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Graham Holdings Co - Quarter Report: 2009 June (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 June 28, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller Reporting Company  ¨

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 July 31, 2009:

 

Class A Common Stock

   1,291,693 Shares

Class B Common Stock

   8,108,403 Shares

 

 

 


Table of Contents

Index to Form 10-Q

 

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

a. Condensed Consolidated Statements of Operations (Unaudited) for the Thirteen and Twenty-Six Weeks Ended June 28, 2009 and June 29, 2008

   3
  

b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Twenty-Six Weeks Ended June 28, 2009 and June 29, 2008

   4
  

c. Condensed Consolidated Balance Sheets at June 28, 2009 (Unaudited) and December 28, 2008

   5
  

d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Twenty-Six Weeks Ended June 28, 2009 and June 29, 2008

   6
  

e. Notes to Condensed Consolidated Financial Statements (Unaudited)

   7

Item 2.

  

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   20

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   29

Item 4.

  

Controls and Procedures

   29

PART II.

  

OTHER INFORMATION

  

Item 4.

  

Submission of Matters to a Vote of Security Holders

   30

Item 6.

  

Exhibits

   31

Signatures

   32

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

The Washington Post Company

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  

(In thousands, except per share amounts)

   June 28,
2009
    June 29,
2008
    June 28,
2009
    June 29,
2008
 

Operating revenues

        

Education

   $ 649,323      $ 576,464      $ 1,242,853      $ 1,119,720   

Advertising

     211,493        268,699        408,803        536,425   

Circulation and subscriber

     231,252        224,214        463,134        442,822   

Other

     36,400        36,840        67,798        70,390   
                                
     1,128,468        1,106,217        2,182,588        2,169,357   
                                

Operating costs and expenses

        

Operating

     513,938        507,985        1,009,031        999,138   

Selling, general and administrative

     517,581        525,655        1,011,586        965,703   

Depreciation of property, plant and equipment

     83,577        61,479        161,557        121,939   

Amortization of intangible assets

     7,191        6,282        13,839        10,892   
                                
     1,122,287        1,101,401        2,196,013        2,097,672   
                                

Income (loss) from operations

     6,181        4,816        (13,425     71,685   

Other income (expense)

        

Equity in losses of affiliates

     (206     (5,653     (968     (8,896

Interest income

     475        1,286        1,283        3,382   

Interest expense

     (7,701     (6,098     (15,581     (12,632

Other, net

     19,719        2,897        15,676        7,031   
                                

Income (loss) before income taxes

     18,468        (2,752     (13,015     60,570   

Provision (benefit) for income taxes

     7,100        (100     (4,900     23,900   
                                

Net income (loss)

     11,368        (2,652     (8,115     36,670   

Net loss (income) attributable to noncontrolling interests

     1,106        (49     1,894        (104
                                

Net income (loss) attributable to The Washington Post Company

     12,474        (2,701     (6,221     36,566   

Redeemable preferred stock dividends

     (225     (237     (698     (710
                                

Net income (loss) available for common shares

   $ 12,249      $ (2,938   $ (6,919   $ 35,856   
                                

Basic earnings (loss) per common share

   $ 1.30      $ (0.31   $ (0.74   $ 3.78   
                                

Diluted earnings (loss) per common share

   $ 1.30      $ (0.31   $ (0.74   $ 3.77   
                                

Dividends declared per common share

   $ 2.15      $ 2.15      $ 6.45      $ 6.45   
                                

Basic average number of common shares outstanding

     9,340        9,480        9,339        9,482   

Diluted average number of common shares outstanding

     9,400        9,480        9,339        9,508   

 

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The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  

(In thousands)

   June 28,
2009
    June 29,
2008
    June 28,
2009
    June 29,
2008
 

Net income (loss)

   $ 11,368      $ (2,652   $ (8,115   $ 36,670   
                                

Other comprehensive income (loss)

        

Foreign currency translation adjustment

     32,137        6,485        19,117        13,943   

Change in unrealized gain on available-for-sale securities

     (30,995     2,482        (1,580     (50,699

Pension and other postretirement plan adjustments

     (679     (1,883     (95     (3,770
                                
     463        7,084        17,442        (40,526

Income tax benefit (expense) related to other comprehensive income (loss)

     10,898        (440     39        22,514   
                                
     11,361        6,644        17,481        (18,012
                                

Comprehensive income

     22,729        3,992        9,366        18,658   
                                

Comprehensive loss (income) attributable to the noncontrolling interest

     1,106        (49     1,889        (104
                                

Total comprehensive income attributable to to The Washington Post Company

   $ 23,835      $ 3,943      $ 11,255      $ 18,554   
                                

 

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The Washington Post Company

Condensed Consolidated Balance Sheets

 

(In thousands)

   June 28, 2009     December 28, 2008  
     (unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 349,288      $ 390,509   

Investments in marketable equity securities and other investments

     364,904        357,337   

Accounts receivable, net

     386,545        479,361   

Deferred income taxes

     11,165        10,967   

Income taxes

     9,853        —     

Inventories

     28,047        40,213   

Other current assets

     69,906        73,153   
                

Total current assets

     1,219,708        1,351,540   

Property, plant and equipment

    

Buildings

     382,227        349,785   

Machinery, equipment and fixtures

     2,403,693        2,337,149   

Leasehold improvements

     277,789        256,866   
                
     3,063,709        2,943,800   

Less accumulated depreciation

     (1,922,941     (1,805,619
                
     1,140,768        1,138,181   

Land

     49,365        49,859   

Construction in progress

     67,963        114,294   
                

Total property, plant and equipment

     1,258,096        1,302,334   

Investments in affiliates

     77,937        76,437   

Goodwill, net

     1,419,757        1,390,157   

Indefinite-lived intangible assets, net

     531,129        531,323   

Amortized intangible assets, net

     84,690        94,260   

Prepaid pension cost

     287,367        346,325   

Deferred charges and other assets

     60,337        66,058   
                
   $ 4,939,021      $ 5,158,434   
                

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable and accrued liabilities

   $ 526,550      $ 544,920   

Income taxes payable

     —          7,499   

Deferred revenue

     402,254        388,007   

Dividends declared

     20,440        —     

Short-term borrowings

     3,081        153,822   
                

Total current liabilities

     952,325        1,094,248   

Postretirement benefits other than pensions

     72,391        70,992   

Accrued compensation and related benefits

     229,545        242,508   

Other liabilities

     103,446        102,713   

Deferred income taxes

     346,962        360,359   

Long-term debt

     396,065        400,003   
                

Total liabilities

     2,100,734        2,270,823   

Redeemable noncontrolling interest

     7,055        17,360   

Redeemable preferred stock

     11,526        11,826   

Preferred stock

     —          —     

Common shareholders’ equity

    

Common stock

     20,000        20,000   

Capital in excess of par value

     239,084        232,201   

Retained earnings

     4,245,753        4,313,287   

Accumulated other comprehensive income (loss)

    

Cumulative foreign currency translation adjustment

     14,516        (3,412

Unrealized gain on available-for-sale securities

     71,698        72,646   

Unrealized loss on pensions and other postretirement plans

     (79,413     (79,914

Cost of Class B common stock held in treasury

     (1,692,409     (1,697,268
                

Total The Washington Post Company common shareholders’ equity

     2,819,229        2,857,540   
                

Noncontrolling interest

     477        885   
                

Total equity

     2,819,706        2,858,425   
                
   $ 4,939,021      $ 5,158,434   
                

 

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The Washington Post Company

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Twenty-Six Weeks Ended  

(In thousands)

   June 28,
2009
    June 29,
2008
 

Cash flows from operating activities:

    

Net (loss) income

   $ (8,115   $ 36,670   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation of property, plant and equipment

     161,557        121,939   

Amortization of intangible assets

     13,839        10,892   

Net pension benefit

     (2,900     (13,182

Early retirement program expense

     63,418        112,001   

Foreign exchange gain

     (18,391     (7,263

Equity in losses of affiliates, net of distributions

     968        9,086   

Benefit for deferred income taxes

     (15,497     (20,511

Net loss on sale or write-down of property, plant and equipment

     14,251        883   

Change in assets and liabilities:

    

Decrease in accounts receivable, net

     98,822        26,614   

Decrease (increase) in inventories

     12,166        (13,435

Decrease in accounts payable and accrued liabilities

     (30,949     (10,171

Increase (decrease) in Kaplan stock compensation

     3,459        (31,841

Increase (decrease) in deferred revenue

     4,999        (3,049

Increase in income taxes receivable

     (17,476     (10,129

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

     (42     7,119   

Other

     2,320        1,509   
                

Net cash provided by operating activities

     282,429        217,132   
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (132,058     (133,832

Investments in marketable equity securities and other investments

     (11,353     (76,397

Investments in certain businesses, net of cash acquired

     (5,129     (55,975

Return of escrow funds from acquisition

     4,667        —     

Return of investment in affiliates

     4,321        —     

Other

     3,629        807   
                

Net cash used in investing activities

     (135,923     (265,397
                

Cash flows from financing activities:

    

Principal payments on debt

     (400,758     (1,363

Issuance of notes, net

     395,329        —     

Dividends paid

     (40,892     (41,417

Common shares repurchased

     (1,371     (64,287

(Repayments) issuance of commercial paper, net

     (149,983     10,200   

Other

     3,906        14,378   
                

Net cash used in financing activities

     (193,769     (82,489
                

Effect of currency exchange rate change

     6,042        5,561   
                

Net decrease in cash and cash equivalents

     (41,221     (125,193

Beginning cash and cash equivalents

     390,509        321,466   
                

Ending cash and cash equivalents

   $ 349,288      $ 196,273   
                

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1: Organization, Basis of Presentation and Recent Accounting Pronouncements

The Washington Post Company, Inc. (the “Company”) is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations consist of the ownership and operation of cable television systems, newspaper publishing (principally The Washington Post), television broadcasting (through the ownership and operation of six television broadcast stations), and magazine publishing (principally Newsweek).

