share-based compensation expense.
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 approximately 60 percent of total revenues in fiscal 2007. 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 flow 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 78 percent of Meredith's revenues and 67 percent of the combined operating profit from publishing and broadcasting operations in fiscal 2007.
In the following discussion, references to comparable results for fiscal 2006 as compared to fiscal 2005 exclude the impact of the acquisition of the G+J Consumer Titles that occurred on July 1, 2005.
The 2 percent increase in publishing revenues in fiscal 2007 followed a 37 percent increase in fiscal 2006. On a comparable basis, publishing revenues increased 6 percent in fiscal 2006. The table below presents the components of revenues for the last three fiscal years.
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 ( Parents and American Baby ). Combined ad pages and ad revenues for our women's service titles ( Better Homes and Gardens , Family Circle , and Ladies' Home Journal ) 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 ( Siempre Mujer and Ser Padres ), 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 ( Country Home and Traditional Home ) declined in the high-single digits on a percentage basis. Combined advertising pages and revenues for the remaining three titles ( Midwest Living , Successful Farming , and Wood ) 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.
Online advertising revenues in our interactive media operations contribute a small, but rapidly growing, percentage to total publishing advertising revenues. In fiscal 2007, online advertising revenues increased almost 50 percent due to increased market demand.
Comparable advertising revenues increased 5 percent in fiscal 2006. Advertising revenues continued to be volatile throughout the fiscal year with growth in the mid-teens on a percentage basis in the second quarter and in the low-to-mid-single digits in the first, third, and fourth fiscal quarters. Comparable advertising pages also increased 5 percent in fiscal 2006 while average net revenues per page were down slightly. Advertising pages for Better Homes and Gardens were down slightly and pages for Ladies' Home Journal increased 4 percent in fiscal 2006. Advertising pages for our mid-size titles, More , Traditional Home , Country Home , Midwest Living , and American Baby , increased 6 percent in fiscal 2006. Advertising categories showing strength in fiscal 2006 included the pharmaceutical category as well as the financial services, direct response, cosmetics, and food categories. Advertising was weaker in the home, automotive, retail, and non-direct-to-consumer categories.
Comparable online advertising revenues, while a small percentage of total advertising, increased 56 percent in fiscal 2006 due to increased traffic, price increases, and more efficient use of advertising inventory.
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. A 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 G+J Consumer Titles to our direct-to-publisher circulation model. The decrease in newsstand revenues 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 due to the changing of its on-sale dates.
Comparable fiscal 2006 magazine circulation revenues rose 3 percent. Newsstand revenues increased 9 percent despite industry-wide weakness. The increase in newsstand revenues was primarily due to an increase in the number of special interest publications, partially offset by a decrease in average sales per issue. In late fiscal 2006, we took action to improve the financial performance of our special interest publications by adjusting our retail trade strategy, implementing a new wholesaler incentive plan, and eliminating approximately 20 marginal publications. Subscription revenues increased slightly because of higher sales of newer titles such as More , partially offset by lower average revenues for several titles due to an increase in the term of direct mail offers.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
In the third quarter of fiscal 2008, an increase in other publishing revenues of 15 percent was offset by a 4 percent decrease in advertising revenues and a 5 percent decline in circulation revenues. Increases in advertising and other publishing revenues of 6 and 12 percent, respectively, for the first nine months of fiscal 2008, more than offset a 5 percent decline in circulation revenues.
Magazine advertising revenues, which declined 4 percent in the third quarter, increased 5 percent in the first nine months of fiscal 2008. Total advertising pages were down in the high-single digits on a percentage basis in the third quarter but were up in the low-single digits for the first nine months of fiscal 2008. Our parenthood, Hispanic, and men's magazines showed strength in the quarter and the nine-month period while our home decorating titles showed weakness. For our women's service field magazines and More , advertising pages and revenues were down for the third quarter but were flat to up for the nine-month period. While ad pages for special interest publications declined in the third quarter, they were up for the nine-month period. Ad revenues for special interest publications declined for both periods primarily due to a change in the mix of publications issued and there being fewer issues published in both the current quarter and the nine-month period than in the comparable prior-year periods. Fitness ad pages were down in the third quarter but relatively flat on a year-to-date basis. While Fitness ad revenues were flat in the third quarter they were up on a year-to-date basis. Among our core advertising categories, food and beverage and retail showed strength. Advertising was weaker in the home, direct-to-consumer pharmaceuticals, and direct response categories.
