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Graham Holdings Co - Quarter Report: 2011 July (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 July 3, 2011

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 (§232.405 of this chapter) 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 August 5, 2011:

 

Class A Common Stock

     1,229,383 Shares   

Class B Common Stock

     6,702,037 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 Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010

     3   
  

b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010

     4   
  

c. Condensed Consolidated Balance Sheets at July 3, 2011 (Unaudited) and January 2, 2011

     5   
  

d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010

     6   
  

e. Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   
Item 2.   

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

     24   
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     31   
Item 4.   

Controls and Procedures

     31   
PART II. OTHER INFORMATION   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     32   
Item 6.   

Exhibits

     33   
Signatures      34   

 

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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     Twenty-Six Weeks Ended  

(In thousands, except per share amounts)

   July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Operating revenues

        

Education

   $ 628,701      $ 742,921      $ 1,258,728      $ 1,441,257   

Advertising

     193,352        207,241        370,736        391,423   

Circulation and subscriber

     216,607        215,995        431,130        429,449   

Other

     34,337        31,253        65,413        64,266   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,072,997        1,197,410        2,126,007        2,326,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

        

Operating

     500,204        471,525        975,489        936,897   

Selling, general and administrative

     420,956        490,414        874,214        979,510   

Depreciation of property, plant and equipment

     63,908        61,024        127,138        122,482   

Amortization of intangible assets

     6,836        7,549        13,057        14,009   
  

 

 

   

 

 

   

 

 

   

 

 

 
     991,904        1,030,512        1,989,898        2,052,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     81,093        166,898        136,109        273,497   

Other income (expense)

        

Equity in earnings (losses) of affiliates

     3,138        2,027        6,875        (6,082

Interest income

     997        599        1,979        925   

Interest expense

     (7,960     (7,598     (15,921     (15,177

Other, net

     (2,591     (3,807     (26,623     (7,128
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     74,677        158,119        102,419        246,035   

Provision for income taxes

     27,500        56,400        37,800        90,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     47,177        101,719        64,619        155,935   

Loss from discontinued operations, net of tax

     (1,414     (9,592     (3,227     (17,980
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     45,763        92,127        61,392        137,955   

Net loss attributable to noncontrolling interests

     40        8        26        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Washington Post Company

     45,803        92,135        61,418        137,975   

Redeemable preferred stock dividends

     (230     (231     (691     (692
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Washington Post Company common stockholders

   $ 45,573      $ 91,904      $ 60,727      $ 137,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to The Washington Post Company common stockholders:

        

Income from continuing operations

   $ 46,987      $ 101,496      $ 63,954      $ 155,263   

Loss from discontinued operations, net of tax

     (1,414     (9,592     (3,227     (17,980
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Washington Post Company common stockholders

   $ 45,573      $ 91,904      $ 60,727      $ 137,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic income per common share from continuing operations

   $ 5.92      $ 11.04      $ 7.97      $ 16.86   

Basic loss per common share from discontinued operations

     (0.18     (1.04     (0.40     (1.95
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 5.74      $ 10.00      $ 7.57      $ 14.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic average number of common shares outstanding

     7,852        9,126        7,949        9,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per common share from continuing operations

   $ 5.92      $ 11.04      $ 7.97      $ 16.86   

Diluted loss per common share from discontinued operations

     (0.18     (1.04     (0.40     (1.95
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 5.74      $ 10.00      $ 7.57      $ 14.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average number of common shares outstanding

     7,933        9,193        8,026        9,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  

(In thousands)

   July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Net income

   $ 45,763      $ 92,127      $ 61,392      $ 137,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

        

Foreign currency translation adjustment

     5,088        (11,256     13,058        (13,866

Change in unrealized (loss) gain on available-for-sale securities

     (22,315     (80,751     (15,105     5,363   

Pension and other postretirement plan adjustments

     (593     142        (5,800     (3,396

Less reclassification adjustment for write-down on available-for-sale security included in net income

     —          —          30,696        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (17,820     (91,865     22,849        (11,899

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

     9,100        33,008        (6,269     (1,428
  

 

 

   

 

 

   

 

 

   

 

 

 
     (8,720     (58,857     16,580        (13,327
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     37,043        33,270        77,972        124,628   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to noncontrolling interests

     (3     21        (38     33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to The Washington Post Company

   $ 37,040      $ 33,291      $ 77,934      $ 124,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The Washington Post Company

Condensed Consolidated Balance Sheets

 

     July 3,
2011
    January 2,
2011
 

(In thousands)

   (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 299,362      $ 437,740   

Restricted cash

     20,452        31,138   

Investments in marketable equity securities and other investments

     366,140        373,750   

Accounts receivable, net

     388,106        397,024   

Income taxes receivable

     26,245        33,307   

Deferred income taxes

     16,372        15,318   

Inventories

     8,142        4,984   

Other current assets

     80,429        68,637   
  

 

 

   

 

 

 

Total current assets

     1,205,248        1,361,898   

Property, plant and equipment, net

     1,168,596        1,200,726   

Investments in affiliates

     32,687        31,637   

Goodwill, net

     1,463,191        1,376,357   

Indefinite-lived intangible assets, net

     536,802        530,816   

Amortized intangible assets, net

     59,024        61,242   

Prepaid pension cost

     541,974        538,753   

Deferred charges and other assets

     72,257        56,938   

Noncurrent assets of discontinued operations

     12,715        —     
  

 

 

   

 

 

 

Total assets

   $ 5,092,494      $ 5,158,367   
  

 

 

   

 

 

 

Liabilities and Equity

    

Current liabilities

    

Accounts payable and accrued liabilities

   $ 642,957      $ 626,188   

Deferred revenue

     379,487        379,089   

Dividends declared

     18,866        —     

Short-term borrowings

     3,219        3,000   
  

 

 

   

 

 

 

Total current liabilities

     1,044,529        1,008,277   

Postretirement benefits other than pensions

     66,374        64,342   

Accrued compensation and related benefits

     213,912        231,034   

Other liabilities

     114,764        119,036   

Deferred income taxes

     522,029        506,405   

Long-term debt

     402,328        396,650   

Noncurrent liabilities of discontinued operations

     1,715        —     
  

 

 

   

 

 

 

Total liabilities

     2,365,651        2,325,744   

Redeemable noncontrolling interest

     6,707        6,733   

Redeemable preferred stock

     11,295        11,526   

Preferred stock

     —          —     

Common shareholders’ equity

    

Common stock

     20,000        20,000   

Capital in excess of par value

     247,118        249,719   

Retained earnings

     4,524,621        4,520,332   

Accumulated other comprehensive income, net of taxes

    

Cumulative foreign currency translation adjustment

     50,157        37,606   

Unrealized gain on available-for-sale securities

     80,061        70,707   

Unrealized gain on pensions and other postretirement plans

     68,501        73,826   

Cost of Class B common stock held in treasury

     (2,281,617     (2,157,826
  

 

 

   

 

 

 

Total common shareholders’ equity

     2,708,841        2,814,364   
  

 

 

   

 

 

 

Noncontrolling interests

     —          —     
  

 

 

   

 

 

 

Total equity

     2,708,841        2,814,364   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 5,092,494      $ 5,158,367   
  

 

 

   

 

 

 

 

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The Washington Post Company

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Twenty-Six Weeks Ended  

(In thousands)

   July 3,
2011
    July 4,
2010
 

Cash flows from operating activities:

    

Net income

   $ 61,392      $ 137,955   

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

    

Depreciation of property, plant and equipment

     128,973        125,633   

Amortization of intangible assets

     14,215        14,120   

Net pension benefit

     (1,747     (1,199

Multiemployer pension plan withdrawal charge

     —          17,700   

Early retirement program expense

     430        —     

Foreign exchange (gain) loss

     (3,031     7,099   

Net loss on write-down of marketable equity securities

     30,696        —     

Equity in (earnings) losses of affiliates, net of distributions

     (6,875     6,082   

Provision (benefit) for deferred income taxes

     4,798        (20,818

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

     5,638        8,677   

Change in assets and liabilities:

    

Decrease in accounts receivable, net

     43,375        27,970   

(Increase) decrease in inventories

     (3,158     4,458   

Decrease in accounts payable and accrued liabilities

     (44,888     (21,763

Decrease in deferred revenue

     (28,216     (10,557

Income taxes receivable/payable

     6,655        16,441   

(Increase) decrease in other assets and other liabilities, net

     (28,840     4,226   

Other

     597        1,294   
  

 

 

   

 

 

 

Net cash provided by operating activities

     180,014        317,318   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (92,842     (84,835

Net proceeds from sale of business

     —          23,176   

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

     7,913        12,343   

Investments in certain businesses, net of cash acquired

     (79,065     (3,626

Investments in marketable equity securities and other investments

     (4,928     (2,699

Other

     (36     781   
  

 

 

   

 

 

 

Net cash used in investing activities

     (168,958     (54,860
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Common shares repurchased

     (131,520     (43,482

Dividends paid

     (38,262     (41,997

Other

     16,298        9,593   
  

 

 

   

 

 

 

Net cash used in financing activities

     (153,484     (75,886
  

 

 

   

 

 

 

Effect of currency exchange rate change

     4,050        (5,218
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (138,378     181,354   

Beginning cash and cash equivalents

     437,740        477,673   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 299,362      $ 659,027   
  

 

 

   

 

 

 

 

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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).

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 2011 and 2010 ended on July 3, 2011, April 3, 2011, July 4, 2010 and April 4, 2010, respectively. With the exception of the newspaper publishing operations and the corporate office, subsidiaries of the Company report on a calendar-quarter basis.

Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (“SEC”). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010 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 2, 2011.

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

 

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disclosures and is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The implementation of this guidance in the first quarter of 2011 did not have a material impact on the condensed consolidated financial statements of the Company.

In January 2010, the FASB issued additional disclosure requirements for fair value measurements. One of the fair value disclosure amendments requires more detailed disclosures of the changes in Level 3 instruments. This change became effective for interim and annual periods beginning after December 15, 2010, and did not impact the condensed consolidated financial statements of the Company.

Note 2: Discontinued Operations

On May 16, 2011, Kaplan entered into an agreement to sell Kaplan Virtual Education. Under the terms of the asset purchase agreement, the buyer will receive Kaplan Virtual Education’s intellectual property, education programs and selected other long-lived assets. The transaction closed in July 2011. The resulting gain or loss at closing is not expected to be material to the financial position of the Company. The assets and liabilities of Kaplan Virtual Education have been classified on the Company’s condensed balance sheet as assets and liabilities of discontinued operations as of July 3, 2011. The Company did not reclassify its condensed consolidated balance sheet as of January 2, 2011 to reflect the discontinued operations.