Financial Periods – The Company generally reports on a thirteen week fiscal quarter ending on the Sunday nearest the calendar quarter-end. The fiscal quarters for 2009 and 2008 ended on June 28, 2009, March 29, 2009, June 29, 2008 and March 30, 2008, respectively. With the exception of the newspaper publishing operations and the corporate office, subsidiaries of the Company report on a calendar-quarter basis.

Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (“SEC”). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the thirteen and twenty-six weeks ended June 28, 2009 and June 29, 2008 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2008.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, as adjusted for the adoption of SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), but does not include all disclosures required by GAAP.

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

Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.

Recently Adopted and Issued Accounting Pronouncements – In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 was effective for the Company at the beginning of fiscal year 2008 for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in the Company’s consolidated financial statements on a

 

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recurring basis (at least annually). The adoption of these provisions did not have any impact on the Company’s condensed consolidated financial statements, as the Company’s existing fair value measurements were consistent with the guidance of SFAS 157. The FASB issued FASB Staff Position (“FSP”) No. 157-2, “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”), which deferred the effective date of SFAS 157 for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis to fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for nonfinancial assets and nonfinancial liabilities at the beginning of the Company’s 2009 fiscal year did not have a material impact on the Company’s condensed consolidated financial statements. See Note 10 for additional disclosures about fair value measurements.

In April 2009, the FASB issued FSP No. 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (“FSP 157-4”). FSP 157-4 provides additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R requires that the acquisition method of accounting be applied to all business combinations, which significantly changes the accounting for certain aspects of business combinations. Under SFAS 141R, an acquiring entity is required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R changes the accounting treatment for certain specific acquisition-related items, including (1) expensing acquisition-related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R also amends SFAS No. 109, “Income Taxes” (“SFAS 109”) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141R would also apply the provisions of SFAS 141R. SFAS 141R did not have any impact on the Company’s condensed consolidated financial statements upon adoption at the beginning of fiscal year 2009. The Company expects SFAS 141R to have an impact on its accounting for future business combinations, but the effect is dependent upon the acquisitions that are made in the future. Also, since the Company has acquired deferred tax assets for which valuation allowances were recorded at the acquisition date, SFAS 141R could affect the results of operations if changes in the valuation allowances occur in the future.

In April 2009, the FASB issued FSP No. 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141R-1). FSP 141R-1 amends and clarifies SFAS 141R to address application issues associated with initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141R-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is subsequent to the beginning of fiscal year 2009. FSP 141R-1 did not have any impact on the Company’s condensed consolidated financial statements upon adoption. The Company expects FSP 141R-1 to have an impact on its accounting for future business combinations, but the effect is dependent upon the acquisitions that are made in the future.

In December 2007, the FASB issued SFAS 160, which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement also requires disclosure, on the face of the consolidated financial statements, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The Company adopted SFAS 160 at the beginning of fiscal year

 

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2009 and reclassified $17.4 million from other liabilities to redeemable noncontrolling interest outside permanent equity and $0.9 million of noncontrolling interest from other liabilities to a separate component of shareholders equity in our condensed consolidated balance sheet as of December 28, 2008. Previously the Company presented minority interest in “Other income (expense)” in the condensed consolidated statements of income. The condensed consolidated statement of income for the thirteen and twenty-six weeks ended June 29, 2008 was adjusted to reflect 100% of the results of subsidiaries not wholly-owned. The “net income” was subsequently adjusted to remove the noncontrolling interest of $0.1 million and $0.1 million to arrive at “Net income attributable to The Washington Post Company” for the thirteen and twenty-six weeks ended June 29, 2008, respectively.

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” The Company adopted this FSP at the beginning of fiscal year 2009 and applied its provisions retrospectively to all earnings per share data presented in the Company’s condensed consolidated financial statements. The implementation of this FSP did not have a material impact on the earnings per share data of the Company.

In December 2008, the FASB issued FSP No. 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132R-1”). FSP 132R-1 amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132R”), to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosure requirements under this FSP include expanded disclosures about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value measurements of plan assets. This FSP is effective for fiscal years ending after December 15, 2009 and does not require comparative information for earlier periods presented. The Company is in the process of evaluating the impact of FSP 132R-1 on its condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 is effective prospectively for interim and annual periods ending after June 15, 2009. The implementation of this standard had no impact on the condensed consolidated financial statements as the Company already followed a similar approach prior to the implementation of this standard. The Company has evaluated subsequent events through August 4, 2009.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (SFAS 168). SFAS 168 identifies the FASB Accounting Standards Codification (“Codification”) as the authoritative source of GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and will not have any impact on the Company’s condensed consolidated financial statements.

 

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Note 2: Investments

Investments in marketable equity securities at June 28, 2009 and December 28, 2008 consist of the following (in thousands):

 

     June 28,
2009
   December 28,
2008

Total cost

   $ 223,064    $ 212,242

Gross unrealized gains

     119,497      121,077
             

Total fair value

   $ 342,561    $ 333,319
             

In the first quarter of 2009, the Company invested $10.8 million in the Class B common stock of Berkshire Hathaway Inc. In the first quarter of 2008, the Company invested $65.8 million in the common stock of a publicly traded education company.

Note 3: Acquisitions

The Company made one small acquisition in the second quarter of 2009 and did not make any acquisitions during the first quarter of 2009.

In connection with a 2007 acquisition, additional purchase consideration of approximately $3.2 million was contingent on the achievement of certain future operating results: such amounts were not included in the Company’s purchase accounting as of December 30, 2007. In the second quarter of 2009, the Company recorded $3.2 million of additional purchase consideration in connection with the achievement of certain operating results by the acquired company and allocated the additional purchase consideration to goodwill.

In the second quarter of 2008, Kaplan acquired two businesses in their professional and test preparation divisions totaling $14.8 million. In the first quarter of 2008, Kaplan acquired two businesses in their professional and test preparation divisions totaling $31.4 million. Also in the first quarter of 2008, the cable division acquired subscribers in the Winona, Mississippi area for $15.6 million.

In 2007, Kaplan purchased a 40% interest in Shanghai Kai Bo Education Management Investment Co., Ltd. (“Kaplan China”), a provider of education in China that offers preparation courses for entry to U.K. universities, along with degree and professional training programs at campuses throughout China. In the first quarter of 2008, Kaplan exercised an option to increase its investment in Kaplan China to a majority interest and the transaction was completed in November 2008. Kaplan China’s results from the transaction date forward have been included in the Company’s consolidated financial statements.

