FY15 Q2 Dec 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10‑Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2014
Commission file number 1-5128
 
 
 
MEREDITH CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-0410230
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1716 Locust Street, Des Moines, Iowa
 
50309-3023
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code:  (515) 284-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Shares of stock outstanding at December 31, 2014
 
Common shares
37,246,735

Class B shares
7,287,666

Total common and Class B shares
44,534,401

 
 



 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
 
Part I - Financial Information
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014
 
 
 
 
 
 
Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended December 31, 2014
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2014 and 2013
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
Signature
 
 
 
 
 
Index to Attached Exhibits
 
 
 
 
 
 
 
 
Meredith Corporation and its consolidated subsidiaries are referred to in this Quarterly Report
on Form 10‑Q (Form 10‑Q) as Meredith, the Company, we, our, and us.



PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 

Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

Assets
 
December 31,
2014
 
June 30,
2014
(In thousands)
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
18,123

 
$
36,587

Accounts receivable, net
 
289,658

 
257,644

Inventories
 
26,213

 
24,008

Current portion of subscription acquisition costs
 
97,609

 
96,893

Current portion of broadcast rights
 
12,083

 
4,551

Assets held for sale
 
54,610

 
32,900

Other current assets
 
24,381

 
17,429

Total current assets
 
522,677

 
470,012

Property, plant, and equipment
 
524,803

 
501,216

Less accumulated depreciation
 
(312,274
)
 
(296,168
)
Net property, plant, and equipment
 
212,529

 
205,048

Subscription acquisition costs
 
105,808

 
101,533

Broadcast rights
 
2,809

 
3,114

Other assets
 
87,419

 
86,935

Intangible assets, net
 
930,090

 
835,531

Goodwill
 
941,237

 
841,627

Total assets
 
$
2,802,569

 
$
2,543,800

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
62,500

 
$
87,500

Current portion of long-term broadcast rights payable
 
12,137

 
4,511

Accounts payable
 
76,308

 
81,402

Accrued expenses and other liabilities
 
149,186

 
136,047

Current portion of unearned subscription revenues
 
184,282

 
173,643

Total current liabilities
 
484,413

 
483,103

Long-term debt
 
796,250

 
627,500

Long-term broadcast rights payable
 
4,223

 
4,327

Unearned subscription revenues
 
166,464

 
151,533

Deferred income taxes
 
287,509

 
277,477

Other noncurrent liabilities
 
140,604

 
108,208

Total liabilities
 
1,879,463

 
1,652,148

Shareholders' equity
 
 
 
 
Series preferred stock
 

 

Common stock
 
37,247

 
36,776

Class B stock
 
7,288

 
7,700

Additional paid-in capital
 
43,555

 
41,884

Retained earnings
 
844,189

 
814,050

Accumulated other comprehensive loss
 
(9,173
)
 
(8,758
)
Total shareholders' equity
 
923,106

 
891,652

Total liabilities and shareholders' equity
 
$
2,802,569

 
$
2,543,800


See accompanying Notes to Condensed Consolidated Financial Statements.

1


Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)

 
Three Months
 
Six Months
Periods ended December 31,
2014
 
2013
 
2014
 
2013
(In thousands except per share data)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Advertising
$
241,422

 
$
193,531

 
$
459,453

 
$
392,078

Circulation
59,468

 
67,733

 
125,353

 
143,467

All other
98,015

 
92,784

 
185,283

 
174,955

Total revenues
398,905

 
354,048

 
770,089

 
710,500

Operating expenses
 
 
 
 
 
 
 
Production, distribution, and editorial
140,283

 
132,216

 
282,170

 
272,993

Selling, general, and administrative
175,452

 
158,341

 
339,128

 
319,413

Depreciation and amortization
14,308

 
11,590

 
27,077

 
23,385

Total operating expenses
330,043

 
302,147

 
648,375

 
615,791

Income from operations
68,862

 
51,901

 
121,714

 
94,709

Interest expense, net
(4,785
)
 
(2,555
)
 
(9,027
)
 
(5,268
)
Earnings before income taxes
64,077

 
49,346

 
112,687

 
89,441

Income taxes
(24,486
)
 
(18,777
)
 
(43,731
)
 
(34,831
)
Net earnings
$
39,591

 
$
30,569

 
$
68,956

 
$
54,610

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.89

 
$
0.68

 
$
1.55

 
$
1.22

Basic average shares outstanding
44,483

 
44,696

 
44,471

 
44,672

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.87

 
$
0.67

 
$
1.52

 
$
1.20

Diluted average shares outstanding
45,268

 
45,619

 
45,224

 
45,499

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.4325

 
$
0.4075

 
$
0.8650

 
$
0.8150


See accompanying Notes to Condensed Consolidated Financial Statements.


2


Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months
 
Six Months
Periods ended December 31,
2014
 
2013
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
Net earnings
$
39,591

 
$
30,569

 
$
68,956

 
$
54,610

Other comprehensive income, net of income taxes
 
 
 
 
 
 
 
Pension and other postretirement benefit plans activity
42

 
268

 
84

 
658

Unrealized loss on interest rate swaps
(1,276
)
 

 
(499
)
 

Other comprehensive income (loss), net of income taxes
(1,234
)
 
268

 
(415
)
 
658

Comprehensive income
$
38,357

 
$
30,837

 
$
68,541

 
$
55,268


See accompanying Notes to Condensed Consolidated Financial Statements.


3


Meredith Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)

(In thousands except per share data)
Common
Stock - $1
par value
Class B
Stock - $1
par value
Additional
Paid-in
Capital
 
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at June 30, 2014
 
$
36,776

 
$
7,700

 
$
41,884

 
$
814,050

 
$
(8,758
)
 
$
891,652

Net earnings
 

 

 

 
68,956

 

 
68,956

Other comprehensive loss, net of income taxes
 

 

 

 

 
(415
)
 
(415
)
Share-based incentive plan transactions
 
786

 

 
27,603

 

 

 
28,389

Purchases of Company stock
 
(726
)
 
(1
)
 
(35,450
)
 

 

 
(36,177
)
Share-based compensation
 

 

 
8,431

 

 

 
8,431

Conversion of Class B to common stock
 
411

 
(411
)
 

 

 

 

Dividends paid
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 

 

 

 
(32,509
)
 

 
(32,509
)
Class B stock
 

 

 

 
(6,308
)
 

 
(6,308
)
Tax benefit from share-based awards
 

 

 
1,087

 

 

 
1,087

Balance at December 31, 2014
 
$
37,247

 
$
7,288

 
$
43,555

 
$
844,189

 
$
(9,173
)
 
$
923,106


See accompanying Notes to Condensed Consolidated Financial Statements.


