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Graham Holdings Co - Quarter Report: 2010 October (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended October 3, 2010

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  x.    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 November 5, 2010:

 

Class A Common Stock

     1,240,883 Shares   

Class B Common Stock

     7,205,624 Shares   

 

 

 


Table of Contents

 

THE WASHINGTON POST COMPANY

Index to Form 10-Q

 

PART I. FINANCIAL INFORMATION   
Item 1.   Financial Statements   
 

a.  Condensed Consolidated Statements of Operations (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 3, 2010 and September 27, 2009

     3   
 

b.  Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 3, 2010 and September 27, 2009

     4   
 

c. Condensed Consolidated Balance Sheets at October 3, 2010 (Unaudited) and January 3, 2010

     5   
 

d.  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirty-Nine Weeks Ended October 3, 2010 and September 27, 2009

     6   
 

e. Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   
Item 2.   Management’s Discussion and Analysis of Results of Operations and Financial Condition      25   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      34   
Item 4.   Controls and Procedures      35   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      36   
Item 1A.   Risk Factors      36   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      38   
Item 6.   Exhibits      39   
Signatures      40   

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

The Washington Post Company

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  

(In thousands, except per share amounts)

   October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Operating revenues

        

Education

   $ 743,319      $ 684,516      $ 2,202,024      $ 1,927,369   

Advertising

     200,532        179,804        591,955        549,187   

Circulation and subscriber

     212,376        211,773        641,803        630,427   

Other

     33,496        32,701        97,784        93,290   
                                
     1,189,723        1,108,794        3,533,566        3,200,273   
                                

Operating costs and expenses

        

Operating

     476,918        461,867        1,420,022        1,399,462   

Selling, general and administrative

     487,183        471,249        1,484,479        1,422,789   

Depreciation of property, plant and equipment

     61,049        68,897        183,780        228,979   

Amortization of intangible assets

     6,521        6,767        20,641        20,606   

Impairment of goodwill and other long-lived assets

     27,477        25,387        27,477        25,387   
                                
     1,059,148        1,034,167        3,136,399        3,097,223   
                                

Operating income

     130,575        74,627        397,167        103,050   

Other income (expense)

        

Equity in earnings (losses) of affiliates

     2,140        (27,192     (3,942     (28,160

Interest income

     600        555        1,525        1,838   

Interest expense

     (7,633     (7,533     (22,810     (23,114

Other, net

     12,486        103        3,995        15,779   
                                

Income from continuing operations before income taxes

     138,168        40,560        375,935        69,393   

Provision for income taxes

     56,800        14,600        148,100        25,000   
                                

Income from continuing operations

     81,368        25,960        227,835        44,393   

Loss from discontinued operations, net of tax

     (20,292     (8,894     (28,804     (35,442
                                

Net income

     61,076        17,066        199,031        8,951   

Net loss attributable to noncontrolling interests

     76        214        96        2,108   
                                

Net income attributable to The Washington Post Company

     61,152        17,280        199,127        11,059   

Redeemable preferred stock dividends

     (230     (230     (922     (928
                                

Net income available for The Washington Post Company common stockholders

   $ 60,922      $ 17,050      $ 198,205      $ 10,131   
                                

Amounts attributable to The Washington Post Company common stockholders:

        

Income from continuing operations

   $ 81,214      $ 25,944      $ 227,009      $ 45,573   

Loss from discontinued operations, net of tax

     (20,292     (8,894     (28,804     (35,442
                                

Net income available for The Washington Post Company common stockholders

   $ 60,922      $ 17,050      $ 198,205      $ 10,131   
                                

Per share information attributable to The Washington Post Company common stockholders:

        

Basic income per common share from continuing operations

   $ 9.14      $ 2.76      $ 24.94      $ 4.85   

Basic loss per common share from discontinued operations

     (2.29     (0.95     (3.17     (3.77
                                

Basic net income per common share

   $ 6.85      $ 1.81      $ 21.77      $ 1.08   
                                

Basic average number of common shares outstanding

     8,839        9,340        9,047        9,340   
                                

Diluted income per common share from continuing operations

   $ 9.12      $ 2.76      $ 24.91      $ 4.85   

Diluted loss per common share from discontinued operations

     (2.28     (0.95     (3.16     (3.77
                                

Diluted net income per common share

   $ 6.84      $ 1.81      $ 21.75      $ 1.08   
                                

Diluted average number of common shares outstanding

     8,904        9,401        9,113        9,400   
                                

 

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Table of Contents

 

The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  

(In thousands)

   October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Net income

   $ 61,076      $ 17,066      $ 199,031      $ 8,951   
                                

Other comprehensive income (loss)

        

Foreign currency translation adjustment

     19,422        11,903        5,556        31,020   

Change in unrealized gain on available-for-sale securities

     5,731        41,721        11,094        40,141   

Pension and other postretirement plan adjustments

     (363     (54     (3,759     (149
                                
     24,790        53,570        12,891        71,012   

Income tax expense related to other comprehensive income

     (2,444     (18,227     (3,872     (18,188
                                
     22,346        35,343        9,019        52,824   
                                

Comprehensive income

     83,422        52,409        208,050        61,775   
                                

Comprehensive (income) loss attributable to noncontrolling interests

     (1     219        32        2,108   
                                

Total comprehensive income attributable to The Washington Post Company

   $ 83,421      $ 52,628      $ 208,082      $ 63,883   
                                

 

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The Washington Post Company

Condensed Consolidated Balance Sheets

 

(In thousands)    October 3,
2010
    January 3,
2010
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 577,875      $ 477,673   

Investments in marketable equity securities and other investments

     399,468        385,001   

Accounts receivable, net

     402,060        430,669   

Deferred income taxes

     10,779        14,633   

Inventories

     5,638        16,019   

Other current assets

     63,905        64,069   
                

Total current assets

     1,459,725        1,388,064   

Property, plant and equipment, net

     1,184,615        1,239,692   

Investments in affiliates

     44,994        54,722   

Goodwill, net

     1,371,920        1,423,462   

Indefinite-lived intangible assets, net

     530,662        540,012   

Amortized intangible assets, net

     63,055        71,314   

Prepaid pension cost

     407,194        409,445   

Deferred charges and other assets

     60,042        59,495   
                

Total assets

   $ 5,122,207      $ 5,186,206   
                

Liabilities and Equity

    

Current liabilities

    

Accounts payable and accrued liabilities

   $ 623,171      $ 555,478   

Income taxes payable

     7,886        8,048   

Deferred revenue

     452,953        422,998   

Dividends declared

     21,002        —     

Short-term borrowings

     3,000        3,059   
                

Total current liabilities

     1,108,012        989,583   

Postretirement benefits other than pensions

     66,807        73,672   

Accrued compensation and related benefits

     220,161        210,640   

Other liabilities

     120,172        134,783   

Deferred income taxes

     401,293        422,838   

Long-term debt

     396,547        396,236   
                

Total liabilities

     2,312,992        2,227,752   

Redeemable noncontrolling interest

     6,767        6,907   

Redeemable preferred stock

     11,526        11,526   

Preferred stock

     —          —     

Common shareholders’ equity

    

Common stock

     20,000        20,000   

Capital in excess of par value

     247,853        241,435   

Retained earnings

     4,439,577        4,324,289   

Accumulated other comprehensive income (loss)

    

Cumulative foreign currency translation adjustment

     32,695        27,010   

Unrealized gain on available-for-sale securities

     85,148        78,492   

Unrealized loss on pensions and other postretirement plans

     (4,312     (990

Cost of Class B common stock held in treasury

     (2,030,039     (1,750,686
                

Total The Washington Post Company common shareholders’ equity

     2,790,922        2,939,550   
                

Noncontrolling interests

     —          471   
                

Total equity

     2,790,922        2,940,021   
                

Total liabilities and equity

   $ 5,122,207      $ 5,186,206   
                

 

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The Washington Post Company

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Thirty-Nine Weeks Ended  

(In thousands)

   October 3,
2010
    September 27,
2009
 

Cash flows from operating activities:

    

Net income

   $ 199,031      $ 8,951   

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

    

Depreciation of property, plant and equipment

     188,451        231,651   

Amortization of intangible assets

     20,641        20,606   

Goodwill and other long-lived asset impairment charges

     27,477        25,387   

Net pension benefit

     (2,122     (5,206

Multiemployer pension plan withdrawal charge

     20,355        —     

Early retirement program expense

     —          64,541   

Foreign exchange gain

     (4,824     (18,429

Net loss on sales of businesses

     11,824        —     

Equity in losses of affiliates, including impairment charges, net of distributions

     3,942        28,160   

Benefit for deferred income taxes

     (21,391     (22,253

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

     11,621        16,890   

Change in assets and liabilities:

    

Decrease in accounts receivable, net

     9,555        72,552   

Decrease in inventories

     7,917        15,154   

Increase (decrease) in accounts payable and accrued liabilities

     2,832        (15,604

(Decrease) increase in Kaplan stock compensation

     (1,310     5,155   

Increase in deferred revenue

     41,825        64,674   

Decrease in income taxes payable

     (110     (7,288

Increase in other assets and other liabilities, net

     27,567        16,924   

Other

     186        1,772   
                

Net cash provided by operating activities

     543,467        503,637   
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (159,167     (183,036

Net proceeds from sales of businesses

     23,064        —     

Proceeds from sale of property, plant and equipment and other assets

     15,418        3,481   

Investments in marketable equity securities and other investments

     (6,764     (11,105

Investments in certain businesses, net of cash acquired

     (3,626     (8,134

Return of escrow funds from acquisition

     —          4,667   

Return of investment in affiliates

     998        4,321   

Other

     (293     712   
                

Net cash used in investing activities

     (130,370     (189,094
                

Cash flows from financing activities:

    

Common shares repurchased

     (277,053     (1,371

Dividends paid

     (62,855     (61,332

Principal payments on debt

     —          (400,787

Issuance of notes, net

     —          395,329   

Repayments of commercial paper, net

     —          (149,983

Other

     25,216        6,460   
                

Net cash used in financing activities

     (314,692     (211,684
                

Effect of currency exchange rate change

     1,797        7,267   
                

Net increase in cash and cash equivalents

     100,202        110,126   

Beginning cash and cash equivalents

     477,673        390,509   
                

Ending cash and cash equivalents

   $ 577,875      $ 500,635   
                

 

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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), and television broadcasting (through the ownership and operation of six television broadcast stations).

The Company announced on August 2, 2010 that it had entered into an agreement to sell Newsweek. On September 30, 2010, the Company completed such sale. The operating results of Newsweek have been presented in loss from discontinued operations, net of tax, for all periods presented.

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 2010 and 2009 ended on October 3, 2010, July 4, 2010, April 4, 2010, September 27, 2009, June 28, 2009 and March 29, 2009, 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 thirty-nine weeks ended October 3, 2010 and September 27, 2009 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 January 3, 2010.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation, which includes the reclassification of the results of operations of the magazine publishing segment as discontinued operations for all periods presented.

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.

Discontinued Operations – A business is classified as a discontinued operation when (i) the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from the Company’s ongoing operations; (ii) the business has either been disposed of or is classified as held for sale; and (iii) the Company will not have any significant continuing involvement in the operations of the business after the disposal transactions. The results of discontinued operations (as well as the gain or loss on the disposal) are aggregated and separately presented in the Company’s condensed consolidated statement of operations, net of income taxes. The assets and related liabilities are aggregated and separately presented in the Company’s condensed consolidated balance sheet.

Assets Held for Sale – An asset or business is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or business is available for immediate sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets and related liabilities are aggregated and reported separately in the Company’s condensed consolidated balance sheet.

Recently Adopted and Issued Accounting Pronouncements – In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance that modifies the fair value requirement of multiple element revenue arrangements. The new guidance allows the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and third-party evidence (“TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. The guidance requires expanded qualitative and quantitative disclosures and is effective for

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is not planning to early adopt the guidance and will continue evaluating the impact of this new guidance on its condensed consolidated financial statements.

