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Graham Holdings Co - Quarter Report: 2005 October (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended October 2, 2005

 

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 1-6714

 


 

THE WASHINGTON POST COMPANY

(Exact name of registrant as specified in its charter)

 


 

Delaware   53-0182885

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1150 15th Street, N.W. Washington, D.C.   20071
(Address of principal executive offices)   (Zip Code)

 

(202) 334-6000

(Registrant’s telephone number, including area code)

 


 

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  ¨.

 

Indicate by check mark whether the registrant is an accelerated filer as defined by Rule 12b-2 of the Exchange Act).    Yes  x.    No  ¨.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

 

Shares outstanding at October 31, 2005:

 

Class A Common Stock

   1,722,250 Shares

Class B Common Stock

   7,875,311 Shares

 



Table of Contents

THE WASHINGTON POST COMPANY

 

Index to Form 10-Q

 

PART I.   FINANCIAL INFORMATION     
Item 1.   Financial Statements     
   

a. Condensed Consolidated Statements of Income (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 2, 2005 and September 26, 2004

   3
   

b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 2, 2005 and September 26, 2004

   4
    c. Condensed Consolidated Balance Sheets at October 2, 2005 (Unaudited) and January 2, 2005    5
   

d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirty-Nine Weeks Ended October 2, 2005 and September 26, 2004

   6
    e. Notes to Condensed Consolidated Financial Statements (Unaudited)    7
Item 2.   Management’s Discussion and Analysis of Results of Operations and Financial Condition    17
Item 3.   Quantitative and Qualitative Disclosures about Market Risk    24
Item 4.   Controls and Procedures    24
PART II.   OTHER INFORMATION     
Item 6.   Exhibits    25
Signatures    27

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Washington Post Company

Condensed Consolidated Statements of Income (Unaudited)

 

     Thirteen Weeks Ended

    Thirty-Nine Weeks Ended

 

(In thousands, except per share amounts)

 

   October 2,
2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Operating revenues

                                

Advertising

   $ 311,581     $ 323,021     $ 953,694     $ 960,208  

Circulation and subscriber

     182,677       185,521       560,521       551,508  

Education

     362,822       293,621       1,033,985       828,588  

Other

     16,582       17,869       56,969       57,088  
    


 


 


 


       873,662       820,032       2,605,169       2,397,392  
    


 


 


 


Operating costs and expenses

                                

Operating

     486,400       422,894       1,411,833       1,252,983  

Selling, general and administrative

     225,760       210,488       689,604       611,953  

Depreciation of property, plant and equipment

     47,531       45,020       141,004       133,648  

Amortization of intangible assets

     1,587       1,332       4,660       7,593  
    


 


 


 


       761,278       679,734       2,247,101       2,006,177  
    


 


 


 


Income from operations

     112,384       140,298       358,068       391,215  

Other income (expense)

                                

Equity in (losses) earnings of affiliates

     (952 )     539       (1,135 )     (1,530 )

Interest income

     611       351       1,761       1,153  

Interest expense

     (7,554 )     (6,874 )     (20,509 )     (20,565 )

Other, net

     6,869       858       10,319       1,529  
    


 


 


 


Income before income taxes

     111,358       135,172       348,504       371,802  

Provision for income taxes

     44,800       52,700       136,600       145,000  
    


 


 


 


Net income

     66,558       82,472       211,904       226,802  

Redeemable preferred stock dividends

     (245 )     (245 )     (981 )     (992 )
    


 


 


 


Net income available for common shares

   $ 66,313     $ 82,227     $ 210,923     $ 225,810  
    


 


 


 


Basic earnings per share

   $ 6.91     $ 8.59     $ 21.99     $ 23.62  
    


 


 


 


Diluted earnings per share

   $ 6.89     $ 8.57     $ 21.93     $ 23.54  
    


 


 


 


Dividends declared per common share

   $ 1.85     $ 1.75     $ 7.40     $ 7.00  
    


 


 


 


Basic average number of common shares outstanding

     9,596       9,568       9,592       9,560  

Diluted average number of common shares outstanding

     9,618       9,598       9,616       9,591  
    


 


 


 


 

3


Table of Contents

The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

     Thirteen Weeks Ended

    Thirty-Nine Weeks Ended

 

(In thousands)

 

   October 2,
2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Net income

   $ 66,558     $ 82,472     $ 211,904     $ 226,802  
    


 


 


 


Other comprehensive income (loss)

                                

Foreign currency translation adjustment

     1,171       3,227       (7,441 )     1,124  

Change in unrealized gain on available-for-sale securities

     (9,727 )     8,622       (37,592 )     27,199  

Add: reclassification adjustment for realized gains included in net income

     (8,978 )     —         (12,323 )     —    
    


 


 


 


       (17,534 )     11,849       (57,356 )     28,323  

Income tax benefit (expense) related to other comprehensive income

     7,295       (3,359 )     19,469       (10,637 )
    


 


 


 


       (10,239 )     8,490       (37,887 )     17,686  
    


 


 


 


Comprehensive income

   $ 56,319     $ 90,962       174,017     $ 244,488  
    


 


 


 


 

4


Table of Contents

The Washington Post Company

Condensed Consolidated Balance Sheets

 

     October 2,
2005


   

January 2,

2005


 
(In thousands)    (unaudited)        

Assets

                

Current assets

                

Cash and cash equivalents

   $ 170,310     $ 119,400  

Investments in marketable equity securities

     68,105       149,303  

Accounts receivable, net

     387,849       362,862  

Inventories

     24,720       25,127  

Deferred income taxes

     31,614       30,871  

Income taxes receivable

     —         18,375  

Other current assets

     55,000       48,429  
    


 


       737,598       754,367  

Property, plant and equipment

                

Buildings

     313,642       304,606  

Machinery, equipment and fixtures

     1,837,123       1,730,997  

Leasehold improvements

     163,465       133,674  
    


 


       2,314,230       2,169,277  

Less accumulated depreciation

     (1,326,210 )     (1,197,375 )
    


 


       988,020       971,902  

Land

     42,195       37,470  

Construction in progress

     77,619       80,580  
    


 


       1,107,834       1,089,952  

Investments in marketable equity securities

     242,875       260,433  

Investments in affiliates

     67,593       61,814  

Goodwill, net

     1,120,566       1,023,140  

Indefinite-lived intangible assets, net

     493,192       493,192  

Amortized intangible assets, net

     23,560       7,879  

Prepaid pension cost

     583,778       556,747  

Deferred charges and other assets

     67,909       69,117  
    


 


     $ 4,444,905     $ 4,316,641  
    


 


Liabilities and Shareholders’ Equity

                

Current liabilities

                

Accounts payable and accrued liabilities

   $ 420,404     $ 443,332  

Deferred revenue

     246,137       186,593  

Dividends declared

     18,010       —    

Income taxes payable

     7,531       —    

Short-term borrowings

     22,527       58,236  
    


 


       714,609       688,161  

Postretirement benefits other than pensions

     150,026       145,490  

Other liabilities

     243,470       228,654  

Deferred income taxes

     385,418       403,698  

Long-term debt

     406,624       425,889  
    


 


       1,900,147       1,891,892  

Redeemable preferred stock

     12,267       12,267  
    


 


Preferred stock

     —         —    
    


 


Common shareholders’ equity

                

Common stock

     20,000       20,000  

Capital in excess of par value

     201,694       186,827  

Retained earnings

     3,769,139       3,629,222  

Accumulated other comprehensive income

                