In April 2010, Kaplan completed the sale of Education Connection and in September 2010, the Company completed the sale of Newsweek magazine. The results of operations of Kaplan Virtual Education, Education Connection and the magazine publishing division for the second quarter and first six months of 2011 and 2010, where applicable, are included in the Company’s condensed consolidated statements 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 condensed consolidated statements of cash flows to reflect the discontinued operations.

Newsweek employees were participants in The Washington Post Company Retirement Plan, and the Company had historically allocated Newsweek a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were retained by the Company, the associated credit of $8.8 million and $17.1 million, respectively, for the second quarter and six months of 2010 has been excluded from the reclassification of Newsweek results to discontinued operations. In the second quarter of 2010, Newsweek recorded $3.9 million in accelerated depreciation and property, plant and equipment write-downs.

The summarized loss from discontinued operations, net of tax, for the first half of 2011 and 2010 is presented below (in thousands):

 

     Second Quarter Period     Six Month Period  
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Operating revenues

   $ 12,879     $ 40,256     $ 23,481     $ 82,429  

Operating costs and expenses

     (15,093 )     (48,285 )     (28,708 )     (104,546 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (2,214 )     (8,029 )     (5,227 )     (22,117 )

Benefit from income taxes

     (800 )     (3,600 )     (2,000 )     (9,300 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations

     (1,414 )     (4,429 )     (3,227 )     (12,817 )

Loss on sale of discontinued operations

     —          (1,363 )     —          (1,363 )

Provision for income taxes on sale of discontinued operations

     —          3,800       —          3,800  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of tax

   $ (1,414 )   $ (9,592 )   $ (3,227 )   $ (17,980 )
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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The following table summarizes the quarterly operating results of the Company for 2010 and the first quarter of 2011, following the reclassification of the operations discussed above as discontinued operations (in thousands):

 

     Thirteen Weeks Ended  
     April 3,
2011
    January 2,
2011
    October 3,
2010
    July 4,
2010
    April 4,
2010
 

Operating revenues

          

Education

   $ 630,027      $ 695,619      $ 741,156      $ 742,921      $ 698,336   

Advertising

     177,384        241,650        200,532        207,241        184,182   

Circulation and subscriber

     214,523        214,464        213,377        215,995        213,454   

Other

     31,076        34,106        32,495        31,253        33,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,053,010        1,185,839        1,187,560        1,197,410        1,128,985   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

          

Operating

     475,285        496,694        473,328        471,525        465,372   

Selling, general and administrative

     453,258        467,880        481,436        490,414        489,096   

Depreciation of property, plant and equipment

     63,230        63,901        60,939        61,024        61,458   

Amortization of intangible assets

     6,221        6,495        6,466        7,549        6,460   

Impairment of goodwill and other long-lived assets

     —          —          27,477        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     997,994        1,034,970        1,049,646        1,030,512        1,022,386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     55,016        150,869        137,914        166,898        106,599   

Other income (expense)

          

Equity in earnings (losses) of affiliates

     3,737        (191     2,140        2,027        (8,109

Interest income

     982        1,051        600        599        326   

Interest expense

     (7,961     (7,693     (7,633     (7,598     (7,579

Other, net

     (24,032     2,157        12,486        (3,807     (3,321
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     27,742        146,193        145,507        158,119        87,916   

Provision for income taxes

     10,300        68,100        59,600        56,400        33,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     17,442        78,093        85,907        101,719        54,216   

(Loss) gain from discontinued operations, net of tax

     (1,813     896        (24,831     (9,592     (8,388
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     15,629        78,989        61,076        92,127        45,828   

Net (income) loss attributable to noncontrolling interests

     (14     (2     76        8        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Washington Post Company

     15,615        78,987        61,152        92,135        45,840   

Redeemable preferred stock dividends

     (461     —          (230     (231     (461
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Washington Post Company common stockholders

   $ 15,154      $ 78,987      $ 60,922      $ 91,904      $ 45,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to The Washington Post Company common stockholders:

          

Income from continuing operations

   $ 16,967      $ 78,091      $ 85,753      $ 101,496      $ 53,767   

(Loss) gain from discontinued operations, net of tax

     (1,813     896        (24,831     (9,592     (8,388
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the Washington Post Company common stockholders

   $ 15,154      $ 78,987      $ 60,922      $ 91,904      $ 45,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Basic income per common share from continuing operations

   $ 2.09      $ 9.31      $ 9.64      $ 11.04      $ 5.82   

Basic (loss) income per common share from discontinued operations

     (0.22     0.11        (2.79     (1.04     (0.91
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 1.87      $ 9.42      $ 6.85      $ 10.00      $ 4.91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per common share from continuing operations

   $ 2.09      $ 9.31      $ 9.63      $ 11.04      $ 5.82   

Diluted (loss) income per common share from discontinued operations

     (0.22     0.11        (2.79     (1.04     (0.91
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 1.87      $ 9.42      $ 6.84      $ 10.00      $ 4.91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the operating results of the Company for fiscal year 2010 and 2009, following the reclassification of Kaplan Virtual Education and Education Connection as discontinued operations (in thousands):

 

     Fiscal Year Ended  
     January 2,
2011
    January 3,
2010
 

Operating revenues

    

Education

   $ 2,878,032      $ 2,595,802   

Advertising

     833,605        778,158   

Circulation and subscriber

     857,290        845,848   

Other

     130,867        125,872   
  

 

 

   

 

 

 
     4,699,794        4,345,680   
  

 

 

   

 

 

 

Operating costs and expenses

    

Operating

     1,906,919        1,852,166   

Selling, general and administrative

     1,928,826        1,878,310   

Depreciation of property, plant and equipment

     247,322        291,221   

Amortization of intangible assets

     26,970        26,294   

Impairment of goodwill and other long-lived assets

     27,477        25,387   
  

 

 

   

 

 

 
     4,137,514        4,073,378   
  

 

 

   

 

 

 

Operating income

     562,280        272,302   

Other income (expense)

    

Equity in losses of affiliates

     (4,133     (29,421

Interest income

     2,576        2,597   

Interest expense

     (30,503     (31,565

Other, net

     7,515        13,197   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     537,735        227,110   

Provision for income taxes

     217,800        81,800   
  

 

 

   

 

 

 

Income from continuing operations

     319,935        145,310   

Loss from discontinued operations, net of tax

     (41,915     (54,110
  

 

 

   

 

 

 

Net income

     278,020        91,200   

Net loss attributable to noncontrolling interests

     94        1,574   
  

 

 

   

 

 

 

Net income attributable to The Washington Post Company

     278,114        92,774   

Redeemable preferred stock dividends

     (922     (928
  

 

 

   

 

 

 

Net income attributable to The Washington Post Company common stockholders

   $ 277,192      $ 91,846   
  

 

 

   

 

 

 

Amounts attributable to The Washington Post Company common stockholders:

    

Income from continuing operations

   $ 319,107      $ 145,956   

Loss from discontinued operations, net of tax

     (41,915     (54,110
  

 

 

   

 

 

 

Net income attributable to The Washington Post Company common stockholders

   $ 277,192      $ 91,846   
  

 

 

   

 

 

 

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

    

Basic income per common share from continuing operations

   $ 35.76      $ 15.54   

Basic loss per common share from discontinued operations

     (4.70     (5.76
  

 

 

   

 

 

 

Basic net income per common share

   $ 31.06      $ 9.78   

Diluted income per common share from continuing operations

   $ 35.74      $ 15.54   

Diluted loss per common share from discontinued operations

     (4.70     (5.76
  

 

 

   

 

 

 

Diluted net income per common share

   $ 31.04      $ 9.78   
  

 

 

   

 

 

 

 

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Table of Contents

Note 3: Investments

Investments in marketable equity securities at July 3, 2011 and January 2, 2011 consist of the following (in thousands):

 

     July 3,
2011
     January 2,
2011
 

Total cost

   $ 192,368       $ 223,064   

Net unrealized gains

     133,437         117,846   
  

 

 

    

 

 

 

Total fair value

   $ 325,805       $ 340,910   
  

 

 

    

 

 

 

There were no new investments or sales of marketable equity securities in the first six months of 2011 and 2010.

At the end of the first quarter of 2011, the Company’s investment in Corinthian Colleges, Inc. had been in an unrealized loss position for over six months. The Company evaluated this investment for other-than-temporary impairment based on various factors, including the duration and severity of the unrealized loss, the reason for the decline in value and the potential recovery period, and the Company’s ability and intent to hold the investment. In the first quarter of 2011, the Company concluded the loss was other-than-temporary and recorded a $30.7 million write-down on the investment. The Company’s investment in Corinthian Colleges, Inc. accounted for $33.5 million of the total fair value of the Company’s investments in marketable equity securities at July 3, 2011.

Note 4: Acquisitions and Dispositions

In the first six months of 2011, the Company acquired four businesses totaling $127.2 million, including assumed debt of $5.5 million and other assumed liabilities. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition; most of the purchase price for these acquisitions has been allocated to goodwill, other intangible assets, and property, plant and equipment on a preliminary basis.

In the second quarter of 2011, Kaplan acquired three businesses in its Kaplan International division. These acquisitions included Kaplan’s May 2011 acquisitions of Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia. In June 2011, Kaplan acquired Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain.

In July 2011, Kaplan sold Kaplan Virtual Education, which was part of Kaplan Ventures.

In the second quarter of 2010, the Company made two small acquisitions in its Other Businesses and Cable divisions. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. In April 2010, Kaplan sold Education Connection, which was part of Kaplan Ventures.

Note 5: Goodwill and Other Intangible Assets

The education division made several changes to its operating and reporting structure in the first quarter of 2011, 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.

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 July 3, 2011 and July 4, 2010 was $7.4 million and $7.6 million, respectively. Amortization of intangible assets for the twenty-six weeks ended July 3, 2011 and July 4, 2010 was $14.2 million and $14.1 million, respectively. Amortization of intangible assets is estimated to be approximately $14 million for the remainder of 2011, $15 million in 2012, $11 million in 2013, $6 million in 2014, $4 million in 2015, $3 million in 2016 and $5 million thereafter.