In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The guidance requires previous fair value hierarchy disclosures to be further disaggregated by class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. In addition, significant transfers between Levels 1 and 2 of the fair value hierarchy are required to be disclosed. These additional requirements became effective for interim and annual periods beginning after December 15, 2009 and did not have an impact on the condensed consolidated financial statements of the Company. In addition, the fair value disclosure amendments also require more detailed disclosures of the changes in Level 3 instruments. These changes will not become effective until interim and annual periods beginning after December 15, 2010 and are not expected to have an impact on the condensed consolidated financial statements of the Company.

Note 2: Discontinued Operations

On September 30, 2010, the Company completed the sale of Newsweek magazine. Under the terms of the asset purchase agreement, the buyer assumed Newsweek’s subscription obligations and received Newsweek’s intellectual property, target working capital and selected equipment used in the business. The Company retained the pension assets and liabilities and certain employee obligations, including severance, and other liabilities arising prior to the sale. The Company recorded an after-tax loss on the transaction of $11.5 million, which is included in “Loss from discontinued operations, net of tax” in the Company’s condensed consolidated statement of income for the third quarter and first nine months of 2010.

The results of operations of the magazine publishing division for the third quarter and first nine months of 2010 and 2009 are included in the Company’s condensed consolidated statement of income as “Loss from discontinued operations, net of tax”. All corresponding prior period operating results presented in the Company’s condensed consolidated financial statements and the accompanying notes have been reclassified to reflect the discontinued operations presented. The Company did not reclassify its consolidated balance sheet as of December 31, 2009 to reflect the discontinued operations. The Company also did not reclassify its cash flow statements to reflect the discontinued operations.

Newsweek employees were participants in The Washington Post Company Retirement Plan and Newsweek had historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were retained by the Company, the associated credit had been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations (see Note 12).

In the third quarter and first nine months of 2010, Newsweek recorded $0.8 million and $4.7 million, respectively, in accelerated depreciation and property, plant and equipment write-downs.

The summarized loss from discontinued operations, net of tax for the third quarter and first nine months of 2010 and 2009 is presented below (in thousands):

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Operating revenues

   $ 28,750      $ 40,167      $ 94,231      $ 131,776   

Operating costs and expenses

     (41,149     (53,561     (121,842     (187,018
                                

Loss from discontinued operations

     (12,399     (13,394     (27,611     (55,242

Benefit from income taxes

     (3,569     (4,500     (10,269     (19,800
                                

Net loss from discontinued operations

     (8,830     (8,894     (17,342     (35,442

Loss on sale of discontinued operations

     (10,293     —          (10,293     —     

Income taxes on sale of discontinued operations

     1,169        —          1,169        —     
                                

Loss from discontinued operations, net of tax

   $ (20,292   $ (8,894   $ (28,804   $ (35,442
                                

Note 3: Investments

Investments in marketable equity securities at October 3, 2010 and January 3, 2010 consist of the following (in thousands):

 

     October 3,
2010
     January 3,
2010
 

Total cost

   $ 223,064       $ 223,064   

Net unrealized gains

     141,914         130,820   
                 

Total fair value

   $ 364,978       $ 353,884   
                 

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

There were no new investments or sales of marketable equity securities in the first nine months of 2010. In the first quarter of 2009, the Company invested $10.8 million in the Class B common stock of Berkshire Hathaway Inc.

In the third quarter of 2009, the Company recorded $29.0 million in impairment charges at two of the Company’s affiliate investments. The loss primarily related to an impairment charge recorded on the Company’s interest in Bowater Mersey Paper Company, as a result of the challenging economic environment for newsprint producers.

Note 4: Acquisitions and Dispositions

In the second quarter of 2010, the Company made two small acquisitions in its Cable division and in Other businesses. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. The Company did not make any acquisitions during the third quarter of 2010. On September 30, 2010, the Company completed the sale of Newsweek. Consequently, the Company’s income from continuing operations for the third quarter and year-to-date periods excludes Newsweek results, which have been reclassified to discontinued operations (see Note 2). In the second quarter of 2010, Kaplan completed the sale of Education Connection, which was part of the Kaplan Ventures division.

In the first nine months of 2009, the Company completed business acquisitions totaling approximately $8.1 million. This included the acquisition of a company at the Kaplan International division in the third quarter of 2009, as well as a small acquisition by the Company in the second quarter of 2009. This also included $3.2 million of additional purchase consideration recorded to goodwill in the second quarter of 2009, in connection with the achievement of certain operating results by a company acquired by Kaplan in 2007. The purchase consideration was contingent on the achievement of certain future operating results and therefore was not included in the Company’s purchase accounting as of December 30, 2007. The Company did not make any acquisitions during the first quarter of 2009.

Note 5: Goodwill and Other Intangible Assets

The education division made several minor changes to its operating and reporting structure in the first quarter of 2010, changing the composition of the reporting units within Kaplan Test Preparation, Kaplan Ventures and Kaplan Higher Education (see Note 12). The changes resulted in the reassignment of the assets and liabilities to the reporting units affected. The goodwill was allocated to the reporting units affected using the relative fair value approach.

As a result of challenges in the lead generation industry, in the third quarter of 2010, the Company performed an interim review of the carrying value of goodwill and other intangible asset at its online lead generation business, which is included within the other businesses segment. The Company failed the step one goodwill impairment test and performed a step two analysis, resulting in a $27.5 million goodwill and other intangible asset impairment charge. The Company estimated the fair value utilizing a discounted cash flow model.

The education division reorganized its operations in the third quarter of 2009 into the following four operating segments for the purpose of making operating decisions and assessing performance: Higher Education, Test Preparation, Kaplan International and Kaplan Ventures. The reorganization changed the composition of the reporting units within the education division and resulted in the reassignment of the assets and liabilities. The goodwill was allocated to the reporting units using the relative fair value approach. As a result of the reassignment and allocation, the Company performed an interim review of the carrying value of goodwill at the education division for possible impairment on both a prereorganization and postreorganization basis. No impairment of goodwill was indicated at the prereorganization reporting units. On a postreorganization basis, the Company failed the step one goodwill impairment test at two reporting units (Kaplan EduNeering and Kaplan Compliance Solutions) within the Kaplan Ventures operating segment and performed a step two analysis. The Company recorded a goodwill and other long-lived asset impairment charge of $25.4 million related to these two reporting units. The fair value of Kaplan EduNeering was determined utilizing a discounted cash flow model; the fair value of Kaplan Compliance Solutions was determined using a cost approach. Effective in the first quarter of 2010, Kaplan Compliance Solutions was moved from Kaplan Ventures to Test Preparation (see Note 12).

The Company amortizes the recorded values of its amortized intangible assets over their estimated useful lives. Amortization of intangible assets for the thirteen weeks ended October 3, 2010 and September 27, 2009 was $6.5 million and $6.8 million, respectively. Amortization of intangible assets for the thirty-nine weeks ended October 3, 2010 and September 27, 2009 was $20.6 million. Amortization of intangible assets is estimated to be approximately $7 million for the remainder of 2010, $22 million in 2011, $10 million in 2012, $5 million in 2013, $4 million in 2014 and $15 million thereafter.

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

The changes in the carrying amount of goodwill related to continuing operations, by segment, for the thirty-nine weeks ended October 3, 2010 were as follows:

 

(in thousands)    Education     Cable
Television
     Newspaper
Publishing
    Television
Broadcasting
     Magazine
Publishing
    Other
Businesses
    Total  

Balance as of January 3, 2010:

                

Goodwill

   $ 1,073,852      $ 85,488       $ 81,186      $ 203,165       $ 24,515      $ 97,342      $ 1,565,548   

Accumulated impairment losses

     (15,529     —           (65,772     —           —          (60,785     (142,086
                                                          
     1,058,323        85,488         15,414        203,165         24,515        36,557        1,423,462   

Acquisitions

     3,999        —           —          —           —          2,810        6,809   

Impairment

     —          —           —          —           —          (24,634     (24,634

Dispositions

     (19,851     —           —          —           (24,515     —          (44,366

Foreign currency exchange rate changes and other

     10,652        —           (3     —           —          —          10,649   
                                                          

Balance as of October 3, 2010

                

Goodwill

     1,068,652        85,488         81,183        203,165         —          100,152        1,538,640   

Accumulated impairment losses

     (15,529     —           (65,772     —           —          (85,419     (166,720
                                                          
   $ 1,053,123      $ 85,488       $ 15,411      $ 203,165       $ —        $ 14,733      $ 1,371,920   
                                                          

The changes in carrying amount of goodwill at the Company’s education division for the thirty-nine weeks ended October 3, 2010 were as follows:

 

(in thousands)    Higher
Education
     Test Preparation     Kaplan
International
     Kaplan
Ventures
    Total  

Balance as of January 3, 2010:

            

Goodwill

   $ 335,226       $ 236,779      $ 432,973       $ 68,874      $ 1,073,852   

Accumulated impairment losses

     —           —          —           (15,529     (15,529 )
                                          
     335,226         236,779        432,973        53,345        1,058,323   

Reallocation (Note 12)

     —           (14,534 )     —           14,534       —     

Acquisitions

     —           —          —           3,999       3,999  

Dispositions

     —           —          —           (19,851 )     (19,851 )

Foreign currency exchange rate changes and other

     —           81       8,881        1,690       10,652  
                                          

Balance as of October 3, 2010

            

Goodwill

     335,226        229,363       441,854        62,209       1,068,652   

Accumulated impairment losses

     —           (7,037 )     —           (8,492 )     (15,529 )
                                          
   $ 335,226      $ 222,326     $ 441,854       $ 53,717     $ 1,053,123  
                                          

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Other intangible assets consist of the following:

 

            As of October 3, 2010      As of January 3, 2010  

(in thousands)

  

Useful Life

Range

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

Amortized intangible assets:

                    

Non-compete agreements

     2-5 years       $ 43,172       $ 30,993       $ 12,179       $ 43,886       $ 24,093       $ 19,793   

Student and customer relationships

     2-10 years         66,035         40,209         25,826         67,360         35,475         31,885   

Databases and technology

     3-5 years         10,526         1,952         8,574         12,195         3,889         8,306   

Trade names and trademarks

     2-10 years         28,983         14,210         14,773         19,978         10,639         9,339   

Other

     1-25 years         7,999         6,296         1,703         7,797         5,806         1,991   
                                                        
      $ 156,715       $ 93,660       $ 63,055       $ 151,216       $ 79,902       $ 71,314   
                                                        

Indefinite-lived intangible assets:

                    

Franchise agreements

      $ 496,166             $ 496,047         

Wireless licenses

        22,150               22,150         

Licensure and accreditation

        7,862               7,862         

Other

        4,484               13,953         
                                
      $ 530,662             $ 540,012         
                                

Note 6: Borrowings

Debt consists of the following (in millions):

 

     October 3,
2010
    January 3,
2010
 

7.25% unsecured notes due February 1, 2019

   $ 396.5      $ 396.2   

Other indebtedness

     3.0        3.1   
                

Total

     399.5        399.3   

Less current portion

     (3.0     (3.1
                

Total long-term debt

   $ 396.5      $ 396.2   
                

The Company’s other indebtedness at October 3, 2010 and January 3, 2010 is at an interest rate of 6% and matures during 2010.

During the third quarter of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.5 million and $399.2 million, respectively, at average annual interest rates of approximately 7.2%. During the third quarter of 2010 and 2009, the Company incurred net interest expense of $7.0 million.

During the first nine months of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.4 million and $434.9 million, respectively, at average annual interest rates of approximately 7.2% and 6.8%, respectively. During the first nine months of 2010 and 2009, the Company incurred net interest expense of $21.3 million.

