RDA Holding Co. Announces Results for the Third Quarter and Nine Months Ended September 30, 2010

NEW YORK, Nov. 4, 2010 /PRNewswire-FirstCall/ -- RDA Holding Co., parent company of The Reader's Digest Association, Inc. (together with its subsidiaries and affiliated entities, "RDA"), today reported results for the third quarter and nine months ended September 30, 2010.  

Mary G. Berner, President and Chief Executive Officer, commented, "We are pleased to announce that our Board of Directors has approved the return of $50 million of cash to stockholders in the form of a share repurchase.  From a financial perspective, despite revenue declines largely due to the deconsolidation of our UK business in the first quarter, fair value adjustments, and the effects of the managed decline of certain publications, products and markets, we continued to see improvements in our LTM consolidated EBITDA which increased 10% over last year.  In addition, despite continued uncertainties in the global macro environment, we expect full year 2010 consolidated EBITDA of $165-$175 million, which includes $12 million of investments in digital initiatives.

"From a strategic standpoint, we launched English20, one of our key initiatives to grow the business.  We also continued to capitalize on opportunities in both digital and print advertising, and as a result, we generated an improvement in advertising sales in our lifestyle community properties during the quarter.  In addition, we made progress against our goal of growing the percentage of revenue derived from digital sources and saw increases in unique visitors to our Allrecipes.com, Tasteofhome.com, Readersdigest.com and rachaelraymag.com websites.  While we are pleased with some of our progress in the quarter, we remain focused on our strategic plan designed to return our business to consistent revenue growth."

Third Quarter 2010 Highlights and Summary Results

• Revenues were $341.8 million in the third quarter of 2010 compared with $481.4 million in the third quarter of 2009. The decline in revenues was due primarily to the absence of revenue contributions from the UK business ("RDA UK") following its deconsolidation in the first quarter, amortization of fair value adjustments, and movements in foreign currency translation.  Excluding the negative effects of the deconsolidation of RDA UK ($22.7 million), fair value adjustments ($19.4 million), and foreign exchange translation ($4.8 million), revenues in the third quarter of 2010 declined $92.7 million, or 20.1%, compared to the prior year period. Revenues were also impacted by the frequency reduction from three issues to two issues in the quarter and the planned rate base reduction of Reader's Digest magazine in the U.S. In addition, lower response rates in some international markets, declines in sales of our Ab Circle Pro fitness product in the Lifestyle & Entertainment Direct segment and the closure or sale of unprofitable or marginally profitable product lines also affected revenues during the period.
• Operating loss for all of the Company's segments combined was $9.5 million during the quarter, compared with a loss of $5.2 million in the same period of 2009. The operating loss was impacted by the factors that affected revenue as well as additional investment in digital products.  These factors were partially offset by cost savings initiatives and the absence of unprofitable and marginally profitable businesses that were discontinued in the prior year, as well as increases in advertising revenue, both print and digital, across several of our major brands.    
• Consolidated EBITDA decreased to a loss of $10.6 million in the third quarter of 2010 compared with a loss of $5.1 million in the same period of 2009, and was impacted by the same factors that affected our segment operating results.
• Consolidated EBITDA for the last twelve months ended September 30, 2010 increased 10.0% to $165.4 million from approximately $150.4 million in the comparable period of 2009. Cash and cash equivalents were $149.9 million as of September 30, 2010, down $45.8 million from September 30, 2009 principally because the Company was in the midst of its restructuring in the prior year.

 

Third Quarter 2010 Segment Results

The Company classifies its segments during the third quarter of 2010 into six reportable segments: United States, Europe, Asia Pacific & Latin America ("APLA"), Canada, Lifestyle & Entertainment Direct ("LED"), and Other. These segments operate under two business lines: branded communities and direct marketing.

The United States segment is comprised of the Company's branded communities businesses, consisting of the Reader's Digest community and lifestyle communities (Food & Entertaining, Home & Garden, and Do-It-Yourself).

The Company's Europe, APLA and Canada segments primarily consist of the direct marketing operations in those regions.  