4


Meredith Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Six months ended December 31,
2014
 
2013
(In thousands)
 
 
 
Cash flows from operating activities
 
 
 
Net earnings
$
68,956

 
$
54,610

Adjustments to reconcile net earnings to net cash provided by operating activities
 
 
 
Depreciation
18,806

 
16,735

Amortization
7,012

 
6,650

Share-based compensation
8,431

 
7,926

Deferred income taxes
13,486

 
10,764

Amortization of broadcast rights
8,063

 
4,437

Payments for broadcast rights
(7,847
)
 
(5,338
)
Provision for write-down of impaired assets
1,450

 

Fair value adjustment to contingent consideration
(1,100
)
 
(1,100
)
Excess tax benefits from share-based payments
(6,035
)
 
(3,866
)
Changes in assets and liabilities
(36,853
)
 
(30,131
)
Net cash provided by operating activities
74,369

 
60,687

Cash flows from investing activities
 
 
 
Acquisitions of and investments in businesses
(183,944
)
 
(879
)
Additions to property, plant, and equipment
(11,855
)
 
(11,272
)
Net cash used in investing activities
(195,799
)
 
(12,151
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt
285,000

 
106,000

Repayments of long-term debt
(141,250
)
 
(116,000
)
Dividends paid
(38,817
)
 
(36,628
)
Purchases of Company stock
(36,177
)
 
(58,198
)
Proceeds from common stock issued
28,389

 
50,633

Excess tax benefits from share-based payments
6,035

 
3,866

Other
(214
)
 

Net cash provided by (used in) financing activities
102,966

 
(50,327
)
Net decrease in cash and cash equivalents
(18,464
)
 
(1,791
)
Cash and cash equivalents at beginning of period
36,587

 
27,674

Cash and cash equivalents at end of period
$
18,123

 
$
25,883


See accompanying Notes to Condensed Consolidated Financial Statements.


5


Meredith Corporation and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements
 
(Unaudited)
 


1. Summary of Significant Accounting Policies

Basis of Presentation—The condensed consolidated financial statements include the accounts of Meredith Corporation and its wholly owned subsidiaries (Meredith or the Company), after eliminating all significant intercompany balances and transactions. Meredith does not have any off-balance sheet arrangements. The Company's use of special-purpose entities is limited to Meredith Funding Corporation, whose activities are fully consolidated in Meredith's condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements, which are included in Meredith's Annual Report on Form 10‑K for the year ended June 30, 2014, filed with the SEC.

The condensed consolidated financial statements as of December 31, 2014, and for the three and six months ended December 31, 2014 and 2013, are unaudited but, in management's opinion, include all normal, recurring adjustments necessary for a fair presentation of the results of interim periods. The year-end condensed consolidated balance sheet data as of June 30, 2014, were derived from audited financial statements, but do not include all disclosures required by GAAP. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

Derivative Financial Instruments—Meredith does not engage in derivative or hedging activities, except to hedge interest rate risk on debt as described in Note 6. Fundamental to our approach to risk management is the desire to minimize exposure to volatility in interest costs of variable rate debt, which can impact our earnings and cash flows. In the first quarter of fiscal 2015, we entered into interest rate swap agreements with counterparties that are major financial institutions. These agreements effectively fix the variable rate cash flow on $200 million of a combination of our variable-rate private placement senior notes and bank term loan. We designated and accounted for the interest rate swaps as cash flow hedges in accordance with Accounting Standards Codification 815, Derivatives and Hedging. The effective portion of the change in the fair value of interest rate swaps is reported in other comprehensive income (loss). The gain or loss included in other comprehensive income (loss) is subsequently reclassified into net earnings on the same line in the Condensed Consolidated Statements of Earnings as the hedged item in the same period that the hedge transaction affects net earnings. The ineffective portion of a change in fair value of the interest rate swaps would be reported in interest expense. During the first six months of fiscal 2015, the interest rate swap agreements were considered effective hedges and there were no material gains or losses recognized in earnings for hedge ineffectiveness.

Adopted Accounting Pronouncements—In July 2013, the FASB issued guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The guidance was effective for the Company in the first quarter of fiscal 2015. The adoption of this guidance did not have an impact on our results of operations or cash flows and we have updated our presentation of unrecognized tax benefits net of our deferred tax assets where applicable on our Condensed Consolidated Balance Sheets.



6


2. Acquisitions

Fiscal 2015
On October 31, 2014, Meredith acquired WGGB, the ABC affiliate in Springfield, Massachusetts. The results of WGGB's operations have been included in the condensed consolidated financial statements since that date. The acquisition-date fair value of the consideration totaled $53.3 million, which consisted of $50.0 million of cash and $3.3 million of contingent consideration. The contingent consideration arrangement requires the Company to pay contingent payments based on certain future regulatory actions. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. The fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in Note 9. As of December 31, 2014, the Company estimates the future payments will range from zero to $4.0 million. The maximum amount of contingent payments the seller may receive is $4.0 million.

Effective November 1, 2014, Meredith completed its acquisition of Martha Stewart Living magazine and its related digital assets (collectively Martha Stewart Living Media Properties). In addition, Meredith entered into a 10‑year licensing arrangement with Martha Stewart Living Omnimedia (MSLO) for the licensing of the Martha Stewart Living trade name. The acquired business operations include sales and marketing, circulation, production, and other non-editorial functions. Meredith will source editorial content from MSLO. The results of the Martha Stewart Living Media Properties have been included in the condensed consolidated financial statements since the effective date. There was no consideration exchanged in this transaction.

On November 13, 2014, Meredith acquired 100 percent of the membership interests in My Wedding, LLC (Mywedding) resulting in the acquisition of Mywedding.com. Mywedding.com is one of the top five wedding websites in the U.S., providing couples with a complete wedding planning product suite. The results of Mywedding have been included in the condensed consolidated financial statements since that date. The acquisition-date fair value of the consideration was $42.6 million, which consisted of $20.0 million of cash and $22.6 million of contingent consideration. The contingent consideration arrangement requires the Company to pay a contingent payment based on certain financial targets achieved during fiscal 2018 generally based on earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the acquisition agreement. The contingent consideration is not dependent on the continued employment of the sellers. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. The fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in Note 9. As of December 31, 2014, the Company estimates the future payments will range from $11.1 million to $40.0 million. The maximum amount of contingent payments the seller may receive is $40.0 million.

On December 19, 2014, Meredith acquired WALA, the FOX affiliate in Mobile, Alabama-Pensacola, Florida. The results of WALA's operations have been included in the condensed consolidated financial statements since that date. The cash purchase price, including the purchase of working capital, was $89.9 million.