At October 3, 2010, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $481.9 million, compared with the carrying amount of $396.5 million. At January 3, 2010, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $443.1 million, compared with the carrying amount of $396.2 million. The carrying value of the Company’s other unsecured debt at October 3, 2010 approximates fair value.

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Note 7: Earnings Per Share

The Company’s earnings per share from continuing operations (basic and diluted) for the third quarter and first nine months of 2010 and 2009 are presented below (in thousands, except per share amounts):

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Income from continuing operations attributable to The Washington Post Company common stockholders

   $ 81,214      $ 25,944      $ 227,009      $ 45,573   

Less: Amount attributable to participating securities

     (458     (165     (1,389     (308
                                

Basic income from continuing operations attributable to The Washington Post Company common stockholders

   $ 80,756      $ 25,779      $ 225,620      $ 45,265   
                                

Plus: Amount attributable to participating securities

     458        165        1,389        308   
                                

Diluted income from continuing operations attributable to The Washington Post Company common stockholders

   $ 81,214      $ 25,944      $ 227,009      $ 45,573   
                                

Basic weighted-average shares outstanding

     8,839        9,340        9,047        9,340   

Effect of dilutive shares:

        

Stock options and restricted stock

     65        61        66        60   
                                

Diluted weighted-average shares outstanding

     8,904        9,401        9,113        9,400   
                                

Income per share from continuing operations attributable to The Washington Post Company common stockholders:

        

Basic

   $ 9.14      $ 2.76      $ 24.94      $ 4.85   
                                

Diluted

   $ 9.12      $ 2.76      $ 24.91      $ 4.85   
                                

The Company treats unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities and includes these securities in the computation of earnings per share under the two-class method.

For the first nine months of 2010, there were 9,046,653 weighted average basic and 9,112,564 weighted average diluted shares outstanding. For the third quarter of 2010, there were 8,839,329 weighted average basic and 8,904,453 weighted average diluted shares outstanding. For the first nine months of 2009, there were 9,339,646 weighted average basic and 9,399,501 weighted average diluted shares outstanding. For the third quarter of 2009, there were 9,340,067 weighted average basic and 9,401,010 weighted average diluted shares outstanding.

The diluted earnings per share amounts for the third quarter of 2010 and the first nine months of 2010 exclude the effects of 59,069 and 36,125 stock options outstanding, respectively, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the third quarter of 2009 and the first nine months of 2009 exclude the effects of 60,125 and 72,069 stock options outstanding, respectively, as their inclusion would have been antidilutive.

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Note 8: Pension and Postretirement Plans

Defined Benefit Plans. The total cost (benefit) arising from the Company’s defined benefit pension plans for the third quarter and nine months ended October 3, 2010 and September 27, 2009, consists of the following components (in thousands):

 

     Pension Plans  
     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Service cost

   $ 6,836      $ 6,713      $ 20,969      $ 22,517   

Interest cost

     14,993        13,918        45,180        43,077   

Expected return on assets

     (23,847     (24,409     (71,558     (73,832

Amortization of transition asset

     (8     (14     (22     (29

Amortization of prior service cost

     1,103        1,419        3,309        3,087   

Recognized actuarial gain

     —          67        —          (26
                                

Net periodic benefit

     (923     (2,306     (2,122     (5,206

Early retirement programs expense

     —          1,123        —          64,541   

Special termination benefits

     5,295       —          5,295       —     

Recognition of prior service cost

     2,369       —          2,369       —     
                                

Total cost (benefit)

   $ 6,741      $ (1,183   $ 5,542      $ 59,335   
                                

In connection with the Newsweek sale, the Company recorded $5.3 million in special termination benefits expense and $2.4 million in prior service cost expense; these amounts are included in discontinued operations.

Newsweek offered a Voluntary Retirement Incentive Program to certain employees in November 2008 that was completed in the first quarter of 2009; early retirement program expense of $6.6 million was recorded in the first quarter of 2009, and is included in discontinued operations.

The Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper in the first quarter of 2009; early retirement program expense of $56.8 million was recorded in the second quarter of 2009, funded mostly from the assets of the Company’s pension plans.

In the third quarter of 2009, the Company offered a Voluntary Retirement Incentive Program to certain employees of Robinson Terminal Warehouse Corporation; early retirement program expense of $1.1 million was recorded in the third quarter of 2009, funded mostly from the assets of the Company’s pension plans.

The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) for the third quarter and nine months ended October 3, 2010 and September 27, 2009, including a portion included in discontinued operations, consists of the following components (in thousands):

 

     SERP  
     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     October 3,
2010
     September 27,
2009
     October 3,
2010
     September 27,
2009
 

Service cost

   $ 344       $ 334       $ 1,033       $ 1,001   

Interest cost

     1,072         1,032         3,216         3,096   

Amortization of prior service cost

     102         111         305         334   

Recognized actuarial loss

     238         388         714         1,164   
                                   

Total cost

   $ 1,756       $ 1,865       $ 5,268       $ 5,595   
                                   

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. As of September 30, 2010 and December 31, 2009, the assets of the Company’s pension plans were allocated as follows:

 

     Pension Plan Asset Allocations  
     September 30,
2010
    December 31,
2009
 

U.S. equities

     73     74

U.S. fixed income

     21     18

International equities

     6     8
                

Total

     100     100
                

Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of September 30, 2010, up to 13% of the assets could be invested in international stocks, and no less than 9% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.

In determining the 6.5% expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.

The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2010. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. Included in the assets are $167.0 million and $274.3 million of Berkshire Hathaway Class A and Class B common stock at September 30, 2010 and December 31, 2009, respectively. Approximately 52% of the Berkshire Hathaway common stock held at December 31, 2009 was sold during the first six months of 2010.

Other Postretirement Plans. The total (benefit) cost arising from the Company’s postretirement plans for the third quarter and nine months ended October 3, 2010 and September 27, 2009, including a portion included in discontinued operations, consists of the following components (in thousands):

 

     Postretirement Plans  
     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     October 3,
2010
    September 27,
2009
    October 3,
2010
    September 27,
2009
 

Service cost

   $ 847      $ 968      $ 2,540      $ 2,903   

Interest cost

     997        1,042        2,992        3,126   

Amortization of prior service credit

     (1,287     (1,242     (3,862     (3,726

Recognized actuarial gain

     (513     (782     (1,538     (2,346
                                

Net periodic cost (benefit)

     44        (14     132        (43

Curtailment gain

     (8,583 )     —          (8,583 )     (677
                                

Total benefit

   $ (8,539   $ (14   $ (8,451   $ (720
                                

The Company recorded a curtailment gain of $8.5 million in the third quarter of 2010 due to the sale of Newsweek; the gain is included in discontinued operations.

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.

Multiemployer Pension Plans. The Washington Post newspaper contributes to multiemployer pension plans on behalf of three union-represented employee groups: the CWA-ITU Negotiated Pension Plan on behalf of Post mailers, helpers and utility mailers; the IAM National Pension Fund on behalf of Post machinists; and the Central Pension Fund of the International Union of Operating Engineers

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

on behalf of Post engineers, carpenters and painters. Contributions are made in accordance with the relevant collective bargaining agreements and are generally based on straight-time hours.

The Post has negotiated in collective bargaining the contractual right to withdraw from two of these plans; the right to withdraw from the CWA-ITU Negotiated Pension Plan (the Plan) has been the subject of contract negotiations that have reached an impasse. In July 2010, the Post notified the union and the Plan of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post has recorded a $20.4 million charge based on an estimate of the withdrawal liability; $17.7 million of this charge was recorded in the second quarter of 2010 and $2.7 million was recorded in the third quarter of 2010. The Plan is obligated to notify the Post of the actual withdrawal liability in a timely manner at which time an adjustment to the estimated charge will be made to reflect the difference between the estimated and actual withdrawal liability. Payment of the actual withdrawal liability will relieve the Post of further liability to the Plan absent certain circumstances prescribed by law.

Note 9: Other Non-Operating Income (Expense)

A summary of non-operating income (expense) for the thirteen and thirty-nine weeks ended October 3, 2010 and September 27, 2009, is as follows (in millions):

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     October 3,
2010
     September 27,
2009
     October 3,
2010
    September 27,
2009
 

Foreign currency gains, net

   $ 11.9      $ —         $ 4.8      $ 18.4   

Impairment write-downs on cost method investments

     —           —           —          (2.9

Other, net

     0.6         0.1         (0.8     0.3   
                                  

Total

   $ 12.5       $ 0.1       $ 4.0      $ 15.8   
                                  

Note 10: Contingencies

Litigation and Legal Matters. A purported class action complaint was filed against the Company, Donald E. Graham and Hal S. Jones on October 28, 2010, in the U.S. District Court for the District of Columbia, by the Plumbers Local #200 Pension Fund. The complaint alleges that the Company and certain of its officers made materially false and misleading statements, or failed to disclose material facts relating to Kaplan Higher Education (KHE), in violation of the federal securities laws. The complaint seeks damages, attorneys’ fees, costs and equitable/injunctive relief. Based on an initial review of this complaint, the Company believes the complaint is without merit and intends to vigorously defend against it.

On October 19, 2010, the Florida Attorney General announced that it had commenced an investigation into alleged deceptive trade practices at five proprietary school groups located in Florida, including Kaplan. The Florida Attorney General has served KHE with a subpoena seeking records. KHE is cooperating with the investigation, but cannot at this time predict the outcome of the investigation.

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Department of Education (DOE) Program Reviews. From 2007 through 2010, the DOE undertook program reviews at four of KHE’s campus locations and at Kaplan University. The DOE has issued a final report with respect to one of the campus locations with no action taken. No final reports with respect to the other reviews have been issued. Therefore, the results of these reviews and their impact on Kaplan’s operations is uncertain.

In particular, while KHE has responded to the previously disclosed preliminary report and request for additional information (which included a complete file review of Title IV disbursements for three consecutive award years from 2005/2006 through 2007/2008) by the DOE with regard to its program review at the Broomall campus, KHE has not received a final report. With respect to the previously disclosed United States Attorney’s inquiry into the surgical tech program, the U.S. Attorney has expressed concerns about the program’s historical sufficiency of externship sites, but has not concluded its inquiry. At this time we cannot predict the ultimate impact the DOE program review or U.S. Attorney’s inquiry may have on Kaplan.

Other. In September 2010 KHE received a report from one of its accreditors, ACCSC, regarding its Riverside campus, which report requested that KHE provide ACCSC detailed information about how KHE schools intend to maintain compliance with federal regulations. KHE has responded to ACCSC’s request and at this time cannot predict if ACCSC will request additional information or take additional action. ACCSC accredits 32 Kaplan campuses.

Note 11: Fair Value Measurements

Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on 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 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.

 

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of October 3, 2010 were as follows (in millions):

            Fair Value Measurements as of
October 3, 2010
 
     Fair Value at
October  3,
2010
     Quoted Prices in
Active  Markets for
Identical Items
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
 

Assets:

        

Money market investments(1)

   $ 342.5       $ —         $ 342.5   

Marketable equity securities(2)

     365.0         365.0         —     

Other current investments(3)

     34.5         17.4         17.1   
                          

Total financial assets

   $ 742.0       $ 382.4       $ 359.6   
                          

Liabilities:

        

Deferred compensation plan liabilities (4)

   $ 66.7       $ —         $ 66.7   

7.25% Unsecured notes (5)

     481.9         —           481.9   
                          

Total financial liabilities

   $ 548.6       $ —         $ 548.6   
                          

 

(1)

The Company’s money market investments are included in cash and cash equivalents.

(2)

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

(3)

Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).

(4)

Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.

(5)

See Note 6 for carrying amount of these notes.