Increased market demand in the first half of fiscal 2008 lifted online advertising revenues 21 percent for the first nine months of fiscal 2008. Softening in the advertising market in calendar 2008 resulted in a decline of 5 percent in online advertising revenues in the third quarter.
Magazine circulation revenues decreased 5 percent in the third quarter and the first nine months of fiscal 2008, reflecting declines in both subscription and newsstand revenues. The continued decrease in subscription revenues was anticipated due to the series of previously announced strategic initiatives taken to improve long-term subscription contribution including 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 in the third quarter and first nine months of fiscal 2008 as compared to the prior-year periods.
Integrated marketing revenues increased 46 percent in the third quarter and 50 percent in the first nine months of fiscal 2008 due to the addition of revenues from the online marketing companies acquired in the last half of fiscal 2007 as well as continued growth in the traditional integrated marketing operations from expanding certain relationships. Revenues from other sources such as magazine related custom projects and licensing also increased in both the third quarter and first nine months of fiscal 2008. These increases were partially offset by decreases in book revenues in Meredith Retail. 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, magazine other revenues, and book operations, other publishing revenues increased 15 percent for the third quarter and 12 percent for the first nine months of fiscal 2008.
Publishing operating costs were flat in the third quarter and increased 3 percent in the first nine months of fiscal 2008. Employee compensation costs were up as a result of higher staff levels due to the integrated marketing acquisitions and growth in our legacy business. While performance-based incentive expenses declined in the third quarter, they were higher for the nine-month period. Custom marketing production expenses also increased due to the integrated marketing acquisitions. Postage expense increased due to the recent rate increases. These costs were partially offset by lower paper expense, subscription acquisition costs, book manufacturing costs, and bad debt expense. Paper prices in the third quarter were higher than those a year ago but for the nine-month period, weighted average paper prices were slightly lower than the prior year. Declines in paper consumption in the third quarter due to a decrease in advertising pages sold more than offset increases in paper prices of approximately 7 percent.
Publishing operating profit was flat in the quarter and grew 12 percent in the nine-month period compared with the respective prior-year periods. Increased operating profit from organic business and acquisitions in our integrated marketing operations and from growth in our magazine operations more than offset declines in operating results in our book business and interactive media operations. Magazine circulation contribution and margin increased for both the quarter and the nine-month period.
Broadcasting revenues decreased 1 percent in the third quarter and 9 percent in the first nine months of fiscal 2008 compared with the respective prior-year periods. Net political advertising revenues totaled $1.4 million in the third quarter and $3.9 million in the first nine months of fiscal 2008 compared with $0.4 million in the prior-year third quarter and $32.9 million in the prior-year nine-month period. Changes 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 declined 4 percent in the quarter but increased 2 percent for the nine-month period reflecting growth in local non-political advertising. Local non-political advertising revenues were down 3 percent in the third quarter; they grew 3 percent in the first nine months of fiscal 2008. National non-political advertising decreased 9 percent as compared to the prior-year quarter and 6 percent as compared to the prior-year first nine months. Online advertising, a small but growing percentage of broadcasting advertising revenues, increased almost 50 percent as compared to the prior-year third quarter and over 70 percent as compared to the prior-year first nine months.
Broadcasting operating expenses increased 2 percent in the quarter and declined 3 percent in the first nine months of fiscal 2008. For both periods, decreases in performance-based incentive accruals, repairs and maintenance expenses, travel and entertainment, and program rights amortization were partially offset by higher employee compensation costs. While legal expenses and radio advertising and promotion expenses declined in the nine-month period, they were flat in the third quarter. Production costs, other selling expenses, and bad debt expenses were also higher in the third quarter as compared to the same period a year ago.
Broadcasting operating profit declined 9 percent in the third quarter and 24 percent in the first nine months of fiscal 2008 as compared to the same periods in fiscal 2007. The declines primarily reflected lower revenues due to the cyclical nature of political advertising.