Cumulative foreign currency translation adjustment

     6,432       13,873  

Unrealized gain on available-for-sale securities

     45,002       75,448  

Cost of Class B common stock held in treasury

     (1,509,776 )     (1,512,888 )
    


 


       2,532,491       2,412,482  
    


 


     $ 4,444,905     $ 4,316,641  
    


 


 

5


Table of Contents

The Washington Post Company

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Thirty-Nine Weeks Ended

 

(In thousands)

 

   October 2,
2005


    September 26,
2004


 

Cash flows from operating activities:

                

Net income

   $ 211,904     $ 226,802  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation of property, plant and equipment

     141,004       133,648  

Amortization of goodwill and other intangibles

     4,660       7,593  

Net pension benefit

     (28,154 )     (31,021 )

Early retirement program expense

     1,021       132  

Gain from sale of land

     (5,148 )     —    

Property, plant and equipment write-downs

     9,948       —    

Gain on disposition of marketable equity securities

     (11,957 )     —    

Foreign exchange loss (gain)

     6,208       (670 )

Cost method and other investment write-downs

     658       677  

Equity in losses of affiliates, net of distributions

     1,135       1,530  

Provision for deferred income taxes

     9,758       10,773  

Change in assets and liabilities:

                

Increase in accounts receivable, net

     (3,216 )     (19,805 )

Decrease (increase) in inventories

     1,623       (4,404 )

(Decrease) increase in accounts payable and accrued liabilities

     (36,726 )     52,888  

Increase in deferred revenue

     38,299       24,586  

Increase in income taxes payable

     26,274       18,224  

Decrease (increase) in other assets and other liabilities, net

     19,970       (14,926 )

Other

     203       (78 )
    


 


Net cash provided by operating activities

     387,464       405,949  
    


 


Cash flows from investing activities:

                

Purchases of property, plant and equipment

     (164,736 )     (137,834 )

Investments in certain businesses

     (148,137 )     (55,102 )

Proceeds from the sale of property, plant and equipment

     25,830       —    

Investments in marketable equity securities

     —         (46,937 )

Proceeds from sale of marketable equity securities

     55,459       —    

Investment in affiliates

     (4,981 )     —    

Other

     —         683  
    


 


Net cash used in investing activities

     (236,565 )     (239,190 )
    


 


Cash flows from financing activities:

                

Net repayment of commercial paper

     (50,201 )     (122,072 )

Principal payments on debt

     (3,611 )     (18,654 )

Dividends paid

     (53,976 )     (50,919 )

Cash overdraft

     5,617       (127 )

Proceeds from exercise of stock options

     5,117       11,926  
    


 


Net cash used in financing activities

     (97,054 )     (179,846 )
    


 


Effect of currency exchange rate change

     (2,935 )     (155 )
    


 


Net increase (decrease) in cash and cash equivalents

     50,910       (13,242 )

Beginning cash and cash equivalents

     119,400       116,561  
    


 


Ending cash and cash equivalents

   $ 170,310     $ 103,319  
    


 


 

6


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. All adjustments reflected in the interim financial statements are of a normal recurring nature.

 

The Washington Post Company (the “Company”) generally reports on a 13 week fiscal quarter ending on the Sunday nearest the calendar quarter-end. With the exception of the newspaper publishing operations, subsidiaries of the Company report on a calendar-quarter basis.

 

Certain amounts in previously issued financial statements have been reclassified to conform with the 2004 presentation.

 

Note 1: Acquisitions.

 

In the third quarter of 2005, Kaplan acquired two businesses in the test preparation division, totaling $38.4 million, financed with cash. This included the acquisition of The Kidum Group, the leading provider of test preparation services in Israel. In the second quarter of 2005, Kaplan acquired five businesses in their higher education and professional divisions totaling $83.1 million. These acquisitions included BISYS Education Services, a provider of licensing education and compliance solutions for financial services institutions and professionals as well as Asia Pacific Management Institute, a private education provider for undergraduate and postgraduate students in Asia. In the first quarter of 2005, the Company acquired Slate, an online magazine and Kaplan acquired two businesses in their higher education division; these acquisitions totaled $26.5 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.

 

In the third quarter of 2004, Kaplan acquired three businesses in their higher education and professional divisions totaling $3.9 million. In the second quarter of 2004, Kaplan acquired two businesses in their higher education and professional divisions totaling $4.5 million, financed through cash and debt, with $0.3 million remaining to be paid. In addition, the cable division completed two small transactions for $1.8 million. In May 2004, the Company acquired El Tiempo Latino, a leading Spanish-language weekly newspaper in the greater Washington area. In the first quarter of 2004, Kaplan acquired three businesses in their higher education and test preparation divisions, totaling $49.8 million, financed through cash and debt.

 

Note 2: Investments.

 

Investments in marketable equity securities at October 2, 2005 and January 2, 2005 consist of the following (in thousands):

 

    

October 2,

2005


  

January 2,

2005


Total cost

   $ 237,076    $ 285,912

Gross unrealized gains

     73,904      123,824
    

  

Total fair value

   $ 310,980    $ 409,736
    

  

 

During the third quarter and first nine months of 2005, the Company sold marketable equity securities for a pre-tax gain of $8.6 million and $12.0 million, respectively. There were no sales of marketable equity securities in the first nine months of 2004. The Company made $46.9 million in investments in marketable equity securities during the third quarter of 2004.

 

7


Table of Contents

At October 2, 2005 and January 2, 2005, the carrying value of the Company’s cost method investments was $12.3 million and $4.6 million, respectively. The Company invested $0.2 million and $8.3 million during the third quarter and first nine months of 2005, respectively, in companies constituting cost method investments; for the same periods of 2004, the Company invested $0 and $0.1 million, respectively.

 

The Company recorded charges of $0.1 million and $0.7 million during the third quarter and first nine months of 2005, respectively, to write-down certain of its investments to estimated fair value; for the same periods of 2004, the Company recorded charges of $0 and $0.7 million, respectively.

 

As of October 2, 2005, the Company has commercial paper investments of $57.8 million that are classified as “cash and cash equivalents” on the Company’s consolidated balance sheet.

 

Note 3: Borrowings.

 

Long-term debt consists of the following (in millions):

 

     October 2,
2005


    January 2,
2005


 

Commercial paper borrowings

   $ —       $ 50.2  

5.5 percent unsecured notes due February 15, 2009

     399.1       398.9  

4.0 percent notes due 2006 (£8.32 million)

     14.7       16.1  

Other indebtedness

     15.3       18.9  
    


 


Total

     429.1       484.1  

Less current portion

     (22.5 )     (58.2 )
    


 


Total long-term debt

   $ 406.6     $ 425.9  
    


 


 

The Company’s commercial paper borrowings at January 2, 2005 were at an average interest rate of 2.2% and matured through January 2005.

 

During 2003, notes of £16.7 million were issued to current employees of The Financial Training Company (FTC) who were former FTC shareholders in connection with the March 2003 acquisition by Kaplan. In 2004, 50% of the balance on the notes were paid. The remaining balance outstanding of £8.32 million is due for repayment in August 2006.

 

The Company’s other indebtedness at October 2, 2005 and January 2, 2005 is at interest rates of 6% to 7% and matures from 2004 to 2009.

 

During the third quarter of 2005 and 2004, the Company had average borrowings outstanding of approximately $433.3 million and $490.1 million, respectively, at average annual interest rates of approximately 5.4 percent and 5.0 percent, respectively. During the third quarter of 2005 and 2004, the Company incurred net interest expense of $6.9 million and $6.5 million, respectively.