The changes in the carrying amount of goodwill related to continuing operations, by segment, for the twenty-six weeks ended July 3, 2011 are as follows (in thousands):

 

     Education     Cable
Television
     Newspaper
Publishing
    Television
Broadcasting
     Other
Businesses
    Total  

Balance as of January 2, 2011:

              

Goodwill

   $ 1,073,089      $ 85,488       $ 81,183      $ 203,165       $ 100,152      $ 1,543,077   

Accumulated impairment losses

     (15,529     —           (65,772     —           (85,419     (166,720
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     1,057,560        85,488         15,411        203,165         14,733        1,376,357   

Acquisitions

     74,359        —           —          —           —          74,359   

Reclassification to discontinued operations

     (3,646     —           —          —           —          (3,646

Foreign currency exchange rate changes and other

     16,121        —           —          —           —          16,121   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance as of July 3, 2011

              

Goodwill

     1,159,923        85,488         81,183        203,165         100,152        1,629,911   

Accumulated impairment losses

     (15,529     —           (65,772     —           (85,419     (166,720
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,144,394      $ 85,488       $ 15,411      $ 203,165       $ 14,733      $ 1,463,191   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Higher
Education
    Test
Preparation
    Kaplan
International
     Kaplan
Ventures
    Kaplan
Corporate
and Other
     Total  

Balance as of January 2, 2011:

              

Goodwill

   $ 335,226      $ 229,486      $ 444,940       $ 63,437      $ —         $ 1,073,089   

Accumulated impairment losses

     —          (7,037     —           (8,492     —           (15,529
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     335,226        222,449        444,940         54,945        —           1,057,560   

Reallocation, net (Note 12)

     91,043        (70,262     —           (20,781     —           —     

Acquisitions

     422        —          70,519         3,418        —           74,359   

Reclassification to discontinued operations

     —          —          —           (3,646     —           (3,646

Foreign currency exchange rate changes and other

     105        —          14,164         1,852        —           16,121   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance as of July 3, 2011

              

Goodwill

     433,833        152,187        529,623         44,280        —           1,159,923   

Accumulated impairment losses

     (7,037     —          —           (8,492     —           (15,529
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 426,796      $ 152,187      $ 529,623       $ 35,788      $ —         $ 1,144,394   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other intangible assets consist of the following (in thousands):

 

          As of July 3, 2011      As of January 2, 2011  
    

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    $ 44,033       $ 38,985       $ 5,048       $ 43,940       $ 33,570       $ 10,370   

Student and customer relationships

   2-10 years      75,929         44,466         31,463         66,510         41,958         24,552   

Databases and technology

   3-5 years      10,514         4,861         5,653         10,514         2,921         7,593   

Trade names and trademarks

   2-10 years      29,618         17,062         12,556         29,053         15,330         13,723   

Other

   1-25 years      10,085         5,781         4,304         11,502         6,498         5,004   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 170,179       $ 111,155       $ 59,024       $ 161,519       $ 100,277       $ 61,242   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Indefinite-lived intangible assets:

                    

Franchise agreements

      $ 496,166             $ 496,166         

Wireless licenses

        22,150               22,150         

Licensure and accreditation

        7,878               7,877         

Other

        10,608               4,623         
     

 

 

          

 

 

       
      $ 536,802             $ 530,816         
     

 

 

          

 

 

       

Note 6: Borrowings

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

 

     July 3, 2011     January 2, 2011  

7.25% unsecured notes due February 1, 2019

   $ 396,858      $ 396,650   

Other indebtedness

     8,689        3,000   
  

 

 

   

 

 

 

Total

     405,547        399,650   

Less: current portion

     (3,219     (3,000
  

 

 

   

 

 

 

Total long-term debt

   $ 402,328      $ 396,650   
  

 

 

   

 

 

 

The Company’s other indebtedness at July 3, 2011 and January 2, 2011 is at an interest rate of 0% to 6% and matures from 2011 to 2016.

During the second quarter of 2011 and 2010, the Company had average borrowings outstanding of approximately $401.2 million and $399.4 million, respectively, at average annual interest rates of approximately 7.2%. During the second quarter of 2011 and 2010, the Company incurred net interest expense of $7.0 million.

During the first six months of 2011 and 2010, the Company had average borrowings outstanding of approximately $400.6 million and $399.4 million, respectively, at average annual interest rates of approximately 7.2%. During the first six months of 2011 and 2010, the Company incurred net interest expense of $13.9 million and $14.3 million, respectively.

 

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Table of Contents

On June 17, 2011, The Washington Post Company (the “Company”) terminated its U.S. $500,000,000 five year revolving credit agreement, dated as of August 8, 2006, among the Company, the lenders party thereto and Citibank, N.A. (the “2006 Credit Agreement”), in connection with the entrance into a new revolving credit facility. No borrowings were outstanding under the 2006 Credit Agreement at the time of termination. On June 17, 2011, the Company entered into a credit agreement (the “Credit Agreement”) providing for a new U.S. $450 million, AUS $50 million four year revolving credit facility (the “Facility”), with each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (“JP Morgan”), and J.P. Morgan Australia Limited, as Australian Sub-Agent. The Facility consists of two tranches: (a) U.S. $450 million and (b) AUS $50 million (subject, at the Company’s option, to conversion of the unused Australian dollar commitments into U.S. dollar commitments at a specified exchange rate). The Credit Agreement provides for an option to increase the total U.S. dollar commitments up to an aggregate amount of U.S. $700 million. The Facility replaced the Company’s 2006 Credit Agreement. The Company is required to pay a facility fee on a quarterly basis, based on the Company’s long-term debt ratings, of between 0.08% and 0.20% of the amount of the Facility. Any borrowings are made on an unsecured basis and bear interest at (a) for U.S. dollar borrowings, at the Company’s option, either (i) a fluctuating interest rate equal to the highest of JPMorgan’s prime rate, 0.50 percent above the Federal funds rate or the one-month eurodollar rate plus 1%, or (ii) the eurodollar rate for the applicable interest period, or (b) for Australian dollar borrowings, the bank bill rate, in each case plus an applicable margin that depends on the Company’s long-term debt ratings. The Facility supports the issuance of the Company’s commercial paper, but the Company may also draw on the facility for other general corporate purposes. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term. Any outstanding borrowings must be repaid on or prior to the final termination date. The Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and, among other things, requires the Company to maintain at least $1.5 billion of consolidated shareholders’ equity. The Company did not borrow funds under its commercial paper program or its revolving credit facility in the first half of 2011.

At July 3, 2011, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $463.1 million, compared with the carrying amount of $396.9 million. At January 2, 2011, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $457.2 million, compared with the carrying amount of $396.7 million. The carrying value of the Company’s other unsecured debt at July 3, 2011 approximates fair value.

Note 7: Earnings Per Share

The Company’s earnings per share from continuing operations (basic and diluted) for the second quarter and first six months of 2011 and 2010 are presented below (in thousands, except per share amounts):

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

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

   $ 46,987      $ 101,496      $ 63,954      $ 155,263   

Less: Amount attributable to participating securities

     (480     (717     (631     (1,118
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 46,507      $ 100,779      $ 63,323      $ 154,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Plus: Amount attributable to participating securities

     480        717        631        1,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 46,987      $ 101,496      $ 63,954      $ 155,263   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     7,852        9,126        7,949        9,150   

Effect of dilutive shares:

        

Stock options and restricted stock

     81        67        77        67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     7,933        9,193        8,026        9,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 5.92      $ 11.04      $ 7.97      $ 16.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 5.92      $ 11.04      $ 7.97      $ 16.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

The diluted earnings per share amounts for the second quarter of 2011 and the first six months of 2011 exclude the effects of 89,850 and 79,850 stock options outstanding, respectively, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the second quarter of 2010 and the first six months of 2010 exclude the effects of 51,275 stock options outstanding, as their inclusion would have been antidilutive.

 

13


Table of Contents

In the second quarter and the first six months of 2011, the Company declared regular dividends totaling $2.35 and $7.05 per share, respectively.

Note 8: Pension and Postretirement Plans

Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans for the second quarter and six months ended July 3, 2011 and July 4, 2010, included in income from continuing operations, consists of the following components (in thousands):

 

     Pension Plans  
     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Service cost

   $ 6,760      $ 6,835      $ 13,974      $ 14,133   

Interest cost

     14,964        14,993        30,069        30,187   

Expected return on assets

     (24,064     (23,688     (47,553     (47,711

Amortization of transition asset

     —          (7     —          (14

Amortization of prior service cost

     882        1,103        1,763        2,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit

     (1,458     (764     (1,747     (1,199

Early retirement programs expense

     —          —          430        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefit

   $ (1,458   $ (764   $ (1,317   $ (1,199
  

 

 

   

 

 

   

 

 

   

 

 

 

The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) for the second quarter and six months ended July 3, 2011 and July 4, 2010, including a portion included in income from discontinued operations, consists of the following components (in thousands):

 

     SERP  
     Thirteen Weeks
Ended
     Twenty-Six Weeks Ended  
     July 3,
2011
     July 4,
2010
     July 3,
2011
     July 4,
2010
 

Service cost

   $ 380       $ 344       $ 760       $ 689   

Interest cost

     1,084         1,072         2,168         2,144   

Amortization of prior service cost

     65         102         130         203   

Recognized actuarial loss

     353         238         706         476   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost

   $ 1,882       $ 1,756       $ 3,764       $ 3,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2011 and December 31, 2010, the assets of the Company’s pension plans were allocated as follows:

 

     Pension Plan Asset Allocations  
     June 30,
2011
    December 31,
2010
 

U.S. equities

     65     66

U.S. fixed income

     12     19

International equities

     23     15
  

 

 

   

 

 

 

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. In June 2011, the Company increased the limit on international stocks to no more than 24% of the assets at the time of the investment. None of the assets is managed internally by the Company.

In determining the 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.

 

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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 June 30, 2011. 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. At June 30, 2011 the Company held common stock in one investment which exceeded 10% of total plan assets. This investment was valued at $247.5 million and $134.8 million at June 30, 2011 and December 31, 2010, respectively, or approximately 14% and 8%, respectively, of total plan assets. Assets also included $155.8 million and $161.6 million of Berkshire Hathaway Class A and Class B common stock at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 the Company held investments in one foreign country which exceeded 10% of total plan assets. These investments were valued at $270.7 million and $155.0 million at June 30, 2011 and December 31, 2010, respectively, or approximately 15% and 9%, respectively, of total plan assets.

