10-Q 1 fy18q2dec10-q.htm FORM 10-Q Document

 
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, 2017
Commission file number 1-5128
image6a05.jpg
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, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act     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 January 31, 2018
 
Common shares
39,626,226

Class B shares
5,108,980

Total common and Class B shares
44,735,206

 
 



 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
 
Part I - Financial Information
 
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017
 
 
 
 
 
 
Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2017 and 2016
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2017 and 2016
 
 
 
 
 
 
Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended December 31, 2017
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016
 
 
 
 
 
 
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. Except where context otherwise suggests,
references to Meredith, the Company, we, our, or us do not include Time Inc. (Time) or its subsidiaries.



PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 

Meredith Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

Assets
 
December 31, 2017
 
June 30, 2017
(In thousands)
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
34,976


$
22,287

Accounts receivable, net
 
297,388


289,052

Inventories
 
21,410


21,890

Current portion of subscription acquisition costs
 
141,155


144,896

Current portion of broadcast rights
 
16,453


7,853

Other current assets
 
31,531


19,275

Total current assets
 
542,913

 
505,253

Property, plant, and equipment
 
555,265

 
549,536

Less accumulated depreciation
 
(354,395
)
 
(359,670
)
Net property, plant, and equipment
 
200,870

 
189,866

Subscription acquisition costs
 
77,384

 
79,740

Broadcast rights
 
23,397

 
21,807

Other assets
 
69,056

 
69,616

Intangible assets, net
 
926,809

 
955,883

Goodwill
 
907,558

 
907,458

Total assets
 
$
2,747,987

 
$
2,729,623

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
65,625

 
$
62,500

Current portion of long-term broadcast rights payable
 
16,847

 
9,206

Accounts payable
 
83,919

 
66,598

Accrued expenses and other liabilities
 
105,087

 
116,907

Current portion of unearned subscription revenues
 
202,249

 
204,459

Total current liabilities
 
473,727

 
459,670

Long-term debt
 
631,552

 
635,737

Long-term broadcast rights payable
 
24,623

 
22,454

Unearned subscription revenues
 
107,901

 
106,506

Deferred income taxes
 
263,242

 
384,726

Other noncurrent liabilities
 
100,104

 
124,558

Total liabilities
 
1,601,149

 
1,733,651

Shareholders' equity
 
 
 
 
Series preferred stock
 

 

Common stock
 
39,625

 
39,433

Class B stock
 
5,109

 
5,119

Additional paid-in capital
 
58,926

 
54,726

Retained earnings
 
1,060,614

 
915,703

Accumulated other comprehensive loss
 
(17,436
)
 
(19,009
)
Total shareholders' equity
 
1,146,838

 
995,972

Total liabilities and shareholders' equity
 
$
2,747,987

 
$
2,729,623


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,
2017
 
2016
 
 
2017
 
2016
(In thousands except per share data)
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Advertising
$
231,815

 
$
267,129

 
 
$
441,064

 
$
493,018

Circulation
67,672

 
66,805

 
 
136,599

 
135,473

All other
118,211

 
108,708

 
 
232,806

 
214,030

Total revenues
417,698

 
442,642

 
 
810,469

 
842,521

Operating expenses
 
 
 
 
 
 
 
 
Production, distribution, and editorial
158,746

 
148,625

 
 
314,548

 
298,853

Selling, general, and administrative
189,384

 
170,643

 
 
357,005

 
345,636

Depreciation and amortization
12,458

 
13,549

 
 
25,008

 
27,445

Impairment of long-lived assets

19,765

 

 
 
19,765

 

Total operating expenses
380,353

 
332,817

 
 
716,326

 
671,934

Income from operations
37,345

 
109,825

 
 
94,143

 
170,587

Interest expense, net
(5,171
)
 
(4,679
)
 
 
(10,249
)
 
(9,428
)
Earnings before income taxes
32,174

 
105,146

 
 
83,894

 
161,159

Income tax benefit (expense)
127,134

 
(33,341
)
 
 
108,855

 
(55,381
)
Net earnings
$
159,308

 
$
71,805

 
 
$
192,749

 
$
105,778

 
 
 
 
 
 
 
 
 
Basic earnings per share
$
3.55

 
$
1.61

 
 
$
4.30

 
$
2.38

Basic average shares outstanding
44,857

 
44,511

 
 
44,818

 
44,535

 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
3.49

 
$
1.58

 
 
$
4.23

 
$
2.33

Diluted average shares outstanding
45,601

 
45,378

 
 
45,603

 
45,385

 
 
 
 
 
 
 
 
 
Dividends paid per share
$
0.520

 
$
0.495

 
 
$
1.040

 
$
0.990


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,
2017
 
2016
 
 
2017
 
2016
(In thousands)
 
 
 
 
 
 
 
 
Net earnings
$
159,308

 
$
71,805

 
 
$
192,749

 
$
105,778

Other comprehensive income, net of income taxes
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans activity
326

 
537

 
 
653

 
1,075

Unrealized gains on interest rate swaps
664

 
2,354

 
 
920

 
3,822

Other comprehensive income, net of income taxes
990

 
2,891

 
 
1,573

 
4,897

Comprehensive income
$
160,298

 
$
74,696

 
 
$
194,322

 
$
110,675


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, 2017
$
39,433

$
5,119

$
54,726

$
915,703

 
$
(19,009
)
 
$
995,972

Net earnings



192,749

 

 
192,749

Other comprehensive income, net of income taxes




 
1,573

 
1,573

Shares issued under incentive plans, net of forfeitures
584


17,228


 

 
17,812

Purchases of Company stock
(402
)

(24,130
)

 

 
(24,532
)
Share-based compensation


10,060


 

 
10,060

Conversion of Class B to common stock
10

(10
)


 

 

Dividends paid
 
 
 
 
 
 
 
 
Common stock



(41,877
)
 

 
(41,877
)
Class B stock



(5,319
)
 

 
(5,319
)
Cumulative effect adjustment for adoption of Accounting Standards Update 2016-09


1,042

(642
)
 

 
400

Balance at December 31, 2017
$
39,625

$
5,109

$
58,926

$
1,060,614

 
$
(17,436
)
 
$
1,146,838


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,
2017
 
2016
(In thousands)
 
 
 
Cash flows from operating activities
 
 
 
Net earnings
$
192,749

 
$
105,778

Adjustments to reconcile net earnings to net cash provided by operating activities
 
 
 
Depreciation
15,799

 
17,885

Amortization
9,209

 
9,560

Share-based compensation
10,060

 
9,408

Deferred income taxes
(122,065
)
 
21,879

Amortization of broadcast rights
9,643

 
8,740

Payments for broadcast rights
(10,584
)
 
(8,346
)
Gain on disposition of assets
(3,282
)
 

Provision for write-down of impaired assets
19,815

 
1,838

Fair value adjustments to contingent consideration
(1,316
)
 
(17,961
)
Excess tax benefits from share-based payments

 
(2,883
)
Changes in assets and liabilities
(18,456
)
 
(28,617
)
Net cash provided by operating activities
101,572

 
117,281

Cash flows from investing activities
 
 
 
Acquisitions of and investments in businesses
(3,000
)
 
(11,819
)
Additions to property, plant, and equipment
(28,809
)
 
(10,949
)
Proceeds from disposition of assets, net of cash sold
2,193

 

Net cash used in investing activities
(29,616
)
 
(22,768
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt
60,000

 
270,000

Repayments of long-term debt
(61,250
)
 
(288,125
)
Dividends paid
(47,196
)
 
(44,823
)
Purchases of Company stock
(24,532
)
 
(26,453
)
Proceeds from common stock issued
17,812

 
16,988

Payment of acquisition-related contingent consideration
(4,000
)
 
(4,000
)
Excess tax benefits from share-based payments

 
2,883

Other
(101
)
 
(1,465
)
Net cash used in financing activities
(59,267
)
 
(74,995
)
Net increase in cash and cash equivalents
12,689

 
19,518

Cash and cash equivalents at beginning of period
22,287

 
24,970

Cash and cash equivalents at end of period
$
34,976

 
$
44,488


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 (U.S. 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, 2017, filed with the SEC.