 

During the first nine months of 2005 and 2004, the Company had average borrowings outstanding of approximately $446.0 million and $532.9 million, respectively, at average annual interest rates of approximately 4.8 percent and 4.7 percent, respectively. During the first nine months of 2005 and 2004, the Company incurred net interest expense of $18.7 million and $19.4 million, respectively.

 

Note 4: Business Segments.

 

The following table summarizes financial information related to each of the Company’s business segments. The 2005 and 2004 asset information is as of October 2, 2005 and January 2, 2005, respectively.

 

8


Table of Contents

Third Quarter Period

(in thousands)

 

     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2005

                                                      

Operating revenues

   $ 235,517     $ 73,984    $ 78,106    $ 123,233     $ 362,822     $ —       $ 873,662  

Income (loss) from operations

   $ 28,594     $ 27,033    $ 11,321    $ 4,899     $ 48,499     $ (7,962 )   $ 112,384  

Equity in earnings of affiliates

                                                   (952 )

Interest expense, net

                                                   (6,943 )

Other, net

                                                   6,869  
                                                  


Income before income taxes

                                                 $ 111,358  
                                                  


Depreciation expense

   $ 9,419     $ 2,427    $ 692    $ 24,960     $ 9,624     $ 409     $ 47,531  

Amortization expense

   $ 292     $ —      $ —      $ 183     $ 1,112     $ —       $ 1,587  

Net pension credit (expense)

   $ (134 )   $ 735    $ 9,079    $ (310 )   $ (539 )   $ —       $ 8,831  

Identifiable assets

   $ 701,115     $ 408,106    $ 585,929    $ 1,092,111     $ 1,206,755     $ 72,316     $ 4,066,332  

Investments in marketable equity securities

                                                   310,980  

Investments in affiliates

                                                   67,593  
                                                  


Total assets

                                                 $ 4,444,905  
                                                  


     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2004

                                                      

Operating revenues

   $ 224,930     $ 91,367    $ 85,227    $ 124,887     $ 293,621     $ —       $ 820,032  

Income (loss) from operations

   $ 29,979     $ 43,355    $ 11,437    $ 24,543     $ 37,975     $ (6,991 )   $ 140,298  

Equity in earnings of affiliates

                                                   539  

Interest expense, net

                                                   (6,523 )

Other, net

                                                   858  
                                                  


Income before income taxes

                                                 $ 135,172  
                                                  


Depreciation expense

   $ 9,002     $ 2,770    $ 806    $ 24,916     $ 7,526     $ —       $ 45,020  

Amortization expense

   $ 6     $ —      $ —      $ 332     $ 994     $ —       $ 1,332  

Net pension credit (expense)

   $ 1,077     $ 802    $ 9,722    $ (265 )   $ (402 )   $ —       $ 10,934  

Identifiable assets

   $ 688,812     $ 410,294    $ 582,489    $ 1,113,554     $ 1,035,772     $ 14,170     $ 3,845,091  

Investments in marketable equity securities

                                                   409,736  

Investments in affiliates

                                                   61,814  
                                                  


Total assets

                                                 $ 4,316,641  
                                                  


 

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Table of Contents

Nine Month Period

(in thousands)

 

     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2005

                                                      

Operating revenues

   $ 704,881     $ 241,672    $ 245,906    $ 378,725     $ 1,033,985     $ —       $ 2,605,169  

Income (loss) from operations

   $ 86,991     $ 100,894    $ 26,152    $ 51,894     $ 115,252     $ (23,115 )   $ 358,068  

Equity in losses of affiliates

                                                   (1,135 )

Interest expense, net

                                                   (18,748 )

Other, net

                                                   10,319  
                                                  


Income before income taxes

                                                 $ 348,504  
                                                  


Depreciation expense

   $ 27,551     $ 7,426    $ 2,139    $ 75,384     $ 27,413     $ 1,091     $ 141,004  

Amortization expense

   $ 827     $ —      $ —      $ 592     $ 3,241     $ —       $ 4,660  

Net pension credit (expense)

   $ (799 )   $ 2,204    $ 28,250    $ (929 )   $ (1,593 )   $ —       $ 27,133  
     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2004

                                                      

Operating revenues

   $ 677,734     $ 257,927    $ 260,816    $ 372,327     $ 828,588     $ —       $ 2,397,392  

Income (loss) from operations

   $ 99,646     $ 118,336    $ 35,891    $ 72,382     $ 88,055     $ (23,095 )   $ 391,215  

Equity in losses of affiliates

                                                   (1,530 )

Interest expense, net

                                                   (19,412 )

Other, net

                                                   1,529  
                                                  


Income before income taxes

                                                 $ 371,802  
                                                  


Depreciation expense

   $ 28,023     $ 8,321    $ 2,484    $ 74,093     $ 20,727     $ —       $ 133,648  

Amortization expense

   $ 14     $ —      $ —      $ 405     $ 7,174     $ —       $ 7,593  

Net pension credit (expense)

   $ 2,462     $ 2,430    $ 27,890    $ (765 )   $ (1,128 )   $ —       $ 30,889  

 

10


Table of Contents

Newspaper publishing includes the publication of newspapers in the Washington, D.C. area and Everett, Washington; newsprint warehousing and recycling facilities; and the Company’s electronic media publishing business (primarily washingtonpost.com).

 

The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer’s Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community.

 

Television broadcasting operations are conducted through six VHF, television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville) with revenues derived primarily from sales of advertising time.

 

Cable television operations consist of cable systems offering basic cable, digital cable, pay television, cable modem and other services to subscribers in midwestern, western, and southern states. The principal source of revenue is monthly subscription fees charged for services.

 

Education products and services are provided through the Company’s wholly-owned subsidiary Kaplan, Inc. Kaplan’s businesses include supplemental education services, which is made up of Kaplan Test Prep and Admissions, providing test preparation services for college and graduate school entrance exams; Kaplan Professional, providing education and career services to business people and other professionals; and Score!, offering multi-media learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include higher education services, which includes all of Kaplan’s post-secondary education businesses, including fixed facility colleges which offer Bachelor’s degrees, Associate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; and online post-secondary and career programs (various distance-learning businesses).

 

Corporate office includes the expenses of the Company’s corporate office.

 

Note 5: Goodwill and Other Intangible Assets.

 

The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable division, as the Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable division historically has obtained renewals and extensions of such agreements for nominal costs and without any material modifications to the agreements. Amortized intangible assets are primarily mastheads, customer relationships intangibles and non-compete agreements, with amortization periods up to five years.