The LED segment primarily consists of the Company's direct response television ("DRTV") marketing business and the Other segment primarily consists of the Weekly Reader Publishing Group branded community.

Summary of reportable segment results

United States

In the third quarter, revenues for the United States business segment decreased $21.8 million, or 14.7%, to $126.4 million as compared with $148.2 million during the third quarter of 2009.  The majority of the decline was attributable to efforts initiated in January 2010 to increase profitability and cash flows for Reader's Digest magazine in the U.S., including a frequency reduction from three issues to two issues in the quarter and the planned rate base reduction. The closure and sale of unprofitable or marginally profitable product lines and the elimination of certain poorly performing special interest and seasonal publications also contributed to the decline. The declines were offset in part by higher advertising revenues at Allrecipes.com, Taste of Home magazine and other lifestyle community publications.

Operating profit for the United States business segment decreased $0.5 million, or 25%, to $1.5 million as compared with an operating profit of $2.0 million during the third quarter of 2009. The decrease was primarily driven by revenue declines and additional investment in digital products, which were partially offset by overhead expense savings as a result of headcount reductions announced in the second quarter of 2010 and the absence of unprofitable and marginally profitable businesses that were discontinued in the prior year, as well as increases in advertising revenue, both print and digital, as described above.

Europe

In the third quarter, Europe business segment revenues decreased $48.9 million, or 28.8%, to $120.9 million, as compared with $169.8 million in the third quarter of 2009. Excluding the negative effect of foreign currency translation of $9.5 million, the Europe segment experienced a net decrease in revenue of $39.4 million, or 23.2%, as compared to the third quarter of 2009. The decrease is largely due to the loss and deconsolidation of RDA UK combined with lower than expected response rates on mailing campaigns across the region, with the greatest impact experienced in Germany and Central Europe.

Operating loss within the Europe business segment for the third quarter 2010 decreased $3.5 million, or 28.2%, to an operating loss of $8.9 million as compared with $12.4 million in the third quarter of 2009. Excluding the positive effect of foreign currency translation of $0.9 million, the Europe segment experienced a net decrease in operating loss of $2.6 million, or 21.0%, as compared to the third quarter of 2009.  The improvement was, in part, driven by promotion savings and other cost savings resulting from headcount reductions initiated during the first half of 2010, partially offset by lower revenue described above, combined with an increase in promotional efforts in France and Russia.

Asia Pacific and Latin America (APLA)

In the third quarter, revenue in the APLA business segment decreased $6.7 million, or 10.1%, to $59.9 million, as compared with $66.6 million during the third quarter of 2009. Excluding the positive effect of foreign currency translation of $3.6 million, the APLA segment experienced a net decrease in revenue of $10.3 million, or 15.5%, as compared to the third quarter of 2009. The decrease was primarily due to lower mail quantities and lower response rates across all markets.  We also reduced promotional efforts on licensed products in the Australian and Asian markets and eliminated unprofitable or marginally profitable products, primarily in Mexico.

Operating loss within the APLA business segment for the third quarter 2010 increased $1.5 million, to an operating loss of $1.6 million as compared to $0.1 million in the third quarter of 2009.  The effect of foreign currency as compared to 2009 was minimal.  The increase in operating loss was mainly the result of the negative impact of revenue declines described above and a bad debt write-off related to a significant distributor of the Company's products who entered into bankruptcy during the period. These factors were largely offset by a reduction in the use of poorly performing outside lists, primarily in Asia; and the continued impact of headcount reductions and cost savings initiatives, mainly related to the centralization of customer support services in Asia and editorial functions in Asia and Latin America.  

Canada

In the third quarter, revenue in the Canada business segment decreased $3.1 million, or 11.9%, to $23.0 million, as compared with $26.1 million during the third quarter of 2009. Excluding the positive effect of foreign currency translation of $1.2 million, the Canada segment experienced a net decrease in revenue of $4.3 million, or 16.5%, as compared to the third quarter of 2009.  The decrease was the result of lower mail quantities and lower response rates across most of the Company's promotional campaigns for books and home entertainment products.  In addition, renewal rates on the Company's magazine products decreased, resulting in lower subscription revenue.