Note 4: Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, by segment, for the twenty-six weeks ended June 28, 2009 were as follows:

 

(in thousands)

   Education    Cable
Television
   Newspaper
Publishing
    Television
Broadcasting
   Magazine
Publishing
   Other
Businesses
and
Corporate
    Total  

Balance as of December 28, 2008:

                  

Goodwill

   $ 1,022,671    $ 85,488    $ 81,186      $ 203,165    $ 25,015    $ 99,189      $ 1,516,714   

Accumulated impairment losses

     —        —        (65,772     —        —        (60,785     (126,557
                                                    
     1,022,671      85,488      15,414        203,165      25,015      38,404        1,390,157   

Acquisitions

     3,013      —        —          —        —        (935     2,078   

Foreign currency exchange rate changes and other

     28,434      —        —          —        —        (912     27,522   
                                                    

Balance as of June 28, 2009

                  

Goodwill

     1,054,118      85,488      81,186        203,165      25,015      97,342        1,546,314   

Accumulated impairment losses

     —        —        (65,772     —        —        (60,785     (126,557
                                                    
   $ 1,054,118    $ 85,488    $ 15,414      $ 203,165    $ 25,015    $ 36,557      $ 1,419,757   
                                                    

 

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The changes in the carrying amount of goodwill at the Company’s education division for the twenty-six weeks ended June 28, 2009 were as follows:

 

(in thousands)

   Higher
Education
   Test
Prep
    Professional    Kaplan
Corporate
and Other
   Total

Balance as of December 28, 2008:

             

Goodwill

   $ 343,332    $ 185,876      $ 493,463    —      $ 1,022,671

Accumulated impairment losses

     —        —          —      —        —  
                                 
     343,332      185,876        493,463    —        1,022,671

Acquisitions

     28      (227     3,212    —        3,013

Foreign currency exchange rate changes and other

     916      (894     28,412    —        28,434
                                 

Balance as of June 28, 2009

             

Goodwill

     344,276      184,755        525,087    —        1,054,118

Accumulated impairment losses

     —        —          —      —        —  
                                 
   $ 344,276    $ 184,755      $ 525,087    —      $ 1,054,118
                                 

Other intangible assets consists of the following:

 

     As of June 28, 2009    As of December 28, 2008

(in thousands)

   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Amortized intangible assets:

                 

Non-compete agreements

   $ 45,782    $ 20,898    $ 24,884    $ 48,160    $ 17,958    $ 30,202

Student and customer relationships

     73,695      36,420      37,275      70,926      31,922      39,004

Databases and technology

     15,425      6,658      8,766      15,425      5,324      10,101

Trade names and trademarks

     21,612      9,565      12,047      20,190      7,164      13,026

Other

     7,162      5,445      1,718      7,027      5,100      1,927
                                         
   $ 163,676    $ 78,986    $ 84,690    $ 161,728    $ 67,468    $ 94,260
                                         

Indefinite-lived intangible assets:

                 

Franchise agreements

   $ 496,047          $ 495,570      

Wireless licenses

     22,150            22,150      

Licensure and accreditation

     7,862            8,362      

Other

     5,070            5,241      
                         
   $ 531,129          $ 531,323      
                         

The Company amortizes the recorded values of its amortized intangible assets over their estimated useful lives. Amortization of intangible assets for the twenty-six weeks ended June 28, 2009 and June 29, 2008 was $13.8 million and $10.9 million, respectively. Amortization of these intangible assets is estimated to be approximately $11.9 million for the remainder of 2009, approximately $22.0 million in each of 2010 and 2011, and approximately $9.0 million in each of 2012 and 2013.

 

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Note 5: Borrowings

The Company’s borrowings consist of the following (in millions):

 

     June 28, 2009     December 28, 2008  

Commercial paper borrowings

   $ —        $ 150.0   

7.25 percent unsecured notes due February 1, 2019

     396.0        —     

5.5 percent unsecured notes due February 15, 2009

     —          399.9   

Other indebtedness

     3.1        3.9   
                

Total

     399.1        553.8   

Less current portion

     (3.1     (153.8
                

Total long-term debt

   $ 396.0      $ 400.0   
                

The Company’s commercial paper borrowings at December 28, 2008 were at an average interest rate of 0.2 percent.

In January 2009, the Company issued $400 million in unsecured ten-year fixed-rate notes due February 1, 2019 (“the Notes”). The Notes have a coupon rate of 7.25% per annum, payable semi-annually on February 1 and August 1, beginning August 1, 2009. The Company used the net proceeds from the sale of the Notes and other cash to repay $400 million of 5.5% notes that matured on February 15, 2009. Under the terms of the Notes, unless the Company has exercised its right to redeem the Notes, the Company is required to offer to repurchase the Notes in cash at 101% of the principal amount, plus accrued and unpaid interest, upon the occurrence of both a Change of Control and Below Investment Grade Rating Events as described in the Prospectus Supplement of January 27, 2009.

The Company’s other indebtedness at June 28, 2009 and December 28, 2008 is at interest rates of 5% to 6% and matures during 2009.

During the second quarter of 2009 and 2008, the Company had average borrowings outstanding of approximately $399.1 million and $457.3 million, respectively, at average annual interest rates of approximately 7.2 percent and 5.1 percent, respectively. During the second quarter of 2009 and 2008, the Company incurred net interest expense of $7.2 million and $4.8 million, respectively.

During the first six months of 2009 and 2008, the Company had average borrowings outstanding of approximately $450.2 million and $475.0 million, respectively, at average annual interest rates of approximately 6.7 percent and 5.1 percent, respectively. During the first six months of 2009 and 2008, the Company incurred net interest expense of $14.3 million and $9.3 million, respectively.

At June 28, 2009 the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $408.0 million, compared with the carrying amount of $396.0 million. At December 28, 2008 the fair value of the Company’s 5.5% unsecured notes, based on quoted market prices, totaled $397.8 million, compared with the carrying amount of $399.9 million. The carrying value of the Company’s other unsecured debt at June 28, 2009 approximates fair value.

 

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Note 6: Earnings (Loss) Per Share

The Company’s earnings (loss) per share (basic and diluted) for the second quarter and first six months of 2009 and 2008, are presented below:

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended
     June 28,
2009
   June 29,
2008
    June 28,
2009
    June 29,
2008

Net income (loss) available for common shares

   $ 12,249    $ (2,938   $ (6,919   $ 35,856
                             

Weighted-average shares outstanding – basic

     9,340      9,480        9,339        9,482
                             

Effect of dilutive shares:

         

Stock options and restricted stock

     60      24        60        26

Less: Dilutive shares excluded from calculation due to net loss

     —        (24     (60     —  
                             

Weighted-average shares outstanding – diluted

     9,400      9,480        9,339        9,508

Basic earnings (loss) per common share

   $ 1.30    $ (0.31   $ (0.74   $ 3.78
                             

Diluted earnings (loss) per common share

   $ 1.30    $ (0.31   $ (0.74   $ 3.77
                             

For the first six months of 2009, there were 9,339,445 weighted average basic and diluted shares outstanding; these amounts are the same as the company reported a net loss for the first six months of 2009.

For the second quarter of 2008, there were 9,480,073 weighted average basic and diluted shares outstanding; these amounts are the same as the Company reported a net loss for the second quarter of 2008.

The diluted earnings per share amounts for the second quarter of 2009 and the first six months of 2008 exclude the effects of 86,719 and 29,625 stock options outstanding, respectively, as their inclusion would have been antidilutive.

Note 7: Pension and Postretirement Plans

The total cost (income) arising from the Company’s defined benefit pension plans for the second quarter and six months ended June 28, 2009 and June 29, 2008, consists of the following components (in thousands):

 

     Pension Plans  
     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     June 28,
2009
    June 29,
2008
    June 28,
2009
    June 29,
2008
 

Service cost

   $ 7,835      $ 6,855      $ 15,804      $ 13,761   

Interest cost

     14,513        11,334        29,159        22,752   

Expected return on assets

     (24,764     (24,246     (49,423     (48,673

Amortization of transition asset

     (8     (9     (15     (19

Amortization of prior service cost

     904        1,065        1,668        2,139   

Recognized actuarial gain

     (50     (1,566     (93     (3,142
                                

Net periodic benefit

     (1,570     (6,567     (2,900     (13,182

Early retirement programs expense

     56,800        82,351        63,418        104,875   
                                

Total cost

   $ 55,230      $ 75,784      $ 60,518      $ 91,693   
                                
     SERP  
     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     June 28,
2009
    June 29,
2008
    June 28,
2009
    June 29,
2008
 

Service cost

   $ 334      $ 406      $ 667      $ 812   

Interest cost

     1,032        849        2,064        1,698   

Amortization of prior service cost

     112        111        223        223   

Recognized actuarial loss

     388        172        776        343   
                                

Net periodic cost

     1,866        1,538        3,730        3,076   

Early retirement programs expense

     —          5,027        —          7,126   
                                

Total cost

   $ 1,866      $ 6,565      $ 3,730      $ 10,202   
                                

 

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Newsweek offered a Voluntary Retirement Incentive Program to certain employees in November 2008 and 44 employees accepted the offer in the first quarter of 2009; early retirement program expense of $6.6 million was recorded in the first quarter of 2009, which will be funded primarily from the assets of the Company’s pension plans. In the first quarter of 2008, Newsweek offered a Voluntary Retirement Incentive Program to certain employees and 117 employees accepted the offer. The early retirement program expense in 2008 totaled $29.2 million, which is being funded mostly from the assets of the Company’s pension plans. Of this amount, $24.6 million was recorded in the first quarter of 2008 and $4.6 million was recorded in the second quarter of 2008.

The Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper in the first quarter of 2009. A total of 220 employees accepted the offer and early retirement program expense of $56.8 million was recorded in the second quarter of 2009, which will be funded primarily from the assets of the Company’s pension plans. In the first quarter of 2008, a Voluntary Retirement Incentive Program was also offered to certain employees of The Washington Post newspaper and the corporate office; 236 employees accepted the offer; $82.8 million in early retirement program expense was recorded in the second quarter of 2008, also funded primarily from the assets of the Company’s pension plans.

The total (income) cost arising from the Company’s postretirement plans for the second quarter and six months ended June 28, 2009 and June 29, 2008, consists of the following components (in thousands):

 

     Postretirement Plans  
     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     June 28,
2009
    June 29,
2008
    June 28,
2009
    June 29,
2008
 

Service cost

   $ 967      $ 942      $ 1,935      $ 1,885   

Interest cost

     1,042        1,212        2,084        2,423   

Amortization of prior service credit

     (1,242     (1,286     (2,484     (2,572

Recognized actuarial gain

     (782     (372     (1,564     (743
                                

Net periodic (benefit) cost

     (15     496        (29     993   

Curtailment gain

     —          —          (677     —     
                                

Total (benefit) cost

   $ (15   $ 496      $ (706   $ 993   
                                

The Company recorded a curtailment gain of $0.7 million in the first quarter of 2009, due to the elimination of life insurance benefits for new retirees on or after January 1, 2009.

Note 8: Other Non-Operating Income (Expense)

A summary of non-operating income (expense) for the thirteen and twenty-six weeks ended June 28, 2009 and June 29, 2008, is as follows (in millions):

 

     Thirteen Weeks Ended    Twenty-Six Weeks Ended  
     June 28,
2009
    June 29,
2008
   June 28,
2009
    June 29,
2008
 

Foreign currency gains, net

   $ 19.8      $ 2.9    $ 18.4      $ 7.3   

Impairment write-downs on investments

     —          —        (2.9     —     

Other, net

     (0.1     —        0.2        (0.3
                               

Total

   $ 19.7      $ 2.9    $ 15.7      $ 7.0   
                               

Note 9: Fair Value Measurements

In accordance with SFAS 157, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. SFAS 157 also established a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques

 

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in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 28, 2009 were as follows (in thousands):

 

          Fair Value Measurements as of
June 28, 2009
     Fair Value at
June 28, 2009
   Quoted Prices in
Active Markets for
Identical Items
(Level 1)
   Significant Other
Observable Inputs

(Level 2)

Assets:

        

Marketable equity securities(1)

   $ 342.6    $ 342.6    $ —  

Other current investments(2)

     22.3      18.4      3.9
                    

Total financial assets

   $ 364.9    $ 361.0    $ 3.9
                    

Liabilities:

        

Deferred compensation plan liabilities(3)

   $ 58.0    $ —      $ 58.0
                    

Total financial liabilities

   $ 58.0    $ —      $ 58.0
                    

 

(1)

The Company’s investments in marketable equity securities are classified as available-for-sale.

 

(2)

Other current investments include U.S. Government Securities, corporate bonds, and money market investments held in a trust. In addition, other current investments include time deposits with original maturities greater than 90 days, but less than one year.

 

(3)

Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan.

For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.

Note 10: Business Segments

The following table summarizes financial information related to each of the Company’s business segments. The 2009 and 2008 asset information is as of June 28, 2009 and December 28, 2008, respectively.

 

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Table of Contents

Second Quarter Period

(in thousands)

 

    Education     Cable
Television
    Newspaper
Publishing
    Television
Broadcasting
    Magazine
Publishing
    Other
Businesses
and
Corporate
Office
    Intersegment
Elimination
    Consolidated  

2009

               

Operating revenues

  $ 649,323      $ 186,684      $ 168,765      $ 66,653      $ 45,539      $ 13,156      $ (1,652   $ 1,128,468   

Income (loss) from operations

  $ 58,107      $ 39,807      $ (89,347   $ 14,268      $ (5,034   $ (11,620   $ —        $ 6,181   

Equity in losses of affiliates

                  (206

Interest expense, net

                  (7,226

Other, net

                  19,719   
                     

Income before income taxes

                $ 18,468   
                     

Depreciation expense

  $ 22,401      $ 31,099      $ 25,741      $ 3,486      $ 663      $ 187      $ —        $ 83,577   

Amortization expense

  $ 6,089      $ 85      $ 219      $ —        $ —        $ 798      $ —        $ 7,191   

Net pension (expense) credit

  $ (1,106   $ (394   $ (61,600   $ (147   $ 8,238      $ (221   $ —        $ (55,230

Identifiable assets

  $ 1,930,149      $ 1,195,947      $ 193,991      $ 405,632      $ 579,848      $ 212,956      $ —        $ 4,518,523   

Investments in marketable equity securities

                  342,561   

Investments in affiliates

                  77,937   
                     

Total assets

                $ 4,939,021   
                     
    Education     Cable
Television
    Newspaper
Publishing
    Television
Broadcasting
    Magazine
Publishing
    Other
Businesses
and
Corporate
Office
    Intersegment
Elimination
    Consolidated  

2008

               

Operating revenues

  $ 576,464      $ 178,914      $ 197,286      $ 82,836      $ 62,686      $ 9,141      $ (1,110   $ 1,106,217   

Income (loss) from operations

  $ 47,421      $ 40,105      $ (96,704   $ 29,652      $ (3,716   $ (11,942   $ —        $ 4,816   

Equity in losses of affiliates

                  (5,653

Interest expense, net

                  (4,812

Other, net

                  2,897   
                     

Loss before income taxes

                $ (2,752
                     

Depreciation expense

  $ 16,482      $ 30,743      $ 11,401      $ 2,272      $ 525      $ 56      $ —        $ 61,479   

Amortization expense

  $ 4,512      $ 89      $ 150      $ —        $ —        $ 1,531      $ —        $ 6,282   

Net pension (expense) credit

  $ (930   $ (359   $ (78,916   $ 284      $ 5,979      $ (1,842   $ —        $ (75,784

Identifiable assets

  $ 2,080,037      $ 1,204,373      $ 383,849      $ 412,129      $ 547,239      $ 121,051      $ —        $ 4,748,678   

Investments in marketable equity securities

                  333,319   

Investments in affiliates

                  76,437   
                     

Total assets

                $ 5,158,434   
                     

 

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Table of Contents

Six Month Period

(in thousands)

 

    Education     Cable
Television
    Newspaper
Publishing
    Television
Broadcasting
    Magazine
Publishing
    Other
Businesses
and
Corporate
Office
    Intersegment
Elimination
    Consolidated  

2009

               

Operating revenues

  $ 1,242,853      $ 370,192      $ 329,656      $ 127,816      $ 91,609      $ 23,976      $ (3,514   $ 2,182,588   

Income (loss) from operations

  $ 69,269      $ 81,819      $ (143,099   $ 26,411      $ (25,372   $ (22,453   $ —        $ (13,425

Equity in losses of affiliates

                  (968

Interest expense, net

                  (14,298

Other, net

                  15,676   
                     

Loss before income taxes

                $ (13,015
                     

Depreciation expense

  $ 42,082      $ 62,198      $ 49,509      $ 5,930      $ 1,475      $ 363      $ —        $ 161,557   

Amortization expense

  $ 11,630      $ 152      $ 462      $ —        $ —        $ 1,595      $ —        $ 13,839   

Net pension (expense) credit

  $ (2,238   $ (787   $ (66,616   $ (294   $ 9,858      $ (441   $ —        $ (60,518
    Education     Cable
Television
    Newspaper
Publishing
    Television
Broadcasting
    Magazine
Publishing
    Other
Businesses
and
Corporate
Office
    Intersegment
Elimination
    Consolidated  

2008

               

Operating revenues

  $ 1,119,720      $ 353,171      $ 403,376      $ 160,504      $ 116,074      $ 18,600      $ (2,088   $ 2,169,357   

Income (loss) from operations

  $ 94,152      $ 74,390      $ (95,546   $ 56,256      $ (36,046   $ (21,521   $ —        $ 71,685   

Equity in losses of affiliates

                  (8,896

Interest expense, net

                  (9,250

Other, net

                  7,031   
                     

Income before income taxes

                $ 60,570   
                     

Depreciation expense

  $ 32,781      $ 61,567      $ 21,885      $ 4,470      $ 1,049      $ 187      $ —        $ 121,939   

Amortization expense

  $ 7,352      $ 155      $ 324      $ —        $ —        $ 3,061      $ —        $ 10,892   

Net pension (expense) credit

  $ (1,808   $ (718   $ (81,156   $ 568      $ (6,720   $ (1,859   $ —        $ (91,693

 