 

11


Table of Contents

The Company’s goodwill and other intangible assets as of October 2, 2005 and January 2, 2005 were as follows (in thousands):

 

     Gross

   Accumulated
Amortization


   Net

2005

                    

Goodwill

   $ 1,418,968    $ 298,402    $ 1,120,566

Indefinite-lived intangible assets

     656,998      163,806      493,192

Amortized intangible assets

     40,362      16,802      23,560
    

  

  

     $ 2,116,328    $ 479,010    $ 1,637,318
    

  

  

2004

                    

Goodwill

   $ 1,321,542    $ 298,402    $ 1,023,140

Indefinite-lived intangible assets

     656,998      163,806      493,192

Amortized intangible assets

     20,021      12,142      7,879
    

  

  

     $ 1,998,561    $ 474,350    $ 1,542,211
    

  

  

 

Activity related to the Company’s goodwill and other intangible assets during the nine months ended October 2, 2005 was as follows (in thousands):

 

     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Goodwill, net

                                              

Beginning of year

   $ 72,770     $ 203,165    $ 69,556    $ 85,666     $ 591,983     $ 1,023,140  

Acquisitions

     7,881       —        —        —         104,031       111,912  

Foreign currency exchange rate changes

     —         —        —        —         (14,486 )     (14,486 )
    


 

  

  


 


 


Balance at October 2, 2005

   $ 80,651     $ 203,165    $ 69,556    $ 85,666     $ 681,528     $ 1,120,566  
    


 

  

  


 


 


     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Indefinite-Lived Intangible Assets, net

                                              

Beginning of year

     —         —        —      $ 486,330     $ 6,862     $ 493,192  

Acquisitions

     —         —        —        —         —         —    
    


 

  

  


 


 


Balance at October 2, 2005

     —         —        —      $ 486,330     $ 6,862     $ 493,192  
    


 

  

  


 


 


     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Amortized intangible assets, net

                                              

Beginning of year

   $ 118       —        —      $ 2,474     $ 5,287     $ 7,879  

Acquisitions

     7,677       —        —        —         12,870       20,547  

Foreign currency exchange rate changes

     —         —        —        —         (206 )     (206 )

Amortization

     (827 )     —        —        (592 )     (3,241 )     (4,660 )
    


 

  

  


 


 


Balance at October 2, 2005

   $ 6,968       —        —      $ 1,882     $ 14,710     $ 23,560  
    


 

  

  


 


 


 

Activity related to the Company’s goodwill and other intangible assets during the nine-months ended September 26, 2004 was as follows (in thousands):

 

     Newspaper
Publishing


   Television
Broadcasting


   Magazine
Publishing


   Cable
Television


   Education

   Total

Goodwill, net

                                         

Beginning of year

   $ 71,277    $ 203,165    $ 69,556    $ 85,666    $ 536,030    $ 965,694

Acquisitions

     1,390      —        —        —        49,238      50,628

Foreign currency exchange rate changes

     —        —        —        —        787      787
    

  

  

  

  

  

Balance at September 26, 2004

   $ 72,667    $ 203,165    $ 69,556    $ 85,666    $ 586,055    $ 1,017,109
    

  

  

  

  

  

 

12


Table of Contents
     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Indefinite-Lived Intangible Assets, net

                                          

Beginning of year

     —       —      —      $ 484,556     $ 2,100     $ 486,656  

Acquisitions

     —       —      —        1,350       —         1,350  
    


 
  
  


 


 


Balance at September 26, 2004

     —       —      —      $ 485,906     $ 2,100     $ 488,006  
    


 
  
  


 


 


     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Amortized intangible assets, net

                                          

Beginning of year

   $ 30     —      —      $ 1,081     $ 4,115     $ 5,226  

Acquisitions

     130     —      —        1,788       11,872       13,790  

Foreign currency exchange rate changes

     —       —      —        —         54       54  

Amortization

     (14 )   —      —        (405 )     (7,174 )     (7,593 )
    


 
  
  


 


 


Balance at September 26, 2004

   $ 146     —      —      $ 2,464     $ 8,867     $ 11,477  
    


 
  
  


 


 


 

Note 6: Stock Options.

 

Effective the first day of the Company’s 2002 fiscal year, the Company adopted the fair-value-based method of accounting for Company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method was applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 are accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The following table presents what the Company’s results would have been had the fair values of options granted after 1995, but prior to 2002, been recognized as compensation expense in the third quarter and first nine-months of 2005 and 2004 (in thousands, except per share amounts).

 

     Quarter ended

    Nine-months ended

 
     October 2,
2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Net income available for common shares, as reported

   $ 66,313     $ 82,227     $ 210,923     $ 225,810  

Add: Company stock option compensation expense included in net income, net of related tax effects

     172       130       517       391  

Deduct: Total Company stock option compensation expense determined under the fair value based method for all awards, net of related tax effects

     (256 )     (733 )     (769 )     (2,199 )
    


 


 


 


Pro forma net income available for common shares

   $ 66,229     $ 81,624     $ 210,671     $ 224,002  
    


 


 


 


Basic earnings per share, as reported

   $ 6.91     $ 8.59     $ 21.99     $ 23.62  

Pro forma basic earnings per share

   $ 6.90     $ 8.53     $ 21.96     $ 23.43  

Diluted earnings per share, as reported

   $ 6.89     $ 8.57     $ 21.93     $ 23.54  

Pro forma diluted earnings per share

   $ 6.89     $ 8.50     $ 21.91     $ 23.36  

 

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Table of Contents

The Company also maintains a stock option plan at its Kaplan subsidiary that provides for the issuance of Kaplan stock options to certain members of Kaplan’s management. Under the provisions of the plan, options are issued with an exercise price equal to the estimated fair value of Kaplan’s common stock, and these options vest ratably over the number of years specified (generally four to five years) at the time of grant. Upon exercise, an option holder receives cash equal to the difference between the exercise price and the then fair value. The fair value of Kaplan’s common stock is determined by the Company’s compensation committee of the Board of Directors and in January 2005, the committee set the fair value price at $2,080 per share. Also in January 2005, 15,353 Kaplan stock options were exercised, and 10,582 Kaplan stock options were awarded at an option price of $2,080. At September 30, 2005, there were 63,229 Kaplan stock options outstanding.

 

For the third quarter of 2005, the Company reversed a portion of the accrual related to this plan, resulting in a credit of $9.8 million, compared to expense of $5.1 million in the third quarter of 2004, to reflect the anticipated impact that slower growth in Kaplan’s expected operating results and an overall decline in public market values of other education companies will have when the compensation committee sets the value in January 2006. For the first nine months of 2005, the Company recorded expense of $0.2 million, compared to expense of $22.9 million in the first nine months of 2004.

 

Note 7: Antidilutive Securities.

 

The third quarter and first nine months of 2005 diluted earnings per share amount excludes the effects of 4,000 stock options outstanding as their inclusion would be antidilutive. There were no antidilutive stock options outstanding during the third quarter and first nine months of 2004.

 

Note 8: Pension and Postretirement Plans.

 

The total (income) cost arising from the Company’s defined benefit pension plans for the third quarter and nine months ended October 2, 2005 and September 26, 2004 consists of the following components (in thousands):

 

     Thirteen Weeks Ended

    Thirty-Nine Weeks Ended

 
    

October 2,

2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Service cost

   $ 7,436     $ 5,798     $ 21,250     $ 17,098  

Interest cost

     10,695       9,526       30,561       27,628  

Expected return on assets

     (28,063 )     (25,086 )     (80,197 )     (72,616 )

Amortization of transition asset

     (29 )     (292 )     (81 )     (795 )

Amortization of prior service cost

     1,214       1,083       3,470       3,446  

Recognized actuarial gain

     (1,105 )     (1,963 )     (3,157 )     (5,782 )
    


 


 


 


Net periodic benefit

     (9,852 )     (10,934 )     (28,154 )     (31,021 )

Early retirement program expense

     1,021       —         1,021       132  
    


 


 


 


Total benefit

   $ (8,831 )   $ (10,934 )   $ (27,133 )   $ (30,889 )
    


 


 


 


 

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Table of Contents

The total (income) cost arising from the Company’s postretirement plans for the third quarter and nine months ended October 2, 2005 and September 26, 2004, consists of the following components (in thousands):