The condensed consolidated financial statements as of December 31, 2017, and for the three and six months ended December 31, 2017 and 2016, 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, 2017, were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

Adopted Accounting Pronouncements

ASU 2016-07—In March 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) simplifying the transition to the equity method of accounting. The new guidance eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The Company adopted this standard effective July 1, 2017. The adoption of this guidance did not have an impact on our results of operations, cash flows, or disclosures.

ASU 2016-09—In March 2016, as a part of its simplification initiative, the FASB issued guidance on the accounting for employee share-based payments. The new guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax treatment, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this standard effective July 1, 2017.

The adoption of this guidance resulted in the prospective recognition of realized excess tax benefits related to the exercise or vesting of share-based awards in our Condensed Consolidated Statements of Earnings instead of in additional paid-in capital within our Condensed Consolidated Balance Sheets. See Note 7 for discussion of the credits to income tax expense recorded in our Condensed Consolidated Statements of Earnings. Using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $1.0 million increase to additional paid-in capital, a $0.6 million reduction to retained earnings, and a $0.4 million reduction to deferred taxes to reflect the incremental share-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance. Presentation requirements for cash flows related to employee taxes paid using withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. We no longer classify excess tax benefits related to share-based awards as a financing cash inflow and an operating cash outflow. This classification requirement was

6


adopted prospectively and, as such, our Condensed Consolidated Statement of Cash Flows has not been retrospectively adjusted.

Pending Accounting Pronouncements

ASU 2017-12—In August 2017, the FASB issued guidance amending hedge accounting requirements. The purpose of this guidance is to better align a company's risk management activities and financial reporting requirements, and to simplify the application of hedge accounting. The effective date is the first quarter of fiscal 2020, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on our results of operations, cash flows, or disclosures.

ASU 2014-09—In May 2014, the FASB issued an accounting standards update that replaces existing revenue recognition guidance. The new guidance requires a company to recognize revenue for the transfer of promised goods or services equal to the amount it expects to receive in exchange for those goods or services. The guidance includes a five-step framework to determine the timing and amount of revenue to recognize related to contracts with customers. Additionally, the guidance requires new and significantly enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts as well as judgments made by a company when following the framework. The FASB continues to issue amendments to further clarify provisions of this guidance. These amendments will be effective upon adoption of the standard.

The Company will adopt the standard beginning July 1, 2018 (fiscal 2019). The two permitted transition methods are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized in the earliest period shown; or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. While a final decision has not been made, we currently anticipate adopting the standard using the modified retrospective method.

We are in the process of assessing and documenting the impact of the guidance on our current accounting policies and practices to identify material differences, if any, that would result from applying the new requirements to our revenue contracts. We continue to make progress on our revenue recognition analyses and are currently evaluating the impact, if any, on changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new guidance. As these analyses are completed, the Company will be better able to quantify the anticipated impact, if any, to our consolidated financial statements.


2. Acquisitions and Dispositions

On December 7, 2016, Meredith acquired the assets of a digital lead-generation company in the home services market, which has been rebranded Meredith Performance Marketing by the Company. During the first quarter of fiscal 2018, the provisional amount of goodwill was increased by $0.1 million, with a corresponding decrease to intangible assets.

On April 21, 2017, Meredith acquired WPCH-TV, an independent television station in Atlanta, Georgia, which was operated by Meredith prior to its acquisition.

Effective July 1, 2017, Meredith's national media group sold a 70 percent interest in Charleston Tennis LLC, which operates the Family Circle Tennis Center, to an unrelated third party. In return, Meredith received $0.6 million in cash and a note receivable for $8.5 million. The note receivable is due in annual installments over a period of 8 years. At December 31, 2017, there was $3.6 million in unamortized discount and an allowance of $2.8 million recorded against the note. This transaction generated a gain of $3.3 million, which was recorded in the selling, general, and administrative line of the Condensed Consolidated Statements of Earnings. Of this gain, $1.0 million related to the remeasurement of the retained investment. As Meredith retains a 30 percent interest, has a seat on the

7


board, and has approval rights over certain limited matters, Meredith now accounts for this investment under the equity method of accounting.


3. Inventories

Major components of inventories are summarized below. Of total net inventory values shown, 67 percent are under the last-in first-out (LIFO) method at December 31, 2017, and 65 percent at June 30, 2017.

(In thousands)
December 31, 2017
 
June 30, 2017
Raw materials
 
$
10,161

 
$
13,404

Work in process
 
11,351

 
8,665

Finished goods
 
1,188

 
1,111

 
 
22,700

 
23,180

Reserve for LIFO cost valuation
 
(1,290
)
 
(1,290
)
Inventories
 
$
21,410

 
$
21,890



4. Intangible Assets and Goodwill

Intangible assets consisted of the following:
 
December 31, 2017
 
 
June 30, 2017
(In thousands)
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Advertiser relationships
$
13,810

 
$
(12,772
)
 
$
1,038

 
 
$
18,610

 
$
(15,514
)
 
$
3,096

Customer lists
4,200

 
(525
)
 
3,675

 
 
7,280

 
(3,395
)
 
3,885

Other
21,325

 
(10,387
)
 
10,938

 
 
22,325

 
(9,850
)
 
12,475

Local media
 
 
 
 
 
 
 
 
 
 
 
 
Network affiliation agreements
229,309

 
(145,431
)
 
83,878

 
 
229,309

 
(142,216
)
 
87,093

Retransmission agreements
27,923

 
(12,808
)
 
15,115

 
 
27,923

 
(10,700
)
 
17,223

Other
1,670

 
(643
)
 
1,027

 
 
1,680

 
(472
)
 
1,208

Total
$
298,237

 
$
(182,566
)
 
115,671

 
 
$
307,127

 
$
(182,147
)
 
124,980

Intangible assets not
 
 
 
 
 
 
 
 
 
 
 
 
subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
National media
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
 
 
 
 
7,827

 
 
 
 
 
 
7,827

Trademarks
 
 
 
 
128,150

 
 
 
 
 
 
147,915

Local media
 
 
 
 
 
 
 
 
 
 
 
 
FCC licenses
 
 
 
 
675,161

 
 
 
 
 
 
675,161

Total
 
 
 
 
811,138

 
 
 
 
 
 
830,903

Intangible assets, net
 
 
 
 
$
926,809

 
 
 
 
 
 
$
955,883


Amortization expense was $9.2 million and $9.6 million for the six months ended December 31, 2017 and 2016, respectively. Annual amortization expense for intangible assets is expected to be as follows: $17.1 million in fiscal 2018, $14.6 million in fiscal 2019, $13.7 million in fiscal 2020, $9.7 million in fiscal 2021, and $7.3 million in fiscal 2022.