Other Postretirement Plans. The total (benefit) cost arising from the Company’s other postretirement plans for the second quarter and six months ended July 3, 2011 and July 4, 2010, including a portion included in income from discontinued operations, consists of the following components (in thousands):

 

     Postretirement Plans  
     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Service cost

   $ 718      $ 846      $ 1,436      $ 1,693   

Interest cost

     765        998        1,531        1,995   

Amortization of prior service credit

     (1,412     (1,288     (2,825     (2,575

Recognized actuarial gain

     (480     (512     (960     (1,025
  

 

 

   

 

 

   

 

 

   

 

 

 

Total periodic (benefit) cost

   $ (409   $ 44      $ (818   $ 88   
  

 

 

   

 

 

   

 

 

   

 

 

 

Multiemployer Pension Plans. In July 2010, the Washington Post notified the union and the CWA-ITU Negotiated Pension Plan (the Plan) of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post recorded a $17.7 million charge in the second quarter of 2010 based on an estimate of the withdrawal liability.

Note 9: Other Non-Operating (Expense) Income

A summary of non-operating (expense) income for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010, is as follows (in thousands):

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 3,
2011
    July 4,
2010
    July 3,
2011
    July 4,
2010
 

Impairment write-down on a marketable equity security

   $ —        $ —        $ (30,696   $ —     

Foreign currency gains (losses), net

     331        (3,751     3,031        (7,099

Gain on sale of cost method investments

     199        —          4,031        —     

Impairment write-down on a cost method investment

     (3,148     —          (3,148     —     

Other, net

     27        (56     159        (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (2,591   $ (3,807   $ (26,623   $ (7,128
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 10: Contingencies

Litigation and Legal Matters.

The Company is involved in various legal proceedings that arise in the ordinary course of its business. Although the outcome of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows.

Also, based on currently available information, management is of the opinion that the exposure to future material losses from existing legal proceedings is not reasonably possible, or that future material losses in excess of the amounts accrued are not reasonably possible.

On July 22, 2011, Kaplan Higher Education finalized a comprehensive agreement to terminate the pending inquiries and related matters involving the Surgical Technology program previously offered at its CHI-Broomall campus in Broomall, Pennsylvania. The Surgical Technology program at CHI-Broomall ceased enrolling students in 2008. The agreement: (a) concludes the inquiry by the Assistant U.S. Attorney in the Civil Division of the U.S. Attorney’s Office for the Eastern District of Pennsylvania into the Surgical Technology program previously offered at the CHI-Broomall campus; (b)

 

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concludes, but for the issuance of a final determination, the program review by the U.S. Department of Education into that Surgical Technology program and the CHI-Broomall campus; and (c) fully resolves and dismisses with prejudice a previously-sealed federal False Claims Act complaint relating to that Surgical Technology program, which had been filed by a former employee. The agreement terminates each of these matters without any admission of wrongdoing. The total amount of all required payments by CHI-Broomall under the agreement is $1.6 million. On July 22, 2011, the U.S. Attorney’s Office for the Eastern District of Pennsylvania filed a motion in the U.S. District Court for the Eastern District of Pennsylvania, in the previously-sealed case captioned United States ex rel. Goodstein v. Kaplan, Inc. et al. (No. 07-1491), seeking to unseal the case docket, along with a notice of intervention in the case solely for the purpose of resolving and dismissing the case pursuant to the agreement described above.

On July 20, 2011, the Company received a subpoena from the office of the Delaware Attorney General, seeking information about Delaware residents who attended Kaplan Higher Education schools from 2006 to 2010. Kaplan intends to cooperate with the Delaware Attorney General in connection with the subpoena and any further actions that may occur.

DOE Program Reviews. The U.S. Department of Education (DOE) has undertaken Program Reviews at various Kaplan Higher Education (KHE) campus locations and at Kaplan University. Currently, there are six pending Program Reviews, including two that are scheduled to take place before the end of the third quarter of 2011. Therefore, the results of these open reviews and their impact on Kaplan’s operations are uncertain.

Texas Workforce Commission Notification. On July 18, 2011, the Texas Workforce Commission (TWC) notified KHE that 10 programs at 9 Texas campuses have been placed on “conditional approval” status due to unsatisfactory placement rates. These campuses will be required to report placement rates from September 1, 2010 through August 31, 2011 for these programs to the TWC on December 1, 2011; programs for which the placement rate falls below 60% may be subject to a hold on accepting new enrollments, which most likely would take effect in the first quarter of 2012. There are approximately 550 students enrolled in these programs.

Other. The UK Border Agency issued revised immigration rules which became operational on April 21, 2011. Students from outside the European Economic Area (EEA) and Switzerland who were issued a Confirmation of Acceptance for Studies (CAS) after July 4, 2011 will be given permission to work part-time during their studies only if they attend an institution which qualifies as a “Higher Education Institution” (HEI). Many of the Kaplan UK international students currently work part-time. Kaplan UK is not in receipt of public funding for the courses upon which international students study and, therefore, does not qualify as an HEI. Also, certain Kaplan UK schools have gained, applied for or are in the process of applying for Highly Trusted Sponsor status (HTS). Without HTS, these schools cannot issue CASs to potential incoming international students starting in April 2012. These rules have the potential to adversely impact the number of international students studying at Kaplan UK.

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.

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

 

     Fair Value      Level 1      Level 2  

At July 3, 2011:

        

Assets:

        

Money market investments(1)

   $ 100,324       $ —         $ 100,324   

Marketable equity securities(3)

     325,805         325,805         —     

Other current investments(4)

     40,335         14,529         25,806   
  

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 466,464       $ 340,334       $ 126,130   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Deferred compensation plan liabilities (5)

   $ 65,941       $ —         $ 65,941   

7.25% unsecured notes(6)

     463,080         —           463,080   
  

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 529,021       $ —         $ 529,021   
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     Fair Value      Level 1      Level 2  

At January 2, 2011:

        

Assets:

        

Money market investments (2)

   $ 308,927       $ —         $ 308,927   

Marketable equity securities(3)

     340,910         340,910         —     

Other current investments(4)

     32,840         11,835         21,005   
  

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 682,677       $ 352,745       $ 329,932   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Deferred compensation plan liabilities (5)

   $ 69,226       $ —         $ 69,226   

7.25% unsecured notes(6)

     457,200         —           457,200   
  

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 526,426       $ —         $ 526,426   
  

 

 

    

 

 

    

 

 

 

 

(1) The Company’s money market investments at July 3, 2011 are included in cash and cash equivalents.
(2) The Company’s money market investments at January 2, 2011 are included in cash, cash equivalents and restricted cash.
(3) The Company’s investments in marketable equity securities are classified as available-for-sale.
(4) Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
(5) 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.
(6) See Note 6 for the 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.

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 2011, Kaplan made several changes to its operating and reporting structure. Kaplan’s domestic professional training business was moved from Test Preparation to Kaplan Higher Education and Kaplan Continuing Education moved from Kaplan Ventures to Kaplan Higher Education. These businesses were integrated with Kaplan University to become part of the Kaplan University School of Continuing and Professional Education. Also, Kaplan sold Kaplan Virtual Education in July 2011 and Education Connection in April 2010; therefore, the education division’s operating results exclude these businesses. Segment operating results of the education division have been restated to reflect these changes.

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 the Company’s electronic media publishing business (primarily washingtonpost.com and Slate). 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.

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 were participants in The Washington Post Company Retirement Plan, and the Company had historically allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were 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.

 

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Table of Contents

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 2011 (in thousands):

 

     First Quarter     Second Quarter  

2011 Quarterly Operating Results

    

Operating revenues

    

Education

   $ 630,027      $ 628,701   

Cable television

     190,280        191,231   

Newspaper publishing

     154,997        162,772   

Television broadcasting

     72,183        84,940   

Other businesses

     6,662        6,095   

Corporate office

     —          —     

Intersegment elimination

     (1,139     (742
  

 

 

   

 

 

 
   $ 1,053,010      $ 1,072,997   
  

 

 

   

 

 

 

Income (loss) from operations

    

Education

   $ 18,512      $ 20,462   

Cable television

     37,707        40,425   

Newspaper publishing

     (12,827     (2,918

Television broadcasting

     19,591        32,571   

Other businesses

     (5,039     (5,014

Corporate office

     (2,928     (4,433
  

 

 

   

 

 

 
   $ 55,016      $ 81,093   
  

 

 

   

 

 

 

Equity in earnings of affiliates

     3,737        3,138   

Interest expense, net

     (6,979     (6,963

Other, net

     (24,032     (2,591
  

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 27,742      $ 74,677   
  

 

 

   

 

 

 

Depreciation of property, plant and equipment

    

Education

   $ 21,209      $ 22,517   

Cable television

     31,786        31,533   

Newspaper publishing

     6,900        6,540   

Television broadcasting

     3,110        3,134   

Other businesses

     81        84   

Corporate office

     144        100   
  

 

 

   

 

 

 
   $ 63,230      $ 63,908   
  

 

 

   

 

 

 

Amortization of intangible assets

    

Education

   $ 4,925      $ 5,547   

Cable television

     73        66   

Newspaper publishing

     290        289   

Television broadcasting

     —          —     

Other businesses

     933        934   

Corporate office

     —          —     
  

 

 

   

 

 

 
   $ 6,221      $ 6,836   
  

 

 

   

 

 

 

Net pension (expense) credit

    

Education

   $ (1,552   $ (1,652

Cable television

     (518     (497

Newspaper publishing

     (6,705     (5,288

Television broadcasting

     (646     (335

Other businesses

     (17     (17

Corporate office

     9,297        9,247   
  

 

 

   

 

 

 
   $ (141   $ 1,458   
  

 

 

   

 

 

 

 

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Table of Contents

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     Fourth Quarter  

2010 Quarterly Operating Results

        

Operating revenues

        

Education

   $ 698,336      $ 742,921      $ 741,156      $ 695,619   

Cable television

     189,358        190,558        188,694        191,274   

Newspaper publishing

     155,771        172,730        163,447        188,425   

Television broadcasting

     73,482        82,592        83,178        102,912   

Other businesses

     14,134        10,693        13,098        8,470   

Corporate office

     —          —          —          —     

Intersegment elimination

     (2,096     (2,084     (2,013     (861
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,128,985      $ 1,197,410      $ 1,187,560      $ 1,185,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Education