On December 30, 2014, Meredith acquired 100 percent of the outstanding stock of Selectable Media, Inc. (Selectable Media), a leading native and engagement-based digital advertising company. The results of Selectable Media have been included in the condensed consolidated financial statements since that date. The acquisition-date fair value of the consideration totaled $30.2 million, which consisted of $23.0 million of cash and $7.2 million of contingent consideration. The contingent consideration arrangement requires the Company to pay contingent payments based on certain financial targets over the next three fiscal years generally based on revenue, as defined in the acquisition agreement. The contingent consideration is not dependent on the continued employment of the sellers. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. The fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in Note 9. As of December 31, 2014, the Company estimates the future payments will range from $7.3 million to $8.0 million. The maximum amount of contingent payments the seller may receive is $8.0 million.


7


As of the date of each acquisition, Meredith allocates the purchase price to the assets acquired and liabilities assumed based on their respective preliminary fair values. The Company is in the process of obtaining third-party valuations of fixed and intangible assets; thus, the provisional measurements of fixed assets, intangible assets, goodwill, and deferred income tax balances are subject to change. The following table summarizes the total estimated fair values of the assets acquired and liabilities assumed by segment:

(In thousands)
Local Media Acquisitions
National Media Acquisitions
Total
Accounts receivable
$
4,375

$
4,060

$
8,435

Current portion of broadcast rights
1,582


1,582

Other current assets
1,106

1,070

2,176

Property, plant, and equipment
13,695

140

13,835

Other noncurrent assets
1,907

3,063

4,970

Intangible assets
107,518

17,400

124,918

Total identifiable assets acquired
130,183

25,733

155,916

Deferred subscription revenue

(26,866
)
(26,866
)
Current portion of broadcast rights
(1,582
)

(1,582
)
Other current liabilities
(1,387
)
(7,702
)
(9,089
)
Long-term liabilities
(5,242
)
(31,434
)
(36,676
)
Total liabilities assumed
(8,211
)
(66,002
)
(74,213
)
Net identifiable assets acquired
121,972

(40,269
)
81,703

Goodwill
17,974

83,269

101,243

Net assets acquired
$
139,946

$
43,000

$
182,946


The following table provides details of the acquired intangible assets by acquisition:

(In thousands)
WGGB
Martha Stewart
Mywedding
WALA
Selectable Media
Total
Intangible assets
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
National media
 
 
 
 
 
 
Advertiser relationships
$

$
2,500

$
2,700

$

$
3,200

$
8,400

Customer lists

1,500




1,500

Other




700

700

Local media
 
 
 
 
 
 
Retransmission agreements
761



3,254


4,015

Other
70



102


172

Total
831

$
4,000

$
2,700

$
3,356

$
3,900

$
14,787

Intangible assets not
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
National media
 
 
 
 
 
 
Trademarks


6,500


300

6,800

Local media
 
 
 
 
 
 
FCC licenses
33,116



70,215


103,331

Total
33,116


6,500

70,215

300

110,131

Intangible assets, net
$
33,947

$
4,000

$
9,200

$
73,571

$
4,200

$
124,918



8


The useful life of the advertiser relationships ranges from three to five years, the customer lists useful lives are two years, and other national media intangible assets useful lives are five years. The useful lives of the retransmission agreements are six years and other local media other intangible assets useful lives are three years.

For all acquisitions, goodwill is attributable primarily to expected synergies and the assembled workforces. Goodwill, with a provisionally assigned value of $76.2 million, is expected to be fully deductible for tax purposes.

Mywedding and Selectable Media are subject to legal and regulatory requirements, including but not limited to those related to taxation, in each of the jurisdictions in the countries in which they operate. The Company has conducted a preliminary assessment of liabilities arising in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisitions for all identified liabilities in accordance with the business combinations guidance. However, the Company is continuing its review of these matters during the measurement period, and if new information about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, or any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized.

During the second quarter of fiscal 2015, acquisition related costs of $1.3 million were incurred. These costs are included in the selling, general, and administrative line in the Condensed Consolidated Statements of Earnings.

Fiscal 2014
Effective February 28, 2014, Meredith acquired KMOV. The results of KMOV's operations have been included in the consolidated financial statements since that date. During the first quarter of fiscal 2015, the provisional amounts recorded to the network affiliation agreements intangible asset were increased $1.0 million, other intangibles were decreased $0.1 million, and a corresponding decrease of $0.9 million was recorded to goodwill based on an updated valuation report.

Effective June 19, 2014, Meredith acquired KTVK and an interest in the assets of KASW. The results of KTVK's operations have been included in the consolidated financial statements since that date. As part of the Federal Communications Commission's (FCC) approval of the transaction, Meredith is required to sell its interest in the KASW assets. Accordingly, this interest is shown on the Condensed Consolidated Balance Sheet as assets held for sale. During the second quarter of fiscal 2015, the provisional amount recorded to assets held for sale were increased $23.0 million, partially offset by $1.4 million of estimated costs to sell. A corresponding adjustment to the assets of KTVK was recorded as a $23.9 million reduction to the FCC license and $0.8 million reduction of goodwill, partially offset by a $1.7 million increase in retransmission agreements. All adjustments were based on an updated valuation report. The Company is in the process of obtaining third-party valuations of fixed and intangible assets; thus, the provisional measurements of fixed assets, intangible assets, goodwill, and deferred income tax balances are subject to change for KTVK and KASW.



9


3. Inventories

Major components of inventories are summarized below. Of total net inventory values shown, 45 percent are under the last-in first-out (LIFO) method at December 31, 2014, and 49 percent at June 30, 2014.

(In thousands)
December 31,
2014
 
June 30,
2014
Raw materials
 
$
12,072

 
$
11,993

Work in process
 
15,971

 
13,398

Finished goods
 
2,367

 
2,814

 
 
30,410

 
28,205

Reserve for LIFO cost valuation
 
(4,197
)
 
(4,197
)
Inventories
 
$
26,213

 
$
24,008



4. Intangible Assets and Goodwill

Intangible assets consist of the following:
 
December 31, 2014
 
 
June 30, 2014
(In thousands)
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Advertiser relationships
$
15,529

 
$
(5,097
)
 
$
10,432

 
 
$
8,752

 
$
(6,069
)
 
$
2,683

Customer lists
7,570

 
(5,320
)
 
2,250

 
 
16,257

 
(14,852
)
 
1,405

Other
17,025

 
(5,938
)
 
11,087

 
 
17,105

 
(5,608
)
 
11,497

Local media
 
 
 
 
 
 
 
 
 
 
 
 
Network affiliation agreements
229,309

 
(126,149
)
 
103,160

 
 
228,314

 
(122,888
)
 
105,426

Retransmission agreements
21,290

 
(1,313
)
 
19,977

 
 
15,713

 
(188
)
 
15,525

Other
1,194

 
(210
)
 
984

 
 
1,020

 

 
1,020

Total
$
291,917

 
$
(144,027
)
 
147,890

 
 
$
287,161

 
$
(149,605
)
 
137,556

Intangible assets not
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
 
 
 
 
1,827

 
 
 
 
 
 
1,827

Trademarks
 
 
 
 
155,689

 
 
 
 
 
 
148,889

Local media
 
 
 
 
 
 
 
 
 
 
 
 
FCC licenses
 
 
 
 
624,684

 
 
 
 
 
 
547,259

Total
 
 
 
 
782,200

 
 
 
 
 
 
697,975

Intangible assets, net
 
 
 
 
$
930,090

 
 
 
 
 
 
$
835,531


Amortization expense was $7.0 million for the six months ended December 31, 2014. Annual amortization expense for intangible assets is expected to be as follows: $13.8 million in fiscal 2015, $16.0 million in fiscal 2016, $14.3 million in fiscal 2017, $12.6 million in fiscal 2018, and $11.7 million in fiscal 2019.


