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10-Q: MEREDITH CORP5:07PM ET on Monday Apr 27, 2015

Management's Discussion and Analysis of Financial Condition and Results Item 2. 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 220 million consumers monthly, including 100 million unduplicated women and 60 percent of American millennial women. Meredith is the leader at 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, Allrecipes and Shape. 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 65 percent of the Company's $1.2 billion in revenues in the first nine months of fiscal 2015 while the local media segment contributed 35 percent.

LOCAL MEDIA

Local media derives the majority of its revenues-76 percent in the first nine 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 47 percent of national media's first nine 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 29 percent of national media's first nine months' revenues. Circulation revenues result from the sale of magazines to consumers

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 24 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 NINE MONTHS FISCAL 2015 FINANCIAL OVERVIEW

Meredith completed several strategic acquisitions during the first nine months 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; the December 2014 acquisitions of WALA, the Fox affiliate in Mobile, Alabama-Pensacola, Florida and of Selectable Media; and the February 2015 acquisition of the Shape brand and related digital assets.

In October 2014, the Company entered into a $100.0 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 pre-tax restructuring charges totaling $16.6 million. The restructuring charges include severance and related benefit costs of $14.7 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 $0.7 million.

Local media revenues increased 39 percent and operating profit rose 40 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 3 percent as compared to the prior-year period as declines in the revenues of our magazine operations of $69.8 million more than offset revenues from acquisitions of $38.0 million and increased revenues in our interactive media operations of $8.8 million. Approximately 45 percent of the decline in revenues of our magazine operations was due to the prior year conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication. National media operating profit increased 12 percent as the lack of a $10.3 million intangible impairment charge as recorded in the prior year, improved operating results in our digital and mobile operations of $8.5 million, operating profit from acquisitions of $3.9 million, and increased operating profit in our customer relationship marketing operations of $3.5 million more than offset a decline of magazine operating results of $14.5 million.

Diluted earnings per share increased 29 percent to $2.08 from $1.61 in the prior-year first nine months.

                             RESULTS OF OPERATIONS
Three months ended March 31,             2015            2014        Change
(In thousands except per share data)
Total revenues                       $   398,179     $   367,414          8 %
Operating expenses                      (351,073 )      (336,185 )        4 %
Income from operations               $    47,106     $    31,229         51 %
Net earnings                         $    25,256     $    18,486         37 %
Diluted earnings per share                  0.56            0.41         37 %
Nine months ended March 31,              2015            2014        Change
(In thousands except per share data)
Total revenues                       $ 1,168,268     $ 1,077,914          8 %
Operating expenses                      (999,448 )      (951,976 )        5 %
Income from operations               $   168,820     $   125,938         34 %
Net earnings                         $    94,212     $    73,096         29 %
Diluted earnings per share                  2.08            1.61         29 %

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 nine months ended March 31, 2015, 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 10­K (Form 10­K) for the year ended June 30, 2014.

ACQUISITIONS

During the first nine-months 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, the December 2014 acquisition of Selectable Media, and the February 2015 acquisition of the Shape brand and its related digital assets 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.

LOCAL MEDIA
Local media operating results were as follows:
Three months ended March 31,    2015          2014       Change
(In thousands)
Non-political advertising    $  87,752     $  69,796         26  %
Political advertising              279           532        (48 )%
Other                           34,850        27,406         27  %
Total revenues                 122,881        97,734         26  %
Operating expenses             (91,461 )     (71,038 )       29  %
Operating profit             $  31,420     $  26,696         18  %
Operating profit margin           25.6 %        27.3 %
Nine months ended March 31,     2015          2014       Change
(In thousands)
Non-political advertising    $ 262,914     $ 212,418         24  %
Political advertising           42,564         1,761      2,317  %
Other                           98,785        77,462         28  %
Total revenues                 404,263       291,641         39  %
Operating expenses            (281,545 )    (204,044 )       38  %
Operating profit             $ 122,718     $  87,597         40  %
Operating profit margin           30.4 %        30.0 %

Revenues

Other revenues increased 27 percent in the third quarter primarily due to the addition of $6.0 million from acquisitions and increased retransmission fees of $3.5 million. They grew 28 percent in the nine-month period primarily due to the addition of $16.1 million from acquisitions and increased retransmission fees of $8.9 million.

Operating Expenses

addition, programming fees paid to the networks increased $10.2 million and legal services expense increased $2.4 million, while the Company incurred severance and related benefit accruals of $2.3 million and write-downs on video production fixed assets of $1.2 million related to recent performance improvement plans.

Operating Profit

NATIONAL MEDIA
National media operating results were as follows:
Three months ended March 31,    2015          2014       Change
(In thousands)
Advertising                  $ 117,979     $ 111,847          5  %
Circulation                     96,037        96,078          -  %
Other                           61,282        61,755         (1 )%
Total revenues                 275,298       269,680          2  %
Operating expenses            (251,838 )    (256,066 )       (2 )%
Operating profit             $  23,460     $  13,614         72  %
Operating profit margin            8.5 %         5.0 %
Nine months ended March 31,     2015          2014       Change
(In thousands)
Advertising                  $ 359,985     $ 360,074          -  %
Circulation                    221,390       239,545         (8 )%
Other                          182,630       186,654         (2 )%
Total revenues                 764,005       786,273         (3 )%
Operating expenses            (685,543 )    (716,513 )       (4 )%
Operating profit             $  78,462     $  69,760         12  %
Operating profit margin           10.3 %         8.9 %

Revenues

Magazine circulation revenues were flat in the third quarter. They decreased 8 percent in the first nine months of fiscal 2015. Subscription revenues increased in the low-single digits on a percentage basis in the third quarter but were down in the mid-single digits for the nine-month period. For the third quarter, subscription revenues from acquisitions of $10.5 million more than offset a decline in subscription revenues of $6.6 million from the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication. The fluctuation in subscription revenues for the nine-month period was primarily due to the conversion of Ladies' Home Journal. Newsstand revenues declined in the mid-to-upper teens on a percentage basis in the third quarter and first nine months of fiscal 2015. The declines in newsstand revenues were primarily due to overall weaker demand and a wholesaler disruption in the newsstand channel.