8


During the second quarter of fiscal 2018, Meredith made the strategic decision to no longer publish Fit Pregnancy and Baby magazine as a standalone title, rather including it as a feature within Parents magazine. This decision was determined to be a triggering event requiring Meredith to evaluate the trademarks within our Parents Network for impairment. The fair value of the trademarks are determined based on significant inputs not observable in the market. The reduction in advertising revenue caused by the change to Fit Pregnancy and Baby magazine, as well as updated revenue projections for the Parents Network resulted in an impairment to the trademarks. As such, during the quarter, the national media segment recorded a non-cash impairment charge of $19.8 million to partially impair the trademarks within our Parents Network. This impairment charge is recorded in the impairment of long-lived assets line in the Condensed Consolidated Statements of Earnings.

Changes in the carrying amount of goodwill were as follows:

Six months ended December 31,
2017
 
 
2016
(In thousands)
National
Media
 
Local
Media
 
Total
 
 
National
Media
 
Local
Media
 
Total
Balance at beginning of period
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
943,803

 
$
80,604

 
$
1,024,407

 
 
$
931,303

 
$
68,775

 
$
1,000,078

Accumulated impairment losses
(116,949
)
 

 
(116,949
)
 
 
(116,949
)
 

 
(116,949
)
Total goodwill
826,854

 
80,604

 
907,458

 
 
814,354

 
68,775

 
883,129

Activity during the period
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition adjustments
100

 

 
100

 
 
12,260

 

 
12,260

Balance at end of period
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
943,903

 
80,604

 
1,024,507

 
 
943,563

 
68,775

 
1,012,338

Accumulated impairment losses
(116,949
)
 

 
(116,949
)
 
 
(116,949
)
 

 
(116,949
)
Total goodwill
$
826,954

 
$
80,604

 
$
907,558

 
 
$
826,614

 
$
68,775

 
$
895,389



5. Restructuring Accrual

During the second quarter of fiscal 2018, management committed to a performance improvement plan including the strategic decision to no longer publish Fit Pregnancy and Baby magazine as a standalone title, rather including it as a feature within Parents magazine and other restructurings. These actions resulted in selected workforce reductions primarily in our national media group. In connection with this plan, the Company recorded pre-tax restructuring charges totaling $3.1 million including $3.0 million for severance and related benefit costs related to the involuntary termination of employees and other write-downs of $0.1 million. The majority of severance costs are being paid out over a 12-month period. The plan affects approximately 90 employees. The severance and related benefit costs are recorded in the selling, general, and administrative line of the Condensed Consolidated Statements of Earnings. The other write-downs are recorded in the production, distribution, and editorial line of the Condensed Consolidated Statements of Earnings.

During the second quarter of fiscal 2017, management committed to a performance improvement plan that included selected workforce reductions primarily in our national media group. In connection with this plan, the Company recorded pre-tax restructuring charges totaling $8.1 million including $7.6 million for severance and related benefit costs related to the involuntary termination of employees and other accruals of $0.3 million. The majority of severance costs have been paid out. The plan affected approximately 125 employees. The severance and related benefit costs and other accruals are recorded in the selling, general, and administrative line of the Condensed Consolidated Statements of Earnings. The Company also wrote down manuscript and art inventory by $0.2 million, which is recorded in the production, distribution, and editorial line of the Condensed Consolidated Statements of Earnings.


9


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

Six months ended December 31,
2017
 
2016
(In thousands)
 
 
 
Balance at beginning of period
$
8,674

 
$
7,388

Severance accruals
2,956

 
7,578

Cash payments
(4,946
)
 
(3,484
)
Reversal of excess accrual
(242
)
 
(13
)
Balance at end of period
$
6,442

 
$
11,469



6. Long-term Debt

Long-term debt consisted of the following:

(In thousands)
December 31, 2017
 
June 30, 2017
Variable-rate credit facilities
 
 
 
 
Asset-backed bank facility of $100 million, due 10/18/2019
 
$
75,000

 
$
75,000

Revolving credit facility of $200 million, due 11/30/2021
 
90,000

 
85,000

Term loan due 11/30/2021
 
234,375

 
240,625

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

 
50,000

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

 
100,000

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

 
150,000

Total long-term debt
 
699,375

 
700,625

Unamortized debt issuance costs
 
(2,198
)
 
(2,388
)
Current portion of long-term debt
 
(65,625
)
 
(62,500
)
Long-term debt
 
$
631,552

 
$
635,737


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, 2017, $174.9 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 of 4.50 percent at December 31, 2017, from Meredith Funding Corporation. The agreement was 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.

In October 2017, we renewed our asset-backed bank facility for an additional two-year period on terms substantially similar to those previously in place. The renewed facility was scheduled to expire in October 2019.

The Company held interest rate swap agreements to hedge variable interest rate risk on the $250.0 million floating rate senior notes and on $50.0 million of the term loan. The expiration of the swaps was as follows: $50.0 million in August 2018, $100.0 million in March 2019, and $150.0 million in August 2019. Under the swaps the Company paid fixed rates of interest (1.36 percent on the swap maturing in August 2018, 1.53 percent on the swap maturing in March 2019, and 1.76 percent on the swaps maturing in August 2019) and received variable rates of interest

10


based on the one to three-month London Interbank Offered Rate (LIBOR) (1.51 percent on the swap maturing in August 2018, 1.64 percent on the swap maturing in March 2019, and 1.48 percent on the swaps maturing in August 2019 as of December 31, 2017) on the $300.0 million notional amount of indebtedness. The swaps were 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 income 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 either December 31, 2017 or 2016.

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, 2017, the swaps were in a $1.1 million asset position. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to the swap agreements. The Company strives to manage this exposure through diversification and monitoring of the creditworthiness of the counterparties. There was $1.1 million potential loss that the Company would incur on the interest rate swaps if the counterparties were to fail to meet their obligations under the agreements at December 31, 2017. 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, 2017.

On January 31, 2018, in connection with the Company's acquisition of Time Inc. (Time), the Company repaid and terminated our existing indebtedness detailed above. Also on January 31, 2018, in connection with the Company's acquisition of Time, the Company entered into new debt facilities as described in Note 12, Subsequent Events.


7. Income Taxes

For the second quarter and first six months of fiscal 2018, Meredith recorded a tax benefit of $127.1 million and $108.9 million, respectively. This compares to tax expense recorded by the Company of $33.3 million and $55.4 million for the second quarter and first six months of fiscal 2017, respectively.