 

     Thirteen Weeks Ended

    Thirty-Nine Weeks Ended

 
     October 2,
2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Service cost

   $ 1,507     $ 1,231     $ 4,519     $ 3,693  

Interest cost

     1,858       1,873       5,576       5,619  

Amortization of prior

service cost

     (147 )     (147 )     (441 )     (439 )

Recognized actuarial gain

     (266 )     (414 )     (796 )     (1,240 )
    


 


 


 


Total cost

   $ 2,952     $ 2,543     $ 8,858     $ 7,633  
    


 


 


 


 

The expected rate of return on plan assets is 7.5% in 2005. At January 2, 2005, the Company reduced its assumption on the discount rate from 6.25% to 5.75% for both its pension plans and postretirement plans. During the first quarter of 2005, the Company changed from the 1983 Group Annuity Mortality Table to the 1994 Group Annuity Mortality Table, for its pension plans. These assumption changes are estimated to cause an approximate $7 million reduction in the 2005 pension credit. Overall, the pension credit for 2005 is expected to be down by approximately $4 million compared to 2004.

 

In December of 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was enacted. The Act introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health benefit plans that provide a benefit that meets certain criteria. The Company’s other postretirement plans covering retirees currently provide certain prescription benefits to eligible participants. In accordance with FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,” the Company concluded that the Act is not significant to the Company’s other postretirement plans; therefore, the effects of the Act were incorporated into the latest valuation of December 31, 2004. Overall, the Company’s Postretirement benefit obligation was reduced by about $4.0 million at January 2, 2005 as a result of the Act; the Company’s postretirement expense is expected to be reduced by about $0.5 million in fiscal year 2005 as a result of the Act.

 

Note 9 – Hurricane Losses

 

The Company’s cable division was significantly impacted by Hurricane Katrina in the third quarter of 2005. About 94,000 of the cable division’s pre-hurricane subscribers were located on the Gulf Coast of Mississippi, including Gulfport, Biloxi, Pascagoula and other neighboring communities where storm damage was significant. Through the end of the third quarter of 2005, the Company recorded an estimated $9.9 million loss of property, plant and equipment, incurred an estimated $4.2 million in incremental clean-up, repair and other expenses in connection with the hurricane, and experienced an estimated $4.4 million reduction in operating income from granting a 30-day service credit to all its 94,000 pre-hurricane Gulf Coast subscribers; additional costs related to the hurricane recovery will continue to be incurred in the fourth quarter of 2005. The Company has property and business interruption insurance that is expected to cover some of these losses. The Company has not recorded any estimated insurance recovery amount as of the end of the third quarter of 2005 as the Company is in the early stages of preparing its insurance claim.

 

Note 10 – Other Non-Operating Income (Expense)

 

The Company recorded other non-operating expense, net, of $6.9 million for the third quarter of 2005, compared to $0.9 million for the third quarter of 2004. For the first nine months of 2005 and 2004, the Company recorded other non-operating income, net, of $10.3 million and $1.5 million, respectively.

 

15


Table of Contents

A summary of non-operating income (expense) for the thirteen and thirty-nine weeks ended October 2, 2005 and September 26, 2004, is as follows (in millions):

 

     Thirteen Weeks Ended

    Thirty-Nine Weeks Ended

 
     October 2,
2005


    September 26,
2004


    October 2,
2005


    September 26,
2004


 

Gain on sale of non-operating property

   $ —       $ —       $ 5.1     $ —    

Gains on sale of marketable equity securities

     8.6       —         12.0       —    

Foreign currency (losses) gains, net

     (1.6 )     (0.2 )     (6.2 )     0.7  

Impairment write-downs on cost method and other investments

     —         —         (0.7 )     (0.7 )

Other gains (losses), net

     (0.1 )     1.1       0.1       1.5  
    


 


 


 


Total

   $ 6.9     $ 0.9     $ 10.3     $ 1.5  
    


 


 


 


 

Note 11: Contingencies.

 

On April 29, 2005, Kaplan was named as a party in a proposed class action antitrust lawsuit in California. At this stage, the Company cannot reasonably estimate any possible loss associated with this lawsuit. The Company intends to defend the lawsuit vigorously.

 

Note 12: Recent Accounting Pronouncements.

 

In December 2004, Statement of Financial Accounting Standards No. 123R (SFAS 123R), “Shared Based Payment” was issued, which requires companies to record the cost of employee services in exchange for stock options based on the grant-date fair value of the award. Because the Company adopted the fair-value-based method of accounting for Company stock options in 2002, SFAS 123R will have a minimal impact on the Company’s results of operations when adopted in the first quarter of 2006.

 

EITF Topic D-108, “Use of the Residual Method to Value Acquired Assets Other than Goodwill,” requires companies that have applied the residual method to value intangible assets to perform an impairment test on those intangible assets using the direct method by the end of the first quarter of 2005. As a result, the Company was required to complete such an impairment test at its cable division in the first quarter of 2005, and the Company has concluded that no impairment charge was required.

 

16


Table of Contents

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

 

This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.

 

Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume.

 

Results of Operations

 

Net income for the third quarter of 2005 was $66.6 million ($6.89 per share), down from net income of $82.5 million ($8.57 per share) for the third quarter of last year.

 

Operating results for the cable division in the third quarter of 2005 include the impact of charges and lost revenues associated with Hurricane Katrina; the Company estimates that the adverse impact on operating income was approximately $18.5 million (after-tax impact of $11.2 million, or $1.17 per share). Third quarter results also include non-operating gains from the sales of marketable securities (after-tax impact of $5.2 million, or $0.54 per share).

 

About 94,000 of the cable division’s pre-hurricane subscribers were located on the Gulf Coast of Mississippi, including Gulfport, Biloxi, Pascagoula and other neighboring communities where storm damage was significant. Through the end of the third quarter of 2005, the Company recorded an estimated $9.9 million loss of property, plant and equipment, incurred an estimated $4.2 million in incremental clean-up, repair and other expenses in connection with the hurricane, and experienced an estimated $4.4 million reduction in operating income from granting a 30-day service credit to all its 94,000 pre-hurricane Gulf Coast subscribers; additional costs related to the hurricane recovery will continue to be incurred in the fourth quarter of 2005. The Company has property and business interruption insurance that is expected to cover some of these losses. The Company has not recorded any estimated insurance recovery amount as of the end of the third quarter of 2005 as the Company is in the early stages of preparing its insurance claim.

 

Revenue for the third quarter of 2005 was $873.7 million, up 7% from $820.0 million in 2004. The increase is due mostly to significant revenue growth at the education division, along with increased revenues at the Company’s newspaper publishing division. Revenues were down at the Company’s television broadcasting, magazine publishing and cable divisions in the third quarter of 2005.

 

Despite the revenue increases, operating income was down 20% for the third quarter of 2005 to $112.4 million, from $140.3 million in 2004. The Company’s earnings were adversely impacted by declines at the cable, television broadcasting, newspaper publishing and magazine publishing divisions. A significant portion of the decline in operating income is due to the impact of the hurricane, particularly at the cable division, discussed above. The operating income decline was offset by improved results at the Company’s education division, which benefited from a credit of $9.8 million due to the reversal of a portion of the accrual related to Kaplan’s stock option plan, compared to expense of $5.1 million in the third quarter of 2004.