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Table of Contents

The Company’s education division comprises the following operating segments:

Second Quarter Period

(in thousands)

 

     Higher
Education
   Test Prep     Professional    Corporate
Overhead
and Other
    Intersegment
Elimination
    Total
Education

2009

              

Operating revenues

   $ 401,776    $ 141,817      $ 107,773    $ 277      $ (2,320   $ 649,323

Income (loss) from operations

   $ 70,431    $ (1,649   $ 9,736    $ (20,535   $ 124      $ 58,107

Identifiable assets

   $ 661,449    $ 399,709      $ 825,311    $ 43,680      $ —        $ 1,930,149

Depreciation expense

   $ 9,951    $ 7,468      $ 4,045    $ 937      $ —        $ 22,401

Amortization expense

           $ 6,089        $ 6,089

Kaplan stock-based incentive compensation expense

           $ 1,697        $ 1,697
     Higher
Education
   Test Prep     Professional    Corporate
Overhead
and Other
    Intersegment
Elimination
    Total
Education

2008

              

Operating revenues

   $ 295,822    $ 153,651      $ 128,128    $ 304      $ (1,441   $ 576,464

Income (loss) from operations

   $ 40,422    $ 25,296      $ 10,981    $ (29,321   $ 43      $ 47,421

Identifiable assets

   $ 833,514    $ 411,419      $ 797,565    $ 37,539      $ —        $ 2,080,037

Depreciation expense

   $ 8,353    $ 3,469      $ 3,697    $ 963      $ —        $ 16,482

Amortization expense

           $ 4,512        $ 4,512

Kaplan stock-based incentive compensation expense

           $ 13,965        $ 13,965

Six Month Period

(in thousands)

 

     Higher
Education
   Test Prep     Professional    Corporate
Overhead
and Other
    Intersegment
Elimination
    Total
Education

2009

              

Operating revenues

   $ 769,266    $ 269,034      $ 208,978    $ 652      $ (5,077   $ 1,242,853

Income (loss) from operations

   $ 109,671    $ (9,776   $ 7,682    $ (38,497   $ 189      $ 69,269

Depreciation expense

   $ 19,397    $ 12,826      $ 7,777    $ 2,082      $ —        $ 42,082

Amortization expense

           $ 11,630        $ 11,630

Kaplan stock-based incentive compensation expense

           $ 3,458        $ 3,458
     Higher
Education
   Test Prep     Professional    Corporate
Overhead
and Other
    Intersegment
Elimination
    Total
Education

2008

              

Operating revenues

   $ 587,615    $ 289,526      $ 244,897    $ 688      $ (3,006   $ 1,119,720

Income (loss) from operations

   $ 83,553    $ 34,435      $ 12,788    $ (36,705   $ 81      $ 94,152

Depreciation expense

   $ 16,558    $ 6,957      $ 7,362    $ 1,904      $ —        $ 32,781

Amortization expense

           $ 7,352        $ 7,352

Kaplan stock-based incentive compensation expense

           $ 7,283        $ 7,283

Through its subsidiary Kaplan, Inc., the Company provides educational services for individuals, schools and businesses. The Company also operates principally in four areas of the media business: cable television, newspaper publishing, television broadcasting and magazine publishing.

Kaplan’s businesses include higher education services, comprised of Kaplan’s domestic and international post-secondary education businesses, including fixed-facility colleges that offer bachelor’s degree, associate’s degree and diploma programs primarily in the fields of healthcare, business and information technology; and online post-secondary and career programs. Kaplan’s businesses also include domestic and international test preparation, which includes Kaplan’s standardized

 

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test prep and English-language course offerings, as well as K12 and Score, which offer multimedia learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include Kaplan Professional, which provides education and career services to businesspeople and other professionals, both domestically and internationally. The education division’s primary segments are higher education, test prep and professional. Kaplan corporate and other is also included; other includes Kaplan stock compensation expense and amortization of certain intangible assets.

At the end of March 2009, the Company approved a plan to offer tutoring services, previously provided at Score, in Kaplan test prep centers. The plan was substantially completed by the end of the second quarter of 2009. In conjunction with this plan, 14 existing Score centers were converted into Kaplan test prep centers and the remaining 64 Score centers were closed. The Company recorded $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009. This amount includes a $9.2 million write-down of Score’s software product to its fair value following an impairment review under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

In 2007, Kaplan announced restructuring plans at Kaplan Professional (U.S.) that involved product changes and decentralization of certain operations, in addition to employee terminations. In the fourth quarter of 2008, Kaplan expanded the Kaplan Professional (U.S.) restructuring to include additional operations. Total restructuring-related expenses of $1.8 million and $7.2 million were recorded in the second quarter and first half of 2009 related to lease termination, accelerated depreciation of fixed assets and severance costs, compared to $1.8 million and $3.2 million in restructuring-related severance costs recorded in the second quarter and first half of 2008, respectively.

Accrued restructuring charges of $11.9 million related to Kaplan’s Score and Professional (U.S.) operations are included in accounts payable and accrued liabilities in the condensed consolidated balance sheet as of June 28, 2009.

Kaplan is in the process of implementing changes to its organizational and internal reporting structures. This reorganization is expected to be completed by the end of the third quarter of 2009 and when completed, will result in changes to the composition of the Company’s reporting segments.

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

Newspaper publishing includes the publication of newspapers in the Washington, DC, area and Everett, WA; 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 newsmagazine, Newsweek, which has one domestic and three English-language international editions (and, in conjunction with others, publishes seven foreign-language editions around the world) and the publication of Arthur Frommer’s Budget Travel. The magazine publishing division also includes certain online media publishing businesses (newsweek.com and budgettravel.com).

Revenues from both newspaper and magazine publishing operations are derived from advertising and, to a lesser extent, from circulation.

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.

Other businesses and corporate office includes the expenses associated with the Company’s corporate office and the operating results of Avenue100 Media Solutions (formerly CourseAdvisor).

 

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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.

Results of Operations

Net income for the second quarter of 2009 was $11.4 million ($1.30 earnings per share), compared to net loss of $2.7 million ($0.31 loss per share) for the second quarter of last year.

Items included in the Company’s results for the second quarter of 2009:

 

   

charges of $56.8 million related to early retirement program expense at The Washington Post (after-tax impact of $35.2 million, or $3.77 per share);

 

   

$15.2 million in restructuring charges related to Kaplan’s Score and Professional (U.S.) operations (after-tax impact of $9.4 million, or $1.01 per share);

 

   

$14.3 million in accelerated depreciation at The Washington Post (after-tax impact of $8.8 million, or $0.95 per share); and

 

   

$19.8 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $12.3 million, or $1.31 per share).

Items included in the Company’s results for the second quarter of 2008:

 

   

charges of $87.4 million related to early retirement program expense at The Washington Post, the corporate office and Newsweek (after-tax impact of $52.9 million, or $5.58 per share);

 

   

$1.8 million in restructuring charges related to Kaplan’s Professional (U.S.) operations (after-tax impact of $1.1 million, or $0.11 per share);

 

   

$6.8 million in impairment charges at two of the Company’s affiliates (after-tax impact of $4.1 million, or $0.43 per share); and

 

   

$2.9 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $1.7 million, or $0.18 per share).

Revenue for the second quarter of 2009 was $1,128.5 million, up 2% from $1,106.2 million in the second quarter of 2008. The increase is due to revenue growth at the education and cable television divisions. Revenues were down at the Company’s newspaper publishing, magazine publishing and television broadcasting divisions.

Operating income increased in the second quarter of 2009 to $6.2 million, from $4.8 million in the second quarter of 2008. Excluding charges related to early retirement plan buyouts and accelerated depreciation at The Washington Post, the newspaper publishing and magazine publishing divisions reported increased losses in the second quarter of 2009, compared to the second quarter of 2008. Operating results were also down at the television broadcasting division and were relatively flat at the cable television division, while the education division reported improved results for the quarter in spite of the restructuring charges.

For the first six months of 2009, the Company reported a net loss of $8.1 million ($0.74 per share), compared with net income of $36.7 million ($3.77 per share) for the same period of 2008.

 

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Items included in the Company’s results for the first six months of 2009:

 

   

$63.4 million in early retirement program expense at The Washington Post and Newsweek (after-tax impact of $39.3 million, or $4.21 per share);

 

   

$32.1 million in restructuring charges related to Kaplan’s Score and Professional (U.S.) operations (after-tax impact of $19.9 million, or $2.13 per share);

 

   

$27.7 million in accelerated depreciation at The Washington Post (after-tax impact of $17.2 million, or $1.84 per share); and

 

   

$18.4 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $11.4 million, or $1.22 per share).