The "Tax Cuts and Jobs Act of 2017" (the Tax Reform Act) was signed into law on December 22, 2017. The Tax Reform Act significantly changed the United States (U.S.) corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35 percent to 21 percent effective for taxable years beginning on or after January 1, 2018, while also repealing the deduction for domestic production activities. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

Under the Tax Reform Act, a blended federal rate of 28 percent applies retroactive to the beginning of Meredith's fiscal 2018. This reduced rate had the effect of lowering fiscal 2018 tax expense by $4.4 million for amounts previously recognized in our first fiscal quarter. Meredith recorded this adjustment in its fiscal 2018 second quarter. In addition, absent the Tax Reform Act, Meredith estimates that second quarter tax expense on second quarter earnings would have been $3.7 million higher. Also as a result of the Tax Reform Act, Meredith remeasured its deferred tax assets, deferred tax liabilities, and tax reserves during its second fiscal quarter, resulting in a net tax benefit of $133.0 million. Deferred tax assets and liabilities expected to be recognized after June 30, 2018, were remeasured using the 21 percent U.S. corporate tax rate.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which provides guidance regarding how a company is to reflect provision amounts when necessary information is not yet available, prepared, or analyzed sufficiently to complete its accounting for the effect of the changes in the Tax Reform Act. The tax benefits described above, which represent all known and estimable impacts of the Tax Reform Act, reflect provisional amounts based on the Company’s current best estimates. These provisional amounts incorporate assumptions made based upon the Company’s current interpretations of the Tax Reform Act and may change as the Company receives

11


additional clarification and implementation guidance, and as data becomes available allowing a more precise scheduling of the deferred tax assets and liabilities including those related to intangible assets, fixed assets, and employee compensation. Adjustments to these provisional amounts through December 22, 2018, will be included in income from operations as an adjustment to tax expense in future periods.

Effective July 1, 2017, the Company adopted new accounting guidance related to share-based compensation. Under this new guidance, excess tax benefits and deficiencies are to be recognized as a discrete component of the income tax provision in the period they occur and not as an adjustment to additional paid-in capital. As such, we recognized an excess tax benefit of $2.1 million as a credit to income tax expense in our Condensed Consolidated Statements of Earnings in the first quarter of fiscal 2018 as the majority of the Company's annual share-based grants vest in the first quarter of each fiscal year. In the second quarter of fiscal 2018, an additional $1.0 million was recorded as a credit to income tax expense primarily for options exercised during the quarter. However, as a result of the change in the federal corporate tax rate due to the Tax Reform Act, these amounts were reduced in the aggregate by $0.6 million in the second quarter of fiscal 2018.

Additionally during the second quarter of fiscal 2018, the Company incurred $12.1 million of investment banking, legal, accounting, and other professional fees and expenses related to the acquisition of Time Inc. Approximately 40 percent of these acquisition-related expenses have been determined to be currently tax deductible. For further discussion of the acquisition, refer to Note 12. These costs are included in the selling, general, and administrative line in the Condensed Consolidated Statements of Earnings.


8. Pension and Postretirement Benefit Plans

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

 
Three Months
 
 
Six Months
Periods ended December 31,
2017
 
2016
 
 
2017
 
2016
(In thousands)
 
 
 
 
 
 
 
 
Pension benefits
 
 
 
 
 
 
 
 
Service cost
$
3,251

 
$
3,136

 
 
$
6,502

 
$
6,273

Interest cost
1,470

 
1,225

 
 
2,940

 
2,450

Expected return on plan assets
(2,616
)
 
(2,298
)
 
 
(5,232
)
 
(4,596
)
Prior service cost amortization
72

 
49

 
 
144

 
97

Actuarial loss amortization
513

 
897

 
 
1,026

 
1,794

Net periodic benefit costs
$
2,690

 
$
3,009

 
 
$
5,380

 
$
6,018

 
 
 
 
 
 
 
 
 
Postretirement benefits
 
 
 
 
 
 
 
 
Service cost
$
19

 
$
23

 
 
$
38

 
$
46

Interest cost
82

 
80

 
 
164

 
160

Prior service credit amortization
(85
)
 
(98
)
 
 
(170
)
 
(196
)
Actuarial gain amortization
(81
)
 
(77
)
 
 
(162
)
 
(155
)
Net periodic benefit credit
$
(65
)
 
$
(72
)
 
 
$
(130
)
 
$
(145
)

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



12


9. Earnings per Share

The following table presents the calculations of earnings per share:

 
Three Months
 
 
Six Months
Periods ended December 31,
2017
 
2016
 
 
2017
 
2016
(In thousands except per share data)
 
 
 
 
 
 
 
 
Net earnings
$
159,308

 
$
71,805

 
 
$
192,749

 
$
105,778

Basic average shares outstanding
44,857

 
44,511

 
 
44,818

 
44,535

Dilutive effect of stock options and equivalents
744

 
867

 
 
785

 
850

Diluted average shares outstanding
45,601

 
45,378

 
 
45,603

 
45,385

Earnings per share
 
 
 
 
 
 
 
 
Basic earnings per share
$
3.55

 
$
1.61

 
 
$
4.30

 
$
2.38

Diluted earnings per share
3.49

 
1.58

 
 
4.23

 
2.33


For the three months ended December 31, 2017 and 2016, antidilutive options excluded from the above calculations totaled 0.2 million (with a weighted average exercise price of $66.44) and 0.8 million (with a weighted average exercise price of $53.64), respectively.

For the six months ended December 31, 2017 and 2016, antidilutive options excluded from the above calculations totaled 0.4 million (with a weighted average exercise price of $63.18) and 0.5 million (with a weighted average exercise price of $53.98), respectively.

In the six months ended December 31, 2017 and 2016, options were exercised to purchase 0.5 million and 0.4 million common shares, respectively.


10. Fair Value Measurements

We 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 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.


13


The following table sets forth the carrying value and the estimated fair value of the Company's financial instruments not measured at fair value on a recurring basis:

 
December 31, 2017
 
 
June 30, 2017
(In thousands)
Carrying Value
 
Fair Value
 
 
Carrying Value
 
Fair Value
Broadcast rights payable
$
41,470

 
$
39,609

 
 
$
31,660

 
$
30,544

Total long-term debt
699,375

 
699,391

 
 
700,625

 
700,714


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 total 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, 2017
 
 
June 30, 2017
Other current assets
 
 
 
 
Interest rate swaps
$
480

 
 
$

Property, plant, and equipment
 
 
 
 
Corporate airplanes, held for sale

 
 
1,927

Other assets
 
 
 
 
Interest rate swaps
621

 
 
158

Accrued expenses and other liabilities
 
 
 
 
Contingent consideration
24,815

 
 
4,000

Interest rate swaps

 
 
602

Other noncurrent liabilities
 
 
 
 
Contingent consideration
4,080

 
 
30,211


The fair value of interest rate swaps was determined using discounted cash flows derived from market observable inputs including swap curves that are included in Level 2. The fair values of contingent consideration are significant unobservable inputs and thus represent Level 3 measurements. The key inputs used to determine the fair value of contingent consideration included projected financial performance of acquisitions and a probability-weighted discounted cash flow model. Estimated financial performance is based upon internally developed estimates based on industry knowledge and historical performance. The corporate airplanes fair value was also based on significant inputs not observable in the market and thus represents a Level 3 measurement.