 

For the first nine months of 2005, net income totaled $211.9 million ($21.93 per share), compared with $226.8 million ($23.54 per share) for the same period of 2004.

 

In addition to the adverse impact of the hurricane on cable results, results for the first nine months of 2005 include non-operating gains from the sales of non-operating land and marketable securities (after-tax impact of $10.4 million, or $1.08 per share).

 

17


Table of Contents

Revenue for the first nine months of 2005 was $2,605.2 million, up 9% over revenue of $2,397.4 million for the first nine months of 2004. The increase is due mostly to significant revenue growth at the education division, along with increased revenues at the Company’s newspaper publishing and cable divisions. Revenues were down at the Company’s television broadcasting and magazine publishing divisions.

 

Operating income declined 8% to $358.1 million, from $391.2 million in 2004, due to lower earnings at the Company’s cable, television broadcasting, magazine publishing and newspaper publishing divisions, offset by increased earnings at the Company’s education division. A large portion of the decline in operating income is due to the impact of the hurricane, particularly at the cable division, discussed above.

 

Excluding charges related to early retirement programs, the Company’s operating income for the third quarter and first nine months of 2005 includes $9.9 million and $28.2 million of net pension credits, respectively, compared to $10.9 million and $31.0 million for the same periods of 2004. At January 2, 2005, the Company reduced its assumption on the discount rate from 6.25% to 5.75% and, during the first quarter of 2005, the Company changed to a more current Mortality Table. Overall, the pension credit for 2005 is expected to be down by approximately $4 million compared to 2004.

 

Newspaper Publishing Division. Newspaper publishing division revenue totaled $235.5 million for the third quarter of 2005, an increase of 5% from $224.9 million in the third quarter of 2004; division revenue increased 4% to $704.9 million for the first nine months of 2005, from $677.7 million for the first nine months of 2004. Division operating income for the third quarter declined 5% to $28.6 million, from $30.0 million in the third quarter of 2004; operating income decreased 13% to $87.0 million for the first nine months of 2005, compared to $99.6 million for the first nine months of 2004. The third quarter and year-to-date declines in operating income reflect a 7% and 8% increase, respectively, in newsprint expense at The Post, as well as increased pension and payroll costs; in addition, operating results for 2005 include losses from the recent Slate acquisition. The declines were offset by improved results at Washingtonpost.Newsweek Interactive.

 

Print advertising revenue at The Washington Post newspaper in the third quarter increased 3% to $145.3 million, from $140.9 million in 2004, and increased 1% to $437.6 million for the first nine months of 2005, from $433.1 million for the first nine months of 2004. The increase in print advertising revenues for the third quarter and first nine months of 2005 is primarily due to increases in zoned, classified and retail advertising, which more than offset the continued decline in national and supplements advertising. Classified recruitment advertising revenue rose 10% to $22.1 million in the third quarter of 2005, from $20.1 million in the third quarter of 2004, and was up 8% to $63.4 million in the first nine months of 2005, compared to $58.7 million in the first nine months of 2004.

 

For the first nine months of 2005, Post daily and Sunday circulation each declined 3.9% compared to the same period of the prior year. For the nine months ended October 2, 2005, average daily circulation at The Post totaled 681,600 and average Sunday circulation totaled 974,900.

 

Revenue generated by the Company’s online publishing activities (including Slate, which was acquired in January 2005), primarily washingtonpost.com, increased 24% to $19.8 million for the third quarter of 2005, from $15.9 million in the third quarter of 2004; online revenues increased 24% to $55.5 million for the first nine months of 2005, from $44.7 million in the first nine months of 2004. Local and national online advertising revenues grew 32% and 36% for the third quarter and first nine months of 2005, respectively. Online classified advertising revenue on washingtonpost.com increased 26% in the third quarter of 2005 and 22% for the first nine months of 2005.

 

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Television Broadcasting Division. Revenue for the television broadcasting division declined 19% in the third quarter of 2005 to $74.0 million, from $91.4 million in 2004, due primarily to strong third quarter 2004 revenues that included $9.6 million in political advertising and $8.0 million in incremental summer Olympics-related advertising at the Company’s NBC affiliates. For the first nine months of 2005, revenue decreased 6% to $241.7 million, from $257.9 million in 2004, which included $16.8 million in political advertising and $8.0 million in incremental Olympics-related advertising at the Company’s NBC affiliates.

 

Operating income for the third quarter and first nine months of 2005 decreased 38% and 15%, respectively, to $27.0 million and $100.9 million, respectively, from $43.4 million and $118.3 million for the third quarter and first nine months of 2004, respectively. The operating income declines are primarily related to the absence of significant political and Olympics revenue in 2005, as discussed above.

 

Magazine Publishing Division. Revenue for the magazine publishing division totaled $78.1 million for the third quarter of 2005, an 8% decrease from $85.2 million for the third quarter of 2004; division revenue totaled $245.9 million for the first nine months of 2005, a 6% decrease from $260.8 million for the first nine months of 2004. Advertising revenue at Newsweek was down 11% in the third quarter of 2005 due to fewer ad pages at the domestic edition. The decline in revenues for the first nine months of 2005 reflects the weak domestic and international advertising environment at Newsweek, particularly in the first quarter of 2005; overall, Newsweek advertising revenues are down 11% for the first nine months of 2005.

 

Operating income totaled $11.3 million for the third quarter of 2005, a slight decrease from $11.4 million in the third quarter of 2004, due primarily to a $1.3 million early retirement charge at Newsweek International. Operating income totaled $26.2 million for the first nine months of 2005, down 27% from $35.9 million for the first nine months of 2004, due primarily to revenue reductions at Newsweek discussed above.

 

Cable Television Division. Cable division revenue of $123.2 million for the third quarter of 2005 represents a 1% decline over 2004 third quarter revenue of $124.9 million; for the first nine months of 2005, revenue increased 2% to $378.7 million, from $372.3 million in 2004. Hurricane Katrina had a large impact on cable division revenues in the third quarter of 2005. About 94,000 of the cable division’s pre-hurricane subscribers were located on the Gulf Coast of Mississippi, including Gulfport, Biloxi, Pascagoula and other neighboring communities where storm damage was significant. Revenues for the third quarter were adversely impacted by approximately $6.2 million due to lost revenues from a 30-day service credit granted to the 94,000 pre-hurricane Gulf Coast subscribers; this was offset by increased growth in the division’s cable modem revenues. Also, the Company does not plan to implement an overall basic rate increase in 2005.

 

Cable division operating income for the third quarter of 2005 was $4.9 million, compared to operating income of $24.5 million for the third quarter of 2004; cable division operating income for the first nine months of 2005 was $51.9 million, compared to $72.4 million for the first nine months of 2004. The decline in third quarter operating income is due mostly to the hurricane, which had an estimated adverse impact of $18.5 million on the cable division’s results. Through the third quarter of 2005, the Company recorded an estimated $9.9 million loss of property, plant and equipment, incurred an estimated $4.2 million in incremental clean-up, repair and other expenses associated with the hurricane, and experienced an estimated $4.4 million reduction in operating income from granting a 30-day service credit to all its 94,000 pre-hurricane Gulf Coast subscribers. The decrease in operating income is also due to higher depreciation, programming and customer service costs.