10


Changes in the carrying amount of goodwill were as follows:

Six months ended December 31,
2014
 
 
2013
(In thousands)
National
Media
 
Local
Media
 
Total
 
 
National
Media
 
Local
Media
 
Total
Balance at beginning of period
$
789,038

 
$
52,589

 
$
841,627

 
 
$
788,854

 
$

 
$
788,854

Acquisitions
83,269

 
16,341

 
99,610

 
 
(68
)
 

 
(68
)
Balance at end of period
$
872,307

 
$
68,930

 
$
941,237

 
 
$
788,786

 
$

 
$
788,786



5. Restructuring Accrual

During the second quarter of fiscal 2015, management committed to several performance improvement plans related to business realignments resulting primarily from recent broadcast station acquisitions, recent digital business acquisitions, and other selected workforce reductions. In connection with these plans, the Company recorded a pre-tax restructuring charge of $6.7 million. The restructuring charge includes severance and related benefit costs of $5.3 million related to the involuntary termination of employees and other write-downs and accruals of $0.2 million, which are recorded in the selling, general, and administrative line of the Condensed Consolidated Statements of Earnings. The Company also wrote down video production fixed assets that the Company plans to abandon for $1.2 million, which is recorded in the depreciation and amortization line of the Condensed Consolidated Statements of Earnings. The majority of severance costs will be paid out over the next 12 months. The plans affect approximately 140 employees.

Details of changes in the Company's restructuring accrual are as follows:

Six months ended December 31,
2014
 
2013
(In thousands)
 
 
 
Balance at beginning of period
$
13,545

 
$
8,103

Severance accrual
5,273

 

Other accruals
110

 

Cash payments
(7,123
)
 
(2,272
)
Balance at end of period
$
11,805

 
$
5,831




11


6. Long-term Debt

Long-term debt consists of the following:

(In thousands)
December 31,
2014
 
June 30,
2014
Variable-rate credit facilities
 
 
 
 
Asset-backed bank facility of $100 million, due 4/24/2015
 
$
80,000

 
$
70,000

Revolving credit facility of $200 million, due 3/27/2019
 
85,000

 
20,000

Term loan of $250 million, due 3/27/2019
 
243,750

 
250,000

 
 
 
 
 
Private placement notes
 
 
 
 
7.19% senior notes, due 7/13/2014
 

 
25,000

2.62% senior notes, due 3/1/2015
 
50,000

 
50,000

3.04% senior notes, due 3/1/2016
 
50,000

 
50,000

3.04% senior notes, due 3/1/2017
 
50,000

 
50,000

3.04% senior notes, due 3/1/2018
 
50,000

 
50,000

Floating rate senior notes, due 12/19/2022
 
100,000

 

Floating rate senior notes, due 2/28/2024
 
150,000

 
150,000

Total long-term debt
 
858,750

 
715,000

Current portion of long-term debt
 
(62,500
)
 
(87,500
)
Long-term debt
 
$
796,250

 
$
627,500


In connection with the asset-backed bank facility, Meredith entered into a revolving agreement to sell all of its rights, title, and interest in the majority of its accounts receivable related to advertising and miscellaneous revenues to Meredith Funding Corporation, a special-purpose entity established to purchase accounts receivable from Meredith. At December 31, 2014, $168.6 million of accounts receivable net of reserves was outstanding under the agreement. Meredith Funding Corporation in turn may sell receivable interests to a major national bank. In consideration of the sale, Meredith receives cash and a subordinated note, bearing interest at the prime rate, 3.25 percent at December 31, 2014, from Meredith Funding Corporation. The agreement is structured as a true sale under which the creditors of Meredith Funding Corporation will be entitled to be satisfied out of the assets of Meredith Funding Corporation prior to any value being returned to Meredith or its creditors. The accounts of Meredith Funding Corporation are fully consolidated in Meredith's condensed consolidated financial statements.

During the first quarter of fiscal 2015, the Company entered into interest rate swap agreements to hedge variable interest rate risk on the $150 million floating-rate senior notes and on $50 million of the term loan. The expiration of the swaps is as follows: $50 million in August 2018 and $150 million in August 2019. Under the swaps the Company will pay fixed rates of interest (1.36 percent on the swap maturing in August 2018 and 1.76 percent on the swaps maturing in August 2019) and receive variable rates of interest based on the one to three-month London Interbank Offered Rate (LIBOR) (0.17 percent on the swap maturing in August 2018 and 0.23 percent on the swaps maturing in August 2019 at December 31, 2014) on the $200 million notional amount of indebtedness. The swaps are designated as cash flow hedges. The Company evaluates the effectiveness of the hedging relationships on an ongoing basis by recalculating changes in fair value of the derivatives and related hedged items independently.

Unrealized gains or losses on cash flow hedges are recorded in other comprehensive loss to the extent the cash flow hedges are effective. The amount of the swap that offsets the effects of interest rate changes on the related debt is subsequently reclassified into interest expense. Any ineffective portions on cash flow hedges are recorded in interest expense. No material ineffectiveness existed at December 31, 2014.

The fair value of the interest rate swap agreements is the estimated amount the Company would pay or receive to terminate the swap agreements. At December 31, 2014, the swaps had a fair value of $0.8 million net liability. The

12


Company is exposed to credit-related losses in the event of nonperformance by counterparties to the swap agreements. This exposure is managed through diversification and the monitoring of the creditworthiness of the counterparties. The maximum amount of loss that the Company would incur on the interest rate swaps if the counterparties were to fail to meet their obligations under the agreements was $1.6 million at December 31, 2014. Given the strong creditworthiness of the counterparties, management does not expect any of them to fail to meet their obligations. Additionally, the concentration of risk with any individual counterparty is not considered significant at December 31, 2014.