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2010 were as follows (in millions):

            Fair Value Measurements as of
January 3, 2010
 
     Fair Value at
January  3,
2010
     Quoted Prices in
Active  Markets for
Identical Items
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
 

Assets:

        

Money market investments (1)

   $ 327.8       $ —         $ 327.8   

Marketable equity securities (2)

     353.9         353.9         —     

Other current investments (3)

     31.1         30.4         0.7   
                          

Total financial assets

   $ 712.8       $ 384.3       $ 328.5   
                          

Liabilities:

        

Deferred compensation plan liabilities (4)

   $ 66.6       $ —         $ 66.6   

7.25% unsecured notes (5)

     443.1         —           443.1   
                          

Total financial liabilities

   $ 509.7       $ —         $ 509.7   
                          

 

(1)

The Company’s money market investments are included in cash and cash equivalents.

(2)

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

(3)

Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).

(4)

Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.

(5)

See Note 6 for carrying amount of these notes.

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.

 

17


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

Note 12: Business Segments

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

In the first quarter of 2010, Kaplan made several minor changes to its operating and reporting structure: Kaplan Compliance Solutions was moved from Kaplan Ventures to Test Preparation; Kaplan Continuing Education was moved from Test Preparation to Kaplan Ventures; and Colloquy (a business that provides online services to nonprofit higher education institutions) was moved from KHE to Kaplan Ventures. The business segments disclosed are based on this organizational structure. Segment operating results of the education division for fiscal years ended 2009 and 2008 have been restated to reflect these changes.

In the third quarter of 2009, KHE modified its method of recognizing revenue ratably over the period of instruction as services are delivered to students from a weekly convention to a daily convention, on a prospective basis. If KHE’s revenue recognition convention had been on a daily convention in prior periods, revenues and operating income in the first quarter of 2009 would have increased by $7.0 million and $6.5 million, respectively. The Company has concluded that the impact of this change was not material to the Company’s financial position or results of operations for 2009 and the related interim periods, based on its consideration of quantitative and qualitative factors.

At the end of March 2009, the Company approved a plan to offer tutoring services, previously provided at Score, in Kaplan test preparation centers. The plan was substantially completed by the end of the second quarter of 2009. 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.

Restructuring-related expenses of $0.9 million and $8.1 million were recorded in the third quarter and first nine months of 2009, respectively, at Kaplan’s professional domestic training businesses (part of Test Preparation division).

Cable television operations consist of cable systems offering video, Internet, phone 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). Revenues from newspaper 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 include the operating results of Avenue100 Media Solutions and other small businesses. Previously these businesses were combined with the Corporate office in the Other businesses and corporate office division. Segment operating results are now reported separately for Other businesses and Corporate office and results for fiscal years ended 2009 and 2008 have been restated to reflect these changes.

Corporate office includes the expenses of the Company’s corporate office and the pension credit previously reported in the magazine publishing division.

Due to the sale of Newsweek, the magazine publishing division is no longer included as a separate segment as its results have been reclassified to discontinued operations. Newsweek employees are participants in The Washington Post Company Retirement Plan, and Newsweek has historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities will be retained by the Company, the associated credit has been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.

The net pension credit is included with operating results for the Corporate office, as follows:

 

(in thousands)

   2010      2009      2008  

Quarter 1

   $ 8,289       $ 8,238      

Quarter 2

     8,772         8,238      

Quarter 3

     8,772         9,080      

Quarter 4

        9,080      
                    
   $ 25,833       $ 34,636       $ 41,652   

 

18


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

In computing income from operations by segment, the effects of equity in losses of affiliates, interest income, interest expense, other non-operating income and expense items and income taxes are not included.

The following table summarizes quarterly financial information related to each of the Company’s business segments for 2010:

 

(in thousands)

   First Quarter     Second Quarter     Third Quarter  

2010 Quarterly Operating Results

      

Operating revenues

      

Education

   $ 711,382      $ 747,323      $ 743,319   

Cable television

     189,358        190,558        188,694   

Newspaper publishing

     155,771        172,730        163,447   

Television broadcasting

     73,482        82,592        83,178   

Other businesses

     14,134        10,693        13,098   

Corporate office

     —          —          —     

Intersegment elimination

     (2,096     (2,084     (2,013
                        
   $ 1,142,031      $ 1,201,812      $ 1,189,723   
                        

Income (loss) from operations

      

Education

   $ 57,948      $ 108,982      $ 99,100   

Cable television

     42,536        43,790        40,264   

Newspaper publishing

     (13,752     (14,300     (1,715

Television broadcasting

     20,911        29,806        25,283   

Other businesses

     (833     (2,885     (28,459

Corporate office

     (3,707     (1,904     (3,898
                        
   $ 103,103      $ 163,489      $ 130,575   
                        

Equity in (losses) earnings of affiliates

     (8,109     2,027        2,140   

Interest expense, net

     (7,253     (6,999     (7,033

Other, net

     (3,321     (5,170     12,486   
                        

Income from continuing operations before income taxes

   $ 84,420      $ 153,347      $ 138,168   
                        

Depreciation of property, plant and equipment

      

Education

   $ 18,748      $ 19,129      $ 19,060   

Cable television

     31,626        30,722        31,174   

Newspaper publishing

     7,884        7,818        7,416   

Television broadcasting

     3,137        3,260        3,182   

Other businesses

     59        62        72   

Corporate office

     144        142        145   
                        
   $ 61,598      $ 61,133      $ 61,049   
                        

Amortization of intangible assets

      

Education

   $ 5,276      $ 6,355      $ 4,998   

Cable television

     76        75        74   

Newspaper publishing

     282        389        262   

Television broadcasting

     —          —          —     

Other businesses

     882        785        1,187   

Corporate office

     —          —          —     
                        
   $ 6,516      $ 7,604      $ 6,521   
                        

Impairment of goodwill and other long-lived assets

      

Education

   $ —        $ —        $ —     

Cable television

     —          —          —     

Newspaper publishing

     —          —          —     

Television broadcasting

     —          —          —     

Other businesses

     —          —          27,477   

Corporate office

     —          —          —     
                        
   $ —        $ —        $ 27,477   
                        

 

19


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

(in thousands)

   First Quarter     Second Quarter     Third Quarter  

Net pension credit (expense)

      

Education

   $ (1,349   $ (1,526   $ (1,434

Cable television

     (468     (475     (488

Newspaper publishing1

     (5,560     (23,192     (8,088

Television broadcasting

     (262     (295     (278

Other businesses

     (15     (18     (15

Corporate office

     8,089        8,570        8,571   
                        
   $ 435      $ (16,936   $ (1,732
                        

 

1 Includes a $17.7 million and $2.7 million charge in the second quarter and third quarter of 2010, respectively, related to the withdrawal from a multiemployer pension plan.

 

20


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

The following table summarizes quarterly financial information related to each of the Company’s business segments for 2009:

 

(in thousands)

   First Quarter     Second Quarter     Third Quarter     Fourth Quarter  

2009 Quarterly Operating Results

        

Operating revenues

        

Education

   $ 593,530      $ 649,323      $ 684,516      $ 709,269   

Cable television

     183,508        186,684        189,647        190,570   

Newspaper publishing

     160,891        168,765        156,281        193,345   

Television broadcasting

     61,163        66,653        64,599        80,236   

Other businesses

     10,820        13,156        15,314        14,631   

Corporate office

     —          —          —          —     

Intersegment elimination

     (1,612     (1,402     (1,563     (1,808
                                
   $ 1,008,300      $ 1,083,179      $ 1,108,794      $ 1,186,243   
                                

Income (loss) from operations

        

Education

   $ 11,162      $ 58,107      $ 45,900      $ 79,592   

Cable television

     42,012        39,807        40,329        46,903   

Newspaper publishing

     (53,752     (89,347     (23,622     3,172   

Television broadcasting

     12,143        14,268        15,052        29,043   

Other businesses

     (371     239        30        41   

Corporate office

     (2,224     (3,621     (3,062     (3,922
                                
   $ 8,970      $ 19,453      $ 74,627      $ 154,829   
                                

Equity in losses of affiliates

     (762     (206     (27,192     (1,261

Interest expense, net

     (7,072     (7,226     (6,978     (7,692

Other, net

     (4,043     19,719        103        (2,582
                                

(Loss) income from continuing operations before income taxes

   $ (2,907   $ 31,740      $ 40,560      $ 143,294   
                                

Depreciation of property, plant and equipment

        

Education

   $ 19,681      $ 22,401      $ 19,017      $ 20,379   

Cable television

     31,099        31,099        30,800        31,209   

Newspaper publishing

     23,768        25,741        15,352        8,009   

Television broadcasting

     2,444        3,486        3,528        2,841   

Other businesses

     22        32        46        51   

Corporate office

     154        155        154        216   
                                
   $ 77,168      $ 82,914      $ 68,897      $ 62,705   
                                

Amortization of intangible assets

        

Education

   $ 5,541      $ 6,089      $ 5,617      $ 4,976   

Cable television

     67        85        79        79   

Newspaper publishing

     243        219        274        274   

Television broadcasting

     —          —          —          —     

Other businesses

     797        798        797        707   

Corporate office

     —          —          —          —     
                                
   $ 6,648      $ 7,191      $ 6,767      $ 6,036   
                                

Impairment of goodwill and other long-lived assets

        

Education

   $ —        $ —        $ 25,387      $ —     

Cable television

     —          —          —          —     

Newspaper publishing

     —          —          —          —     

Television broadcasting

     —          —          —          —     

Other businesses

     —          —          —          —     

Corporate office

     —          —          —          —     
                                
   $ —        $ —        $ 25,387      $ —     
                                

 

21


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

(in thousands)

   First Quarter     Second Quarter     Third Quarter     Fourth Quarter  

Net pension credit (expense)

        

Education

   $ (1,132   $ (1,106   $ (1,914   $ (1,262

Cable television

     (393     (394     (532     (532

Newspaper publishing

     (5,016     (61,600     (5,168     (4,141

Television broadcasting

     (147     (147     (63     (61

Other businesses

     (20     (21     (20     (21

Corporate office

     8,038        8,038        8,880        8,880   
                                
   $ 1,330      $ (55,230   $ 1,183      $ 2,863   
                                

The following table summarizes financial information related to each of the Company’s business segments for the nine months ended 2010 and 2009, as well as for the fiscal years 2009 and 2008:

 

(in thousands)

   Nine Month Period     Fiscal Year Ended  
     2010     2009     2009     2008  

Operating revenues

        

Education

   $ 2,202,024      $ 1,927,369      $ 2,636,638      $ 2,331,580   

Cable television

     568,610        559,839        750,409        719,070   

Newspaper publishing

     491,948        485,937        679,282        801,265   

Television broadcasting

     239,252        192,415        272,651        325,146   

Other businesses

     37,925        39,290        53,921        39,411   

Corporate office

     —          —          —          —     

Intersegment elimination

     (6,193     (4,577     (6,385     (4,757
                                
   $ 3,533,566      $ 3,200,273      $ 4,386,516      $ 4,211,715   
                                

Income (loss) from operations

        

Education

   $ 266,030      $ 115,169      $ 194,761      $ 206,302   

Cable television

     126,590        122,148        169,051        162,202   

Newspaper publishing

     (29,767     (166,721     (163,549     (192,739

Television broadcasting

     76,000        41,463        70,506        123,495   

Other businesses

     (32,177     (102     (61     (69,835

Corporate office

     (9,509     (8,907     (12,829     2,495   
                                
   $ 397,167      $ 103,050      $ 257,879      $ 231,920   
                                

Equity in losses of affiliates

     (3,942     (28,160     (29,421     (7,837

Interest expense, net

     (21,285     (21,276     (28,968     (18,986

Other, net

     3,995        15,779        13,197        (2,189
                                

Income from continuing operations before income taxes

   $ 375,935      $ 69,393      $ 212,687      $ 202,908   
                                

Depreciation of property, plant and equipment

        