 

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At September 30, 2005, the cable division had approximately 213,900 digital cable subscribers (compared to 220,500 at the end of September 2004 and 219,200 at the end of 2004), representing a 31% penetration of the subscriber base. The Company estimates a decline of 8,000 digital subscribers as a result of the hurricane. At September 30, 2005, the cable division had approximately 219,900 CableONE.net service subscribers, compared to 165,600 at the end of September 2004. The Company estimates a decline of 6,200 CableONE.net service subscribers as a result of the hurricane. Both digital and cable modem services are now offered in virtually all of the cable division’s markets. At September 30, 2005, the cable division had approximately 687,400 basic subscribers, compared to 712,800 at the end of September 2004 and 709,100 at the end of December 2004. The Company estimates a decline of 21,200 basic subscribers as a result of the hurricane. These cable subscriber estimates include customers who were temporarily out of service as of September 30, 2005. Repair efforts to the cable plant associated with the hurricane have proceeded rapidly and, as of the end of October 2005, almost all of the surviving households in the Gulf Coast region are now receiving cable service. The estimated hurricane-related basic, digital and cable modem subscriber losses are from destroyed or severely damaged homes.

 

At September 30, 2005, Revenue Generating Units (the sum of basic video, digital video and cable modem subscribers) totaled 1,121,300 compared to 1,098,900 as of September 30, 2004. The increase is due to growth in high-speed data customers, offset by an approximate 35,400 RGU reduction due to the hurricane. RGUs include about 7,000 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by the various franchise agreements.

 

Below are details of Cable division capital expenditures for the nine months of 2005 and 2004, as defined by the NCTA Standard Reporting Categories (in millions):

 

     2005

   2004

Customer Premise Equipment

   $ 19.4    $ 19.8

Commercial

     0.1      —  

Scaleable Infrastructure

     5.8      6.3

Line Extensions

     10.6      10.6

Upgrade/Rebuild

     9.4      10.3

Support Capital

     26.2      11.8
    

  

Total

   $ 71.5    $ 58.8
    

  

 

Education Division. Education division revenue totaled $362.8 million for the third quarter of 2005, a 24% increase over revenue of $293.6 million for the same period of 2004. Excluding revenue from acquired businesses, primarily in the higher education division and the professional training schools that are part of supplemental education, education division revenue increased 16% for the third quarter of 2005. Kaplan reported operating income for the third quarter of 2005 of $48.5 million, an increase of 28% from $38.0 million in the third quarter of 2004. For the first nine months of 2005, education division revenue totaled $1,034.0 million, a 25% increase over revenue of $828.6 million for the same period of 2004. Excluding revenue from acquired businesses, primarily in the higher education division and the professional training schools that are part of supplemental education, education division revenue increased 19% for the first nine months of 2005. Kaplan reported operating income of $115.3 million for the first nine months of 2005, an increase of 31% from $88.1 million for the first nine months of 2004.

 

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A summary of operating results for the third quarter and the first nine months of 2005 compared to 2004 is as follows:

 

     Third Quarter

    YTD

 
(In thousands)    2005

    2004

    % Change

    2005

    2004

    % Change

 

Revenue

                                            

Supplemental education

   $ 181,228     $ 151,093     20     $ 510,272     $ 430,103     19  

Higher education

     181,594       142,528     27       523,713       398,485     31  
    


 


 

 


 


 

     $ 362,822     $ 293,621     24     $ 1,033,985     $ 828,588     25  
    


 


 

 


 


 

Operating income (loss)

                                            

Supplemental education

   $ 34,212     $ 32,894     4     $ 88,112     $ 78,588     12  

Higher education

     11,657       20,162     (42 )     58,655       63,677     (8 )

Kaplan corporate overhead

     (6,035 )     (8,937 )   32       (28,069 )     (24,127 )   (16 )

Other*

     8,665       (6,144 )   —         (3,446 )     (30,083 )   89  
    


 


 

 


 


 

     $ 48,499     $ 37,975     28     $ 115,252     $ 88,055     31  
    


 


 

 


 


 


* Other includes credits (charges) for stock-based incentive compensation and amortization of certain intangibles.

 

Supplemental education includes Kaplan’s test preparation, professional training and Score! businesses. In April 2005, Kaplan Professional completed the acquisition of BISYS Education Services, a provider of licensing education and compliance solutions for financial services institutions and professionals. In August 2005, Kaplan completed the acquisition of The Kidum Group, the leading provider of test preparation services in Israel. Excluding revenue from acquired businesses, supplemental education revenues grew by 11% and 13% for the third quarter and first nine months of 2005, respectively. The improvement in supplemental education results for the first nine months of 2005 is due to growth at Kaplan’s test preparation business (particularly the K12 business), the professional real estate courses and The Financial Training Company U.K. accountancy programs, as well as the BISYS acquisition. These results were offset by soft market demand for Kaplan Professional’s securities and insurance course offerings. While there was a slight increase in revenues at Score! compared to the first nine months of 2004, there was a drop in operating income. There were 167 Score! centers at the end of September 2005 compared to 160 at the end of September 2004.

 

Higher education includes all of Kaplan’s post-secondary education businesses, including fixed-facility colleges as well as online post-secondary and career programs. Excluding revenue from acquired businesses, higher education revenues grew by 21% and 26% in the third quarter and first nine months of 2005, respectively. Higher education enrollments have increased by 16% at September 30, 2005, compared to enrollments at September 30, 2004, with most of the new enrollment growth occurring in the online programs. Increased operating costs associated with expansion activities at both the online and the fixed-facility operations, including new program offerings and higher facility and advertising expenses, have contributed significantly to the third quarter and year-to-date declines in operating income. In May 2005, Kaplan acquired Singapore-based Asia Pacific Management Institute (APMI), a private education provider for undergraduate and postgraduate students in Asia.

 

Corporate overhead represents unallocated expenses of Kaplan, Inc.’s corporate office, which rose in the first nine months of 2005 due to higher overall operating costs. In the third quarter of 2005, certain estimated incentive compensation liabilities were reduced, resulting in a decline for the quarter.

 

Other comprises (credits) charges for stock-based incentive compensation arising from a stock option plan established for certain members of Kaplan’s management and amortization of certain intangibles. Under the stock-based incentive plan, the

 

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amount of compensation (credit) expense varies directly with the estimated fair value of Kaplan’s common stock and the number of options outstanding. For the third quarter of 2005, the Company reversed a portion of the accrual related to this plan, resulting in a credit of $9.8 million, compared to expense of $5.1 million in the third quarter of 2004, to reflect slower growth in Kaplan’s expected operating results and an overall decline in public market values of other education companies. For the first nine months of 2005, the Company recorded expense of $0.2 million, compared to expense of $22.9 million in the first nine months of 2004, related to this plan.

 

Equity in Losses of Affiliates. The Company’s equity in losses of affiliates for the third quarter of 2005 was $1.0 million, compared to earnings of $0.5 million for the third quarter of 2004. For the first nine months of 2005, the Company’s equity in losses of affiliates totaled $1.1 million, compared to losses of $1.5 million for the same period of 2004. The Company’s affiliate investments consist of a 49% interest in BrassRing LLC and a 49% interest in Bowater Mersey Paper Company Limited.

 

Other Non-Operating Income. The Company recorded other non-operating income, net, of $6.9 million for the third quarter of 2005, compared to $0.9 million of other non-operating income, net, in the third quarter of 2004. The third quarter 2005 non-operating income, net, includes $8.6 million in pre-tax gains related to the sale of marketable securities, offset by foreign currency losses of $1.6 million and other non-operating items.