Items included in the Company’s results for the first six months of 2008:

 

   

charges of $112.0 million related to early retirement program expense at The Washington Post, the corporate office and Newsweek (after-tax impact of $67.8 million, or $7.13 per share);

 

   

$3.2 million in restructuring charges related to Kaplan’s Professional (U.S.) operations (after-tax impact of $1.9 million, or $0.20 per share);

 

   

$6.8 million in impairment charges at two of the Company’s affiliates (after-tax impact of $4.1 million, or $0.43 per share); and

 

   

$7.3 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $4.4 million, or $0.46 per share).

Revenue for the first half of 2009 was $2,182.6 million, up 1% from $2,169.4 million in the first half of 2008, due to increased revenues at the Company’s education and cable television divisions, offset by revenue declines at the Company’s newspaper publishing, magazine publishing and television broadcasting divisions. The Company reported an operating loss of $13.4 million for the first half of 2009, compared to operating income of $71.7 million for the first half of 2008. Excluding charges related to early retirement plan buyouts and accelerated depreciation at The Washington Post, the newspaper publishing and magazine publishing divisions reported increased losses in the first six months of 2009, compared to the first six months of 2008. Operating results were also down at the education and television broadcasting divisions, while the cable television division reported improved results for the period.

The Company’s operating results for the second quarter and first six months of 2009 included $1.6 million and $2.9 million of net pension credits, respectively, compared to $6.6 million and $13.2 million of net pension credits, respectively, for the same periods of 2008, excluding charges related to early retirement programs.

Education Division. Education division revenue totaled $649.3 million for the second quarter of 2009, a 13% increase over revenue of $576.5 million for the same period of 2008. Kaplan reported operating income of $58.1 million for the second quarter of 2009, up 23% from $47.4 million in the second quarter of 2008.

For the first six months of 2009, education division revenue totaled $1,242.9 million, an 11% increase over revenue of $1,119.7 million for the same period of 2008. Kaplan reported operating income of $69.3 million for the first six months of 2009, down 26% from $94.2 million for the first six months of 2008.

 

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A summary of Kaplan’s operating results for the second quarter and the first six months of 2009 compared to 2008 is as follows:

 

     Second Quarter     YTD  

(In thousands)

   2009     2008     % Change     2009     2008     % Change  

Revenue

            

Higher education

   $ 401,776      $ 295,822      36      $ 769,266      $ 587,615      31   

Test prep

     141,817        153,651      (8     269,034        289,526      (7

Professional

     107,773        128,128      (16     208,978        244,897      (15

Kaplan corporate

     277        304      (9     652        688      (5

Intersegment elimination

     (2,320     (1,441   —          (5,077     (3,006   —     
                                            
   $ 649,323      $ 576,464      13      $ 1,242,853      $ 1,119,720      11   
                                            

Operating income (loss)

            

Higher education

   $ 70,431      $ 40,422      74      $ 109,671      $ 83,553      31   

Test prep

     (1,649     25,296      —          (9,776     34,435      —     

Professional

     9,736        10,981      (11     7,682        12,788      (40

Kaplan corporate overhead

     (12,750     (10,845   (18     (23,410     (22,071   (6

Other*

     (7,785     (18,476   58        (15,087     (14,634   (3

Intersegment elimination

     124        43      —          189        81      —     
                                            
   $ 58,107      $ 47,421      23      $ 69,269      $ 94,152      (26
                                            

 

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

Kaplan Higher Education (KHE) includes Kaplan’s domestic and international post-secondary education businesses, made up of fixed-facility colleges as well as online post-secondary and career programs. Higher education revenue grew 36% for the second quarter of 2009 and 31% for the first half of 2009 due mostly to strong enrollment growth. Operating income at KHE improved 74% in the second quarter of 2009 reflecting this strong enrollment growth. Operating income is up 31% for the first half of 2009 as the strong enrollment growth was offset by increased marketing and advertising costs in the first quarter of 2009, including a $21.0 million national media campaign. At June 30, 2009, KHE’s enrollments totaled 103,300, a 31% increase compared to total enrollments of 78,700 at June 30, 2008. All KHE divisions contributed to the enrollment growth in the first half of 2009, with Kaplan University’s online offerings growing the strongest at 45%.

Funds provided under student financial aid programs created under Title IV of the Federal Higher Education Act account for a large portion of KHE revenues; these funds are provided in the form of federal loans and grants. Some KHE students also obtain non-Title IV private loans from lenders to finance a portion of their education. A small portion of KHE’s domestic revenues in the first half of 2009 came from non-Title IV private loans obtained by its students. KHE expects private student loan funding to diminish in the future and expects this source to be replaced with funds provided under Title IV sources, student cash payments and, to a lesser extent, a self-funded internal loan program. To date, the KHE self-funded internal loan program activity has not been significant.

Test prep includes Kaplan’s standardized test preparation and English-language course offerings, as well as the K12 and Score businesses. Test prep revenue, excluding Score and revenue from acquired businesses, declined 7% in the second quarter and the first half of 2009 due primarily to declines in English-language, K12 and the traditional test prep programs. Test prep operating income, excluding Score, was down in the first half of 2009 due largely to declines in K12, English-language and the traditional test prep programs.

Score revenues declined 57% in the second quarter of 2009 to $3.6 million and 49% in the first half of 2009 to $8.4 million. Operating losses at Score increased from $1.9 million and $5.6 million in the second quarter and first half of 2008, respectively, to $18.5 million and $36.2 million for the same periods of 2009,

 

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inclusive of restructuring-related charges. At the end of March 2009, the Company approved a plan to offer tutoring services, previously provided at Score, in Kaplan test prep centers. The plan was substantially completed by the end of the second quarter of 2009; 14 existing Score centers were converted into Kaplan test prep centers and the remaining 64 Score centers were closed. The Company recorded charges of $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009, including a $9.2 million write-down on Score’s software product. Of this amount, $13.4 million was recorded in the second quarter of 2009.

Professional includes domestic and overseas training businesses. Professional revenue declined 16% in the second quarter of 2009 and 15% in the first half of 2009. Excluding revenue from acquired businesses, professional revenue was down 18% for the second quarter of 2009 and 17% in the first six months of 2009. The declines are the result of unfavorable exchange rates in the U.K. and Australia and continued declines in the Kaplan Professional (U.S.) real estate and financial education businesses. These declines were offset by revenue growth at professional’s Asian operations. Likewise, professional operating income is down largely due to weakness in professional’s real estate and financial education businesses in the U.S. and the U.K., offset by improved operating results at professional’s Asian operations.

In 2007, Kaplan announced restructuring plans at Kaplan Professional (U.S.) that involved product changes and decentralization of certain operations, in addition to employee terminations. In the fourth quarter of 2008, Kaplan expanded the Kaplan Professional (U.S.) restructuring to include additional operations. Total restructuring-related expenses of $1.8 million and $7.2 million were recorded in the second quarter and first half of 2009, respectively, related to lease termination, accelerated depreciation of fixed assets and severance costs, compared to $1.8 million and $3.2 million in restructuring-related severance costs recorded in the second quarter and first half of 2008, respectively.

Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor activities.

Other includes amortization of certain intangible assets and charges for incentive compensation arising from equity awards under the Kaplan stock option plan. Kaplan recorded stock compensation expense of $1.7 million and $14.0 million in the second quarter of 2009 and 2008, respectively, and $3.5 million and $7.3 million in the first six months of 2009 and 2008, respectively, related to this plan.

Cable Television Division. Cable television division revenue of $186.7 million for the second quarter of 2009 represents a 4% increase from $178.9 million in the second quarter of 2008; for the first six months of 2009, revenue increased 5% to $370.2 million, from $353.2 million in the same period of 2008. The 2009 revenue increase is due to continued growth in the division’s cable modem, telephone and digital revenues, and a $4 monthly rate increase for most basic subscribers in June 2009.

Cable division operating income declined 1% to $39.8 million in the second quarter of 2009, versus $40.1 million in the second quarter of 2008; cable division operating income for the first six months of 2009 increased 10% to $81.8 million, from $74.4 million for the first six months of 2008. The decline in operating income in the second quarter of 2009 is due to increased programming, bad debt and general and administrative costs. The increase in operating income for the first six months of 2009 is due to the division’s revenue growth.