   $ 61,444      $ 112,391      $ 106,439      $ 66,077   

Cable television

     42,536        43,790        40,264        37,355   

Newspaper publishing

     (13,752     (14,300     (1,715     19,941   

Television broadcasting

     20,911        29,806        25,283        45,348   

Other businesses

     (833     (2,885     (28,459     (2,789

Corporate

     (3,707     (1,904     (3,898     (15,063
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 106,599      $ 166,898      $ 137,914      $ 150,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in losses of affiliates

     (8,109     2,027        2,140        (191

Interest expense, net

     (7,253     (6,999     (7,033     (6,642

Other, net

     (3,321     (3,807     12,486        2,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 87,916      $ 158,119      $ 145,507      $ 146,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation of property, plant and equipment

        

Education

   $ 18,608      $ 19,020      $ 18,950      $ 21,420   

Cable television

     31,626        30,722        31,174        31,312   

Newspaper publishing

     7,884        7,818        7,416        7,223   

Television broadcasting

     3,137        3,260        3,182        3,141   

Other businesses

     59        62        72        77   

Corporate office

     144        142        145        728   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 61,458      $ 61,024      $ 60,939      $ 63, 901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of intangible assets

        

Education

   $ 5,220      $ 6,300      $ 4,943      $ 5,171   

Cable television

     76        75        74        102   

Newspaper publishing

     282        389        262        290   

Television broadcasting

     —          —          —          —     

Other businesses

     882        785        1,187        932   

Corporate office

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,460      $ 7,549      $ 6,466      $ 6,495   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment of goodwill and other long-lived assets

        

Education

   $ —        $ —        $ —        $ —     

Cable television

     —          —          —          —     

Newspaper publishing

     —          —          —          —     

Television broadcasting

     —          —          —          —     

Other businesses

     —          —          27,477        —     

Corporate office

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ 27,477      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension credit (expense)

        

Education

   $ (1,349   $ (1,526   $ (1,434   $ (1,398

Cable television

     (468     (475     (488     (488

Newspaper publishing

     (5,560     (23,192     (8,088     (5,447

Television broadcasting

     (262     (295     (278     (278

Other businesses

     (15     (18     (15     (17

Corporate office

     8,089        8,570        8,571        9,369   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 435      $ (16,936   $ (1,732   $ 1,741   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table summarizes financial information related to each of the Company’s business segments for the six months ended 2011 and 2010, as well as for the fiscal years 2010 and 2009 (in thousands):

 

     Six Month Period     Fiscal Year Ended  
     2011     2010     2010     2009  

Operating revenues

        

Education

   $ 1,258,728      $ 1,441,257      $ 2,878,032      $ 2,595,802   

Cable television

     381,511        379,916        759,884        750,409   

Newspaper publishing

     317,769        328,501        680,373        679,282   

Television broadcasting

     157,123        156,074        342,164        272,651   

Other businesses

     12,757        24,827        46,395        53,921   

Corporate office

     —          —          —          —     

Intersegment elimination

     (1,881     (4,180     (7,054 )     (6,385
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,126,007      $ 2,326,395      $ 4,699,794      $  4,345,680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Education

   $ 38,974      $ 173,835      $ 346,351      $ 209,184   

Cable television

     78,132        86,326        163,945        169,051   

Newspaper publishing

     (15,745     (28,052     (9,826 )     (163,549

Television broadcasting

     52,162        50,717        121,348        70,506   

Other businesses

     (10,053     (3,718     (34,966 )     (61

Corporate office

     (7,361     (5,611     (24,572 )     (12,829
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 136,109      $ 273,497      $ 562,280      $ 272,302   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings (losses) of affiliates

     6,875        (6,082     (4,133 )     (29,421

Interest expense, net

     (13,942     (14,252     (27,927 )     (28,968

Other, net

     (26,623     (7,128     7,515        13,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 102,419      $ 246,035      $ 537,735      $ 227,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation of property, plant and equipment

        

Education

   $ 43,726      $ 37,628      $ 77,998      $ 81,015   

Cable television

     63,319        62,348        124,834        124,207   

Newspaper publishing

     13,440        15,702        30,341        72,870   

Television broadcasting

     6,244        6,397        12,720        12,299   

Other businesses

     165        121        270        151   

Corporate office

     244        286        1,159        679   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 127,138      $ 122,482      $ 247,322      $ 291,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of intangible assets

        

Education

   $ 10,472      $ 11,520      $ 21,634      $ 21,875   

Cable television

     139        151        327        310   

Newspaper publishing

     579        671        1,223        1,010   

Television broadcasting

     —          —          —          —     

Other businesses

     1,867        1,667        3,786        3,099   

Corporate office

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 13,057      $ 14,009      $ 26,970      $ 26,294   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment of goodwill and other long-lived assets

        

Education

   $ —        $ —        $ —        $ 25,387   

Cable television

     —          —          —          —     

Newspaper publishing

     —          —          —          —     

Television broadcasting

     —          —          —          —     

Other businesses

     —          —          27,477        —     

Corporate office

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ 27,477      $ 25,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension credit (expense)

        

Education

   $ (3,204   $ (2,875   $ (5,707 )   $ (5,414

Cable television

     (1,015     (943     (1,919 )     (1,851

Newspaper publishing

     (11,993     (28,752     (42,287 )     (75,925

Television broadcasting

     (981     (557     (1,113 )     (418

Other businesses

     (34     (33     (65 )     (82

Corporate office

     18,544        16,659        34,599        33,836   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,317      $ (16,501   $ (16,492   $ (49,854
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Asset information for the Company’s business segments are as follows (in thousands):

 

     As of  
     July 3,
2011
     January 2,
2011
     January 3,
2010
 

Identifiable assets

        

Education

   $ 2,061,646       $ 2,197,277       $ 2,188,328   

Cable television

     1,139,612         1,141,427         1,164,209   

Newspaper publishing

     174,621         206,305         207,234   

Television broadcasting

     431,627         436,289         433,705   

Other businesses

     27,009         30,038         54,418   

Corporate office

     886,772         774,484         729,706   
  

 

 

    

 

 

    

 

 

 
   $ 4,721,287       $ 4,785,820       $ 4,777,600   
  

 

 

    

 

 

    

 

 

 

Investments in marketable equity securities

     325,805         340,910         353,884   

Investments in affiliates

     32,687         31,637         54,722   

Assets of discontinued operations

     12,715         —           —     
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 5,092,494       $ 5,158,367       $ 5,186,206   
  

 

 

    

 

 

    

 

 

 

The following table summarizes 2011 quarterly financial information related to the operating segments of the Company’s education division (in thousands):

 

     First Quarter     Second Quarter  

2011 Quarterly Operating Results

    

Operating revenues

    

Higher education

   $ 390,279      $ 362,169   

Test preparation

     73,365        83,197   

Kaplan international

     148,687        166,071   

Kaplan ventures

     18,365        17,418   

Kaplan corporate and other

     1,117        1,065   

Intersegment elimination

     (1,786     (1,219
  

 

 

   

 

 

 
   $ 630,027      $ 628,701   
  

 

 

   

 

 

 

Income (loss) from operations

    

Higher education

   $ 50,483      $ 45,295   

Test preparation

     (12,676     (11,597

Kaplan international

     547        10,207   

Kaplan ventures

     (3,068     (4,290

Kaplan corporate and other

     (16,543     (19,171

Intersegment elimination

     (231     18   
  

 

 

   

 

 

 
   $ 18,512      $ 20,462   
  

 

 

   

 

 

 

Depreciation of property, plant and equipment

    

Higher education

   $ 11,450      $ 12,115   

Test preparation

     4,449        3,796   

Kaplan international

     3,430        4,713   

Kaplan ventures

     1,049        1,028   

Kaplan corporate and other

     831        865   
  

 

 

   

 

 

 
   $ 21,209      $ 22,517   
  

 

 

   

 

 

 

Amortization of intangible assets

     4,925        5,547   

Kaplan stock-based incentive compensation (credit) expense

     (825     483   

 

21


Table of Contents

The following table summarizes quarterly financial information related to the operating segments within the Company’s education division for 2010 (in thousands):

 

     First Quarter     Second Quarter     Third Quarter     Fourth Quarter  

2010 Quarterly Operating Results

        

Operating revenues

        

Higher education

   $ 478,751      $ 507,448      $ 495,595      $ 438,997   

Test preparation

     73,815        85,238        80,236        75,590   

Kaplan international

     133,985        137,389        151,208        163,342   

Kaplan ventures

     14,123        13,423        14,065        17,685   

Kaplan corporate and other

     1,291        1,283        1,375        1,588   

Intersegment elimination

     (3,629     (1,860     (1,323     (1,583
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 698,336      $ 742,921      $ 741,156      $ 695,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Higher education

   $ 91,604      $ 127,067      $ 117,508      $ 70,547   

Test preparation

     (11,770     (327     (1,625     (18,861

Kaplan international

     4,527        12,945        14,904        23,776   

Kaplan ventures

     (3,981     (4,949     (5,076     (3,484

Kaplan corporate and other

     (18,945     (22,054     (19,302     (5,919

Intersegment elimination

     9        (291     30        18   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 61,444      $ 112,391      $ 106,439      $ 66,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation of property, plant and equipment

        

Higher education

   $ 10,499      $ 10,611      $ 10,834      $ 11,160   

Test preparation

     3,129        3,360        3,025        4,581   

Kaplan international

     2,955        3,000        3,054        3,830   

Kaplan ventures

     1,032        1,009        985        1,083   

Kaplan corporate and other

     993        1,040        1,052        766   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 18,608      $ 19,020      $ 18,950      $ 21,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of intangible assets

   $ 5,220      $ 6,300      $ 4,943      $ 5,171   

Kaplan stock-based incentive compensation expense (credit)

   $ 535      $ 552      $ (2,397   $ 131   

 

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Table of Contents

The following table summarizes financial information related to the operating segments of the Company’s education division segments for the six months ended 2011 and 2010, as well as for the fiscal years 2010 and 2009 (in thousands):

 

     Six Month Period     Fiscal Year Ended  
     2011     2010     2010     2009  

Operating revenues

        

Higher education

   $ 752,448      $ 986,199      $ 1,920,791      $ 1,672,916   

Test preparation1

     156,562        159,053        314,879        336,788   

Kaplan international

     314,758        271,374        585,924        537,238   

Kaplan ventures

     35,783        27,546        59,296        57,210   

Kaplan corporate and other

     2,182        2,574        5,537        2,436   

Intersegment elimination

     (3,005     (5,489     (8,395     (10,786
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,258,728      $ 1,441,257      $ 2,878,032      $ 2,595,802   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Higher education

