UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
For the Quarterly Period Ended July 4, 2010
or
Commission File Number 1-6714
THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(202) 334-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 6, 2010:
Class A Common Stock
Class B Common Stock
Index to Form 10-Q
Financial Statements
a. Condensed Consolidated Statements of Operations (Unaudited) for the Thirteen and Twenty-Six Weeks Ended July 4, 2010 and June 28, 2009
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Twenty-Six Weeks Ended July 4, 2010 and June 28, 2009
c. Condensed Consolidated Balance Sheets at July 4, 2010 (Unaudited) and January 3, 2010
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Twenty-Six Weeks Ended July 4, 2010 and June 28, 2009
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
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PART I. FINANCIAL INFORMATION
The Washington Post Company
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Operating revenues
Education
Advertising
Circulation and subscriber
Other
Operating costs and expenses
Operating
Selling, general and administrative
Depreciation of property, plant and equipment
Amortization of intangible assets
Operating income
Other income (expense)
Equity in earnings (losses) of affiliates
Interest income
Interest expense
Other, net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Net loss attributable to noncontrolling interests
Net income (loss) attributable to The Washington Post Company
Redeemable preferred stock dividends
Net income (loss) available for The Washington Post Company common stockholders
Amounts attributable to The Washington Post Company common stockholders:
Discontinued operations, net of tax
Per share information attributable to The Washington Post Company common stockholders:
Basic income per common share from continuing operations
Basic loss per common share from discontinued operations
Basic net income (loss) per common share
Basic average number of common shares outstanding
Diluted income per common share from continuing operations
Diluted loss per common share from discontinued operations
Diluted net income (loss) per common share
Diluted average number of common shares outstanding
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Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive (loss) income
Foreign currency translation adjustment
Change in unrealized (loss) gain on available-for-sale securities
Pension and other postretirement plan adjustments
Income tax benefit (expense) related to other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Total comprehensive income attributable to The Washington Post Company
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Condensed Consolidated Balance Sheets
Assets
Current assets
Cash and cash equivalents
Investments in marketable equity securities and other investments
Accounts receivable, net
Deferred income taxes
Inventories
Other current assets
Current assets of discontinued operations
Total current assets
Property, plant and equipment, net
Investments in affiliates
Goodwill, net
Indefinite-lived intangible assets, net
Amortized intangible assets, net
Prepaid pension cost
Deferred charges and other assets
Noncurrent assets of discontinued operations
Total assets
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Deferred revenue
Dividends declared
Short-term borrowings
Current liabilities of discontinued operations
Total current liabilities
Postretirement benefits other than pensions
Accrued compensation and related benefits
Other liabilities
Long-term debt
Noncurrent liabilities of discontinued operations
Total liabilities
Redeemable noncontrolling interest
Redeemable preferred stock
Preferred stock
Common shareholders’ equity
Common stock
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Cumulative foreign currency translation adjustment
Unrealized gain on available-for-sale securities
Unrealized loss on pensions and other postretirement plans
Cost of Class B common stock held in treasury
Total The Washington Post Company common shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
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Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net pension benefit
Multiemployer pension plan withdrawal charge
Early retirement program expense
Foreign exchange loss (gain)
Equity in losses of affiliates, net of distributions
Benefit for deferred income taxes
Long-lived asset impairment charges
Net loss on sale or write-down of property, plant and equipment
Change in assets and liabilities:
Decrease in accounts receivable, net
Decrease in inventories
Decrease in accounts payable and accrued liabilities
Increase in Kaplan stock compensation
(Decrease) increase in deferred revenue
Increase (decrease) in income taxes payable
Increase (decrease) in other assets and other liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Net proceeds from sale of business
Proceeds from sale of property, plant and equipment
Investments in certain businesses, net of cash acquired
Return of investment in affiliates
Return of escrow funds from acquisition
Net cash used in investing activities
Cash flows from financing activities:
Common shares repurchased
Dividends paid
Principal payments on debt
Issuance of notes, net
Repayments of commercial paper, net
Net cash used in financing activities
Effect of currency exchange rate change
Net increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
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Notes to Condensed Consolidated Financial Statements
Note 1: Organization, Basis of Presentation and Recent Accounting Pronouncements
The Washington Post Company, Inc. (the “Company”) is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations consist of the ownership and operation of cable television systems, newspaper publishing (principally The Washington Post), and television broadcasting (through the ownership and operation of six television broadcast stations).