 

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At June 30, 2009, Revenue Generating Units (RGUs) grew 2% due to continued growth in high-speed data and telephony subscribers, partially offset by a reduction in basic subscribers. 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. A summary of RGUs is as follows:

 

Cable Television Division Subscribers

   June 30,
2009
   June 30,
2008

Basic

   692,076    701,894

Digital

   227,840    224,996

High-speed data

   386,472    361,269

Telephony

   100,208    85,972
         

Total

   1,406,596    1,374,131
         

Below are details of Cable division capital expenditures for the first six months of 2009 and 2008, as defined by the NCTA Standard Reporting Categories (in millions):

 

     2009    2008

Customer Premise Equipment

   $ 16.3    $ 20.2

Scaleable Infrastructure

     13.0      6.1

Line Extensions

     5.1      8.1

Upgrade/Rebuild

     5.9      4.6

Support Capital

     8.7      19.0
             

Total

   $ 49.0    $ 58.0
             

Newspaper Publishing Division. Newspaper publishing division revenue totaled $168.8 million for the second quarter of 2009, a decrease of 14% from $197.3 million in the second quarter of 2008; division revenue decreased 18% to $329.7 million for the first six months of 2009, from $403.4 million for the first six months of 2008. Print advertising revenue at The Post in the second quarter of 2009 declined 20% to $80.0 million, from $99.8 million in the second quarter of 2008, and decreased 27% to $154.3 million for the first six months of 2009, from $211.4 million in the same period of 2008. The print revenue decline in the second quarter of 2009 is due to large decreases in classified, zones and general advertising; the decline in the first half of 2009 includes similar decreases. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com, declined 9% to $23.5 million for the second quarter of 2009, versus $25.9 million for the second quarter of 2008; newspaper online revenues declined 9% to $45.6 million in the first six months of 2009, versus $49.8 million for the first six months of 2008. Display online advertising revenue grew 2% for the second quarter and first six months of 2009. Online classified advertising revenue on washingtonpost.com declined 29% and 26% for the second quarter and first six months of 2009, respectively.

For the first six months of 2009, Post daily and Sunday circulation declined 1.5% and 2.6%, respectively, compared to the same periods of the prior year. For the six months ended June 28, 2009, average daily circulation at The Post totaled 622,700 and average Sunday circulation totaled 858,100.

As previously announced, the Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper in the first quarter of 2009. A total of 220 employees accepted the offer, and early retirement program expense of $56.8 million was recorded in the second quarter of 2009, which will be funded primarily from the assets of the Company’s pension plans. The Company estimates future annual salary and employee benefits savings of approximately $20.0 million in connection with this early retirement program. In the first quarter of 2008, a Voluntary Retirement Incentive Program was also offered, with 231 employees accepting the offer; $79.8 million in early retirement program expense was recorded in the second quarter of 2008, also funded primarily from the assets of the Company’s pension plans.

 

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The Post closed its College Park, MD, printing plant in July 2009 and has consolidated its printing operations in Springfield, VA. The Post also intends to consolidate certain other operations in Washington, DC. In connection with these activities, accelerated depreciation of $14.3 million and $27.7 million was recorded in the second quarter and first six months of 2009, respectively; accelerated depreciation of $1.2 million was recorded in the second quarter of 2008. The Company estimates that additional accelerated depreciation of $4.5 million will be recorded for the rest of 2009. Also, the Company may incur a loss on an office lease, depending on the results of the efforts to sublease the space.

The newspaper division reported an operating loss of $89.3 million in the second quarter of 2009, compared to an operating loss of $96.7 million in the second quarter of 2008. For the first six months of 2009, the newspaper division reported an operating loss of $143.1 million, compared to an operating loss of $95.5 million for the first six months of 2008. Excluding early retirement program charges and accelerated depreciation, operating results declined in the second quarter and first six months of 2009 due to the significant decline in division advertising revenue and increased bad debt expense, offset by expense reductions. Newsprint expense was down 19% and 9% for the second quarter and first six months of 2009, respectively, due to a decline in newsprint consumption and recent newsprint price declines.

Television Broadcasting Division. Revenue for the television broadcasting division decreased 20% in the second quarter of 2009 to $66.7 million, from $82.8 million in 2008; operating income for the second quarter of 2009 declined 52% to $14.3 million, from $29.7 million in 2008. For the first six months of 2009, revenue decreased 20% to $127.8 million, from $160.5 million in 2008; operating income for the first six months of 2009 declined 53% to $26.4 million, from $56.3 million in 2008. The decrease in revenue and operating income is due to weaker advertising demand in all markets and most product categories, particularly automotive; political advertising revenue also declined by $0.4 million and $3.2 million for the second quarter and first six months of 2009, respectively.

Magazine Publishing Division. Revenue for the magazine publishing division totaled $45.5 million in the second quarter of 2009, a 27% decrease from $62.7 million in the second quarter of 2008; division revenue totaled $91.6 million in the first six months of 2009, a 21% decrease from $116.1 million in the first six months of 2008. The decline is due to a 40% and 32% reduction in advertising revenue at Newsweek for the second quarter and first six months of 2009, respectively, resulting from fewer ad pages at both the domestic and international editions. In February 2009, Newsweek announced a circulation rate base reduction at its domestic edition, from 2.6 million to 1.5 million, by January 2010.

As previously announced, Newsweek offered a Voluntary Retirement Incentive Program to certain employees in November 2008 and 44 employees accepted the offer in the first quarter of 2009; early retirement program expense of $6.6 million was recorded in the first quarter of 2009, which is being funded primarily from the assets of the Company’s pension plans. In the first quarter of 2008, Newsweek also offered a Voluntary Retirement Incentive Program to certain employees and 117 employees accepted the offer. The early retirement program expense in 2008 totaled $29.2 million, which is being funded mostly from the assets of the Company’s pension plans. Of this amount, $24.6 million was recorded in the first quarter of 2008 and $4.6 million was recorded in the second quarter of 2008.

The division had an operating loss of $5.0 million in the second quarter of 2009, compared to an operating loss of $3.7 million in the second quarter of 2008; the division had an operating loss of $25.4 million for the first six months of 2009, compared to an operating loss of $36.0 million for the first six months of 2008. Excluding early retirement program expense, the division’s operating loss increased in the second quarter and first six months of 2009 due to the revenue reductions discussed above, offset by a decline in subscription and editorial expenses at the domestic edition of Newsweek.

 

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Other Businesses and Corporate Office. Other businesses and corporate office included the expenses of the Company’s corporate office and the operating results of Avenue100 Media Solutions (formerly CourseAdvisor). In the second quarter of 2008, the corporate office recorded $3.0 million in early retirement program expense.

Equity in (Losses) Earnings of Affiliates. The Company’s equity in losses of affiliates for the second quarter of 2009 was $0.2 million, compared to losses of $5.7 million for the second quarter of 2008. For the first six months of 2009, the Company’s equity in losses of affiliates totaled $1.0 million, compared to losses of $8.9 million for the same period of 2008. Results for the second quarter of 2008 included $6.8 million in impairment charges at two of the Company’s affiliates.

The Company holds a 49% interest in Bowater Mersey Paper Company and interests in several other affiliates. AbitibiBowater is the majority owner of Bowater Mersey Paper Company. In April 2009, AbitibiBowater and certain of its U.S. and Canadian subsidiaries filed voluntary petitions in the United States under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) and under the Companies’ Creditors Arrangement Act (“CCAA”) in Canada.

Other Non-Operating Income (Expense). The Company recorded other non-operating income, net, of $19.7 million for the second quarter of 2009, compared to other non-operating income, net, of $2.9 million for the second quarter of 2008. The second quarter 2009 non-operating income, net, included $19.8 million in unrealized foreign currency gains. The second quarter 2008 non-operating income, net, included $2.9 million in unrealized foreign currency gains.

The Company recorded other non-operating income, net, of $15.7 million for the first six months of 2009, compared to other non-operating income, net, of $7.0 million for the same period of the prior year. The 2009 non-operating income, net, included $18.4 million in unrealized foreign currency gains, offset by $2.9 million in impairment write-downs on cost method investments and other items. The 2008 non-operating income, net, included $7.3 million in unrealized foreign currency gains.

As noted above, a large part of the Company’s non-operating income (expense) is from unrealized foreign currency gains arising from the translation of British pound and Australian dollar-denominated intercompany loans into U.S. dollars. The unrealized foreign currency gains in the first half of 2009 and 2008 were the result of a weakening of the U.S. dollar against the British pound and the Australian dollar in the first half of 2009 and 2008, versus the exchange rates in effect at the end of 2008 and 2007.

A summary of non-operating income (expense) for the twenty-six weeks ended June 28, 2009 and June 29, 2008, is as follows (in millions):

 

     2009     2008  

Foreign currency gains, net

   $ 18.4      $ 7.3   

Impairment write-downs on investments

     (2.9     —     

Other, net

     0.2        (0.3
                

Total

   $ 15.7      $ 7.0   
                

Net Interest Expense. The Company incurred net interest expense of $7.2 million and $14.3 million for the second quarter and first six months of 2009, respectively, compared to $4.8 million and $9.3 million for the same periods of 2008. The increases are due to a decline in interest income, as well as higher average interest rates in the first half of 2009 versus the same period of the prior year. At June 28, 2009, the Company had $399.1 million in borrowings outstanding at an average interest rate of 7.2%.