Operating profit within the Canada business segment for the third quarter 2010 decreased $0.2 million, or 11.8%, to an operating profit of $1.5 million as compared with $1.7 million for the third quarter of 2009.  The decrease was primarily due to the aforementioned revenue declines, offset, in part, by lower promotional costs resulting from fewer and better priced promotion packages and the continued impact of headcount reductions and cost savings initiatives.

Lifestyle & Entertainment Direct (LED)

In the third quarter, LED business segment revenue decreased $40.2 million, or 56.5%, to $30.9 million from $71.1 million during the third quarter of 2009.  The decrease was attributable to a decline in direct response and retail sales of the Ab Circle Pro as demand for this product decreased.  

Operating loss in the third quarter decreased $6.1 million to a loss of $1.1 million, as compared with operating profit of $5.0 million during the third quarter of 2009.  The operating profit decrease was driven by the decline in sales of the Ab Circle Pro.

Other

In the third quarter, the Other segment revenues decreased $0.4 million, or 9.8%, to $3.7 million, as compared with $4.1 million during the third quarter of 2009.  The decrease in revenues was driven by the elimination of the custom publishing business, and reduced circulation as a result of challenging state and local funding environments that adversely impacted customer educational budgets.  

The operating profit performance in the third quarter of 2010 improved to a loss of $0.9 million as compared with an operating loss of $1.4 million during the third quarter of 2009.  The operating profit improvement was principally due to promotional and overhead savings which more than offset the revenue declines.  

Corporate Unallocated

Corporate unallocated expenses for the third quarter were $22.3 million, as compared with $6.7 million for the third quarter of 2009.  The increase of $15.6 million was driven by amortization of intangibles and lower U.S. pension income in 2010, increased stock compensation expense in 2010 associated with new equity awards, and increased occupancy costs associated with interim duplicative lease expenses as we transition to our new facilities in New York, New York and White Plains, New York.

Impairment of Assets

During the third quarter, the Company recorded an estimated impairment charge of $41.1 million related to goodwill and other intangible assets.  This impairment charge was primarily related to changes in our long-term views related to the underperformance of the Other (Weekly Reader) segment ($26.4 million) and softness of revenues from Reader's Digest trademarked products in several geographic markets.

Third Quarter Product Results

Summary of revenue and approximated margins by product

Product Revenues and Margins

Our contribution margins overall remained flat on lower revenues.  

Books, music & video revenues declined primarily due to lower response rates and most notably in the Company's international direct marketing businesses. However, margins remained flat or improved based on lower product and promotion costs.

Magazine circulation and advertising revenue was down. This decrease is primarily the result of rate base and frequency reductions of the US version of Reader's Digest magazine, partially offset by improvements in advertising, both digitally and in print, in our lifestyle community, particularly in our food & entertaining community.

Revenues for non-published products increased by 13% but overall the margins were lower.  The margin decrease was driven by the mix of non-published product sales which in the LTM period ended September 2010 included more sales from the Ab Circle Pro, which has a lower average margin compared to our other non-published products.

Outlook

The Company expects fourth quarter consolidated EBITDA to be in the range of $89-$99 million, bringing full year 2010 consolidated EBITDA to a range of $165-$175 million.  The Company also expects full year 2010 pro forma free cash flow to a range of $80-$90 million, where pro forma free cash flow is defined as full year 2010 consolidated EBITDA less capital expenditures, cash taxes, working capital and cash interest.  

A number of uncertainties remain that may affect the Company's outlook as stated in this press release for the full year 2010.  These uncertainties are referenced below under "Forward-looking Statements" and in certain filings with the U.S. Securities and Exchange Commission.

Share Repurchase

The Company has decided to return $50 million to shareholders in the form of a share repurchase.  Details regarding the timing, pricing and form are under review and will be announced once determined.  Successful completion of the share repurchase will be dependent on various factors including market conditions and continued compliance with our debt covenants and applicable law.  The decision to return cash to shareholders reflects our confidence in our financial future, as well as our commitment to delivering shareholder value.  