Education

   $ 56,937      $ 61,099      $ 81,478      $ 67,329   

Cable television

     93,522        92,998        124,207        121,310   

Newspaper publishing

     23,118        64,861        72,870        64,983   

Television broadcasting

     9,579        9,458        12,299        9,400   

Other businesses

     193        100        151        54   

Corporate office

     431        463        679        478   
                                
   $ 183,780      $ 228,979      $ 291,684      $ 263,554   
                                

Amortization of intangible assets

        

Education

   $ 16,629      $ 17,247      $ 22,223      $ 15,472   

Cable television

     225        231        310        307   

Newspaper publishing

     933        736        1,010        625   

Television broadcasting

     —          —          —          —     

Other businesses

     2,854        2,392       3,099       6,121   

Corporate office

     —          —          —          —     
                                
   $ 20,641      $ 20,606      $ 26,642      $ 22,525   
                                

 

22


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

(in thousands)

   Nine Month Period     Fiscal Year Ended  
     2010     2009     2009     2008  

Impairment of goodwill and other long-lived assets

        

Education

   $ —        $ 25,387     $ 25,387      $ —     

Cable television

     —          —          —          —     

Newspaper publishing

     —          —          —          65,772   

Television broadcasting

     —          —          —          —     

Other businesses

     27,477       —          —          69,667   

Corporate office

     —          —          —          —     
                                
   $ 27,477     $ 25,387     $ 25,387      $ 135,439   
                                

Net pension (expense) credit

        

Education

   $ (4,309   $ (4,152   $ (5,414   $ (4,255

Cable television

     (1,431     (1,319     (1,851     (1,534

Newspaper publishing1

     (36,840     (71,784     (75,925     (87,962

Television broadcasting

     (835     (357     (418     1,041   

Other businesses

     (48     (61     (82     (67

Corporate office

     25,230        24,956        33,836        39,827   
                                
   $ (18,233   $ (52,717   $ (49,854   $ (52,950
                                

 

1

Includes a $20.4 million charge in the first nine months of 2010, related to the withdrawal from a multiemployer pension plan.

Asset information for the Company’s business segments are as follows:

 

(in thousands)

   As of  
     October 3, 2010      January 3, 2010      December 28, 2008  

Identifiable assets

        

Education

   $ 1,964,428       $ 2,188,328       $ 2,080,037   

Cable television

     1,146,276         1,164,209         1,204,373   

Newspaper publishing

     142,627         207,234         383,849   

Television broadcasting

     425,167         433,705         412,129   

Other businesses

     18,535         54,418         57,092   

Corporate office

     1,015,202         729,706         611,198   
                          
   $ 4,712,235       $ 4,777,600       $ 4,748,678   
                          

Investments in marketable equity securities

     364,978         353,884         333,319   

Investments in affiliates

     44,994         54,722         76,437   
                          

Total assets

   $ 5,122,207       $ 5,186,206       $ 5,158,434   
                          

 

23


Table of Contents

The Washington Post Company

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

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

 

(in thousands)

   Third Quarter Period     Nine Month Period  
     2010     2009     2010     2009  

Operating revenues

        

Higher education

   $ 465,703      $ 408,537      $ 1,383,396      $ 1,118,971   

Test preparation1

     101,491        108,591        313,006        340,871   

Kaplan international

     151,208        138,089        422,582        382,066   

Kaplan ventures2

     24,865        31,102        85,903        91,628   

Kaplan corporate and other

     1,375        728        3,949        1,941   

Intersegment elimination

     (1,323     (2,531     (6,812     (8,108
                                
   $ 743,319      $ 684,516      $ 2,202,024      $ 1,927,369   
                                

Income (loss) from operations

        

Higher education

   $ 117,319      $ 90,026      $ 329,455      $ 203,744   

Test preparation1

     (2,368     3,527        (9,731     (15,657

Kaplan international

     14,904        8,311        32,376        27,304   

Kaplan ventures2

     (11,428     (7,864     (25,351     (14,134

Kaplan corporate and other

     (19,357     (48,185     (60,467     (86,324

Intersegment elimination

     30        85        (252     236   
                                
   $ 99,100      $ 45,900      $ 266,030      $ 115,169   
                                

Depreciation of property, plant and equipment

        

Higher education

   $ 10,121      $ 9,712      $ 29,633      $ 27,724   

Test preparation

     3,726        4,190        11,784        18,919   

Kaplan international

     3,054        3,023        9,009        8,264   

Kaplan ventures

     1,107        1,022        3,426        3,003   

Kaplan corporate and other

     1,052        1,070        3,085        3,189   
                                
   $ 19,060      $ 19,017      $ 56,937      $ 61,099   
                                

Amortization of intangible assets

   $ 4,998      $ 5,617      $ 16,629      $ 17,247   

Impairment of goodwill and other long-lived assets

   $ —        $ 25,387      $ —        $ 25,387   

Kaplan stock-based incentive compensation (credit) expense

   $ (2,397   $ 1,697      $ (1,310   $ 5,155   

Identifiable assets for the Company’s education division consist of the following:

 

     As of  

(in thousands)

   September 30, 2010      December 31, 2009  

Identifiable assets

     

Higher education

   $ 654,530       $ 920,039   

Test preparation

     391,227         393,399   

Kaplan international

     739,360         671,306   

Kaplan ventures

     121,442         143,399   

Kaplan corporate and other

     57,869         60,185   
                 
   $ 1,964,428       $ 2,188,328   
                 

 

1 Test Preparation amounts include revenues and operating losses from Score as follows:

 

(in thousands)

   Third Quarter Period
2009
    Nine Month Period
2009
 

Revenues

   $ 205      $ 8,557   

Operating losses

   $ (371   $ (36,539

 

2 Kaplan Ventures amounts include revenues and operating income from Education Connection as follows:

 

(in thousands)

   Third Quarter Period      Nine Month Period  
     2010      2009      2010      2009  

Revenues

   $ —         $ 7,901       $ 10,945       $ 20,841   

Operating income

   $ —         $ 1,081       $ 1,701       $ 2,519   

 

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

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

Results of Operations

Net income available for common shares was $60.9 million ($6.84 per share) for the third quarter ended October 3, 2010, compared to net income available for common shares of $17.1 million ($1.81 per share) for the third quarter of last year. Net income includes $20.3 million ($2.28 per share) and $8.9 million ($0.95 per share) in losses from discontinued operations for the third quarter of 2010 and 2009, respectively. Income from continuing operations available for common shares was $81.2 million ($9.12 per share) for the third quarter of 2010, compared to $25.9 million ($2.76 per share) for the third quarter of 2009. There were fewer diluted average shares outstanding in 2010.

Kaplan’s higher education businesses are subject to a number of recently enacted and pending regulations by the Department of Education. Also, Kaplan is launching a new program entitled the “Kaplan Commitment” that includes a “risk-free period” of enrollment. The recent and potential rulemaking activities and the “Kaplan Commitment” could have a material adverse effect on Kaplan’s operating results.

On September 30, 2010, the Company completed the sale of Newsweek. Consequently, the Company’s income from continuing operations for the third quarter and year-to-date periods excludes Newsweek results, which have been reclassified to discontinued operations.

Items included in the Company’s income from continuing operations for the third quarter of 2010:

 

   

A $27.5 million goodwill and other long-lived assets impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $26.3 million, or $2.96 per share); and

 

   

$11.9 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $7.5 million, or $0.84 per share).

Items included in the Company’s income from continuing operations for the third quarter of 2009:

 

   

$6.1 million in accelerated depreciation at The Washington Post (after-tax impact of $3.8 million, or $0.40 per share);

 

   

A $25.4 million goodwill and other long-lived assets impairment charge related to Kaplan Ventures (after-tax impact of $18.8 million, or $2.00 per share); and

 

   

A decline in equity in earnings (losses) of affiliates associated with $29.0 million in impairment charges at two of the Company’s affiliates (after-tax impact of $18.8 million, or $2.00 per share).

Revenue for the third quarter of 2010 was $1,189.7 million, up 7% from $1,108.8 million in the third quarter of 2009, due to increased revenues at the education, television broadcasting and newspaper publishing divisions, offset by a small decrease at the cable television division. Operating income increased in the third quarter of 2010 to $130.6 million, from $74.6 million in the third quarter of 2009, due to improved operating results at the education, television broadcasting and newspaper publishing divisions.

For the first nine months of 2010, the Company reported net income available for common shares of $198.2 million ($21.75 per share), compared to net income available for common shares of $10.1 million ($1.08 per share) for the same period of 2009. Net income includes $28.8 million ($3.16 per share) and $35.4 million ($3.77 per share) in losses from discontinued operations for the first nine months of 2010 and 2009, respectively. Income from continuing operations available for common shares was $227.0 million ($24.91 per share) for the first nine months of 2010, compared to $45.6 million ($4.85 per share) for the first nine months of 2009. There were fewer diluted average shares outstanding in 2010.

Items included in the Company’s income from continuing operations for the first nine months of 2010:

 

   

A $20.4 million charge recorded at The Washington Post in connection with the planned withdrawal from a multiemployer pension plan (after-tax impact of $12.7 million, or $1.38 per share);

 

   

A $27.5 million goodwill and other long-lived assets impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $26.3 million, or $2.96 per share); and

 

   

$4.8 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $3.1 million, or $0.36 per share).

 

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Items included in the Company’s income from continuing operations for the first nine months of 2009:

 

   

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

 

   

$33.0 million in restructuring charges related to Kaplan’s Score and Test Preparation operations (after-tax impact of $20.5 million, or $2.18 per share);

 

   

$33.8 million in accelerated depreciation at The Washington Post (after-tax impact of $21.0 million, or $2.23 per share);

 

   

A $25.4 million goodwill and other long-lived assets impairment charge related to Kaplan Ventures (after-tax impact of $18.8 million, or $2.00 per share);

 

   

A decline in equity in earnings (losses) of affiliates associated with $29.0 million in impairment charges at two of the Company’s affiliates (after-tax impact of $18.8 million, or $2.00 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 $1.21 per share).

Revenue for the first nine months of 2010 was $3,533.6 million, up 10% from $3,200.3 million in the first nine months of 2009. The Company reported operating income of $397.2 million for the first nine months of 2010, compared to $103.1 million for the first nine months of 2009. Revenue and operating results improved at all of the Company’s divisions for the first nine months of 2010.

Education Division. Education division revenue totaled $743.3 million for the third quarter of 2010, a 9% increase over revenue of $684.5 million for the same period of 2009. Kaplan reported operating income of $99.1 million for the third quarter of 2010, up from $45.9 million in the third quarter of 2009. Results for the third quarter of 2009 included a goodwill and other long-lived assets impairment charge of $25.4 million related to two businesses at Kaplan Ventures.

For the first nine months of 2010, education division revenue totaled $2,202.0 million, a 14% increase over revenue of $1,927.4 million for the same period of 2009. Kaplan reported operating income of $266.0 million for the first nine months of 2010, up from $115.2 million for the first nine months of 2009. Results for the first nine months of 2010 included $7.8 million in restructuring costs related to Kaplan’s K12 business; results for the first nine months of 2009 included $33.0 million in restructuring charges related to Score and Test Preparation operations and a $25.4 million goodwill and other long-lived assets impairment charge related to two businesses at Kaplan Ventures.