The Company announced on August 2, 2010 that it had entered into an agreement to sell Newsweek. The operating results of Newsweek have been presented in loss from discontinued operations, net of tax, for all periods presented.
Financial Periods – The Company generally reports on a thirteen week fiscal quarter ending on the Sunday nearest the calendar quarter-end. The fiscal quarters for 2010 and 2009 ended on July 4, 2010, April 4, 2010, June 28, 2009 and March 29, 2009, respectively. With the exception of the newspaper publishing operations and the corporate office, subsidiaries of the Company report on a calendar-quarter basis.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (“SEC”). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation, which includes the reclassification of the results of operations of the magazine publishing segment as discontinued operations for all periods presented.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Discontinued Operations – A business is classified as a discontinued operation when (i) the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from the Company's ongoing operations; (ii) the business has either been disposed of or is classified as held for sale; and (iii) the Company will not have any significant continuing involvement in the operations of the business after the disposal transactions. The results of discontinued operations (as well as the gain or loss on the disposal) are aggregated and separately presented in the Company’s condensed consolidated statement of operations, net of income taxes. The assets and related liabilities are aggregated and separately presented in the Company’s condensed consolidated balance sheet.
Assets Held for Sale – An asset or business is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or business is available for immediate sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets and related liabilities are aggregated and reported separately in the Company’s condensed consolidated balance sheet.
Recently Adopted and Issued Accounting Pronouncements – In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance that modifies the fair value requirement of multiple element revenue arrangements. The new guidance allows the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and third-party evidence (“TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. The guidance requires expanded qualitative and quantitative disclosures and is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is not planning to early adopt the guidance and will continue evaluating the impact of this new guidance on its condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements—(Continued)
In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The guidance requires previous fair value hierarchy disclosures to be further disaggregated by class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. In addition, significant transfers between Levels 1 and 2 of the fair value hierarchy are required to be disclosed. These additional requirements became effective for interim and annual periods beginning after December 15, 2009 and did not have an impact on the condensed consolidated financial statements of the Company. In addition, the fair value disclosure amendments also require more detailed disclosures of the changes in Level 3 instruments. These changes will not become effective until interim and annual periods beginning after December 15, 2010 and are not expected to have an impact on the condensed consolidated financial statements of the Company.
Note 2: Discontinued Operations
The Company announced on August 2, 2010 that it had entered into an agreement to sell Newsweek. Under the terms of the asset purchase agreement, the buyer will receive target working capital and selected equipment used in the business, and agrees to fulfill Newsweek’s subscription obligations. The Company retains the pension assets and liabilities and certain employee obligations, including severance, and other liabilities arising prior to the sale. The closing of the transaction is contingent on satisfying certain conditions and is expected to close in the third quarter. 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 Newsweek have been classified on the Company’s condensed consolidated balance sheet as assets and liabilities of discontinued operations as of June 30, 2010. The Company did not reclassify its consolidated balance sheet as of December 31, 2009 to reflect the discontinued operations. The Company also did not reclassify its cash flow statements to reflect the discontinued operations. The results of operations of the magazine publishing division for the second quarter and first half of 2010 and 2009 are included in the Company’s condensed consolidated statement of income as “Loss from discontinued operations, net of tax”. All corresponding prior period operating results presented in the Company’s condensed consolidated financial statements and the accompanying notes have been reclassified to reflect the discontinued operations presented.
Newsweek employees are participants in The Washington Post Company Retirement Plan and Newsweek has historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities will be retained by the Company, the associated credit has been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations (see Note 12).
Assets and liabilities of Newsweek included in discontinued operations include the following: net accounts receivable of $21.9 million and other current assets of $5.8 million; goodwill of $24.5 million and other non-current assets of $2.7 million; current accounts payable and accrued expenses of $14.1 million; current and non-current deferred revenue of $50.8 million.
In the second quarter of 2010, Newsweek recorded $3.9 million in accelerated depreciation and property, plant and equipment write-downs; additional accelerated depreciation and write-downs are expected to be recorded in the third quarter, prior to the sale closing.