Meredith guaranteed $12.5 million of debt of an unrelated third party in connection with the unrelated third party's purchase of title to the assets of KASW. This debt is expected to be repaid upon the sale of this station in fiscal 2015, at which time the guarantee will be released. The Company believes the likelihood of the guarantee being called is remote.


7. Pension and Postretirement Benefit Plans

The following table presents the components of net periodic benefit costs:

 
Three Months
 
 
Six Months
Periods ended December 31,
2014
 
2013
 
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
Pension benefits
 
 
 
 
 
 
 
 
Service cost
$
3,043

 
$
2,537

 
 
$
6,086

 
$
5,075

Interest cost
1,396

 
1,397

 
 
2,792

 
2,795

Expected return on plan assets
(2,759
)
 
(2,422
)
 
 
(5,518
)
 
(4,844
)
Prior service cost amortization
56

 
80

 
 
112

 
161

Actuarial loss amortization
169

 
511

 
 
338

 
1,022

Net periodic benefit costs
$
1,905

 
$
2,103

 
 
$
3,810

 
$
4,209

 
 
 
 
 
 
 
 
 
Postretirement benefits
 
 
 
 
 
 
 
 
Service cost
$
29

 
$
35

 
 
$
58

 
$
100

Interest cost
102

 
116

 
 
204

 
247

Prior service cost amortization
(108
)
 
(105
)
 
 
(216
)
 
(230
)
Actuarial gain amortization
(108
)
 
(101
)
 
 
(216
)
 
(162
)
Curtailment credit

 

 
 

 
(1,511
)
Net periodic benefit
$
(85
)
 
$
(55
)
 
 
$
(170
)
 
$
(1,556
)

The amortization of amounts related to unrecognized prior service costs and net actuarial loss were reclassified out of other comprehensive income as components of net periodic benefit costs.

The curtailment credit was triggered by a change in the postretirement benefit plan to no longer subsidize retiree medical coverage and life insurance for non-vested future non-union retirees.



13


8. Earnings per Share

The following table presents the calculations of earnings per share:

 
Three Months
 
 
Six Months
Periods ended December 31,
2014
 
2013
 
 
2014
 
2013
(In thousands except per share data)
 
 
 
 
 
 
 
 
Net earnings
$
39,591

 
$
30,569

 
 
$
68,956

 
$
54,610

Basic average shares outstanding
44,483

 
44,696

 
 
44,471

 
44,672

Dilutive effect of stock options and equivalents
785

 
923

 
 
753

 
827

Diluted average shares outstanding
45,268

 
45,619

 
 
45,224

 
45,499

Earnings per share
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.89

 
$
0.68

 
 
$
1.55

 
$
1.22

Diluted earnings per share
0.87

 
0.67

 
 
1.52

 
1.20


For the three months ended December 31, 2014 and 2013, antidilutive options excluded from the above calculations totaled 1.0 million (with a weighted average exercise price of $50.29) and 0.8 million (with a weighted average exercise price of $51.78), respectively. For the six months ended December 31, 2014 and 2013, antidilutive options excluded from the above calculations totaled 1.4 million (with a weighted average exercise price of $50.16) and 1.7 million (with a weighted average exercise price of $50.76), respectively.

In the six months ended December 31, 2014 and 2013, options were exercised to purchase 0.8 million and 1.2 million common shares, respectively.


9. Fair Value Measurements

We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize upon disposition.

The fair value hierarchy consists of three broad levels of inputs that may be used to measure fair value, which are described below:

Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3
Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates.

The following table sets forth the carrying value and the estimated fair value of the Company's financial instruments:

 
December 31, 2014
 
 
June 30, 2014
(In thousands)
Carrying Value
 
Fair Value
 
 
Carrying Value
 
Fair Value
Broadcast rights payable
$
16,360

 
$
15,878

 
 
$
8,838

 
$
8,408

Long-term debt
858,750

 
860,856

 
 
715,000

 
717,032


14



The fair value of broadcast rights payable was determined using the present value of expected future cash flows discounted at the Company's current borrowing rate with inputs included in Level 3. The fair value of long-term debt was determined using the present value of expected future cash flows using borrowing rates currently available for debt with similar terms and maturities with inputs included in Level 2.

The following table sets forth the assets and liabilities measured at fair value on a recurring basis:

(In thousands)
December 31, 2014
 
 
June 30,
2014
Other assets
 
 
 
 
Interest rate swaps
$
1,567

 
 
$

Accrued expenses and other liabilities
 
 
 
 
Contingent consideration

 
 
50

Interest rate swaps
2,390

 
 

Other noncurrent liabilities
 
 
 
 
Contingent consideration
33,735

 
 
1,650


The fair value of interest rate swaps is determined based on discounted cash flows derived using market observable inputs including swap curves that are included in Level 2. The fair value of the contingent consideration is based on significant inputs not observable in the market and thus represents Level 3 measurements.


10. Financial Information about Industry Segments

Meredith is a diversified media company focused primarily on the home and family marketplace. On the basis of products and services, the Company has established two reportable segments: national media and local media. There have been no changes in the basis of segmentation since June 30, 2014. There are no material intersegment transactions.

There are two principal financial measures reported to the chief executive officer for use in assessing segment performance and allocating resources. Those measures are operating profit and EBITDA. Operating profit for segment reporting, disclosed below, is revenues less operating costs excluding unallocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods, primarily number of employees. Unallocated corporate expenses are corporate overhead expenses not directly attributable to the operating groups. In accordance with authoritative guidance on disclosures about segments of an enterprise and related information, EBITDA is not presented below.


15


The following table presents financial information by segment:

 
Three Months
 
 
Six Months
Periods ended December 31,
2014
 
2013
 
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
National media
$
242,381

 
$
249,694

 
 
$
488,707

 
$
516,593

Local media
156,524

 
104,354

 
 
281,382

 
193,907

Total revenues
$
398,905

 
$
354,048

 
 
$
770,089

 
$
710,500

 
 
 
 
 
 
 
 
 
Segment profit
 
 
 
 
 
 
 
 
National media
$
26,107

 
$
28,070

 
 
$
55,002

 
$
56,146

Local media
54,986

 
35,225

 
 
91,298

 
60,901

Unallocated corporate
(12,231
)
 
(11,394
)
 
 
(24,586
)
 
(22,338
)
Income from operations
68,862

 
51,901

 
 
121,714

 
94,709

Interest expense, net
(4,785
)
 
(2,555
)
 
 
(9,027
)
 
(5,268
)
Earnings before income taxes
$
64,077

 
$
49,346

 
 
$
112,687

 
$
89,441

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
National media
$
3,487

 
$
4,783

 
 
$
7,112

 
$
9,733

Local media
10,395

 
6,399

 
 
19,110

 
12,832

Unallocated corporate
426

 
408

 
 
855

 
820

Total depreciation and amortization
$
14,308

 
$
11,590

 
 
$
27,077

 
$
23,385




16


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations



Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading “Forward Looking Statements."



