RDA Reports EBITDA gains of 7.6% in Q2

Pleasantville : RDA Holding Co., parent company of The Reader’s Digest Association, Inc. (together with its subsidiaries and affiliated entities, “RDA”), has reported results for the second quarter ended June 30, 2010.

Mary Berner, President and Chief Executive Officer, commented, “Despite lower revenues, we generated an increase of $47 million, or over 38% percent, in our Consolidated Last Twelve Month EBITDA to $170 million as of June 30, 2010 compared with the same period last year”.

Revenues excluding the effects of fair value adjustments and the deconsolidation of the company’s UK subsidiary decreased $34.8 million, or 7% percent, to $476.9 million as compared to $511.7 million in 2009. These revenues were lower principally due to the reduction in the rate base and frequency of Reader’s Digest magazine in the US. In addition, the company experienced modestly lower response rates in some international markets, partially offset by the elimination of several unprofitable or marginally profitable promotion campaigns and positive foreign currency exchange rates.

Segment operating profit was $89.3 million compared with $88.7 million for the prior year period, while operating margin improved to 19 percent from 16 percent in the prior year period.
Consolidated EBITDA increased 7.6 percent to $76.8 million compared to Consolidated EBITDA of $71.4 million in the prior year quarter.

Consolidated EBITDA for the last twelve months ended June 30, 2010 increased to $170 million from approximately $123 million in the comparable period of 2009.Cash and cash equivalents were $171.3 million as of June 30, 2010, up $53.6 million from a year ago.

The company’s businesses are structured into four reportable segments: Reader’s Digest United States, Reader’s Digest International, Lifestyle & Entertainment Direct, and Other, which is comprised solely of the Weekly Reader business.

The Reader’s Digest United States segment is comprised of two Branded Communities: 1) Reader’s Digest Community and 2) US Affinities, which is comprised of Food & Entertaining, Home & Garden, Health and Wellness, as well as Allrecipes.com.

The Reader’s Digest International segment is comprised of three Direct Marketing Units: 1) Europe, 2) Canada, Latin America (CALA) and 3) Asia Pacific (APAC).

In the second quarter, revenues for Reader’s Digest United States decreased $5.6 million, or 3.1 percent, to $177.1 million as compared with $182.7 million during the three months ended June 30, 2009. The majority of the decline was attributable to efforts initiated during the second half of calendar year 2009 to increase profitability. These included a planned rate base reduction and a decrease in the frequency of Reader’s Digest magazine issues, the closure and sale of unprofitable or marginally profitable product lines, the elimination of certain poorly performing special interest and seasonal publications, and the curtailment of promotional efforts on book and music sales.

The declines were offset in part by higher advertising revenues at Allrecipes.com, Taste of Home magazine and several other publications.

In the second quarter, operating profit for Reader’s Digest United States increased by $1.2 million, or 3.2 percent, to an operating profit of $39.0 million as compared with an operating profit of $37.8 million during the three months ended June 30, 2009. Increases were primarily driven by the strong performance of the company’s retail book business combined with the discontinuation of Purpose Driven Connection in the previous year.

In the second quarter, Reader’s Digest International revenues decreased $58.4 million, or 19.2 percent, to $245.6 million, as compared with $304.0 million in the second quarter of 2009. Excluding the positive effect of foreign currency translation of $3.8 million and the deconsolidation of the UK, Reader’s Digest International experienced a net decrease of 9%, during the three months ended June 30, 2010 as compared with 2009.

The decrease is largely the result of the planned elimination of marginally or unprofitable promotional campaigns in France, lower mail quantities and response rates in most international markets, including Germany, Central Europe, Canada, Australia and Asia partially offset by growth and expansion in Russia, Brazil and Argentina. In addition, lower renewal rates on magazine products, most notably in Canada, and an intentional reduction of licensed products across Australian and Asian markets also contributed to the decline.

Reader’s Digest International operating profit for the three months ended June 30, 2010 decreased by $2.0 million, or 4.3 percent, to an operating profit of $45.0 million as compared with $47.0 million for the three months ended June 30, 2009. Excluding the negative effect of foreign currency exchange rates of $0.5 million, Reader’s Digest International experienced a net decrease in operating profit of $1.5 million, or 3.2%, for the three months ended June 30, 2010 as compared with 2009.

The decrease was mainly due to the loss and deconsolidation of the UK subsidiary, combined with the impact of the lower mail quantities and response rates as described above largely offset by lower promotional costs resulting from better priced marketing packages, improved profitability in France resulting from the initiatives described above, and the impact of headcount reductions and other cost savings initiatives.

In the second quarter, Lifestyle & Entertainment Direct (LED) revenue decreased $0.6 million, or 1.2%, to $49.8 million, as compared with $50.4 million during the three months ended June 30, 2009. The decrease was attributable to a modest decline in sales of the segment’s fitness products.

Operating profit performance in the second quarter increased $2.7 million to an operating profit of $5.3 million, as compared with $2.6 million during the three months ended June 30, 2009. The operating profit increase is principally due to the channel mix of fitness products, with higher cost DRTV sales being replaced by more profitable retail sales.

In the second quarter, Other segment (Weekly Reader) revenue decreased $1.8 million, or 22.8 percent, to $6.1 million, as compared with $7.9 million during the three months ended June 30, 2009. The decrease in revenues was primarily driven by the elimination of an unprofitable catalog, and challenging state and local funding environments that adversely impacted customer educational budgets.

Operating profit performance in the second quarter decreased $1.3 million to zero, as compared with an operating profit of $1.3 million during the three months ended June 30, 2009. The operating profit decrease is principally due to lower revenues offset in part by savings in promotional costs.

Corporate unallocated expenses for the three months ended June 30, 2010 were $38.4 million, compared with $7.6 million for the three months ended June 30, 2009. The increase of $30.8 million was mainly driven by higher accrued employee bonuses of $22.3 million. Last year, the company did not meet its target results which resulted in negligible bonuses paid in 2009. In 2010, bonus accruals have been re-established to match the company’s performance level. We also re-established equity award plans which increased non-cash stock compensation expense by $3.8 million year over year.

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