(Provision) Benefit for Income Taxes. The effective tax rate for the second quarter and first six months of 2009 was 38.4% and 37.8%, respectively, compared to 39.5% for the first six months of 2008.

 

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Earnings (Losses) Per Share. The calculation of diluted earnings per share for the second quarter and first six months of 2009 was based on 9,400,420 and 9,339,445 weighted average shares outstanding, respectively, compared to 9,480,073 and 9,507,927, respectively, for the second quarter and first six months of 2008. In the first quarter of 2009, the Company repurchased 3,359 shares of its Class B common stock at a cost of $1.4 million from recipients of vested awards of restricted shares at market price.

Financial Condition: Capital Resources and Liquidity

Acquisitions and Dispositions. The Company made one small acquisition in the second quarter of 2009 and did not make any acquisitions during the first quarter of 2009.

In connection with a 2007 acquisition, additional purchase consideration of approximately $3.2 million was contingent on the achievement of certain future operating results: such amounts were not included in the Company’s purchase accounting as of December 30, 2007. In the second quarter of 2009, the Company recorded $3.2 million of additional purchase consideration in connection with the achievement of certain operating results by the acquired company and allocated the additional purchase consideration to goodwill.

In the second quarter of 2008, Kaplan acquired two businesses in their professional and test preparation divisions totaling $14.8 million. In the first quarter of 2008, Kaplan acquired two businesses in their professional and test preparation divisions totaling $31.4 million. Also in the first quarter of 2008, the cable division acquired subscribers in the Winona, Mississippi area for $15.6 million.

In 2007, Kaplan purchased a 40% interest in Shanghai Kai Bo Education Management Investment Co., Ltd. (“Kaplan China”), a provider of education in China that offers preparation courses for entry to U.K. universities, along with degree and professional training programs at campuses throughout China. In the first quarter of 2008, Kaplan exercised an option to increase its investment in Kaplan China to a majority interest and the transaction was completed in November 2008. Kaplan China’s results from the transaction date forward have been included in the Company’s consolidated financial statements.

Capital expenditures. During the first six months of 2009, the Company’s capital expenditures totaled $132.1 million. The Company estimates that its capital expenditures will be in the range of $280 million to $305 million in 2009.

Liquidity. The Company’s borrowings have decreased by $154.7 million, to $399.1 million at June 28, 2009, as compared to borrowings of $553.8 million at December 28, 2008. At June 28, 2009, the Company has $349.3 million in cash and cash equivalents, compared to $390.5 million at December 28, 2008. The Company had money market investments of $127.1 million and $15.7 million that are classified as “Cash and cash equivalents” in the Company’s Consolidated Balance Sheets as of June 28, 2009 and December 28, 2008, respectively.

At June 28, 2009, the Company had $399.1 million in total debt outstanding, which comprised $396.0 of 7.25% unsecured notes due February 1, 2019 and $3.1 million in other debt.

In January 2009, the Company issued $400 million in unsecured ten-year fixed-rate notes due February 1, 2019 (“the Notes”). The Notes have a coupon rate of 7.25 percent per annum, payable semi-annually on February 1 and August 1, beginning August 1, 2009. The Company used the net proceeds from the sale of the Notes and other cash to repay $400 million of 5.5 percent notes that matured on February 15, 2009. Under the terms of the Notes, unless the Company has exercised its right to redeem the Notes, the Company is required to offer to repurchase the Notes in cash at 101% of the principal amount, plus accrued and unpaid interest, upon the occurrence of both a Change of Control and Below Investment Grade Rating Events as described in the Prospectus Supplement of January 27, 2009.

 

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The Company’s $500 million commercial paper program continues to serve as a significant source of short-term liquidity. The $500 million revolving credit facility that expires in August 2011 supports the issuance of the Company’s short-term commercial paper and provides for general corporate purposes. Despite the recent disruption to the general credit markets, the Company continued to have access and borrowed funds under its commercial paper program and did not need to borrow funds under its revolving credit facility. There is no assurance, however, that the cost or availability of future borrowings under the Company’s commercial paper program in the debt markets will not be impacted in the future.

The Company’s credit ratings were affirmed by the rating agencies in October 2008 with a change in ratings outlook from stable to negative. In May 2009, Standard & Poor’s placed the Company’s “A+” long-term corporate credit and senior unsecured ratings, and the Company’s “A-1” short-term commercial paper rating on CreditWatch with negative implications. In June 2009, Standard & Poor’s lowered its long-term rating to “A” from “A+”, affirmed the “A-1” short-term rating, and removed both ratings from CreditWatch. The Company’s rating outlook remains at negative. The Company’s current credit ratings are as follows:

 

     Moody’s    Standard & Poor’s

Long-term

   A1    A

Short-term

   Prime-1    A-1

During the second quarter of 2009 and 2008, the Company had average borrowings outstanding of approximately $399.1 million and $457.3 million, respectively, at average annual interest rates of approximately 7.2 percent and 5.1 percent, respectively. During the second quarter of 2009 and 2008, the Company incurred net interest expense of $7.2 million and $4.8 million, respectively.

During the first six months of 2009 and 2008, the Company had average borrowings outstanding of approximately $450.2 million and $475.0 million, respectively, at average annual interest rates of approximately 6.7 percent and 5.1 percent, respectively. During the first six months of 2009 and 2008, the Company incurred net interest expense of $14.3 million and $9.3 million, respectively.

At June 28, 2009 and December 28, 2008, the Company had working capital of $267.4 million and $257.3 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 existing cash balances and internally generated funds and, to a lesser extent, through commercial paper borrowings. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2009.

There were no 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 December 28, 2008.

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 December 28, 2008.

 

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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; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2008 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 Senior 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 June 28, 2009. Based on that evaluation, the Company’s Chief Executive Officer and Senior 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 and is accumulated and communicated to management, including the Chief Executive Officer and Senior Vice President–Finance, in a manner that allows timely decisions regarding required disclosure.

 

  (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 June 28, 2009 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 4. Submission of Matters to a Vote of Security Holders.

At the Company’s May 14, 2009 Annual Meeting of Stockholders, the stockholders elected each of the nominees named in the Company’s proxy statement dated March 25, 2009 to its Board of Directors. The voting results are set forth below:

 

Class A Directors

        

Nominee

  
Votes For
   Votes
Withheld
   Broker
Non-Votes

Lee C. Bollinger

   1,291,693    - 0 -    - 0 -

Warren E. Buffett

   1,291,693    - 0 -    - 0 -

Barry Diller

   1,291,693    - 0 -    - 0 -

Melinda F. Gates

   1,291,693    - 0 -    - 0 -

Thomas S. Gayner

   1,291,693    - 0 -    - 0 -

Donald E. Graham

   1,291,693    - 0 -    - 0 -

Anne M. Mulcahy

   1,291,693    - 0 -    - 0 -

Class B Directors

        

Nominee

  
Votes For
   Votes
Withheld
   Broker
Non-Votes

Christopher C. Davis

   7,417,270    47,409    - 0 -

John L. Dotson Jr.

   7,406,767    57,912    - 0 -

Ronald L. Olson

   5,287,408    2,177,271    - 0 -

In addition, the stockholders voted on a series of amendments to the Company’s Incentive Compensation Plan. The amendments (i) provide the Company’s Compensation Committee with greater flexibility in designing compensation plans for key employees of the Company and its subsidiaries and (ii) modify or establish caps on the payouts of various awards payable to participants under the Incentive Compensation Plan. The voting results are set forth below:

 

    
Votes For
   Votes
Against
  
Abstain
   Broker
Non-Votes

Class A Stock

   1,291,693    - 0 -    - 0 -    - 0 -

Class B Stock

   6,616,053    131,949    80,259    636,418

 

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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 November 8, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 14, 2007).
  4.1    Second Supplemental Indenture dated January 30, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A., as successor to The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 30, 2009).
  4.2    Five Year Credit Agreement dated as of August 8, 2006, among the Company, Citibank, N.A., JPMorgan Chase Bank, N.A., Wachovia Bank, National Association, SunTrust Bank, The Bank of New York, PNC Bank, National Association, Bank of America, N.A. and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2006).
10.1    The Washington Post Company Incentive Compensation Plan as amended on May 14, 2009.
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       Section 1350 Certification of the Chief Executive Officer and 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: August 4, 2009     /s/    Donald E. Graham         
   

Donald E. Graham,

Chairman & Chief Executive Officer

(Principal Executive Officer)

Date: August 4, 2009     /s/    Hal S. Jones         
    Hal S. Jones,
   

Senior Vice President-Finance

(Principal Financial Officer)

 

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