EXECUTIVE OVERVIEW

Meredith Corporation has been committed to service journalism for more than 110 years. Today, Meredith uses multiple distribution platforms—including broadcast television, print, digital, mobile, tablets, and video—to provide consumers with content they desire and to deliver the messages of its advertising and marketing partners.

Meredith operates two business segments: local media and national media. The local media segment includes 17 owned or operated television stations reaching 11 percent of U.S. households. Meredith’s portfolio is concentrated in large, fast-growing markets, with seven stations in the nation’s Top 25 markets—including Atlanta, Phoenix, and Portland—and 13 in Top 50 markets. Meredith’s stations produce approximately 650 hours of local news and entertainment content each week, and operate leading local digital destinations.

Our national media segment reaches a multi-channel audience of more than 230 million consumers monthly, including 100 million unduplicated women and 60 percent of American millennial women. Meredith is the leader in creating content across media platforms in key consumer interest areas such as food, home, parenthood, and health through well-known brands such as Better Homes and Gardens, Parents, and Allrecipes. The national media segment features robust brand licensing activities, including more than 3,000 SKUs of branded products at 4,000 Walmart stores across the U.S. Meredith Xcelerated Marketing is a leader at developing and delivering custom content and customer relationship marketing programs for many of the world’s top brands.

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. The national media segment accounted for 63 percent of the Company's $770.1 million in revenues in the first six months of fiscal 2015 while the local media segment contributed 37 percent.


LOCAL MEDIA

Local media derives the majority of its revenues—77 percent in the first six months of fiscal 2015—from the sale of advertising, both over the air and on our stations' websites and apps. The remainder comes from television retransmission fees, station operation management fees, television production services and products, 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. Local media's major expense categories are employee compensation costs and programming fees paid to the networks.


NATIONAL MEDIA

Advertising revenues made up 50 percent of national media's first six months' revenues. These revenues were generated from the sale of advertising space in our magazines and on our websites and apps to clients interested in promoting their brands, products, and services to consumers. Circulation revenues accounted for 25 percent of national media's first six months' revenues. Circulation revenues result from the sale of magazines to consumers

17


through subscriptions and by single copy sales on newsstands in print form, primarily at major retailers and grocery/drug stores, and in digital form on tablets and other media devices. The remaining 25 percent of national media's revenues came from a variety of activities that included the sale of customer relationship marketing products and services and books as well as brand licensing, product sales, and other related activities. National media's major expense categories are production and delivery of publications and promotional mailings and employee compensation costs.


FIRST SIX MONTHS FISCAL 2015 FINANCIAL OVERVIEW

Meredith completed several strategic acquisitions during the second quarter of fiscal 2015 including the October 2014 acquisition of WGGB, the ABC affiliate in Springfield, Massachusetts; the November 2014 acquisitions of the Martha Stewart Living media properties and related digital assets and of Mywedding.com; and the December 2014 acquisitions of WALA, the Fox affiliate in Mobile, Alabama-Pensacola, Florida and of Selectable Media.

In October 2014, the Company entered into a $100 million note purchase agreement. Proceeds were used primarily to fund the WALA acquisition.

Management committed to several performance improvement plans related primarily to business realignments from recent broadcast station acquisitions, business realignments from recent digital business acquisitions, and other selected workforce reductions. In connection with these plans, the Company recorded a pre-tax restructuring charge of $6.7 million. The restructuring charge includes severance and related benefit costs of $5.3 million related to the involuntary termination of employees, the write-down of video production fixed assets that the Company plans to abandon of $1.2 million, and other write-downs and accruals of $0.2 million.

Local media revenues increased 45 percent and operating profit rose 50 percent compared to the prior-year period reflecting the acquisition of two television stations in the second half of fiscal 2014, the acquisition of two television stations in the second quarter of fiscal 2015, and increased cyclical political advertising.

National media revenues declined 5 percent as compared to the prior-year period as declines in the revenues of our magazine operations of $44.5 million more than offset increased revenues in our interactive media operations of $15.4 million. Forty-five percent of the decline in revenues of our magazine operations was due to the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication. National media operating profit decreased 2 percent as declines in the operating profit of our magazine operations of $9.4 million and the national media portion of the restructuring charge discussed above of $3.6 million more than offset increased operating profits in our interactive media operations of $9.4 million, our integrated marketing operations of $1.9 million, and our licensing operations of $1.0 million.

Diluted earnings per share increased 27 percent to $1.52 from $1.20 in the prior-year first six months.



18


RESULTS OF OPERATIONS

Three months ended December 31,
2014
 
2013
 
Change

(In thousands except per share data)
 
 
 
 
 
Total revenues
$
398,905

 
$
354,048

 
13
%
Operating expenses
(330,043
)
 
(302,147
)
 
9
%
Income from operations
$
68,862

 
$
51,901

 
33
%
Net earnings
$
39,591

 
$
30,569

 
30
%
Diluted earnings per share
0.87

 
0.67

 
30
%
 
 
 
 
 
 
Six months ended December 31,
2014
 
2013
 
Change

(In thousands except per share data)
 
 
 
 
 
Total revenues
$
770,089

 
$
710,500

 
8
%
Operating expenses
(648,375
)
 
(615,791
)
 
5
%
Income from operations
$
121,714

 
$
94,709

 
29
%
Net earnings
$
68,956

 
$
54,610

 
26
%
Diluted earnings per share
1.52

 
1.20

 
27
%

The following sections provide an analysis of the results of operations for the local media and national media segments and an analysis of the consolidated results of operations for the three and six months ended December 31, 2014, compared with the prior-year periods. This commentary should be read in conjunction with the interim condensed consolidated financial statements presented elsewhere in this report and with our Annual Report on Form 10‑K (Form 10‑K) for the year ended June 30, 2014.


ACQUISITIONS

During the second quarter of fiscal 2015, Meredith completed several strategic acquisitions including the October 2014 acquisition of WGGB and the December 2014 acquisition of WALA in our local media segment, and the November 2014 acquisitions of the Martha Stewart Living media properties and related digital assets and of Mywedding.com, and the December 2014 acquisition of Selectable Media in our national media segment. In the second half of fiscal 2014, Meredith completed the acquisitions of KMOV, the CBS affiliate in St. Louis, Missouri, and KTVK, an independent station in Phoenix, Arizona. The results of these acquisitions have been included in the Company's consolidated operating results since their respective acquisition dates. See Note 2 to the condensed consolidated financial statements for further information.