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

(In thousands)
December 31, 2017
 
 
June 30, 2017
Trademarks 1
$
35,900

 
 
$

 
 
 
 
 
1   Represents the fair value of trademarks that were partially impaired during fiscal 2018. Not considered to be measured at fair market value as of June 30, 2017. For further discussion, refer to Note 4.

The fair value of the trademarks are determined based on significant inputs not observable in the market and thus represents a Level 3 measurement. The key assumptions used to determine the fair value includes discount rates,

14


estimated cash flows, royalty rates, and revenue growth rates. The discount rate used is based on several factors including market interest rates, a weighted average cost of capital analysis based on the target capital structure, and includes adjustments for market risk and company specific risk. Estimated cash flows are based upon internally developed estimates and the revenue growth rates are based on industry knowledge and historical performance.

Details of changes in the fair value of Level 3 contingent consideration, corporate airplanes, and trademarks are as follows:

Six months ended December 31,
2017
 
2016
(in thousands)
 
 
 
Contingent consideration
 
 
 
Balance at beginning of period
$
34,211

 
$
56,631

Additions due to acquisitions

 
7,681

Payments
(4,000
)
 
(4,000
)
Change in present value of contingent consideration 1
(1,316
)
 
(17,961
)
Balance at end of period
$
28,895

 
$
42,351

 
 
 
 
Corporate airplanes, held for sale
 
 
 
Balance at beginning of period
$
1,927

 
$
2,800

Sale of corporate airplanes
(1,927
)
 

Balance at end of period
$

 
$
2,800

 
 
 
 
Trademarks 2
 
 
 
Balance at beginning of year
$
55,665

 
$

Impairment
(19,765
)
 

Balance at end of period
$
35,900

 
$

 
 
 
 
1       Change in present value of contingent consideration is recorded in the selling, general, and administrative expense line on the Condensed Consolidated Statements of Earnings and is comprised of changes in estimated earn out payments based on projections of performance and the accretion of the present value discount.

2       Represents the fair value of trademarks, which were partially impaired during fiscal 2018. Not considered to be measured at fair market value as of June 30, 2017. For further discussion, refer to Note 4.


11. 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, 2017. There have been no material intersegment transactions.

There are two principal financial measures reported to the chief executive officer (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are operating profit and earnings before interest, taxes, depreciation, and amortization (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

15


authoritative guidance on disclosures about segments of an enterprise and related information, EBITDA is not presented below.

The following table presents financial information by segment:

 
Three Months
 
 
Six Months
Periods ended December 31,
2017
 
2016
 
 
2017
 
2016
(In thousands)
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
National media
$
247,441

 
$
259,345

 
 
$
486,401

 
$
506,638

Local media
170,257

 
183,297

 
 
324,068

 
335,883

Total revenues
$
417,698

 
$
442,642

 
 
$
810,469

 
$
842,521

 
 
 
 
 
 
 
 
 
Segment profit
 
 
 
 
 
 
 
 
National media
$
12,247

 
$
46,757

 
 
$
40,503

 
$
70,868

Local media
50,515

 
76,815

 
 
91,457

 
127,437

Unallocated corporate
(25,417
)
 
(13,747
)
 
 
(37,817
)
 
(27,718
)
Income from operations
37,345

 
109,825

 
 
94,143

 
170,587

Interest expense, net
(5,171
)
 
(4,679
)
 
 
(10,249
)
 
(9,428
)
Earnings before income taxes
$
32,174

 
$
105,146

 
 
$
83,894

 
$
161,159

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
National media
$
3,789

 
$
4,330

 
 
$
7,776

 
$
8,848

Local media
7,886

 
8,865

 
 
15,824

 
17,855

Unallocated corporate
783

 
354

 
 
1,408

 
742

Total depreciation and amortization
$
12,458

 
$
13,549

 
 
$
25,008

 
$
27,445



12. Subsequent Events

On January 31, 2018, Meredith completed its acquisition of all outstanding shares of Time Inc. (Time) for $18.50 per share, for a total purchase price of approximately $2.8 billion, including the repayment of Time's outstanding debt. This transaction creates a premier media and marketing company serving 200 million American consumers. Meredith's brands will now have a readership of more than 135 million and paid circulation of nearly 60 million. The acquisition also increased Meredith's digital position with approximately 170 million monthly unique visitors in the United States.

Meredith's results of operations will include Time beginning on February 1, 2018. The acquired business will be reported primarily within the national media segment. Currently, Time continues its efforts to finalize its consolidated financial statements for its year ended December 31, 2017, and such amounts are not yet available. As a result, we are unable to make disclosures required for business combinations related to pro forma revenue and earnings for the periods presented herein. In addition, due to the limited time since the date of the acquisition, the Company’s initial accounting for the business combination is incomplete as information regarding the assets and liabilities acquired as of January 31, 2018, is similarly not yet available. As a result, we are unable to make disclosures for such assets and liabilities, and contingencies acquired or other acquisition date fair value disclosures. The Company plans to provide this information in its Quarterly Report on Form 10-Q for the quarter ending March 31, 2018.

The purchase price was financed through a combination of debt, preferred equity and cash on hand. The debt financing consists of $1.8 billion of senior secured term loans (Term Loan B) maturing in 2025 and priced at

16


LIBOR plus 3.00 percent; $1.4 billion of senior unsecured notes maturing in 2026 and priced at 6.875 percent; and a five-year senior secured revolving credit facility for $350.0 million that is currently undrawn. The preferred equity represents a $650.0 million investment from a private equity firm. In exchange for the preferred equity investment, Meredith issued 650,000 shares of perpetual convertible redeemable non-voting Series A preferred stock (Series A preferred stock) as well as detachable warrants to purchase up to 1,625,000 shares of Meredith's common stock with an exercise price of $1.00 per share and options to purchase up to 875,000 shares of Meredith's common stock with an exercise price of $70.50 per share. From and after the seventh anniversary of the issuance date, the holders of the Series A preferred stock may elect to convert some or all of the Series A preferred stock into Meredith common stock at a ratio based on its Accrued Stated Value (as defined below) divided by the volume weighted average price of Meredith common stock for the 30 trading days immediately preceding the written notice of conversion. The Accrued Stated Value is an amount equal to: (i) the Stated Value ($1,000 multiplied by the number of shares of Series A preferred stock outstanding); plus (ii) any accrued and unpaid dividends thereof (including any accumulated dividends). The Series A preferred stock ranks senior to any other class or series of equity.

These proceeds were used to finance the acquisition, refinance certain existing debt of Time, refinance certain existing debt of Meredith, and pay transaction-related costs including $12.1 million which were incurred in the second quarter of fiscal 2018. These costs are included in the selling, general, and administrative line in the Condensed Consolidated Statements of Earnings.

The Meredith debt refinanced with the proceeds included $75.0 million outstanding under the asset-backed bank facility, $90.0 million outstanding under the revolving credit facility, $234.4 million under the term loan, $50.0 million under the 3.04 percent fixed rate unsecured senior notes, and $250.0 million under floating rate unsecured senior notes. These amounts are based on our debt balances as of December 31, 2017.