The summarized operating results of the Company’s discontinued operations for the second quarter and first six months of 2010 and 2009 are presented below (in thousands):
Loss from discontinued operations
Benefit from income taxes
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The following table summarizes the quarterly operating results of the Company for 2009 and the first quarter of 2010, following the reclassification of the magazine publishing division as discontinued operations:
(in thousands)
Impairment of goodwill and other long-lived assets
Equity in losses of affiliates
Income (loss) from continuing operations before income taxes
Provision (benefit) for income taxes
Income (loss) from continuing operations
Net loss (income) attributable to noncontrolling interests
Basic income (loss) per common share from continuing operations
Diluted income (loss) per common share from continuing operations
9
The following table summarizes the operating results of the Company for fiscal year 2009 and 2008, following the reclassification of the magazine publishing division as discontinued operations:
Net income
Net income attributable to The Washington Post Company
Net income available for The Washington Post Company common stockholders
Basic net income per common share
Diluted net income per common share
Note 3: Investments
Investments in marketable equity securities at July 4, 2010 and January 3, 2010 consist of the following (in thousands):
Total cost
Net unrealized gains
Total fair value
There were no new investments or sales of marketable equity securities in the first six months of 2010. In the first quarter of 2009, the Company invested $10.8 million in the Class B common stock of Berkshire Hathaway Inc.
Note 4: Acquisitions and Dispositions
In the second quarter of 2010, the Company made two small acquisitions in its Other Businesses and Corporate and Cable divisions. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. The Company made one small acquisition in the second quarter of 2009 and did not make any acquisitions during the first quarter of 2009.
In the second quarter of 2010, Kaplan completed the sale of Education Connection, which was part of the Kaplan Ventures division.
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Note 5: Goodwill and Other Intangible Assets
The education division made several minor changes to its operating and reporting structure in the first quarter of 2010, changing the composition of the reporting units within Kaplan Test Preparation, Kaplan Ventures and Kaplan Higher Education (see Note 12). The changes resulted in the reassignment of the assets and liabilities to the reporting units affected. The goodwill was allocated to the reporting units affected using the relative fair value approach.
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 4, 2010 and June 28, 2009 was $7.6 million and $7.2 million, respectively. Amortization of intangible assets for the twenty-six weeks ended July 4, 2010 and June 28, 2009 was $14.1 million and $13.8 million, respectively. Amortization of intangible assets is estimated to be approximately $15 million for the remainder of 2010, $23 million in 2011, $11 million in 2012, $5 million in each of 2013 and 2014 and $13 million thereafter.
The changes in the carrying amount of goodwill related to continuing operations, by segment, for the twenty-six weeks ended July 4, 2010 are as follows:
Balance as of January 3, 2010:
Goodwill
Accumulated impairment losses
Acquisitions
Dispositions
Reclassification to discontinued operations
Foreign currency exchange rate changes and other
Balance as of July 4, 2010
Reallocation, net (Note 12)
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Other intangible assets consist of the following:
Useful Life
Range
Amortized intangible assets:
Non-compete agreements
Student and customer relationships
Databases and technology
Trade names and trademarks
Indefinite-lived intangible assets:
Franchise agreements
Wireless licenses
Licensure and accreditation
Note 6: Borrowings
The Company’s borrowings consist of the following (in millions):
7.25% unsecured notes due February 1, 2019
Other indebtedness
Total
Less: current portion
Total long-term debt
The Company’s other indebtedness at July 4, 2010 and January 3, 2010 is at an interest rate of 6% and matures during 2010.
During the second quarter of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.4 million and $399.1 million, respectively, at average annual interest rates of approximately 7.2%. During the second quarter of 2010 and 2009, the Company incurred net interest expense of $7.0 million and $7.2 million, respectively.
During the first six months of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.4 million and $450.2 million, respectively, at average annual interest rates of approximately 7.2% and 6.7%, respectively. During each of the first six months of 2010 and 2009, the Company incurred net interest expense of $14.3 million.
At July 4, 2010, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $479.5 million, compared with the carrying amount of $396.4 million. At January 3, 2010, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $443.1 million, compared with the carrying amount of $396.2 million. The carrying value of the Company’s other unsecured debt at July 4, 2010 approximates fair value.