   $ 95,778      $ 218,671      $ 406,726      $ 283,839   

Test preparation1

     (24,273     (12,097     (32,583     (18,029

Kaplan international

     10,754        17,472        56,152        53,772   

Kaplan ventures

     (7,358     (8,930     (17,490     (9,286

Kaplan corporate and other

     (35,714     (40,999     (66,220     (101,422

Intersegment elimination

     (213     (282     (234     310   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 38,974      $ 173,835      $ 346,351      $ 209,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation of property, plant and equipment

        

Higher education

   $ 23,565      $ 21,110      $ 43,104      $ 43,425   

Test preparation

     8,245        6,489        14,095        17,941   

Kaplan international

     8,143        5,955        12,839        11,438   

Kaplan ventures

     2,077        2,041        4,109        3,911   

Kaplan corporate and other

     1,696        2,033        3,851        4,300   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 43,726      $ 37,628      $ 77,998      $ 81,015   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of intangible assets

   $ 10,472      $ 11,520      $ 21,634      $ 21,875   

Impairment of goodwill and other long-lived assets

   $ —        $ —        $ —        $ 25,387   

Kaplan stock-based incentive compensation (credit) expense

   $ (342   $ 1,087      $ (1,179   $ 933   

 

1. Test Preparation amounts include revenues and operating losses from Score as follows (in thousands):

 

     Fiscal Year Ended  
     2010      2009  

Revenues

   $ —         $ 8,557   

Operating losses

   $ —         $ (36,787

Identifiable assets for the Company’s education division consist of the following (in thousands):

 

     As of  
     June 30,
2011
     December 31,
2010
     December 31,
2009
 

Identifiable assets

        

Higher education

   $ 731,825       $ 1,093,614       $ 1,069,965   

Test preparation

     330,464         290,367         285,673   

Kaplan international

     861,489         675,122         671,249   

Kaplan ventures

     117,542         118,461         88,291   

Kaplan corporate and other

     20,326         19,713         73,150   
  

 

 

    

 

 

    

 

 

 
   $ 2,061,646       $ 2,197,277       $ 2,188,328   
  

 

 

    

 

 

    

 

 

 

 

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

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

Results of Operations

The Company reported net income available for common shares of $45.6 million ($5.74 per share) for the second quarter ended July 3, 2011, compared to $91.9 million ($10.00 per share) in the second quarter of last year. Net income includes $1.4 million ($0.18 per share) and $9.6 million ($1.04 per share) in losses from discontinued operations for the second quarter of 2011 and 2010, respectively. Income from continuing operations available for common shares was $47.0 million ($5.92 per share) for the second quarter of 2011, compared to $101.5 million ($11.04 per share) for the second quarter of 2010.

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

 

   

a $17.7 million charge recorded at The Washington Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $11.0 million, or $1.19 per share); and

 

   

$3.8 million in non-operating unrealized foreign currency losses (after-tax impact of $2.3 million, or $0.25 per share).

Revenue for the second quarter of 2011 was $1,073.0 million, down 10% from $1,197.4 million in 2010. The Company reported operating income of $81.1 million in the second quarter of 2011, compared to operating income of $166.9 million in 2010. Revenues were down at the education and newspaper publishing divisions, while revenues were up at the television broadcasting and cable television divisions. Operating results declined at the education and cable television divisions and improved at the television broadcasting division. Excluding the multiemployer pension plan charge noted above, operating results also declined at the newspaper publishing division.

For the first six months of 2011, the Company reported net income available for common shares of $60.7 million ($7.57 per share), compared to $137.3 million ($14.91 per share) for the same period of 2010. Net income includes $3.2 million ($0.40 per share) and $18.0 million ($1.95 per share) in losses from discontinued operations for the first six months of 2011 and 2010, respectively. Income from continuing operations available for common shares was $64.0 million ($7.97 per share) for the first six months of 2011, compared to $155.3 million ($16.86 per share) for the first six months of 2010. As a result of the Company’s share repurchases, there were 13% fewer diluted average shares outstanding in the first half of 2011.

Items included in the Company’s income from continuing operations for the first six months of 2011:

 

   

a $30.7 million write-down of a marketable equity security (after-tax impact of $19.8 million, or $2.44 per share); and

 

   

$3.0 million in non-operating unrealized foreign currency gains (after-tax impact of $1.9 million, or $0.24 per share).

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

 

   

a $17.7 million charge recorded at The Washington Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $11.0 million, or $1.19 per share); and

 

   

$7.1 million in non-operating unrealized foreign currency losses (after-tax impact of $4.4 million, or $0.48 per share).

Revenue for the first half of 2011 was $2,126.0 million, down 9% from $2,326.4 million in the first half of 2010. Revenues were down at the education and newspaper publishing divisions, while revenues were up at the television broadcasting and cable television divisions. The Company reported operating income of $136.1 million for the first half of 2011, compared to $273.5 million for the first half of 2010. Operating results declined at the education and cable television divisions and improved at the television broadcasting division. Excluding the multiemployer pension plan charge noted above, operating results also declined at the newspaper publishing division.

Education Division. Education division revenue totaled $628.7 million for the second quarter of 2011, a 15% decline from revenue of $742.9 million for the second quarter of 2010. Kaplan reported second quarter 2011 operating income of $20.5 million, down from $112.4 million in the second quarter of 2010.

For the first six months of 2011, education division revenue totaled $1,258.7 million, a 13% decline from revenue of $1,441.3 million for the same period of 2010. Kaplan reported operating income of $39.0 million for the first six months of 2011, down from $173.8 million for the first six months of 2010.

 

24


Table of Contents

A summary of Kaplan’s operating results for the second quarter and the first six months of 2011 compared to 2010 is as follows (in thousands):

 

     Second Quarter     YTD  
     2011     2010     %
Change
    2011     2010     %
Change
 

Revenue

            

Higher education

   $ 362,169      $ 507,448        (29   $ 752,448      $ 986,199        (24

Test preparation

     83,197        85,238        (2     156,562        159,053        (2

Kaplan international

     166,071        137,389        21        314,758        271,374        16   

Kaplan ventures

     17,418        13,423        30        35,783        27,546        30   

Kaplan corporate

     1,065        1,283        (17     2,182        2,574        (15

Intersegment elimination

     (1,219     (1,860     —          (3,005     (5,489     —     
  

 

 

   

 

 

     

 

 

   

 

 

   
   $ 628,701      $ 742,921        (15   $ 1,258,728      $ 1,441,257        (13
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating Income (loss)

            

Higher education

   $ 45,295      $ 127,067        (64   $ 95,778      $ 218,671        (56

Test preparation

     (11,597     (327     —          (24,273     (12,097     —     

Kaplan international

     10,207        12,945        (21     10,754        17,472        (38

Kaplan ventures

     (4,290     (4,949     13        (7,358     (8,930     18   

Kaplan corporate

     (13,141     (15,202     14        (25,584     (28,392     10   

Kaplan stock compensation

     (483     (552     13        342        (1,087     —     

Amortization of intangible assets

     (5,547     (6,300     12        (10,472     (11,520     9   

Intersegment elimination

     18        (291     —          (213     (282     —     
  

 

 

   

 

 

     

 

 

   

 

 

   
   $ 20,462      $ 112,391        (82   $ 38,974      $ 173,835        (78
  

 

 

   

 

 

     

 

 

   

 

 

   

In the first quarter of 2011, Kaplan made several changes to its operating and reporting structure. Kaplan’s domestic professional training business moved from Test Preparation to Kaplan Higher Education (KHE), and Kaplan Continuing Education moved from Kaplan Ventures to KHE. These businesses were integrated with Kaplan University to become part of the Kaplan University School of Continuing and Professional Education. The comparative division results presented above reflect these changes. Kaplan sold Kaplan Virtual Education in July 2011 and Education Connection in April 2010. Consequently, the education division’s operating results exclude these businesses.

Kaplan Higher Education includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the domestic professional training and other continuing education businesses. In the second quarter and first six months of 2011, higher education revenue declined 29% and 24%, respectively, due to declines in average enrollments. Operating income decreased 64% and 56% for the second quarter and first six months of 2011, respectively. These declines were due to lower revenue, increased regulatory compliance costs and $5.5 million in second quarter 2011 severance costs associated with workforce reductions, offset by lower advertising costs and other expense reductions associated with lower enrollments.

KHE has implemented a number of marketing and admissions changes to increase student selectivity and help KHE comply with recent regulations. KHE also implemented the Kaplan Commitment program, which provides first-time students with a risk-free trial period. Under the Kaplan Commitment program, KHE also monitors academic progress and conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who withdraw or are subject to academic dismissal during the risk-free trial period do not incur any significant financial obligation. These changes, along with generally lower demand, have resulted in a 47% decline in new enrollments versus the prior year. Management estimates that without the Kaplan Commitment, this decline would have been approximately 36%. Management also estimates that revenue for the first half of 2011 would have been approximately $27 million higher if the Kaplan Commitment had not been implemented. KHE does not recognize tuition revenue for students during the risk-free period.

The Company expects KHE’s operating income to continue to decline for the remainder of 2011 versus prior year performance due to lower student enrollment levels. In addition, Kaplan is formulating plans that are expected to result in additional restructuring and other costs that may be material in 2011, but that should establish lower cost levels in future periods.

For those first-time students enrolled to date under the Kaplan Commitment, the attrition rate during the risk-free period has been approximately 26%, of which about 60% is due to Kaplan’s dismissal of students from the program because of the student’s lack of academic progress during the period and the remainder due to students who have elected not to continue their studies. Given that the Kaplan Commitment program has only been in place for a short period of time, management is unable to estimate with confidence to what degree the program will cause student retention patterns to differ from historical levels. However, based on limited preliminary data, it appears that most of the historical early term attrition has been accelerated into the commitment period, having the desired effect of providing these students with a risk-free trial period and ultimately improving student outcome results for the institution. Management believes the Kaplan Commitment program is unique and reflects Kaplan’s commitment to student success.

 

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Table of Contents

A summary of KHE student enrollments, excluding the Kaplan University School of Continuing and Professional Education, at June 30, 2011, and June 30, 2010, is as follows:

 

     Student Enrollments
As of June 30,
     %  
     2011      2010      Change  

Kaplan University

     53,309         75,520         (29

Kaplan Higher Education Campuses

     25,225         36,701         (31
  

 

 

    

 

 

    
     78,534         112,221         (30
  

 

 

    

 

 

    

Kaplan University enrollments included 5,837 and 8,111 campus-based students as of June 30, 2011, and June 30, 2010, respectively.