In conjunction with these prepayments of debt, the Company also settled the associated interest rate swaps with a notional amount of $300.0 million, and discontinued cash flow hedge accounting treatment for such swaps. The related unrealized gain on the swaps of $1.1 million will be recorded in income in the third quarter of fiscal 2018. In addition, $2.2 million of unamortized debt issuance costs will be expensed in the third quarter of fiscal 2018. These amounts are based on our debt balances as of December 31, 2017. Refer to Note 6 for further discussion on these balances.



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


The following discussion of Meredith's financial condition and results of operations should be read together with Meredith's condensed consolidated financial statements and notes thereto, included elsewhere in this report. When used herein, the terms Meredith, the Company, we, us, and our refer to Meredith Corporation, including consolidated subsidiaries. Except where context otherwise suggests, references to Meredith, the Company, we, us, and our do not include Time Inc. (Time) or its subsidiaries.


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."




17


EXECUTIVE OVERVIEW

Meredith Corporation has been committed to service journalism for more than 115 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 television stations reaching 11 percent of United States (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, St. Louis, and Portland—and 13 in Top 50 markets. Meredith's stations produce more than 700 hours of local news and entertainment content each week, and operate leading local digital destinations.

Our national media segment reaches 110 million unduplicated women and more than 70 percent of American millennial women. Meredith is the leader at creating content across media platforms in key consumer interest areas such as food, home, parenting, and lifestyle through well-known brands such as Better Homes & Gardens, Allrecipes, Parents, and Shape. The national media segment features robust brand licensing activities, including more than 3,000 SKUs of branded products at 5,000 Walmart stores across the U.S. and at walmart.com. Meredith Xcelerated Marketing (MXM), a strategic and creative agency with digital expertise across multiple channels, 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 60 percent of the Company's $810.5 million in revenues in the first six months of fiscal 2018 while the local media segment contributed 40 percent.

On January 31, 2018, the Company completed its acquisition of Time for $18.50 per share in cash for a total of $2.8 billion. As a result, Time has become a wholly owned subsidiary of Meredith. The combination of Meredith and Time creates a premier media and marketing company serving 200 million American consumers that's positioned for growth across industry-leading digital, television, print, video, mobile, and social platforms. Combined, Meredith's brands now have a readership of more than 135 million and paid circulation of nearly 60 million, with leading positions in celebrity, food, lifestyle, news and sports, parenting, and home content creation, as well as enhanced positions in the beauty, fashion, and luxury advertising categories. We expect going forward that the majority of Time's operations will be reported in Meredith's national media segment. February 1, 2018, was the first day of operations for the combined company.

Meredith anticipates generating annual cost synergies of $400 million to $500 million within the first two full years of combined operations. The Company currently estimates that it will incur costs of approximately $300 million related to integration, which include severance and portfolio alignments, to achieve these synergies. These costs are expected to be spread evenly between the first two years of operations. The Company continues to fully develop its integration plan. The Company expects to incur approximately $56.5 million of severance and other costs related to agreements with certain Time executives and to settle vested outstanding share-based equity awards. In addition to costs incurred related to integration, the Company also expects to incur costs of approximately $23.1 million of additional acquisition-related expenses, of which $5.3 million had been accrued as of December 31, 2017; approximately $73.2 million in prepayment penalties associated with the payoff of Time's outstanding debt, which will be expensed in the third quarter of fiscal 2018; and approximately $82.3 million in fees and expenses associated with the new indebtedness incurred in connection with the transaction, which will be recorded as debt discount and amortized over the terms of the new debt facilities.


LOCAL MEDIA

Local media derives the majority of its revenues—60 percent in the first six months of fiscal 2018—from the sale of advertising, both over the air and on our stations' websites and apps. The remainder comes from television

18


retransmission fees 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 represented 51 percent of national media's first six months' revenues. These revenues were generated from the sale of advertising space in our magazines, websites, and apps to clients interested in promoting their brands, products, and services to consumers. Circulation revenues accounted for 28 percent of national media's first six 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 21 percent of national media's revenues came from a variety of activities which included the sale of customer relationship marketing products and services 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 2018 FINANCIAL OVERVIEW

Local media revenues decreased 4 percent as compared to the prior-year period. Operating profit declined 28 percent. These changes are primarily due to declines in higher-margin political advertising revenues due to the cyclical nature of political advertising partially offset by increased retransmission revenues and related profit.

National media revenues declined 4 percent compared to the prior-year period as declines in the revenues of our magazine operations of $23.4 million more than offset increased revenues in our digital operations of $6.4 million. National media operating profit decreased 43 percent primarily due to a $19.8 million impairment of trademarks and a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.9 million. These decreases were partially offset by an increase in the operating profit of our magazine operations of $5.8 million and a gain related to the sale of a majority stake in Charleston Tennis of $3.3 million.

Diluted earnings per share increased 82 percent to $4.23 from $2.33 in the prior-year first six months primarily due to the Company's deferred tax assets, deferred tax liabilities, and tax reserves being remeasured during its second fiscal quarter as a result of the The "Tax Cuts and Jobs Act of 2017" (the Tax Reform Act) partially offset by lower income from operations as discussed above.



19


RESULTS OF OPERATIONS

Three months ended December 31,
2017
 
2016
 
Change

(In thousands except per share data)
 
 
 
 
 
Total revenues
$
417,698

 
$
442,642

 
(6
)%
Operating expenses
(380,353
)
 
(332,817
)
 
14
 %
Income from operations
$
37,345

 
$
109,825

 
(66
)%
Net earnings
$
159,308

 
$
71,805

 
122
 %
Diluted earnings per share
3.49

 
1.58

 
121
 %
 
 
 
 
 
 
Six months ended December 31,
2017
 
2016
 
Change

(In thousands except per share data)
 
 
 
 
 
Total revenues
$
810,469

 
$
842,521

 
(4
)%
Operating expenses
(716,326
)
 
(671,934
)
 
7
 %
Income from operations
$
94,143

 
$
170,587

 
(45
)%
Net earnings
$
192,749

 
$
105,778

 
82
 %
Diluted earnings per share
4.23

 
2.33

 
82
 %

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, 2017, 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, 2017.