 

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A summary of Kaplan’s operating results for the third quarter and the first nine months of 2010 compared to 2009 is as follows:

 

(In thousands)

   Third Quarter     YTD  
     2010     2009     % Change     2010     2009     % Change  

Revenue

            

Higher education

   $ 465,703      $ 408,537        14      $ 1,383,396      $ 1,118,971        24   

Test prep, excluding Score

     101,491        108,386        (6     313,006        332,314        (6

Score

     —          205        —          —          8,557        —     

Kaplan international

     151,208        138,089        10        422,582        382,066        11   

Kaplan ventures

     24,865        31,102        (20     85,903        91,628        (6

Kaplan corporate

     1,375        728        89        3,949        1,941        —     

Intersegment elimination

     (1,323     (2,531     —          (6,812     (8,108     —     
                                                
   $ 743,319      $ 684,516        9      $ 2,202,024      $ 1,927,369        14   
                                                

Operating income (loss)

            

Higher education

   $ 117,319      $ 90,026        30      $ 329,455      $ 203,744        62   

Test prep, excluding Score

     (2,368     3,898        —          (9,731     20,882        —     

Score

     —          (371     —          —          (36,539     —     

Kaplan international

     14,904        8,311        79        32,376        27,304        19   

Kaplan ventures

     (11,428     (7,864     (45     (25,351     (14,134     (79

Kaplan corporate

     (16,756     (15,484     (8     (45,148     (38,535     (17

Kaplan stock compensation

     2,397        (1,697     —          1,310        (5,155     —     

Amortization of intangible assets

     (4,998     (5,617     11        (16,629     (17,247     4   

Impairment of goodwill and other long-lived assets

     —          (25,387     —          —          (25,387     —     

Intersegment elimination

     30        85        —          (252     236        —     
                                                
   $ 99,100      $ 45,900        —        $ 266,030      $ 115,169        —     
                                                

Kaplan Higher Education (KHE). KHE includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE revenue and operating income grew in the first nine months of 2010 due to enrollment growth, improved student retention and increased margins. Total KHE enrollments increased 8% compared to enrollments at September 30, 2009. KHE enrollments in the prior year increased 28% compared to enrollments at September 30, 2008. A summary of KHE student enrollments at September 30, 2010, and September 30, 2009, is as follows:

 

     As of September 30,      % Change  
     2010      2009     

Kaplan University

     67,752         56,115         21   

Kaplan Higher Education Campuses

     44,389         47,734         (7
                    
     112,141         103,849         8   
                    

Kaplan University and KHE Campuses enrollments at September 30, 2010, and September 30, 2009, by degree and certificate programs are as follows:

 

     As of September 30,  
     2010     2009  

Certificate

     22.2     27.1

Associate’s

     34.7     32.9

Bachelor’s

     35.7     35.4

Master’s

     7.4     4.6
                
     100     100
                

Department of Education (DOE) Rulemaking and “Kaplan Commitment” Program. In October 2010, the DOE released rules that address program integrity issues for postsecondary education institutions that participate in Title IV programs. The rules include, among other items, state approval processes, DOE program approval processes, revised standards governing the payment of incentive compensation to admissions and financial aid advisors, standards around misrepresentation and the definition of “credit

 

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hour.” The Company is taking steps to fully comply with these rules but cannot currently predict the impact that these rules will have on its operations and future operating results.

In July 2010, the DOE released a notice of proposed rulemaking addressing substantive measurements for whether an educational program leads to gainful employment in a recognized occupation for purposes of that program’s eligibility for Title IV funds. The proposed rulemaking addressing the definition of gainful employment includes provisions whereby students at a program level must demonstrate certain levels of student loan repayment and/or a program’s graduates must achieve certain debt-to-income ratios for the institution’s program to remain eligible for participation in the Title IV program. If a program fails to meet some or all of these proposed requirements, the program’s eligibility to participate in the Title IV program may be restricted or lost entirely. Some of the data needed to compute program eligibility under this proposed regulation is not readily accessible to the institutions, but is compiled by the DOE.

The Company cannot currently predict with reasonable accuracy the impact the proposed regulation would have on its program offerings if it were enacted in its current form. However, the Company expects that this regulation if enacted as proposed would significantly impact Kaplan’s operating results as some or all institutions owned by Kaplan might be required to limit program offerings to ensure compliance with the restrictions of the proposed gainful employment rule. The Company has filed public comments related to the proposed rulemaking on gainful employment. The DOE plans to issue final rules in early 2011 for an effective date on July 1, 2012.

In September 2010, KHE announced a new program entitled the “Kaplan Commitment,” which has commenced and will be fully operational by the end of 2010. Under this program, students of Kaplan University, Kaplan College and other KHE schools may enroll in classes for several weeks and assess whether their educational experience meets their needs and expectations before incurring a financial obligation. Kaplan will also conduct academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who choose to withdraw from the program during this time frame (“risk-free period”) and students who do not pass the academic evaluation will not have to pay for the coursework. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for Associate’s and Bachelor’s degrees.

This program and related initiatives are designed to benefit students and will likely have a significant impact on the future operations of KHE, including student enrollment and retention, tuition revenues, operating income and cash flow. Based on historical student withdrawal and performance patterns and assuming students who withdrew during early academic terms would have instead availed themselves of the Kaplan Commitment, management estimates that KHE revenues would have been approximately $100 million less in the first nine months of 2010 had the provisions of the Kaplan Commitment commenced on January 1, 2010. Management is not able to estimate whether the Kaplan Commitment will cause student retention patterns to differ from historical levels or whether additional students will be attracted to Kaplan as a result of the risk-free offering.

The recent and potential rulemaking activities and the “Kaplan Commitment” could have a material adverse effect on Kaplan’s operating results.

U.S. Senate Committee Review. In the summer of 2010, the Health, Education, Labor and Pension Committee (“the HELP Committee”) of the U.S. Senate commenced an industry-wide review of private sector higher education institutions. The institutions owned and operated by KHE are included in the scope of this industry-wide review. The scope of the hearings are being established and directed by the chairman of the HELP Committee. Hearings have been conducted thus far and additional hearings are anticipated. The ultimate outcome of the hearings and implications to the operation of KHE’s institutions are presently unknown.

As part of the HELP Committee’s review of private sector higher education institutions, investigators from the United States Government Accountability Office (GAO) performed undercover tests at 15 private sector higher education institutions, including two campuses of KHE. In August 2010, the GAO issued a report which was critical of the recruiting tactics at several schools, including the two Kaplan campuses. The Company has evaluated the GAO findings, conducted an internal investigation and taken appropriate action.

On August 5, 2010 the HELP Committee sent a document request to numerous proprietary schools including Kaplan. The HELP Committee indicated that it is interested in investigating the receipt and use of federal student loan funds at proprietary higher education institutions, and potentially proposing additional legislation related to the sector. KHE is complying with the request. At this time we cannot predict the ultimate impact the investigation may have on Kaplan.

 

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Test Preparation. Test Preparation includes Kaplan’s standardized test preparation and tutoring offerings, as well as the domestic professional training business, K12 and other businesses. In the first quarter of 2010, the Company discontinued certain offerings of the K12 business; $7.8 million in severance, asset write-offs and other closure costs were recorded in the first nine months of 2010 in connection with this plan. Test preparation revenue declined 6% in both the third quarter and first nine months of 2010. Excluding acquisitions, test preparation revenue declined 10% and 9% for the third quarter and first nine months of 2010, respectively, due mostly to the termination of certain K12 offerings. Test preparation operating results were also down in the first nine months of 2010 due to K12, reduced prices at the traditional test preparation programs and higher spending to expand online offerings and innovate various programs. The declines were offset by improved results at test preparation’s domestic professional training businesses due to expense reductions; total restructuring-related expenses of $0.9 million and $8.1 million were recorded in the third quarter and first nine months of 2009, respectively.

Kaplan Test Preparation recently announced a plan to reorganize its business consistent with the migration of students to Kaplan’s online and hybrid test preparation offerings. In conjunction with this plan, Kaplan intends to reduce the number of leased test preparation centers over the next 18 months. The Company estimates that approximately $20.0 million in costs will be incurred related to this plan, mostly comprised of charges related to early lease termination and property, plant and equipment write-downs.

In March 2009, the Company approved a plan to close its Score tutoring centers. 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.

Kaplan International. Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. Kaplan International revenue increased 10% and 11% in the third quarter and first nine months of 2010, respectively, with increases in operating income for these periods as well. The increases in revenue and operating income for 2010 are primarily the result of enrollment growth in the pathway and other higher education programs in the U.K., Singapore and Australia. The rise in revenue is also due to increased English-language program revenue and favorable exchange rates in Europe, Australia and Singapore.

Kaplan Ventures. Kaplan Ventures is made up of a number of businesses in various stages of development that are managed separately from the other education businesses. Revenues at Kaplan Ventures declined 20% in the third quarter and decreased 6% in the first nine months of 2010, respectively; these revenue comparisons were adversely impacted by the April 2010 sale of a business unit within the division. Kaplan Ventures reported operating losses of $11.4 million and $25.4 million in the third quarter and first nine months of 2010, respectively, compared to operating losses of $7.9 million and $14.1 million in the third quarter and first nine months of 2009, respectively. The decline in results for the first nine months of 2010 is due to the sale of the above noted business, decreased operating margins at several of Kaplan Ventures’ established businesses, and increased investment in certain developing business units, including Kaplan Virtual Education, a developing group of online high school institutions. A goodwill and other long-lived assets impairment charge of $25.4 million was recorded at Kaplan in the third quarter of 2009 related to certain Kaplan Ventures businesses, as the book value of these businesses exceeded their estimated fair value.

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

Stock Compensation. Stock compensation relates to incentive compensation arising from equity awards under the Kaplan stock option plan. Kaplan recorded a stock compensation credit of $2.4 million and $1.3 million for the third quarter and first nine months of 2010, respectively, compared to stock compensation expense of $1.7 million and $5.2 million for the third quarter and first nine months of 2009, respectively. The stock compensation credit for 2010 relates to an estimated decline in the fair value of Kaplan common stock since the end of 2009.

Cable Television Division. Cable television division revenue declined slightly for the third quarter of 2010 to $188.7 million, from $189.6 million for the third quarter of 2009; for the first nine months of 2010, revenue increased 2% to $568.6 million, from $559.8 million in the same period of 2009. The revenue increase for the first nine months of 2010 is due to continued growth of the division’s cable modem and telephone revenues.

Cable division operating income was $40.3 million for the third quarter of 2010 and 2009; cable division operating income for the first nine months of 2010 increased 4% to $126.6 million, from $122.1 million for the first nine months of 2009. The increase in operating income is due to the division’s revenue growth, offset by increased technical and sales costs.

 

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At September 30, 2010, Revenue Generating Units (RGUs) were up 2% from the prior year due to growth in high-speed data and telephony subscribers, offset by a decrease in basic and digital subscribers. RGUs include about 6,200 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

   September 30,
2010
     September 30,
2009
 

Basic

     650,902         677,751   

Digital

     214,071         221,564   

High-speed data

     416,690         388,567   

Telephony

     137,709         105,211   
                 

Total

     1,419,372         1,393,093   
                 

Below are details of Cable division capital expenditures for the first nine months of 2010 and 2009, as defined by the NCTA Standard Reporting Categories (in millions):

 

     2010      2009  

Customer Premise Equipment

   $ 16.1       $ 21.0   

Commercial

     0.7         —     

Scaleable Infrastructure

     37.8         17.3   

Line Extensions

     5.0         8.2   

Upgrade/Rebuild

     4.3         7.6   

Support Capital

     14.0         12.7   
                 

Total

   $ 77.9       $ 66.8   
                 

Newspaper Publishing Division. Newspaper publishing division revenue totaled $163.4 million for the third quarter of 2010, an increase of 5% from revenue of $156.3 million for the third quarter of 2009; division revenue increased 1% to $491.9 million for the first nine months of 2010, from $485.9 million for the first nine months of 2009. Print advertising revenue at The Washington Post in the third quarter of 2010 increased 3% to $72.0 million, from $70.0 million in the third quarter of 2009, but decreased 4% to $215.9 million for the first nine months of 2010, from $224.4 million for the first nine months of 2009. The print revenue increase in the third quarter of 2010 is largely due to an increase in general advertising; the decline in the first nine months of 2010 is largely due to reductions in retail and classified advertising. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com and Slate, increased 21% to $27.2 million for the third quarter of 2010, versus $22.6 million for the third quarter of 2009; newspaper online revenues increased 14% to $77.8 million for the first nine months of 2010, versus $68.1 million for the first nine months of 2009. Display online advertising revenue grew 26% and 21% for the third quarter and first nine months of 2010, respectively. Online classified advertising revenue on washingtonpost.com increased 6% for the third quarter of 2010, but decreased 1% for the first nine months of 2010.