19


LOCAL MEDIA

Local media operating results were as follows:

Three months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising
$
95,326

 
$
78,270

 
22
%
Political advertising
29,322

 
718

 
3,984
%
Other
31,876

 
25,366

 
26
%
Total revenues
156,524

 
104,354

 
50
%
Operating expenses
(101,538
)
 
(69,129
)
 
47
%
Operating profit
$
54,986

 
$
35,225

 
56
%
Operating profit margin
35.1
%
 
33.8
%
 
 
 
 
 
 
 
 
Six months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising
$
175,162

 
$
142,622

 
23
%
Political advertising
42,285

 
1,229

 
3,341
%
Other
63,935

 
50,056

 
28
%
Total revenues
281,382

 
193,907

 
45
%
Operating expenses
(190,084
)
 
(133,006
)
 
43
%
Operating profit
$
91,298

 
$
60,901

 
50
%
Operating profit margin
32.4
%
 
31.4
%
 
 

Revenues
Local media revenues increased 50 percent in the second quarter and 45 percent in the first six months of fiscal 2015 primarily reflecting revenues from acquisitions and higher political advertising related to the November 2014 elections. Political advertising revenues totaled $29.3 million in the second quarter and $42.3 million in the first six months of the current fiscal year compared with $0.7 million in the prior-year second quarter and $1.2 million in the prior-year six-month period. Political revenues from acquisitions accounted for almost 25 percent of the increase in political advertising revenues in both periods. 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 increased 22 percent in the second quarter due primarily to the addition of $21.1 million of non-political revenue from acquisitions and 23 percent in the first six months of fiscal 2015 due primarily to the addition of $38.3 million of non-political revenue from acquisitions. Local non-political advertising revenues grew 20 percent in the second quarter and 22 percent for the first six months of fiscal 2015. National non-political advertising increased 22 percent as compared to the prior-year second quarter and 21 percent for the first half of fiscal 2015. Online advertising for the second quarter and first six months of fiscal 2015 increased 54 percent and 49 percent as compared to the prior-year periods, respectively, primarily due to the addition of the acquisitions.

Other revenues increased 26 percent in the second quarter primarily due to the addition of $5.6 million from acquisitions and increased retransmission fees of $2.3 million. They grew 28 percent in the six-month period primarily due to the addition of $10.2 million from acquisitions and increased retransmission fees of $5.4 million.

Operating Expenses
Local media operating expenses increased 47 percent in the second quarter of fiscal 2015. Approximately 60 percent of the increase was due to the addition of acquisition operating expenses. In addition, programming fees paid to the networks increased $4.4 million and legal services expense increased $2.7 million, while the Company incurred severance and related benefit accruals of $1.7 million and video production fixed assets write-downs of

20


$1.2 million related to recent performance improvement plans. Local media operating expenses increased 43 percent in the first six months of fiscal 2015. Approximately 65 percent of the increase was due to the addition of acquisition operating expenses. In addition, programming fees paid to the networks increased $8.7 million and legal services expense increased $2.4 million, while the Company incurred severance and related benefit accruals of $1.7 million and write-downs on video production fixed assets of $1.2 million related to recent performance improvement plans.

Operating Profit
Local media operating profit increased 56 percent in the second quarter of fiscal 2015 and 50 percent in the first six months compared with the prior-year periods reflecting the increase in political advertising revenues as well as the addition of the acquisitions.


NATIONAL MEDIA

National media operating results were as follows:

Three months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Advertising
$
116,774

 
$
114,543

 
2
 %
Circulation
59,468

 
67,733

 
(12
)%
Other
66,139

 
67,418

 
(2
)%
Total revenues
242,381

 
249,694

 
(3
)%
Operating expenses
(216,274
)
 
(221,624
)
 
(2
)%
Operating profit
$
26,107

 
$
28,070

 
(7
)%
Operating profit margin
10.8
%
 
11.2
%
 
 
 
 
 
 
 
 
Six months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Advertising
$
242,006

 
$
248,227

 
(3
)%
Circulation
125,353

 
143,467

 
(13
)%
Other
121,348

 
124,899

 
(3
)%
Total revenues
488,707

 
516,593

 
(5
)%
Operating expenses
(433,705
)
 
(460,447
)
 
(6
)%
Operating profit
$
55,002

 
$
56,146

 
(2
)%
Operating profit margin
11.3
%
 
10.9
%
 
 

Revenues
National media advertising revenues increased 2 percent in the second quarter whereas they decreased 3 percent for the first six months of fiscal 2015. Magazine advertising revenues declined 11 percent in the second quarter and 10 percent in the first six months of fiscal 2015. More than 45 percent of the decline in magazine advertising revenues was due to the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication. Total advertising pages declined in the mid to high-teens on a percentage basis. Excluding Ladies' Home Journal, they decreased in the low-teens, with most of our titles showing declines. Among our core advertising categories, prescription drugs showed strength while most other categories were weaker. Online advertising revenues in our digital and mobile media operations increased 44 percent in the second quarter and 33 percent in the first six months of fiscal 2015 primarily due to acquisitions and strong performance at Allrecipes.com.


21


Magazine circulation revenues decreased 12 percent in the second quarter and 13 percent in the first six months of fiscal 2015. While subscription revenues decreased in the low-teens on a percentage basis, newsstand revenues declined more than 10 percent in the second quarter and more than 20 percent in the first six months of fiscal 2015. The decrease in subscription revenues was primarily due to the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication. The decline in newsstand revenues was primarily due to overall weaker demand and a wholesaler disruption in the newsstand channel.

Other revenues decreased 2 percent in the second quarter primarily due to declines in list rental revenues in our magazine operations. Other revenues decreased 3 percent in the first six months of fiscal 2015 primarily due to declines in marketing and print services revenues and list rental revenues in our magazine operations.

Operating Expenses
National media operating expenses decreased 2 percent in the second quarter and 6 percent in the first six months of fiscal 2015.

For the second quarter, the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication reduced operating expenses by $10.2 million. Circulation expenses decreased $3.9 million. Paper costs declined $2.1 million primarily due to the decrease in printing volumes. In addition to the decrease in the volume of paper used, paper expense also decreased due to a mid-single digit decline in average paper prices as compared to the prior-year period. Editorial costs declined $1.4 million. These decreases were partially offset by the addition of expenses from acquisitions of $10.1 million and a restructuring severance and related benefits accrual of $3.6 million related to a business realignment in our digital business and other selected workforce reductions.

For the first six months of fiscal 2015, the conversion of Ladies' Home Journal reduced operating expenses by $21.7 million. Paper costs declined $5.2 million primarily due to the decrease in printing volumes. In addition to the decrease in the volume of paper used, paper expense also decreased due to a mid-single digit decline in average paper prices as compared to the prior-year period. Circulation expenses declined $5.1 million. Editorial costs decreased $1.9 million. Payroll and related costs declined $2.2 million. These declines were partially offset by expenses from acquisitions of $10.1 million and a restructuring severance and related benefits accrual of $3.6 million related to a business realignment in our digital business and other selected workforce reductions.