LOCAL MEDIA

Local media operating results were as follows:

Three months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising
$
103,951

 
$
91,958

 
13
 %
Political advertising
2,094

 
40,068

 
(95
)%
Other
64,212

 
51,271

 
25
 %
Total revenues
170,257

 
183,297

 
(7
)%
Operating expenses
(119,742
)
 
(106,482
)
 
12
 %
Operating profit
$
50,515

 
$
76,815

 
(34
)%
Operating profit margin
29.7
%
 
41.9
%
 
 
 
 
 
 
 
 
Six months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Non-political advertising
$
191,736

 
$
176,142

 
9
 %
Political advertising
3,475

 
56,421

 
(94
)%
Other
128,857

 
103,320

 
25
 %
Total revenues
324,068

 
335,883

 
(4
)%
Operating expenses
(232,611
)
 
(208,446
)
 
12
 %
Operating profit
$
91,457

 
$
127,437

 
(28
)%
Operating profit margin
28.2
%
 
37.9
%
 
 

20


Revenues
Local media revenues decreased 7 percent in the second quarter and 4 percent in the first six months of fiscal 2018. Political advertising revenues totaled $2.1 million in the second quarter and $3.5 million in the first six months of the current fiscal year compared with $40.1 million in the prior-year second quarter and $56.4 million in the prior-year six-month period. Fluctuations in political advertising revenues at our stations and throughout the broadcasting industry generally follow the biennial cycle of election campaigns. Non-political advertising revenues increased 13 percent in the second quarter and 9 percent in the first six months of fiscal 2018. Local non-political advertising revenues increased 11 percent in the second quarter and 8 percent and in the first six months of fiscal 2018 while national non-political advertising revenues increased 14 percent in the second quarter and 8 percent in the first six months of fiscal 2018. Digital advertising revenues, a component of non-political advertising revenues, were down 4 percent in the second quarter. They increased 4 percent in the first six months of fiscal 2018.

Other revenues grew 25 percent in the second quarter and first six months of fiscal 2018 primarily due to increased retransmission consent fees from cable, satellite, and telecommunications operators.

Operating Expenses
Local media operating expenses increased 12 percent in the second quarter and first six months of fiscal 2018 primarily due to higher programming fees paid to affiliated networks.

Operating Profit
Local media operating profit decreased 34 percent in the second quarter and 28 percent in the first six months of fiscal 2018 primarily due to lower political advertising revenues due to the cyclical nature of political advertising partially offset by increased retransmission-related profit.


NATIONAL MEDIA

National media operating results were as follows:

Three months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Advertising
$
125,770

 
$
135,103

 
(7
)%
Circulation
67,672

 
66,805

 
1
 %
Other
53,999

 
57,437

 
(6
)%
Total revenues
247,441

 
259,345

 
(5
)%
Operating expenses
(235,194
)
 
(212,588
)
 
11
 %
Operating profit
$
12,247

 
$
46,757

 
(74
)%
Operating profit margin
4.9
%
 
18.0
%
 
 
 
 
 
 
 
 
Six months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Advertising
$
245,853

 
$
260,455

 
(6
)%
Circulation
136,599

 
135,473

 
1
 %
Other
103,949

 
110,710

 
(6
)%
Total revenues
486,401

 
506,638

 
(4
)%
Operating expenses
(445,898
)
 
(435,770
)
 
2
 %
Operating profit
$
40,503

 
$
70,868

 
(43
)%
Operating profit margin
8.3
%
 
14.0
%
 
 

21


Revenues
National media advertising revenues decreased 7 percent in the second quarter and 6 percent in the first six months of fiscal 2018. Digital advertising revenues grew 7 percent in the second quarter and 4 percent in the six-month period. In the second quarter of fiscal 2018, magazine advertising revenues and advertising pages declined 16 percent. For the first six months of fiscal 2018, magazine advertising revenues and ad pages decreased 10 percent and 12 percent, respectively. Among our core advertising categories, beauty, media and entertainment, and automotive categories showed strength while demand was weaker for the retail, prescription drug, and non-prescription drug categories.

Magazine circulation revenues increased 1 percent in the second quarter and first six months of fiscal 2018. Subscription revenues were up 3 percent in the second quarter and first six months as increased subscription revenues from The Magnolia Journal more than offset declines in subscription revenue for several titles caused by ongoing efforts to source a larger percentage of magazine subscribers from Meredith's own database instead of external agent sources. Newsstand revenues declined in the high-single digits on a percentage basis in the second quarter and in the low teens in the first six months of fiscal 2018 primarily due to strategic decisions by the Company to significantly reduce the newsstand draw for certain titles. Over time, these subscription and newsstand strategies are expected to lower circulation revenues but increase circulation profits.

Other revenues decreased 6 percent in the second quarter primarily due to declines in our magazine operations of $2.4 million. Other revenues declined 6 percent in the six months of fiscal 2018 primarily due to declines of $3.6 million in our magazine operations, $2.8 million in decreased revenues due to the sale of a majority stake in Charleston Tennis as of the beginning fiscal 2018, and a decrease in MXM revenues of $2.1 million. These declines in the first six months of fiscal 2018 were partially offset by increased other revenues of $2.9 million in our digital operations.

Operating Expenses
National media operating expenses increased 11 percent in the second quarter primarily due to a $19.8 million impairment of trademarks and a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.2 million. These fluctuations were partially offset by decreases in severance and benefit accruals of $3.7 million, declines in paper costs of $3.7 million, decreases in employee compensation costs of $3.2 million, lower postage and other delivery costs of $2.7 million, and decreases in processing costs of $2.6 million.

National media operating expenses increased 2 percent in the first six months of fiscal 2018 primarily due to a $19.8 million impairment of trademarks and a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.9 million. These fluctuations were partially offset by decreases in employee compensation costs of $6.4 million, declines in paper costs of $5.5 million, lower postage and other delivery costs of $5.0 million, decreases in severance and benefit accruals of $3.7 million, and a gain related to the sale of a majority stake in Charleston Tennis of $3.3 million, which was recorded as a reduction in operating expenses.

Operating Profit
National media operating profit decreased 74 percent in the second quarter and 43 percent in the first six months of fiscal 2018. For the second quarter, the decline was primarily due to a $19.8 million impairment of trademarks and a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.2 million. For the six-month period, the decline was primarily due to a $19.8 million impairment of trademarks and a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.9 million partially offset by an increase in the operating profit of our magazine operations of $5.8 million and a gain related to the sale of a majority stake in Charleston Tennis of $3.3 million.



22


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
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Three months ended December 31,
$
25,417

 
$
13,747

 
85
%
Six months ended December 31,
$
37,817

 
$
27,718

 
36
%

Unallocated corporate expenses increased 85 percent in second quarter and 36 percent in the first six months of fiscal 2018 primarily due to the Company incurring $12.1 million of investment banking, legal, accounting, and other professional fees and expenses in the second quarter of fiscal 2018 related to the acquisition of Time.


CONSOLIDATED

Consolidated Operating Expenses
Consolidated operating expenses were as follows:

Three months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
158,746

 
$
148,625

 
7
 %
Selling, general, and administrative
189,384

 
170,643

 
11
 %
Depreciation and amortization
12,458

 
13,549

 
(8
)%
Impairment of long-lived assets

19,765

 

 

Operating expenses
$
380,353

 
$
332,817

 
14
 %
 
 
 
 
 
 
Six months ended December 31,
2017
 
2016
 
Change

(In thousands)
 
 
 
 
 
Production, distribution, and editorial
$
314,548

 
$
298,853

 
5
 %
Selling, general, and administrative
357,005

 
345,636

 
3
 %
Depreciation and amortization
25,008

 
27,445

 
(9
)%
Impairment of long-lived assets
19,765

 

 

Operating expenses
$
716,326

 
$
671,934

 
7
 %

Fiscal 2018 production, distribution, and editorial costs increased 7 percent in the second quarter and 5 percent in the first six months as compared to the prior-year periods. For the second quarter, increases in programming fees paid to affiliated networks of $14.5 million more than offset declines in paper costs of $3.7 million and lower postage and other delivery costs of $2.7 million. For the first six months of fiscal 2018, increases in programming fees paid to affiliated networks of $24.3 million and higher MXM production costs of $4.2 million more than offset declines in paper costs of $5.5 million, lower postage and other delivery costs of $5.0 million, and lower employee compensation costs of $2.0 million.