Other revenues decreased 1 percent in the third quarter primarily due to declines in revenues in our customer relationship marketing operations. Other revenues decreased 2 percent in the first nine months of fiscal 2015 primarily due to declines in list rental revenues in our magazine operations.

Operating Expenses

For the third quarter, the conversion of Ladies' Home Journal from a monthly subscription magazine to a newsstand-only special interest publication reduced operating expenses by $13.5 million. In the prior-year third quarter, an intangible assets impairment charge of $10.3 million was recorded. Circulation expenses decreased $3.5 million. These decreases were partially offset by the addition of expenses from acquisitions of $24.1 million.

For the first nine months of fiscal 2015, the conversion of Ladies' Home Journal reduced operating expenses by $35.3 million. In the prior-year, an intangible assets impairment charge of $10.3 million was recorded. Circulation expenses declined $8.9 million. Paper costs declined $6.5 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 decreased $3.5 million. These declines were partially offset by expenses from acquisitions of $34.1 million.

Operating Profit

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   2015       2014     Change
(In thousands)
Three months ended March 31,   $ 7,774    $ 9,081       (14 )%
Nine months ended March 31,     32,360     31,419         3  %

Unallocated corporate expenses decreased 14 percent in the third quarter. They increased 3 percent in the first nine months of fiscal 2015 compared with the prior-year period. The third quarter decrease was primarily due to a decrease in consulting expenses. The increase in the first nine months of fiscal 2015 was primarily due to an increase in charitable contributions partially offset by a decrease in consulting expenses.

CONSOLIDATED
Consolidated Operating Expenses
Consolidated operating expenses were as follows:
Three months ended March 31,               2015         2014      Change
(In thousands)
Production, distribution, and editorial $ 154,448    $ 144,766         7  %
Selling, general, and administrative      182,015      168,386         8  %
Depreciation and amortization              14,610       23,033       (37 )%
Operating expenses                      $ 351,073    $ 336,185         4  %
Nine months ended March 31,                2015         2014      Change
(In thousands)
Production, distribution, and editorial $ 436,618    $ 417,759         5  %
Selling, general, and administrative      521,143      487,799         7  %
Depreciation and amortization              41,687       46,418       (10 )%
Operating expenses                      $ 999,448    $ 951,976         5  %

Fiscal 2015 production, distribution, and editorial costs increased 7 percent in the third quarter and 5 percent in the first nine months as compared to the prior-year periods. For the third quarter, the addition of acquisition expenses of $19.6 million was partially offset by a reduction in Ladies Home Journal expenses of $6.6 million. For the first nine months of fiscal 2015, the addition of acquisition expenses of $41.1 million and increases in programming fees paid to the networks of $10.2 million were partially offset by a reduction in Ladies Home Journal expenses of $16.8 million and declines in paper expense of $6.5 million and editorial expenses of $3.5 million. In addition, customer relationship marketing expenses declined $7.5 million in the nine-month period primarily due to a change in product mix.

Selling, general, and administrative expenses increased 8 percent in the third quarter and 7 percent in the first nine months of fiscal 2015. For the third quarter, the addition of acquisition expenses of $21.2 million and increases in performance-based incentive accruals of $1.5 million, more than offset a reduction in Ladies Home Journal expenses of $6.9 million and a decline in circulation expenses of $3.5 million. For the first nine months of fiscal 2015, the addition of acquisition expenses of $43.8 million, increased severance and related benefit accruals of $6.2 million, increases in performance-based incentive accruals of $2.1 million, and charitable contributions of $1.5 million more than offset a reduction in Ladies Home Journal expenses of $18.5 million and a decline in circulation expenses of $8.9 million. Customer relationship marketing expenses increased $5.2 million in the nine-month period primarily due to a change in product mix.

Depreciation and amortization expense decreased 37 percent in the third quarter and 10 percent in the first nine months of fiscal 2015. In the third quarter of fiscal 2014, an impairment charge of $10.3 million related to trademarks and customer lists was recorded. No such impairment charge has been taken in fiscal 2015. The decrease in deprecation and amortization expense due to the lack of an impairment charge in the current fiscal year was partially offset by increased depreciation and amortization from acquisitions of $3.7 million in the third quarter and $8.7 million in the first nine months of fiscal 2015.

Income from Operations

Net Interest Expense

Income Taxes

Net Earnings and Earnings per Share

                        LIQUIDITY AND CAPITAL RESOURCES
Nine months ended March 31,                    2015          2014       Change
(In thousands)
Net earnings                                $  94,212     $  73,096         29  %
Cash flows provided by operating activities $ 123,295     $  91,357         35  %
Cash flows used in investing activities      (191,528 )    (205,137 )       (7 )%
Cash flows provided by financing activities    51,304       108,227        (53 )%
Net decrease in cash and cash equivalents   $ (16,929 )   $  (5,553 )      205  %

OVERVIEW

Meredith's primary source of liquidity is cash generated by operating . . .

Apr 27, 2015

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