Kaplan University and Kaplan Higher Education Campuses enrollments at June 30, 2011, and June 30, 2010, by degree and certificate programs, are as follows:

 

     As of June 30,  
     2011     2010  

Certificate

     22.8     25.3

Associate’s

     31.7     33.9

Bachelor’s

     35.2     33.8

Master’s

     10.3     7.0
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Refer to KHE Regulatory Matters below for additional information.

Test preparation includes Kaplan’s standardized test preparation and tutoring offerings and other businesses. In the first quarter of 2010, the Company discontinued certain offerings of the K12 business; $3.2 million and $7.8 million in severance and other closure costs were recorded in the second quarter and first half of 2010, respectively, in connection with this plan. In the fourth quarter of 2010, Kaplan Test Preparation began implementing a plan to reorganize its business consistent with the migration of students to Kaplan’s online and hybrid test preparation offerings, reducing the number of leased test preparation centers. In the first half of 2011, implementation of the plan continued and $6.2 million and $8.5 million in additional costs were incurred in the second quarter and first six months of 2011, respectively. This plan is expected to be largely completed by the end of 2011, and the Company estimates that approximately $4.0 million in additional costs will be incurred.

Test preparation revenue declined 2% in the second quarter and first six months of 2011. Strong enrollment increases, particularly in the Pre-College and Nursing programs, were offset by reduced prices for many programs related to increased competition and a shift in demand to lower priced online test preparation offerings. Test preparation operating results were down in the first half of 2011 due to reduced prices at the traditional test preparation programs and higher spending to expand online offerings and innovate various programs.

Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. In May 2011, Kaplan Australia acquired Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia. In June 2011, Kaplan acquired Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain. Kaplan International revenue increased 21% and 16% in the second quarter and first six months of 2011, respectively. Excluding revenue from acquired businesses, Kaplan International revenue increased 14% and 12% in the second quarter and first six months of 2011, respectively, due to favorable exchange rates and enrollment growth in the pathways and English-language programs. Kaplan International operating income declined in the first half of 2011 due to enrollment declines at its UK professional training schools arising from new pending student visa restrictions. In addition, Kaplan International operating income declined due to up-front spending for admission and occupancy at its Asian and United Kingdom businesses to support expanding operations.

Kaplan Ventures is made up of several businesses in various stages of development that are managed separately from the other education businesses. Revenue at Kaplan Ventures increased 30% for first six months of 2011. Kaplan Ventures reported an operating loss of $4.3 million and $7.4 million in the second quarter and first six months of 2011, compared to an operating loss of $4.9 million and $8.9 million in the second quarter and first six months of 2010, respectively.

 

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

Cable Television Division. Cable television division revenue increased slightly in the second quarter of 2011 to $191.2 million, from $190.6 million for the second quarter of 2010; for the first six months of 2011, revenue increased to $381.5 million, from $379.9 million in the same period of 2010. The revenue increase in 2011 is due to continued growth of the division’s Internet and telephone service revenues, offset by an increase in promotional discounts.

Cable television division operating income decreased 8% to $40.4 million, from $43.8 million in the second quarter of 2010; cable division operating income for the first half of 2011 decreased 9% to $78.1 million, from $86.3 million for the first half of 2010. The division’s operating income declined primarily due to increased programming, technical and sales costs.

In May 2011, Joplin, Missouri was struck by a tornado, resulting in a reduction of subscribers at the Company’s cable system, at least on a temporary basis. The Company estimates that it will cost approximately $3.0 million to replace property, plant and equipment that was destroyed.

At June 30, 2011, Primary Service Units (PSUs) were up 6% from the prior year due to growth in high-speed data and telephony subscribers, offset by a decrease in basic subscribers. PSUs include about 6,200 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by various franchise agreements. A summary of PSUs is as follows:

 

     June 30,
2011
     June 30,
2010
 

Basic video

     637,068         654,228   

High-speed data

     444,357         406,900   

Telephony

     173,977         120,588   
  

 

 

    

 

 

 

Total

     1,255,402         1,181,716   
  

 

 

    

 

 

 

Below are details of Cable division capital expenditures for the first six months of 2011 and 2010, as defined by the NCTA Standard Reporting Categories (in millions):

 

     2011      2010  

Customer Premise Equipment

   $ 19.3       $ 9.7   

Commercial

     1.7         0.3   

Scaleable Infrastructure

     20.9         15.5   

Line Extensions

     2.8         3.0   

Upgrade/Rebuild

     3.7         2.4   

Support Capital

     10.7         9.2   
  

 

 

    

 

 

 

Total

   $ 59.1       $ 40.1   
  

 

 

    

 

 

 

Newspaper Publishing Division. Newspaper publishing division revenue totaled $162.8 million for the second quarter of 2011, down 6% from revenue of $172.7 million for the second quarter of 2010; division revenue declined 3% to $317.8 million for the first six months of 2011, from $328.5 million for the first six months of 2010. Print advertising revenue at The Washington Post in the second quarter of 2011 declined 12% to $66.6 million, from $75.2 million in the second quarter of 2010, and declined 10% to $129.8 million for the first six months of 2011, from $143.9 million for the first six months of 2010. The decline is largely due to reductions in classified, zoned and general advertising. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com and Slate, decreased 13% to $23.4 million for the second quarter of 2011, versus $26.9 million for the second quarter of 2010; newspaper online revenues declined 3% to $49.1 million for the first six months of 2011, versus $50.6 million for the first six months of 2010. Display online advertising revenue declined 16% and 4% for the second quarter and first six months of 2011, respectively. Online classified advertising revenue on washingtonpost.com decreased 2% for the second quarter of 2011, but increased 2% for the first six months of 2011.

For the first six months of 2011, Post daily and Sunday circulation declined 4.5% and 4.1%, respectively, compared to the same periods of the prior year. For the six months ended July 3, 2011, average daily circulation at The Washington Post totaled 531,400, and average Sunday circulation totaled 745,300.

The newspaper division reported an operating loss of $2.9 million in the second quarter of 2011, compared to an operating loss of $14.3 million in the second quarter of 2010. For the first six months of 2011, the newspaper division reported an operating loss of $15.7 million, compared to an operating loss of $28.1 million for the first six months of 2010. As previously disclosed, The Washington Post recorded a $17.7 million charge in the second quarter of 2010 in connection with its withdrawal from the CWA-ITU Negotiated Pension Plan. Excluding this charge and a $3.1 million loss recorded on an office lease in the first quarter of 2010, operating results declined in the first half of 2011 due to the revenue reductions discussed above, offset by a small decrease in overall costs. Newsprint expense was down 4% and 2% for the second quarter and first six months of 2011, respectively, due to a decline in newsprint consumption.

 

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Television Broadcasting Division. Revenue for the television broadcasting division increased 3% in the second quarter of 2011 to $84.9 million, from $82.6 million in 2010; operating income for the second quarter of 2011 increased 9% to $32.6 million, from $29.8 million in 2010. For the first six months of 2011, revenue increased 1% to $157.1 million, from $156.1 million in 2010; operating income for the first six months of 2011 increased 3% to $52.2 million, from $50.7 million in 2010.

The increase in revenue and operating income in the first half of 2011 is due to overall improved advertising demand across many product categories, offset by the absence of $4.7 million in incremental winter Olympics-related advertising in the first quarter of 2010, and a $2.5 million and $4.3 million decrease in political advertising revenue for the second quarter and first six months of 2011, respectively.

Other Businesses. Other businesses includes the operating results of Avenue100 Media Solutions and other small businesses. In the first half of 2011, revenues declined substantially due to volume declines as a result of changes implemented at Avenue100 Media Solutions to improve lead quality. Operating results decreased due to these revenue declines, along with increased costs at the Company’s digital businesses managed at the corporate office.

Equity in Earnings (Losses) of Affiliates. The Company’s equity in earnings of affiliates for the second quarter of 2011 was $3.1 million, compared to earnings of $2.0 million for the second quarter of 2010. For the first six months of 2011, the Company’s equity in earnings of affiliates totaled $6.9 million, compared with losses of $6.1 million for the same period of 2010. The change is due to improved results at the Company’s Bowater Mersey Paper Company and Classified Ventures affiliates.

The Company holds a 49% interest in Bowater Mersey Paper Company, a 16.5% interest in Classified Ventures, LLC and interests in several other affiliates.

Other Non-Operating Income (Expense). The Company recorded other non-operating expense, net, of $2.6 million for the second quarter of 2011, compared to other non-operating expense, net, of $3.8 million for the second quarter of 2010. The second quarter 2011 non-operating expense, net, included $3.1 million for an impairment write-down on a cost method investment, offset by $0.3 million in unrealized foreign currency gains and other items. The second quarter 2010 non-operating expense, net, included $3.8 million in unrealized foreign currency losses.

The Company recorded non-operating expense, net, of $26.6 million for the first six months of 2011, compared to other non-operating expense, net, of $7.1 million for the same period of the prior year. The 2011 non-operating expense, net, included a $30.7 million write-down of a marketable equity security (Corinthian Colleges, Inc.), offset by $3.0 million in unrealized foreign currency gains and other items. The 2010 non-operating expense, net, included $7.1 million in unrealized foreign currency losses.

A summary of non-operating (expense) income for the twenty-six weeks ended July 3, 2011 and July 4, 2010, is as follows (in millions):

 

     2011     2010  

Impairment write-down on a marketable equity security

   $ (30.7   $ —     

Foreign currency gains (losses), net

     3.0        (7.1

Gain on sale of cost method investments

     4.0        —     

Impairment write-downs on cost method investments

     (3.1     —     

Other, net

     0.2        —     
  

 

 

   

 

 

 

Total

   $ (26.6   $ (7.1
  

 

 

   

 

 

 

Net Interest Expense. The Company incurred net interest expense of $7.0 million and $13.9 million for the second quarter and first six months of 2011, respectively, compared to $7.0 million and $14.3 million for the same periods of 2010. At July 3, 2011, the Company had $405.5 million in borrowings outstanding, at an average interest rate of 7.2%.

Provision for Income Taxes. The effective tax rate for the first six months of 2011 was 36.9%, compared with 36.6% for the first six months of 2010.

Discontinued Operations. On September 30, 2010, the Company completed the sale of Newsweek. In addition, Kaplan sold Kaplan Virtual Education in July 2011 and Education Connection in April 2010. Consequently, the Company’s income from continuing operations excludes these businesses, which have been reclassified to discontinued operations, net of tax.