Selling, general, and administrative expenses increased 11 percent in the second quarter and 3 percent in the first six months of fiscal 2018. For the second quarter, the increase was primarily due to a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.2 million and $12.1 million of Time acquisition-related expenses being incurred. These fluctuations were partially offset by a decrease in severance and benefit accruals of $4.6 million. For the first six months of fiscal 2018, the increase was primarily

23


due to a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.9 million and $12.1 million of Time acquisition-related expenses being incurred. These fluctuations were partially offset by a decrease in severance and benefit accruals of $4.6 million, a gain related to the sale of a majority stake in Charleston Tennis of $3.3 million, which was recorded as a reduction in operating expenses, lower payroll and related costs of $2.7 million, declines non-payroll related MXM selling and general costs of $2.6 million and lower performance-based incentive accruals of $2.1 million.

Depreciation and amortization expense declined 8 percent in the second quarter of fiscal 2018 and 9 percent in the first six months of fiscal 2018 primarily due to fixed assets acquired as part of local media acquisitions becoming fully depreciated.

The impairment of long-lived assets charge recorded in the second quarter of fiscal 2018 related to a pre-tax, non-cash impairment of trademarks in the national media segment.

Income from Operations
Income from operations decreased 66 percent in the second quarter of fiscal 2018 primarily due to lower operating profit in our local media operations of $26.3 million, a $19.8 million impairment of trademarks, a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.2 million, and $12.1 million in Time acquisition-related expenses incurred in the second quarter of fiscal 2018.

Income from operations decreased 45 percent in the first six months of fiscal 2018 primarily due to lower operating profit in our local media operations of $36.0 million, a $19.8 million impairment of trademarks, a decrease in the reduction of the fair value adjustment related to previously accrued contingent consideration payable of $18.9 million, and $12.1 million in Time acquisition-related expenses. These decreases were partially offset by an increase in the operating profit of our magazine operations of $5.8 million and a gain related to the sale of a majority stake in Charleston Tennis of $3.3 million.

Net Interest Expense
Net interest expense increased to $5.2 million in the fiscal 2018 second quarter compared with $4.7 million in the prior-year second quarter. For the six months ended December 31, 2017, net interest expense was $10.2 million versus $9.4 million in the first six months of fiscal 2017. Average long-term debt outstanding was $693.5 million in the second quarter of fiscal 2018 and $696.5 million for the six-month period compared with $683.6 million in the prior-year second quarter and $687.1 million in the prior-year six-month period. The Company's approximate weighted average interest rate was 3.0 percent in the first six months of fiscal 2018 and 2.8 percent in the first six months of fiscal 2017. The weighted average interest rates include the effects of derivative financial instruments.

Income Taxes
For the second quarter and first six months of fiscal 2018, Meredith recorded a tax benefit of $127.1 million and $108.9 million, respectively. This compares to tax expense recorded by the Company of $33.3 million and $55.4 million for the second quarter and first six months of fiscal 2017, respectively.

The "Tax Cuts and Jobs Act of 2017" (the Tax Reform Act) was signed into law on December 22, 2017. The Tax Reform Act significantly changed the United States (U.S.) corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35 percent to 21 percent effective for taxable years beginning on or after January 1, 2018, while also repealing the deduction for domestic production activities. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

Under the Tax Reform Act, a blended federal rate of 28 percent applies retroactive to the beginning of Meredith's fiscal 2018. This reduced rate had the effect of lowering fiscal 2018 tax expense by $4.4 million for amounts previously recognized in our first fiscal quarter. Meredith recorded this adjustment in its fiscal 2018 second quarter. In addition, absent the Tax Reform Act, Meredith estimates that second quarter tax expense on second quarter earnings would have been $3.7 million higher. Also as a result of the Tax Reform Act, Meredith remeasured its deferred tax assets, deferred tax liabilities, and tax reserves during its second fiscal quarter, resulting in a net tax

24


benefit of $133.0 million. Deferred tax assets and liabilities expected to be recognized after June 30, 2018, were remeasured using the 21 percent U.S. corporate tax rate.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which provides guidance regarding how a company is to reflect provision amounts when necessary information is not yet available, prepared, or analyzed sufficiently to complete its accounting for the effect of the changes in the Tax Reform Act. The tax benefits described above, which represent all known and estimable impacts of the Tax Reform Act, reflect provisional amounts based on the Company’s current best estimates. These provisional amounts incorporate assumptions made based upon the Company’s current interpretations of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance, and as data becomes available allowing a more precise scheduling of the deferred tax assets and liabilities including those related to intangible assets, fixed assets, and employee compensation. Adjustments to these provisional amounts through December 22, 2018, will be included in income from operations as an adjustment to tax expense in future periods.

Effective July 1, 2017, the Company adopted new accounting guidance related to share-based compensation. Under this new guidance, excess tax benefits and deficiencies are to be recognized as a discrete component of the income tax provision in the period they occur and not as an adjustment to additional paid-in capital. As such, we recognized an excess tax benefit of $2.1 million as a credit to income tax expense in our Condensed Consolidated Statements of Earnings in the first quarter of fiscal 2018 as the majority of the Company's annual share-based grants vest in the first quarter of each fiscal year. In the second quarter of fiscal 2018, an additional $1.0 million was recorded as a credit to income tax expense primarily for options exercised during the quarter. However, as a result of the change in the federal corporate tax rate due to the Tax Reform Act, these amounts were reduced in the aggregate by $0.6 million in the second quarter of fiscal 2018.

Additionally during the second quarter of fiscal 2018, the Company incurred $12.1 million of investment banking, legal, accounting, and other professional fees and expenses related to the acquisition of Time Inc. Approximately 40 percent of these acquisition-related expenses have been determined to be currently tax deductible.

Net Earnings and Earnings per Share
Net earnings were $159.3 million ($3.49 per diluted share) in the quarter ended December 31, 2017, up 122 percent from $71.8 million ($1.58 per diluted share) in the prior-year second quarter. For the six months ended December 31, 2017, net earnings were $192.7 million ($4.23 per diluted share), an increase of 82 percent from prior-year six months earnings of $105.8 million ($2.33 per diluted share). The increase in net earnings was primarily due to the tax benefit recorded in the second quarter of fiscal 2018 partially offset by lower income from operations as discussed above. Average basic and diluted shares outstanding increased in both of the periods.


LIQUIDITY AND CAPITAL RESOURCES

Six months ended December 31,
2017
 
2016
(In thousands)
 
 
 
Net earnings
$
192,749

 
$
105,778

Cash flows provided by operating activities
$
101,572

 
$
117,281

Net cash used in investing activities
(29,616
)
 
(22,768
)
Net cash used in financing activities
(59,267
)