For the first nine months of 2010, Post daily and Sunday circulation declined 8.7% and 8.3%, respectively, compared to the same periods of the prior year. A portion of this decline relates to increased circulation volumes in the first quarter of 2009 due to the Presidential Inauguration. For the nine months ended October 3, 2010, average daily circulation at The Washington Post totaled 548,400, and average Sunday circulation totaled 770,800.

As previously disclosed, The Washington Post contributes to multiemployer plans on behalf of three union-represented employee groups. The Post has negotiated in collective bargaining the contractual right to withdraw from two of these plans; the right to withdraw from the CWA-ITU Negotiated Pension Plan (CWA-ITU Plan) has been the subject of contract negotiations that reached an impasse. In July 2010, the Post notified the union and the CWA-ITU Plan of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post has recorded a $20.4 million charge based on an estimate of the withdrawal liability; $17.7 million of this charge was recorded in the second quarter of 2010, and $2.7 million was recorded in the third quarter of 2010.

As previously reported, The Washington Post recorded early retirement program expense of $56.8 million in the second quarter of 2009, and Robinson Terminal Warehouse Corporation recorded early retirement program expense of $1.1 million in the third quarter of 2009. The costs of these early retirement programs are being funded mostly from the assets of the Company’s pension plans. Also as previously reported, the Post closed a printing plant in July 2009 and consolidated its printing operations. The Post also completed the consolidation of certain other operations in Washington, DC, in the first quarter of 2010. In connection with these activities, accelerated depreciation of $6.1 million and $33.8 million was recorded in the third quarter and first nine months of 2009, respectively, and a $3.1 million loss on an office lease was recorded by the Company in the first quarter of 2010.

 

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The newspaper division reported an operating loss of $1.7 million in the third quarter of 2010, compared to an operating loss of $23.6 million in the third quarter of 2009. For the first nine months of 2010, the newspaper division reported an operating loss of $29.8 million, compared to an operating loss of $166.7 million for the first nine months of 2009. Excluding the multiemployer pension plan charge, early retirement program expense and accelerated depreciation, operating results improved in the first nine months of 2010 due to expense reductions in payroll, newsprint, depreciation, bad debt and agency fees, and expense reductions at washingtonpost.com. Newsprint expense increased 10% for the third quarter of 2010 due to an increase in newsprint prices, offset by a decline in newsprint consumption. Newsprint expense decreased 16% for the first nine months of 2010 due to a decline in newsprint consumption, offset by an increase in newsprint prices.

Television Broadcasting Division. Revenue for the television broadcasting division increased 29% in the third quarter of 2010 to $83.2 million, from $64.6 million in 2009; operating income for the third quarter of 2010 increased 68% to $25.3 million, from $15.1 million in 2009. For the first nine months of 2010, revenue increased 24% to $239.3 million, from $192.4 million in 2009; operating income for the first nine months of 2010 increased 83% to $76.0 million, from $41.5 million in 2009.

The increase in revenue and operating income is due to improved advertising demand in all markets and most product categories, particularly automotive. The increased revenue and operating income also includes $5.1 million in incremental winter Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2010, and a $9.0 million and $14.5 million increase in political advertising revenue for the third quarter and first nine months of 2010, respectively.

Other Businesses. Other businesses includes the operating results of Avenue100 Media Solutions and other small businesses. In the third quarter of 2010, a goodwill and other long-lived assets impairment charge of $27.5 million was recorded at Avenue100 Media Solutions, the Company’s digital marketing business that sources leads for academic institutions and recruiting organizations.

In the third quarter of 2010, the Company performed an interim review of the carrying value of goodwill and other intangible assets at its online lead generation business for possible impairment, as a result of challenges facing the lead generation business due to the changing regulatory environment for private sector higher education institutions. The online lead generation reporting unit failed step one of the interim goodwill impairment review, and the Company performed a step two analysis. The Company used a discounted cash flow model to determine the estimated fair value of the reporting unit. A market value approach was also utilized to supplement the discounted cash flow model. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine the reporting unit’s estimated fair value. The methodology used to estimate the fair value of the Company’s lead generation business reporting unit was consistent with the one used during the Company’s 2009 annual goodwill impairment test. The Company recorded a goodwill and other long-lived assets impairment charge of $27.5 million related to the reporting unit. Following the impairment, the remaining goodwill balance at the reporting unit as of October 3, 2010 was not significant. There exists a reasonable possibility that a decrease in the projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of this reporting unit, could result in additional impairment charges.

Corporate Office. Corporate office includes the expenses of the Company’s corporate office and the pension credit previously reported in the magazine publishing division (refer to Discontinued Operations discussion below).

Equity in Earnings (Losses) of Affiliates. The Company’s equity in earnings of affiliates for the third quarter of 2010 was $2.1 million, compared to losses of $27.2 million for the third quarter of 2009. For the first nine months of 2010, the Company’s equity in losses of affiliates totaled $3.9 million, compared to losses of $28.2 million for the same period of 2009.

Results for the third quarter of 2009 included $29.0 million in write-downs at two of the Company’s affiliate investments. The loss primarily related to an impairment charge recorded on the Company’s interest in Bowater Mersey Paper Company.

Other Non-Operating Income (Expense). The Company recorded other non-operating income, net, of $12.5 million for the third quarter of 2010, compared to other non-operating income, net, of $0.1 million for the third quarter of 2009. The third quarter 2010 non-operating income, net, included $11.9 million in unrealized foreign currency gains and other items.

The Company recorded other non-operating income, net, of $4.0 million for the first nine months of 2010, compared to other non-operating income, net, of $15.8 million for the same period of the prior year. The 2010 non-operating expense, net, included $4.8 million in unrealized foreign currency gains and other items. 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.

As noted above, a large part of the Company’s non-operating income (expense) is from unrealized foreign currency gains or losses arising from the translation of British pound and Australian dollar-denominated intercompany loans into U.S. dollars.

 

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Net Interest Expense. The Company incurred net interest expense of $7.0 million for the third quarter of 2010 and 2009, and $21.3 million for the first nine months of 2010 and 2009. At October 3, 2010, the Company had $399.5 million in borrowings outstanding at an average interest rate of 7.2%.

Provision for Income Taxes. The effective tax rate for the third quarter and first nine months of 2010 was 41.1% and 39.4%, respectively. The higher effective rate in 2010 is primarily due to $9.1 million from nondeductible goodwill in connection with an impairment charge recorded in the third quarter of 2010.

The effective tax rate for the third quarter and first nine months of 2009 was 36.0%. The low effective tax rate for 2009 was due primarily to favorable adjustments recorded in the third quarter of 2009 for a reduction in state income taxes and for prior year permanent federal tax deductions, offset by $3.3 million from nondeductible goodwill in connection with the impairment charge recorded in the third quarter of 2009.

Discontinued Operations. On September 30, 2010, the Company completed the sale of Newsweek. Consequently, the Company’s income from continuing operations for the third quarter and year-to-date periods excludes magazine publishing operations, which have been reclassified to discontinued operations, net of tax. Under the terms of the asset purchase agreement, The Washington Post Company retained the pension assets and liabilities, certain employee obligations arising prior to the sale and other items. A loss of $11.5 million from the Newsweek sale is included in discontinued operations.

Newsweek employees were participants in The Washington Post Company Retirement Plan, and Newsweek was historically allocated a net pension credit. Since this net pension credit will be included in income from continuing operations in the future, it has been excluded from the reclassification of Newsweek results to discontinued operations. The pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.

Earnings Per Share. The calculation of diluted earnings per share for the third quarter and first nine months of 2010 was based on 8,904,453 and 9,112,564 weighted average shares outstanding, respectively, compared to 9,401,010 and 9,399,501, respectively, for the third quarter and first nine months of 2009. In the first nine months of 2010, the Company repurchased 739,935 shares of its Class B common stock at a cost of $277.0 million. On September 23, 2010, the Company’s Board of Directors authorized the Company to acquire up to 750,000 shares of its Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 16,312 shares that remained under the previous authorization.

Financial Condition: Capital Resources and Liquidity

Acquisitions and Dispositions. In the second quarter of 2010, the Company made two small acquisitions in its Cable divisions and in Other businesses. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. The Company did not make any acquisitions during the third quarter of 2010. On September 30, 2010, the Company completed the sale of Newsweek. Consequently, the Company’s income from continuing operations for the third quarter and year-to-date periods excludes Newsweek results, which have been reclassified to discontinued operations. In the second quarter of 2010, Kaplan completed the sale of Education Connection, which was part of the Kaplan Ventures division.

In the first nine months of 2009, the Company completed business acquisitions totaling approximately $8.1 million. This included the acquisition of a company at the Kaplan International division in the third quarter of 2009, as well as a small acquisition by the Company in the second quarter of 2009. This also included $3.2 million of additional purchase consideration recorded to goodwill in the second quarter of 2009, in connection with the achievement of certain operating results by a company acquired by Kaplan in 2007. The purchase consideration was contingent on the achievement of certain future operating results and therefore was not included in the Company’s purchase accounting as of December 30, 2007. The Company did not make any acquisitions during the first quarter of 2009.

Capital expenditures. During the first nine months of 2010, the Company’s capital expenditures totaled $159.2 million. The Company estimates that its capital expenditures will be in the range of $220 million to $245 million in 2010.

Liquidity. The Company’s borrowings increased by $0.2 million, to $399.5 million at October 3, 2010, as compared to borrowings of $399.3 million at January 3, 2010. At October 3, 2010, the Company has $577.9 million in cash and cash equivalents, compared to $477.7 million at January 3, 2010. The Company had money market investments of $342.5 million and $327.8 million that are classified as cash and cash equivalents in the Company’s condensed consolidated Balance Sheets as of October 3, 2010 and January 3, 2010, respectively.

 

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The Company’s total debt outstanding of $399.5 million at October 3, 2010 included $396.5 million of 7.25% unsecured notes due February 1, 2019 and $3.0 million in other debt.

The Company has a $500 million revolving credit facility that expires in August 2011, which supports the issuance of the Company’s short-term commercial paper and provides for general corporate purposes. The Company did not issue any commercial paper in the first nine months of 2010.

In August 2010, Standard & Poor’s revised the Company’s long-term outlook to negative from stable; the Company’s “A” long-term corporate credit and senior unsecured ratings and “A-1” short-term commercial rating remained unchanged. Moody’s lowered the Company’s long-term rating in October 2010 to “A2” from “A1”, confirmed the “Prime-1” commercial paper rating and changed the ratings outlook to negative. The Company’s current credit ratings are as follows:

 

     Moody’s      Standard
& Poor’s
 

Long-term

     A2         A   

Short-term

     Prime-1         A-1   

During the third quarter of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.5 million and $399.2 million, respectively, at average annual interest rates of approximately 7.2%. During the third quarter of 2010 and 2009, the Company incurred net interest expense of $7.0 million.

During the first nine months of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.4 million and $434.9 million, respectively, at average annual interest rates of approximately 7.2% and 6.8%, respectively. During the first nine months of 2010 and 2009, the Company incurred net interest expense of $21.3 million.

At October 3, 2010 and January 3, 2010, the Company had working capital of $351.7 million and $398.5 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. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2010.

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 January 3, 2010.

Critical Accounting Policies and Estimates

Goodwill and Other Intangible Assets. The Company reviews its indefinite-lived intangible assets annually, as of November 30, for possible impairment or between annual tests if an event occurred or circumstances changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company uses a discounted cash flow model and in certain cases, a market value approach is also utilized to supplement the discounted cash flow model, to determine the estimated fair value of the indefinite-lived intangible assets. The Company makes estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and other market values to determine the estimated fair value of the indefinite-lived intangible assets.