Non-GAAP Financial Measures

The Company publicly reports its financial information in accordance with United States generally accepted accounting principles (GAAP). To facilitate external analysis of the Company's operating performance, the Company also presents financial information that may be considered "non-GAAP financial measures" under Regulation G and related reporting requirements promulgated by the Securities and Exchange Commission. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, GAAP financial measures. The following non-GAAP financial measures included in this release are used by the Company in its internal analysis of the business.

EBITDA is a common supplemental measure of performance used by investors and financial analysts.  Management believes that EBITDA provides an additional analytical tool to clarify the Company's results from core operations and delineate underlying trends.  The Company does not use EBITDA as a measure of liquidity because it includes certain contractual and non-discretionary expenditures.  Consolidated EBITDA is defined as EBITDA plus/minus adjustments related to the following major items: (a)  purchase and fresh start accounting; (b)  asset impairment charges; (c) results of disposed and discontinued entities; (d) restructuring and reorganization costs; (e) non-cash gains and losses; and (f) other items, such as stock based compensation and prior owner management fees.

Pro forma free cash flow, a non-GAAP measure, as used herein, is defined as 2010 consolidated EBITDA less (i) capital expenditures, (ii) cash taxes, (iii) working capital, and (iv) cash interest.  The Company believes that free cash flow is useful to investors and financial analysts as a performance measure.  The Company uses free cash flow in its internal evaluation of operating effectiveness and decisions regarding the allocation of resources.  Free cash flow is not defined by GAAP and should not be considered in isolation or as an alternative to net income (loss), income (loss) from continuing operations, net cash provided by (used in) operating, investing and financing activities or other financial data prepared in accordance with GAAP or as an indicator of the Company's operating performance.  Pro forma free cash flow as defined herein may differ from similarly titled measures presented by other companies.

The financial statements and reconciliations of non-GAAP to GAAP measures are available at www.rda.com.

Conference Call

The Company will host a conference call to discuss results for the third quarter of 2010 on Thursday, November 4, 2010 at 11 a.m. Eastern Time.

To listen to the conference call, please dial (866) 788-0542, or (857) 350-1680 internationally, and ask for Reader's Digest. The pass code is "47827021."

There will also be a PowerPoint presentation. To access the presentation, tune Web browsers to this URL: http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=71092&eventID=3461087.

An audio replay of the call will be available within 24 hours and will be posted for seven days on www.rda.com (Investor Relations / Company Reports).

About The Reader's Digest Association, Inc.

RDA is a global media and direct marketing company that connects more than 130 million consumers around the world with products and services from trusted brands. With offices in 43 countries, the Company reaches customers in 78 countries, publishes 91 magazines, including 50 editions of Reader's Digest, the world's largest-circulation magazine, operates 78 branded websites and sells 40 million books, music and video products across the world each year.  Further information about the Company can be found at www.rda.com.

Forward-looking Statements

This press release contains, and oral statements made from time to time by our representatives may contain, forward-looking statements that are based upon our current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. The words "expect," "anticipate," "estimate," "forecast," "initiative," "objective," "plan," "goal," "project," "outlook," "priorities," "target," "intend," "evaluate," "pursue," "commence," "seek," "may," "would," "could," "should," "believe," "potential," "continue," or the negative of any of those words or similar expressions is intended to identify forward-looking statements. All statements contained in this press release, other than statements of historical fact, including, without limitation, statements about our operations, financial condition and liquidity (including our expectations regarding the return of cash to shareholders), strategies, business initiatives, prospects, expectations regarding future events and our financial performance and the development of the industry in which we operate, are forward-looking statements that involve certain risks and uncertainties. While these statements represent the company's current judgment on what the future may hold, and the company believe these judgments are based upon reasonable assumptions, these statements are not guarantees of any events or financial results, and the company's actual results may differ materially. Important factors that could cause our actual results to be materially different from our expectations include those risks described in our Registration Statement on Form S-4 filed with the Securities and Exchange Commission on October 26, 2010.  You should not place undue reliance on the forward-looking statements contained in this press release. These forward-looking statements speak only as of the date on which the statements were made. The company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, except where expressly required by law.

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SOURCE RDA Holding Co.