Earnings Per Share. The calculation of diluted earnings per share for the second quarter and first six months of 2011 was based on 7,933,459 and 8,026,424 weighted average shares outstanding, respectively, compared to 9,192,690 and 9,216,626, respectively, for the second quarter and first six months of 2010. In the first half of 2011, the Company repurchased 304,791 shares of its Class B common stock at a cost of $131.5 million. At July 3, 2011, there were 7,931,420 shares outstanding.

 

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KHE Regulatory Matters

In October 2010, the U.S. Department of Education 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, Department of Education 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 hour.” In March 2011, the Department of Education issued “Dear Colleague Letters” to provide guidance on these regulations, including incentive compensation related to admissions. The Company has taken steps to fully comply with these rules. Among the actions taken, the Company has revised its compensation plans for admissions personnel and completely eliminated enrollment results as a component in the determination of compensation. The Company believes this change in our approach to recruiting adversely impacts our enrollment rates and operating costs, particularly during the transition period.

In July 2010, the Department of Education 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 included 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. In June 2011, the Department of Education issued a final rule that can be found at http://ifap.ed.gov/GainfulEmploymentInfo/index.html. The final rule has a similar framework to the proposed rule that programs must meet to remain eligible to participate in the Title IV program; however, the final rule includes substantial changes to the metrics in the proposed rule including increasing the loan repayment period for some programs and changing the debt-to-income criteria. The final rule also made changes to the treatment of certain types of consolidated loans.

If a program fails all three of the gainful employment metrics in a given year, the Department requires the institution to disclose the amount by which the program under-performed the metrics and the institution’s plan for program improvement. Also, the institution must establish a three-day waiting period before students can enroll. Should a program fail to achieve the metrics twice within three years, the institution must disclose to students that they may find their debts unaffordable; that the program is at risk of losing eligibility to receive federal financial aid; and that transfer options exist. Should a program fail three times within a four year period, the U.S. Department of Education would terminate the program’s eligibility for federal student aid, and the institution would not be able to reestablish the program’s eligibility for at least three years, though the program could continue to operate without student aid. The final rule is scheduled to go into effect on July 1, 2012, however, the first final debt measures will not be released until 2013 and a program cannot lose eligibility until 2015.

Based on currently available information, the Company does not expect that the final regulation will adversely impact most of Kaplan’s current program offerings. However, some of the data needed to compute program eligibility under this regulation, including graduate incomes, are not readily accessible to the institutions, but are compiled by the Department of Education. In addition, the continuing eligibility of our educational programs for Title IV funding may be affected by factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating the discretionary income test, changes in the percentage of our former students who are current in repayment of their student loans, and other factors.

Under regulations referred to as the 90/10 rule, a Kaplan Higher Education OPEID unit would lose its eligibility to participate in the Title IV programs for a period of at least two fiscal years if it derives more than 90% of its receipts from the Title IV programs for two consecutive fiscal years, commencing with the unit’s first fiscal year that ends after August 14, 2008. Any OPEID reporting unit with receipts from the Title IV programs exceeding 90% for a single fiscal year ending after August 14, 2008, would be placed on provisional certification and may be subject to other enforcement measures. In 2011, if current trends continue, management estimates that one OPEID unit of Kaplan Higher Education Campuses (KHEC), representing less than 1% of KHE revenue, may have a 90/10 ratio over 90.0%. However, for 2012, absent changes and if current trends continue, management estimates that 18 OPEID units of KHEC, representing approximately 19% of KHE revenue, may have a 90/10 ratio over 90.0%. Kaplan Higher Education is taking and considering various measures to reduce the percentage of its receipts attributable to Title IV funds, including emphasizing direct-pay and employer-paid education programs; encouraging students to carefully evaluate the amount of Title IV borrowing; and other measures. Although Kaplan is taking steps to address compliance with the 90/10 rule, there can be no guarantee that these measures will be adequate to prevent the 90/10 rule calculations from exceeding 90% in the future, which could ultimately materially affect KHE operating results in the future.

Financial Condition: Capital Resources and Liquidity

Acquisitions and Dispositions. In the first six months of 2011, the Company acquired four businesses totaling $127.2 million, including assumed debt of $5.5 million and other assumed liabilities. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition; most of the purchase price for these acquisitions has been allocated to goodwill, other intangible assets, and property, plant and equipment on a preliminary basis.

In the second quarter of 2011, Kaplan acquired three businesses in its Kaplan International division. These acquisitions included Kaplan’s May 2011 acquisitions of Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia. In June 2011, Kaplan acquired Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain.

 

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In July 2011, Kaplan sold Kaplan Virtual Education, which was part of Kaplan Ventures.

In the second quarter of 2010, the Company made two small acquisitions in its Other Businesses and Cable divisions. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. In April 2010, Kaplan sold Education Connection, which was part of Kaplan Ventures.

Capital expenditures. During the first six months of 2011, the Company’s capital expenditures totaled $92.8 million. The Company estimates that its capital expenditures will be in the range of $210 million to $235 million in 2011.

Liquidity. The Company’s borrowings have increased by $5.9 million, to $405.5 million at July 3, 2011, as compared to borrowings of $399.7 million at January 2, 2011. At July 3, 2011 the Company had $299.4 million in cash and cash equivalents, compared to $437.7 million at January 2, 2011. The Company had money market investments of $100.3 million and $308.9 million that are classified as cash, cash equivalents and restricted cash in the Company’s consolidated Balance Sheet as of July 3, 2011 and January 2, 2011, respectively.

The Company’s total debt outstanding of $405.5 million at July 3, 2011 included $396.9 million of 7.25% unsecured notes due February 1, 2019 and $8.7 million in other debt.

On June 17, 2011, The Washington Post Company (the “Company”) terminated its U.S. $500,000,000 five year revolving credit agreement, dated as of August 8, 2006, among the Company, the lenders party thereto and Citibank, N.A. (the “2006 Credit Agreement”), in connection with the entrance into a new revolving credit facility. No borrowings were outstanding under the 2006 Credit Agreement at the time of termination. On June 17, 2011, the Company entered into a credit agreement (the “Credit Agreement”) providing for a new U.S. $450 million, AUS $50 million four year revolving credit facility (the “Facility”), with each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (“JP Morgan”), and J.P. Morgan Australia Limited, as Australian Sub-Agent. The Facility consists of two tranches: (a) U.S. $450 million and (b) AUS $50 million (subject, at the Company’s option, to conversion of the unused Australian dollar commitments into U.S. dollar commitments at a specified exchange rate). The Credit Agreement provides for an option to increase the total U.S. dollar commitments up to an aggregate amount of U.S. $700 million. The Facility replaced the Company’s 2006 Credit Agreement. The Company is required to pay a facility fee on a quarterly basis, based on the Company’s long-term debt ratings, of between 0.08% and 0.20% of the amount of the Facility. Any borrowings are made on an unsecured basis and bear interest at (a) for U.S. dollar borrowings, at the Company’s option, either (i) a fluctuating interest rate equal to the highest of JPMorgan’s prime rate, 0.50 percent above the Federal funds rate or the one-month eurodollar rate plus 1%, or (ii) the eurodollar rate for the applicable interest period, or (b) for Australian dollar borrowings, the bank bill rate, in each case plus an applicable margin that depends on the Company’s long-term debt ratings. The Facility supports the issuance of the Company’s commercial paper, but the Company may also draw on the facility for other general corporate purposes. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term. Any outstanding borrowings must be repaid on or prior to the final termination date. The Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and, among other things, requires the Company to maintain at least $1.5 billion of consolidated shareholders’ equity. The Company did not borrow funds under its commercial paper program or its revolving credit facility in the half of 2011.

In August 2010, Standard & Poor’s revised the Company’s long-term outlook to negative from stable. On May 19, 2011, Standard and Poor’s placed the Company long-term corporate credit and senior unsecured ratings and short-term commercial paper rating on CreditWatch with negative implications. On August 1, 2011, Standard and Poor’s lowered the Company’s long-term rating to “A-” from “A”, lowered the commercial paper rating to “A-2” from “A-1” and kept the ratings outlook at negative. 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-2   

During the second quarter of 2011 and 2010, the Company had average borrowings outstanding of approximately $401.2 million and $399.4 million, respectively, at average annual interest rates of approximately 7.2%. During the second quarter of 2011 and 2010, the Company incurred net interest expense of $7.0 million.

During the first six months of 2011 and 2010, the Company had average borrowings outstanding of approximately $400.6 million and $399.4 million, respectively, at average annual interest rates of approximately 7.2%. During the first six months of 2011 and 2010, the Company incurred net interest expense of $13.9 million and $14.3 million, respectively.

 

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At July 3, 2011 and January 2, 2011, the Company had working capital of $160.7 million and $353.6 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds and to a lesser extent commercial paper. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2011.

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 2, 2011.

Forward-Looking Statements

This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011.

 

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 2010 Annual Report filed on Form 10-K have not otherwise changed significantly.

 

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Senior Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of July 3, 2011. 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 July 3, 2011 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the quarter ended July 3, 2011, 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*
 

Apr. 4 - May 8, 2011

     23,037       $ 439.51         23,037         127,204   

May 9 - Jun. 5, 2011

     —           —           —           127,204   

Jun. 6 - Jul. 3, 2011

     —           —           —           127,204   
  

 

 

    

 

 

    

 

 

    

Total

     23,037       $ 439.51         23,037      

 

* On 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 July 3, 2011 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

   Four Year Credit Agreement, dated as of June 17, 2011, among the Company, JPMorgan Chase Bank, N.A., J.P. Morgan Australia Limited, Wells Fargo Bank, N.A., The Royal Bank of Scotland PLC, HSBC Bank USA, National Association, The Bank of New York Mellon, PNC Bank, National Association, Bank of America, N.A., Citibank, N.A. and The Northern Trust Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17, 2011).

  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

   The following financial statements from The Washington Post Company Quarterly Report on Form 10-Q for the quarter ended July 3, 2011, filed with the Securities and Exchange Commission on August 10, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

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

 

    THE WASHINGTON POST COMPANY
                        (Registrant)
Date: August 10, 2011    

/s/    Donald E. Graham        

   

Donald E. Graham,

Chairman & Chief Executive Officer

(Principal Executive Officer)

Date: August 10, 2011    

/s/    Hal S. Jones        

   

Hal S. Jones,

Senior Vice President-Finance

(Principal Financial Officer)

 

34