 

The Company recorded other non-operating income, net, of $10.3 million for the first nine months of 2005, compared to other non-operating income, net, of $1.5 million for the same period of the prior year. The 2005 non-operating income is comprised of pre-tax gains of $17.1 million related to the sales of non-operating land and marketable securities, offset by foreign currency losses of $6.2 million and other non-operating items.

 

A summary of non-operating income (expense) for the thirty-nine weeks ended October 2, 2005 and September 26, 2004, follows (in millions):

 

     2005

    2004

 

Gain on sale of non-operating property

   $ 5.1     $ —    

Gain on sale of marketable equity securities

     12.0       —    

Impairment write-downs on cost method and other investments

     (0.7 )     (0.7 )

Foreign currency (losses) gains, net

     (6.2 )     0.7  

Other, net

     0.1       1.5  
    


 


Total

   $ 10.3     $ 1.5  
    


 


 

Net Interest Expense. The Company incurred net interest expense of $6.9 million and $18.7 million for the third quarter and first nine months of 2005, respectively, compared to $6.5 million and $19.4 million for the same periods of 2004. At October 2, 2005, the Company had $429.1 million in borrowings outstanding at an average interest rate of 5.5%.

 

Provision for Income Taxes. The effective tax rate for the third quarter and first nine months of 2005 was 40.2% and 39.2%, respectively, compared to 39.0% for both periods of 2004.

 

Earnings Per Share. The calculation of diluted earnings per share for the third quarter and first nine months of 2005 was based on 9,618,000 and 9,616,000 weighted

 

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average shares outstanding, respectively, compared to 9,598,000 and 9,591,000, respectively, for the third quarter and first nine months of 2004. The Company made no significant repurchases of its stock during the first nine months of 2005.

 

Financial Condition: Capital Resources and Liquidity

 

Acquisitions and Dispositions. In the third quarter of 2005, Kaplan acquired two businesses in the test preparation division, totaling $38.4 million, financed with cash. This included the acquisition of The Kidum Group, the leading provider of test preparation services in Israel. In the second quarter of 2005, Kaplan acquired five businesses in their higher education and professional divisions totaling $83.1 million. These acquisitions included BISYS Education Services, a provider of licensing education and compliance solutions for financial services institutions and professionals as well as Asia Pacific Management Institute, a private education provider for undergraduate and postgraduate students in Asia. In the first quarter of 2005, the Company acquired Slate, an online magazine and Kaplan acquired two businesses in their higher education division; these acquisitions totaled $26.5 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.

 

Capital expenditures. During the first nine months of 2005, the Company’s capital expenditures totaled $164.7 million. The Company estimates that its capital expenditures will be in the range of $225 million to $250 million in 2005.

 

Liquidity. Throughout the first nine months of 2005, the Company’s borrowings, net of repayments, decreased by $55.0 million, with the decrease primarily due to cash flows from operations.

 

At October 2, 2005, the Company had $429.1 million in total debt outstanding, which comprised $399.1 million of 5.5 percent unsecured notes due February 15, 2009, and $30.0 million in other debt. As of October 2, 2005, the Company has commercial paper investments of $57.8 million that are classified as “cash and cash equivalents” on the Company’s consolidated balance sheet.

 

During the third quarter of 2005 and 2004, the Company had average borrowings outstanding of approximately $433.3 million and $490.1 million, respectively, at average annual interest rates of approximately 5.4 percent and 5.0 percent, respectively. During the third quarter of 2005 and 2004, the Company incurred net interest expense of $6.9 million and $6.5 million, respectively.

 

During the first nine months of 2005 and 2004, the Company had average borrowings outstanding of approximately $446.0 million and $532.9 million, respectively, at average annual interest rates of approximately 4.8 percent and 4.7 percent, respectively. During the first nine months of 2005 and 2004, the Company incurred net interest expense on borrowings of $18.7 million and $19.4 million, respectively.

 

At October 2, 2005 and January 2, 2005, the Company has working capital of $23.0 million and $66.2 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through internally generated funds and, to a lesser extent, commercial paper borrowings. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2005.

 

As noted above, the Company’s borrowings have declined by $55.0 million, to $429.1 million, as compared to borrowings of $484.1 million at January 2, 2005. In the first nine months of 2005, the Company executed a building lease amendment and made other commitments aggregating about $37.7 million from 2005 through 2015. There were no other significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended January 2, 2005.

 

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Forward-Looking Statements

 

This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2005.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk, and to its borrowing activities, which are subject to interest rate risk. As of October 2, 2005, the Company had paid off its commercial paper borrowings and had commercial paper investments of $57.8 million, which are also subject to interest rate risk. The Company’s market risk disclosures set forth in its 2004 Annual Report filed on Form 10-K have not otherwise changed significantly.

 

Item 4. Controls and Procedures

 

  (a) Evaluation of Disclosure Controls and Procedures

 

An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of October 2, 2005. Based on that evaluation, the Company’s Chief Executive Officer and Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

  (b) Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting during the quarter ended October 2, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 6. Exhibits.

 

Exhibit

Number


 

Description


3.1   Restated Certificate of Incorporation of the Company dated November 13, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003).
3.2   Certificate of Designation for the Company’s Series A Preferred Stock dated September 22, 2003 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Current Report on Form 8-K dated September 22, 2003).
3.3   By-Laws of the Company as amended and restated through September 22, 2003 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K dated September 22, 2003).
4.1   Form of the Company’s 5.50% Notes due February 15, 2009, issued under the Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999).
4.2   Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999).
4.3   First Supplemental Indenture dated as of September 22, 2003, among WP Company LLC, the Company and Bank One, NA, as successor to The First National Bank of Chicago, as trustee, to the Indenture dated as of February 17, 1999, between The Washington Post Company and The First National Bank of Chicago, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated September 22, 2003).
4.4   364-Day Credit Agreement dated as of August 10, 2005, among the Company, Citibank, N.A., JP Morgan Chase Bank, N.A., Wachovia Bank, National Association, SunTrust Bank, The Bank of New York and PNC Bank, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 12, 2005).
4.5   5-Year Credit Agreement dated as of August 14, 2002, among the Company, Citibank, N.A., Wachovia Bank, N.A., SunTrust Bank, Bank One, N.A., JP Morgan Chase Bank, The Bank of New York and Riggs Bank, N.A. (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2002).
4.6   Consent and Amendment No. 1 dated as of August 13, 2003, to the 5-Year Credit Agreement dated as of August 14, 2002, among the Company, Citibank, N.A. and the other lenders that are parties to such Credit Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated September 22, 2003).
10.1   The Washington Post Company Incentive Compensation Plan as adopted January 20, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 20, 2005).

 

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10.2   The Washington Post Company Stock Option Plan as amended and restated effective May 31, 2003 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2003).
10.3   The Washington Post Company Supplemental Executive Retirement Plan as amended and restated through March 14, 2002 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001).
10.4   The Washington Post Company Deferred Compensation Plan as amended and restated effective May 12, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 12, 2005).
11   Calculation of earnings per share of common stock.
31.1   Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2   Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1   Section 1350 Certification of the Chief Executive Officer.
32.2   Section 1350 Certification of the Chief Financial Officer.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    THE WASHINGTON POST COMPANY
    (Registrant)
Date: November 7, 2005  

/s/ Donald E. Graham


   

Donald E. Graham,

Chairman & Chief Executive Officer

(Principal Executive Officer)

Date: November 7, 2005  

/s/ John B. Morse, Jr.


   

John B. Morse, Jr.,

Vice President-Finance

(Principal Financial Officer)

 

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