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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 2010 and 2009 are presented below (in thousands, except per share amounts):
Income from continuing operations attributable to The Washington Post Company common stockholders
Less: Amount attributable to participating securities
Basic income from continuing operations attributable to The Washington Post Company common stockholders
Plus: Amount attributable to participating securities
Diluted income from continuing operations attributable to The Washington Post Company common stockholders
Basic weighted-average shares outstanding
Effect of dilutive shares:
Stock options and restricted stock
Diluted weighted-average shares outstanding
Income per share from continuing operations attributable to The Washington Post Company common stockholders:
Basic
Diluted
The Company treats unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities and includes these securities in the computation of earnings per share under the two-class method.
For the first six months of 2010, there were 9,150,315 weighted average basic and 9,216,626 weighted average diluted shares outstanding. For the second quarter of 2010, there were 9,125,783 weighted average basic and 9,192,690 weighted average diluted shares outstanding. For the first six months of 2009, there were 9,339,445 weighted average basic and 9,400,050 weighted average diluted shares outstanding. For the second quarter of 2009, there were 9,339,815 weighted average basic and 9,400,420 weighted average diluted shares outstanding.
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. The diluted earnings per share amounts for the second quarter of 2009 and the first six months of 2009 exclude the effects of 86,719 and 71,719 stock options outstanding, respectively, as their inclusion would have been antidilutive.
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Note 8: Pension and Postretirement Plans
Defined Benefit Plans. The total (income) cost arising from the Company’s defined benefit pension plans for the second quarter and six months ended July 4, 2010 and June 28, 2009, included in income from continuing operations, consists of the following components (in thousands):
Service cost
Interest cost
Expected return on assets
Amortization of transition asset
Amortization of prior service cost
Recognized actuarial gain
Net periodic benefit
Early retirement programs expense
Total (income) cost
Newsweek offered a Voluntary Retirement Incentive Program to certain employees in November 2008 that was completed in the first quarter of 2009; early retirement program expense of $6.6 million was recorded in the first quarter of 2009, and is included in income from discontinued operations.
The Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper in the first quarter of 2009; early retirement program expense of $56.8 million was recorded in the second quarter of 2009, funded mostly from the assets of the Company’s pension plans.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) for the second quarter and six months ended July 4, 2010 and June 28, 2009, including a portion included in income from discontinued operations, consists of the following components (in thousands):
Recognized actuarial loss
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, 2010 and December 31, 2009, the assets of the Company’s pension plans were allocated as follows:
U.S. equities
U.S. fixed income
International equities
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of June 30, 2010, up to 13% of the assets could be invested in international stocks, and no less than 9% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
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In determining the 6.5% expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of June 30, 2010. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. Included in the assets are $161.0 million and $274.3 million of Berkshire Hathaway Class A and Class B common stock at June 30, 2010 and December 31, 2009, respectively. Approximately 52% of the Berkshire Hathaway common stock held at December 31, 2009 was sold during the first six months of 2010.
Other Postretirement Plans. The total cost (income) arising from the Company’s postretirement plans for the second quarter and six months ended July 4, 2010 and June 28, 2009, including a portion included in income from discontinued operations, consists of the following components (in thousands):
Amortization of prior service credit
Net periodic cost (benefit)
Curtailment gain
Total cost (benefit)
The Company recorded a curtailment gain of $0.7 million in the first quarter of 2009, due to the elimination of life insurance benefits for new retirees on or after January 1, 2009.
Multiemployer Pension Plans. The Washington Post newspaper contributes to multiemployer pension plans on behalf of three union-represented employee groups: the CWA-ITU Negotiated Pension Plan on behalf of Post mailers, helpers and utility mailers; the IAM National Pension Fund on behalf of Post machinists; and the Central Pension Fund of the International Union of Operating Engineers on behalf of Post engineers, carpenters and painters. Contributions are made in accordance with the relevant collective bargaining agreements and are generally based on straight-time hours.
The Post has negotiated in collective bargaining the contractual right to withdraw from two of these plans; the right to withdraw from the CWA-ITU Negotiated Pension Plan (the Plan) has been the subject of contract negotiations that have reached an impasse. In July 2010, the Post notified the union and the Plan of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post recorded a $17.7 million charge in the second quarter of 2010 based on an estimate of the withdrawal liability. The Plan is obligated to notify the Post of the actual withdrawal liability in a timely manner at which time an adjustment to the estimated charge will be made to reflect the difference between the estimated and actual withdrawal liability. Payment of the actual withdrawal liability will relieve the Post of further liability to the Plan absent certain circumstances prescribed by law.