The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable television division. These franchise agreements result from agreements the Company has with state and local governments that allow the Company to contract and operate a cable business within a specified geographic area. The Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable television division historically has obtained renewals and extensions of such agreements for nominal costs and without material modifications to the agreements. The franchise agreements represent 93% of the $530.7 million of indefinite-lived intangible assets of the Company as of October 3, 2010. The Company grouped the recorded values of its various cable franchise agreements into regional cable television systems or units of account.

The key assumptions used by the Company to determine the fair value of its franchise agreements as of November 30, 2009, the date of its last annual impairment review, were as follows:

 

   

Expected cash flows underlying the Company’s business plans for the periods 2010 through 2019, assuming the only assets the unbuilt start-up cable television systems possess are the various franchise agreements. The expected cash flows took into account the estimated initial capital investment in the system region’s physical plant and related start-up costs, revenues, operating margins and growth rates. These cash flows and growth rates were based on forecasts and long-term business plans and take into account numerous factors including historical experience, anticipated economic conditions, changes in the cable television systems’ cost structures, homes in each region’s service area, number of subscribers based on penetration of homes passed by the systems, and expected revenues per subscriber.

 

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Cash flows beyond 2019 were projected to grow at a long-term growth rate, which the Company estimated by considering historical market growth trends, anticipated cable television system performance, and expected market conditions.

 

   

The Company used a discount rate of 8.3% to risk adjust the cash flow projections in determining the estimated fair value.

The estimated fair value of the Company’s franchise agreements exceeded their respective carrying values by a margin in excess of 50%. There is always a possibility that impairment charges could occur in the future given changes in the cable television market and U.S. economic environment, as well as the inherent variability in projecting future operating performance.

Pension Costs. The Company’s net pension cost (credit) includes an expected return on plan assets component, calculated using the expected return on plan assets assumption applied to a market-related value of plan assets. The market-related value of plan assets is determined using a 5-year average market value method, which recognizes realized and unrealized appreciation and depreciation in market values over a 5-year period. The value resulting from applying this method is adjusted, if necessary, such that it cannot be less than 80% or more than 120% of the market value of plan assets as of the relevant measurement date. As a result, year-to-year increases or decreases in the market-related value of plan assets impact the return on plan assets component of pension cost for the year.

At the end of each year, differences between the actual return on plan assets and the expected return on plan assets are combined with other differences in actual versus expected experience to form a net unamortized actuarial gain or loss in accumulated other comprehensive income. Only those net actuarial gains or losses in excess of the deferred realized and unrealized appreciation and depreciation are potentially subject to amortization. The types of items that generate actuarial gains and losses that may be subject to amortization in net periodic pension cost (credit) include:

 

   

Asset returns that are more or less than the expected return on plan assets for the year;

 

   

Actual participant demographic experience different from assumed (retirements, terminations and deaths during the year);

 

   

Actual salary increases different from assumed; and

 

   

Any changes in assumptions that are made to better reflect anticipated experience of the plan or to reflect current market conditions on the measurement date (discount rate, longevity increases, changes in expected participant behavior and expected return on plan assets).

Amortization of the unrecognized actuarial gain or loss is included as a component of expense for a year if the magnitude of the net unamortized gain or loss in accumulated other comprehensive income exceeds 10% of the greater of the benefit obligation or the market-related value of assets (10% corridor). The amortization component is equal to that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. At the end of 2007, the Company had net unamortized actuarial gains in accumulated other comprehensive income potentially subject to amortization that were outside the 10% corridor that resulted in amortized gains of $6,168,000 being included in 2008 pension cost. Primarily as a result of the significant pension asset losses during 2008, increased life expectations and a decrease in the discount rate, the Company had net unamortized actuarial losses in accumulated other comprehensive income potentially subject to amortization that were outside the corridor that resulted in amortized losses of $40,000 being included in 2009 pension cost. During 2009, there were pension asset gains that were offset by the impact of an increase in the discount rate. The Company currently estimates that there will be no net unamortized actuarial gains or losses in accumulated other comprehensive income potentially subject to amortization outside the corridor and therefore, no amortized gain or loss amounts included in pension cost (credit) in 2010.

Forward-Looking Statements

This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010.

 

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 2009 Annual Report filed on Form 10-K have not otherwise changed significantly.

 

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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 October 3, 2010. 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 October 3, 2010 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 1. Legal Proceedings

A purported class action complaint was filed against the Company, Donald E. Graham and Hal S. Jones on October 28, 2010, in the U.S. District Court for the District of Columbia, by the Plumbers Local #200 Pension Fund. The complaint alleges that the Company and certain of its officers made materially false and misleading statements, or failed to disclose material facts relating to Kaplan Higher Education, in violation of the federal securities laws. The complaint seeks damages, attorneys’ fees, costs and equitable/injunctive relief. Based on an initial review of this complaint, the Company believes the complaint is without merit and intends to vigorously defend against it.

 

Item 1A. Risk Factors

The Company faces a number of significant risks and uncertainties in connection with its operations, as discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended January 3, 2010. Those risks, except to the extent they are updated or amended below, are incorporated herein by this reference. The risks described in the Company’s Annual Report on Form 10-K and updated or amended below, may not be the only ones facing the Company. Additional risks and uncertainties not presently known, or currently deemed immaterial, could have a material adverse effect on the Company’s business, financial condition or results of operations.

Risks Related to Extensive Regulation of Kaplan Higher Education (KHE)

Rulemaking by the U.S. Department of Education (DOE) could result in regulatory changes that could have a material adverse effect on Kaplan’s business.

On October 28, 2010, the DOE issued final rules that address program integrity issues for postsecondary education institutions that participate in Title IV programs, which will take effect on July 1, 2011. The DOE expects to issue final rules in early 2011 related to the definition of gainful employment, which are expected to take effect on July 1, 2012. The Company cannot predict the substance of the final rules related to the definition of gainful employment. In connection with both of these rulemaking activities, the Company filed public comments that collectively address issues related to state authorization, substantial misrepresentation, incentive compensation, and the definition of gainful employment under Title IV. The Company also raised concerns about metrics regarding gainful employment and institution-specific repayment rate data released by the DOE. Under the proposed regulations, if a particular program does not meet the definition of “gainful employment,” the program could be subject to increased disclosure requirements, limits on enrollment growth, termination of Title IV eligibility, and/or other consequences. If Kaplan students’ repayment rates at the programmatic level are similar to the student repayment rates released by the DOE on August 13, 2010, and Kaplan’s students do not meet the alternative debt-to-earnings ratio test, a significant number of Kaplan programs may be deemed either restricted or ineligible to receive Title IV funding. Thus, the gainful employment rules, if adopted as presently drafted, could have a material adverse effect on the future results of the Company’s higher education division.

The Company is in the process of reviewing the final regulations published on October 28, 2010. The Company cannot predict how these regulations or any future regulations will be interpreted. Compliance with the final rules could affect how Kaplan conducts its business, and insufficient time or lack of sufficient guidance for compliance could have a material adverse effect on Kaplan’s business. Uncertainty surrounding the final rules, interpretive regulations or guidance by the DOE may continue for some period of time and could have a material adverse effect on Kaplan’s revenue, operating results, cash flow and operations.

 

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Congressional examination of private sector higher education could lead to legislation or other governmental action that may materially and adversely affect Kaplan’s business.

There has been increased focus by the U.S. Congress in 2010 on the role private sector education institutions play in higher education, including regarding participation in Title IV programs and U.S. Department of Defense oversight of tuition assistance for military service members attending for-profit colleges. Since June 2010, the Health, Education, Labor and Pensions Committee of the U.S. Senate (“HELP Committee”) has held hearings to examine the proprietary education sector. As part of the HELP Committee’s review, investigators from the United States Government Accountability Office (GAO) performed undercover tests at 15 private sector higher education institutions, including two campuses of KHE. In August 2010, the GAO issued a report which was critical of the recruiting tactics at several schools, including the two Kaplan campuses.

On August 5, 2010, the HELP Committee sent a document request to numerous proprietary schools including Kaplan. The information requested covered a broad range of business activities including detailed information relating to financial results, management, operations, personnel, recruiting, enrollment, graduation, student withdrawals, receipt of Title IV funds, accreditation, regulatory compliance and other items. KHE is complying with the request. The HELP Committee indicated that it is interested in investigating the receipt and use of federal student loan funds at proprietary higher education institutions, and potentially proposing additional legislation related to the sector. At this time, the Company cannot predict the ultimate impact the investigation may have on KHE, or the chances of or content of any such legislation.

Other Committees of the U.S. Congress have also held hearings into, among other things, the standards and procedures of accrediting agencies, credit hours and program length, and the portion of federal student financial aid going to for-profit institutions. A number of legislators have variously requested the GAO Office to review and make recommendations regarding, among other things, recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in Title IV programs, and the percentage of proprietary institutions’ revenue coming from Title IV and other federal funding sources. This increased activity may result in legislation, further rulemaking affecting participation in Title IV programs, and other governmental actions. In addition, concerns generated by Congressional or other activity, or media reports, may adversely affect enrollment in for-profit educational institutions.

The Company cannot predict the extent to which these activities could result in further investigations, legislation or rulemaking affecting the Company’s participation in Title IV Programs, other governmental actions, and/or actions by state agencies or legislators or by accreditors. If any laws or regulations are adopted that significantly limit Kaplan’s participation in Title IV Programs or the amount of student financial aid for which Kaplan’s students are eligible, Kaplan’s results of operations and cash flows would be adversely and materially impacted.

 

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The financial impact of the “Kaplan Commitment” program could be greater than Company estimates.

In September 2010, KHE announced a new program entitled the “Kaplan Commitment,” which has commenced and will be fully operational by the end of 2010. Under this program, students of Kaplan University, Kaplan College and other KHE schools may enroll in classes for several weeks and assess whether their educational experience meets their needs and expectations before incurring a financial obligation. Kaplan will also conduct academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who choose to withdraw from the program during this time frame (“risk-free period”) and students who do not pass the academic evaluation will not have to pay for the coursework. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for Associate’s and Bachelor’s degrees. This program will likely have a significant adverse impact on the future operations of KHE, including student enrollment and retention, tuition revenues, operating income and cash flow. Based on historical student withdrawal and performance patterns and assuming students who withdrew during early academic terms would have instead availed themselves of the Kaplan Commitment, management estimates that KHE revenues would have been approximately $100 million less in the first nine months of 2010 had the provision of the Kaplan Commitment commenced on January 1, 2010. The Company’s actual experience and the overall impact of this program could be worse than expected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the quarter ended October 3, 2010, the Company purchased shares of its Class B Common Stock as set forth in the following table:

 

Period

   Total Number
of Shares
Purchased
     Average
Price
Paid per
Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan*
     Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Plan*
 

Jul. 5 - Aug. 8, 2010

     —         $ —           —           656,312   

Aug 9 - Sept. 5, 2010

     564,316         363.38         564,316         91,996   

Sept. 6 - Oct. 3, 2010

     75,684         376.70         75,684         750,000   
                             

Total

     640,000       $ 364.95         640,000      

 

* On January 21, 2010 and September 23, 2010, the Company’s Board of Directors authorized the Company to purchase, on the open market or otherwise, up to 750,000 shares of its Class B Common Stock. There is no expiration date for that authorization. All purchases made during the quarter ended October 3, 2010, were open market transactions.

 

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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 Deferred Compensation Plan as amended and restated through December 2007, and amended September 23, 2010.
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.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

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

 

    THE WASHINGTON POST COMPANY
    (Registrant)
Date: November 10, 2010    

/S/ DONALD E. GRAHAM

    Donald E. Graham,
    Chairman & Chief Executive Officer
    (Principal Executive Officer)
Date: November 10, 2010    

/S/ HAL S. JONES

    Hal S. Jones,
    Senior Vice President-Finance
    (Principal Financial Officer)

 

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