Operating Profit
National media operating profit decreased 7 percent in the second quarter as the $3.6 million restructuring accrual and a decline of magazine operating profit of $3.3 million more than offset increase interactive media operating profit of $4.8 million. National media operating profit declined 2 percent in the first six months of fiscal 2015 as a decline of magazine operating profit of $9.4 million and the $3.6 million restructuring accrual more than offset operating profit improvements in interactive media of $9.4 million, Meredith Xcelerated Marketing of $1.9 million, and brand licensing of $1.0 million.


UNALLOCATED CORPORATE EXPENSES

Unallocated corporate expenses are general corporate overhead expenses not attributable to the operating groups. These expenses were as follows:

Unallocated Corporate Expenses
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Three months ended December 31,
$
12,231

 
$
11,394

 
7
%
Six months ended December 31,
24,586

 
22,338

 
10
%


22


Unallocated corporate expenses increased 7 percent in the second quarter and 10 percent in the first six months of fiscal 2015 compared with the prior-year periods. The second quarter increase was primarily due to an increase in performance-based incentive accruals. The increase in the first six months of fiscal 2015 was primarily due to an increase in charitable contributions.


CONSOLIDATED

Consolidated Operating Expenses
Consolidated operating expenses were as follows:

Three months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
140,283

 
$
132,216

 
6
%
Selling, general, and administrative
175,452

 
158,341

 
11
%
Depreciation and amortization
14,308

 
11,590

 
23
%
Operating expenses
$
330,043

 
$
302,147

 
9
%
 
 
 
 
 
 
Six months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
282,170

 
$
272,993

 
3
%
Selling, general, and administrative
339,128

 
319,413

 
6
%
Depreciation and amortization
27,077

 
23,385

 
16
%
Operating expenses
$
648,375

 
$
615,791

 
5
%

Fiscal 2015 production, distribution, and editorial costs increased 6 percent in the second quarter and 3 percent in the first six months as compared to the prior-year periods. For the second quarter, the addition of local media acquisition expenses of $10.5 million and increases in programming fees paid to the networks of $4.4 million were partially offset by a reduction in Ladies Home Journal expenses of $5.0 million and declines in paper expense of $2.1 million. For the first six months of fiscal 2015, the addition of local media acquisition expenses of $20.5 million and increases in programming fees paid to the networks of $8.7 million were partially offset by a reduction in Ladies Home Journal expenses of $10.2 million and declines in paper expense of $5.2 million. In addition, customer relationship marketing expenses declined $5.5 million in the six-month period primarily due to a change in product mix.

Selling, general, and administrative expenses increased 11 percent in the second quarter and 6 percent in the first six months of fiscal 2015. For the second quarter, the addition of acquisition expenses of $15.9 million, severance and related benefit accruals of $5.3 million, increases in performance-based incentive accruals of $1.9 million, increases in consulting costs of $1.2 million, and increases in transaction costs of $1.2 million more than offset a reduction in Ladies Home Journal expenses of $5.2 million and a decline in circulation expenses of $3.9 million. For the first six months of fiscal 2015, the addition of acquisition expenses of $22.6 million, severance and related benefit accruals of $5.3 million, charitable contributions of $1.5 million, and increases in transaction costs of $1.2 million more than offset a reduction in Ladies Home Journal expenses of $11.6 million, a decline in circulation expenses of $5.1 million, and lower payroll and related costs of $1.9 million. Customer relationship marketing expenses increased $4.6 million in the six-month period primarily due to a change in product mix.

Depreciation and amortization expense increased 23 percent in the second quarter and 16 percent in the first six months of fiscal 2015. Due to restructuring plans committed to by management during the second quarter of fiscal 2015, video production fixed assets were deemed to be impaired and were written down by $1.2 million. Excluding these impairments, depreciation and amortization expense increased primarily due to local media acquisitions.


23


Income from Operations
Income from operations increased 33 percent in the second quarter and 29 percent in the first six months of fiscal 2015. The increase in income from operations in the second quarter was primarily due to the addition of local media acquisitions operating profit of $13.0 million, higher operating profits in our local media segment of $9.8 million, and improved operating results in our national media interactive media operations of $4.8 million partially offset by restructuring charges of $6.7 million and declines in the operating profit of our magazine operations of $3.3 million. For the first six months of fiscal 2015, the addition of local media acquisitions operating profit of $19.2 million, higher operating profits in our local media segment of $14.3 million, and improved operating results in our national media interactive media operations of $9.4 million were partially offset by restructuring charges of $6.7 million and declines in the operating profit of our magazine operations of $9.4 million.

Net Interest Expense
Net interest expense increased to $4.8 million in the fiscal 2015 second quarter compared with $2.6 million in the prior-year second quarter. For the six months ended December 31, 2014, net interest expense was $9.0 million versus $5.3 million in the first six months of fiscal 2014. Average long-term debt outstanding was $771.1 million in the second quarter of fiscal 2015 and $747.1 million for the six-month period compared with $357.5 million in the prior-year second quarter and $356.3 million in the prior-year six-month period. The Company's approximate weighted average interest rate was 2.4 percent in the first six months of fiscal 2015 and 3.0 percent in the first six months of fiscal 2014.

Income Taxes
Our effective tax rate was 38.2 percent in the second quarter and 38.8 percent in the first six months of fiscal 2015 as compared to 38.1 percent in the second quarter and 38.9 percent in the first six months of fiscal 2014.

Net Earnings and Earnings per Share
Net earnings were $39.6 million ($0.87 per diluted share) in the quarter ended December 31, 2014, up 30 percent from $30.6 million ($0.67 per diluted share) in the prior-year second quarter. For the six months ended December 31, 2014, net earnings were $69.0 million ($1.52 per diluted share), an increase of 26 percent from prior-year six months earnings of $54.6 million ($1.20 per diluted share). The increases in net earnings were primarily due to the growth in income from operations as discussed above reduced by increased interest expense. Both average basic and diluted shares outstanding decreased slightly in the current year periods.


LIQUIDITY AND CAPITAL RESOURCES

Six months ended December 31,
2014
 
2013
 
Change

(In thousands)
 
 
 
 
 
Net earnings
$
68,956

 
$
54,610

 
26
%
Cash flows provided by operating activities
$
74,369

 
$
60,687

 
23
%
Cash flows used in investing activities
(195,799
)
 
(12,151
)
 
1,511
%
Cash flows provided by (used in) financing activities
102,966

 
(50,327
)
 
n/m

Net decrease in cash and cash equivalents
$
(18,464
)
 
$
(1,791
)