Note 9: Other Non-Operating (Expense) Income
A summary of non-operating (expense) income for the thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009, is as follows (in millions):
Foreign currency (losses) gains, net
Impairment write-downs on cost method investments
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Note 10: Contingencies
Department of Education Rulemaking. In June 2010, the Department of Education released for public comment a notice of proposed rulemaking that addresses program integrity issues for postsecondary education institutions that participate in Title IV programs. The proposed regulations included, among other items, revised standards governing the payment of incentive compensation to admissions and financial aid advisors, standards around misrepresentation and the definition of “credit hour.” The Company cannot predict the substance of any final rules that may be adopted by the Department of Education with respect to program integrity issues.
In July 2010, the Department of Education released another notice of proposed rulemaking addressing substantive measurements for whether an educational program leads to gainful employment in a recognized occupation for purposes of that program’s eligibility for Title IV funds. The proposed rulemaking addressing the definition of gainful employment includes provisions whereby students at a program level must demonstrate certain levels of student loan repayment and/or a program’s graduates must achieve certain debt to income ratios for the institution’s program to remain eligible for participation in the Title IV program. Under the proposed regulation, if a program fails to meet some or all of these proposed requirements, the program’s eligibility to participate in the Title IV program may be restricted or lost entirely. The data needed to compute program eligibility under this proposed regulation is not readily accessible to the institutions, but is compiled by the Department of Education. Accordingly, the Company cannot currently predict with reasonable accuracy the impact the proposed regulation will have on its program offerings if it were enacted in its current form.
With respect to both notices of proposed rulemaking, the Department of Education would need to issue final rules by November 1, 2010, for them to be effective July 31, 2011. The changes ultimately made to the Title IV regulations could adversely affect, among other things, Kaplan’s ability to retain admissions and financial aid advisors and the ability of Kaplan Higher Education division’s programs and students to qualify for Title IV financial assistance, and could otherwise have a material adverse effect on Kaplan’s operating results.
Department of Education Program Reviews. From 2007 through 2010, the Department of Education undertook program reviews at four of Kaplan Higher Education’s campus locations and at Kaplan University. The Department of Education has issued a final report with respect to one of the campus locations with no action taken. No final reports with respect to the other reviews have been issued. Therefore, the results of these reviews and their impact on Kaplan’s operations is uncertain.
Other. In January 2010, the UK government announced changes to the UK Immigration Points Based Visa System that went into effect in March. These rules have the potential to adversely impact the number of overseas students entering the UK and therefore, the number of students studying at Kaplan.
Note 11: Fair Value Measurements
Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
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The Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 4, 2010 were as follows:
Assets:
Money market investments(1)
Marketable equity securities(2)
Other current investments(3)
Total financial assets
Liabilities:
Deferred compensation plan liabilities(4)
7.25% unsecured notes
Total financial liabilities
The Company’s money market investments are included in cash and cash equivalents.
The Company’s investments in marketable equity securities are classified as available-for-sale.
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
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.
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2010 were as follows:
Money market investments (1)
Deferred compensation plan liabilities (4)
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.
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Note 12: Business Segments
Through its subsidiary Kaplan, Inc., the Company provides educational services for individuals, schools and businesses. The Company also operates principally in three areas of the media business: cable television, newspaper publishing and television broadcasting.
In the first quarter of 2010, Kaplan made several minor changes to its operating and reporting structure: Kaplan Compliance Solutions was moved from Kaplan Ventures to Test Preparation; Kaplan Continuing Education was moved from Test Preparation to Kaplan Ventures; and Colloquy (a business that provides online services to nonprofit higher education institutions) was moved from Kaplan Higher Education to Kaplan Ventures. The business segments disclosed are based on this organizational structure. Segment operating results of the education division for fiscal years ended 2009 and 2008 have been restated to reflect these changes.
In the third quarter of 2009, Kaplan Higher Education (KHE) modified its method of recognizing revenue ratably over the period of instruction as services are delivered to students from a weekly convention to a daily convention, on a prospective basis. If KHE’s revenue recognition convention had been on a daily convention in prior periods, revenues and operating income in the first quarter of 2009 would have increased by $7.0 million and $6.5 million, respectively. The Company has concluded that the impact of this change was not material to the Company’s financial position or results of operations for 2009 and the related interim periods, based on its consideration of quantitative and qualitative factors.
