Business News

RDA Holding Co. Announces Results For The Third Quarter Ended September 30, 2012

Tuesday 20. November 2012 - - Company Announces Third Quarter Revenue of $230.1 Million; Net Loss of $107.2 Million - Results Include Non-Cash Impairment Charge of $85.0 Million

RDA Holding Co., parent company of The Reader’s Digest Association, Inc. (together with its subsidiaries and affiliated entities, “RDA”), the global multi-brand and multi-platform media and direct marketing company, announced today its financial results for the third quarter ended September 30, 2012.
Robert E. Guth, President and Chief Executive Officer, commented, “During the third quarter, we continued to move ahead aggressively with our plan to transform our business. While we are encouraged by some early indications that our plans are taking hold, our overall performance reflects some of the persistent challenges in aspects of our business that we have seen in previous quarters. In addition, increased business pressure on certain elements of our business, in particular, our North America books and home entertainment business and in certain European markets, moved us off of our trajectory for the quarter.
“That said, we remain very committed to our plan to holistically transform the Company. This quarter we made real progress on all elements of this transformation, particularly in our initiative to license our international businesses. We also continued to make steady strides in our strategy to realign our corporate structure to better fit our business, and proceeded to take necessary steps to help change the trajectory in our North America business.”
Third Quarter Company Results
Revenue decreased $82.3 million to $230.1 million, a decline of 26.3% from the 2011 quarter. The revenue declines were primarily due to a lower active customer base on our books and home entertainment products and a reduction in promotional investment across many of our markets in Europe and Asia. Our revenue declines were also due to lower sales on some of our book product lines in North America, the sale of the Every Day with Rachael Ray publication in October 2011 and declining subscription renewals on certain of our magazine titles.
Third quarter operating loss was $100.1 million, which reflects an impairment charge of $85.0 million. Excluding impairment charges in both comparable periods, operating loss decreased $25.9 million to $15.1 million, a decrease of 63.2% from the 2011 quarter. The decrease in operating loss was primarily the result of the sale of the Every Day with Rachael Ray publication, as well as a reduction in promotional investments and overhead cost savings related to our 2011 restructuring initiatives.
EBITDA for the quarter was negative $8.9 million, compared to negative $6.0 million in the 2011 quarter, which has been adjusted to exclude discontinued operations, as well as the Every Day with Rachael Ray publication.
In connection with the preparation of our consolidated financial statements for the three and nine months ended September 30, 2012, we identified certain errors in our consolidated financial statements relating to certain prior periods. We determined that corrections were necessary to the first quarter of 2012. Within our September 30, 2012 consolidated financial statements, we revised our previously reported March 31, 2012 results to reflect these prior period errors, resulting in an increase to net loss by $14.5 million. These errors are primarily due to tax and impairment expenses, are non-cash in nature and do not impact our prior reported EBITDA or our debt covenants.
Outlook
Despite the positive developments taking place in our business as a result of our transformational efforts, certain aspects of our legacy businesses continue to underperform and to offset these positive trends. In particular, parts of our business within our Europe segment and our books and home entertainment business within our North America segment are less profitable than anticipated.
The Company believes that the continuing challenges in these businesses make it increasingly difficult to accurately predict the Company’s performance in the near term. As a result, the Company believes it is prudent to withdraw its previous EBITDA guidance for the full year.
A number of uncertainties remain that may affect the Company’s outlook. These uncertainties are referenced below under “Forward-looking Statements” and in certain filings with the U.S. Securities and Exchange Commission.
Amendment to 2012 Secured Credit Facility
The Company indicated last quarter that it may not be able to meet one or more of its financial covenants in upcoming quarters. In order to maintain compliance with its senior secured term loan, the Company obtained an amendment from its lender on November 9, 2012, to amend the financial covenants for the third quarter.
Third Quarter 2012 Segment Results
The Company classifies its business into three reportable segments: North America, Europe and Asia Pacific & Latin America (“APLA”). These segments comprise two business lines: media and direct marketing.
The North America segment comprises our operations in the United States and Canada that publish and market various magazines and entertainment products.
The Europe and APLA segments primarily consist of our direct marketing operations in those regions.
Summary of Reportable Segment Results
North America
Third quarter revenue in the North America segment was $105.0 million, a decline of $28.8 million, or 21.5%, from the 2011 quarter (with minimal effect from foreign currency translation). The decrease was primarily driven by the sale of the Every Day with Rachael Ray publication, lower sales of books and declining subscription renewals on certain of our magazine titles.
Third quarter 2012 operating loss was $2.5 million, a decrease of $3.5 million, or 58.3%, from the 2011 quarter. The decrease in operating loss was primarily driven by the absence of the Every Day with Rachael Ray publication, which incurred an operating loss in the 2011 quarter, and lower promotional investments. This improvement was partially offset by the revenue declines described above.
Europe
Third quarter revenue in the Europe segment was $85.5 million, a decline of $45.4 million, or 34.7% from the 2011 quarter (a decrease of 26.1% on a constant currency basis). The declines were largely due to a smaller active customer base on our books and home entertainment products. Our results also reflect the continued impact of the decline in our active customer base and a reduction in promotional investments.
Third quarter operating loss in our Europe segment was $5.1 million, an increase of $0.6 million, or 13.3%, from the 2011 quarter (an increase of 26.7% on a constant currency basis). The increase in operating loss was primarily due to lower revenue as described above, and was partially offset by lower promotional investments and overhead cost savings resulting from our 2011 headcount reduction initiatives.
Asia Pacific and Latin America (APLA)
Third quarter revenue in our APLA segment was $44.5 million, a decline of $12.8 million, or 22.3%, from the 2011 quarter (a decline of 16.2% on a constant currency basis). The decline was primarily driven by a lower active customer base for our books and home entertainment products and lower circulation and advertising on certain magazine titles.
Third quarter operating profit in our APLA segment was $3.0 million, a decrease of $0.6 million, or 16.7%, from the 2011 quarter. The decrease was primarily due to lower revenue as described above and partially offset by lower promotional investments and overhead cost savings resulting from our 2011 headcount reduction initiatives, primarily in Asia.
Corporate Unallocated (administrative expenses, not allocated to reportable segments)
Third quarter corporate unallocated decreased to $7.6 million, a decline of $12.2 million, or 61.6%, compared to the 2011 quarter. The decrease in expenses is primarily driven by decreased amortization costs from certain other intangible assets becoming fully amortized in previous periods and a reversal of stock-based compensation expense related to the re-measurement of our liability-classified awards to reflect the estimated fair value of our common stock.
Other Operating Items
Other operating items for the third quarter decreased to $1.7 million, a decline of $8.8 million, or 83.8%, compared to the 2011 quarter. The decrease was due to larger restructuring activities in the prior year, mostly across our Europe and APLA regions.
Impairment of Assets
During the third quarter, the Company recorded an impairment charge of $85.0 million, related to our Europe and North America segments, primarily consisting of $64.0 million for goodwill and $21.0 million for other intangible assets and fixed assets. The interim impairment charge reflects further unanticipated revenue declines in our Europe segment. In addition, revenue declines in certain brands in our North America businesses resulted in the need to perform an interim impairment analysis on certain tradenames.