At the end of March 2009, the Company approved a plan to offer tutoring services, previously provided at Score, in Kaplan test preparation centers. The plan was substantially completed by the end of the second quarter of 2009. The Company recorded $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009. Of this amount, $13.4 million was recorded in the second quarter of 2009.
Restructuring-related expenses of $1.8 million and $7.2 million were recorded in the second quarter and first half of 2009, respectively, at Kaplan’s professional domestic training businesses (part of Test Preparation division).
Cable television operations consist of cable systems offering video, Internet, phone and other services to subscribers in midwestern, western and southern states. The principal source of revenue is monthly subscription fees charged for services.
Newspaper publishing includes the publication of newspapers in the Washington, DC, area and Everett, WA; newsprint warehousing and recycling facilities; and the Company’s electronic media publishing business (primarily washingtonpost.com). Revenues from newspaper publishing operations are derived from advertising and, to a lesser extent, from circulation.
Television broadcasting operations are conducted through six VHF television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville), with revenues derived primarily from sales of advertising time.
Other Businesses and Corporate Office includes the expenses associated with the Company’s corporate office and the operating results of Avenue100 Media Solutions.
In connection with the planned sale of Newsweek, the magazine publishing division is no longer included as a separate segment as its results have been reclassified to discontinued operations. Newsweek employees are participants in The Washington Post Company Retirement Plan, and Newsweek has historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities will be retained by the Company, the associated credit has been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.
The net pension credit is included with operating results for other businesses and corporate, as follows:
Quarter 1
Quarter 2
Quarter 3
Quarter 4
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.
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The following table summarizes quarterly financial information related to each of the Company’s business segments for 2010:
2010 Quarterly Operating Results
Cable television
Newspaper publishing
Television broadcasting
Other businesses and corporate office
Intersegment elimination
Income (loss) from operations
Equity in (losses) earnings of affiliates
Interest expense, net
Net pension credit (expense)
Newspaper publishing1
Includes a $17.7 million charge in the second quarter of 2010 related to the withdrawal from a multiemployer pension plan.
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The following table summarizes quarterly financial information related to each of the Company’s business segments for 2009:
2009 Quarterly Operating Results
(Loss) income from continuing operations before income taxes
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The following table summarizes financial information related to each of the Company’s business segments for the six months ended 2010 and 2009, as well as for the fiscal years 2009 and 2008:
Net pension (expense) credit
Asset information for the Company’s business segments are as follows:
Identifiable assets
Investments in marketable equity securities
Assets of discontinued operations
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The Company’s education division comprises the following operating segments:
Higher education
Test preparation1
Kaplan international
Kaplan ventures2
Kaplan corporate and other
Test preparation
Kaplan ventures
Kaplan stock-based incentive compensation expense
Identifiable assets for the Company’s education division consist of the following:
Revenues
Operating losses
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This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
Net income available for common shares was $91.9 million ($10.00 per share) for the second quarter ended July 4, 2010, compared to net income available for common shares of $12.2 million ($1.30 per share) for the second quarter of last year. Net income includes $2.3 million ($0.25 per share) and $9.0 million ($0.95 per share) in losses from discontinued operations for the second quarter of 2010 and 2009, respectively. Income from continuing operations available for common shares was $94.2 million ($10.25 per share) for the second quarter of 2010, compared to $21.2 million ($2.25 per share) for the second quarter of 2009.
The Department of Education recently issued notices of proposed rulemaking. If enacted, the proposed rules may have a material effect on the future operations and results of Kaplan as further described in the division results below.
On August 2, 2010, the Company announced that it had entered into an agreement to sell Newsweek. The Company expects a closing date in the third quarter of 2010. Consequently, the Company’s income from continuing operations for the second quarter and year-to-date periods excludes Newsweek results, which have been reclassified to discontinued operations.
Items included in the Company’s income from continuing operations for the second quarter of 2010:
a $17.7 million charge recorded at The Washington Post in connection with the planned 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 arising from the strengthening of the U.S. dollar (after-tax impact of $2.3 million, or $0.25 per share).
Items included in the Company’s income from continuing operations for the second quarter of 2009:
$56.8 million in early retirement program expense at The Washington Post (after-tax impact of $35.2 million, or $3.77 per share);
$15.2 million in restructuring charges related to Kaplan’s Score and Test Preparation operations (after-tax impact of $9.4 million, or $1.01 per share);
$14.3 million in accelerated depreciation at The Washington Post (after-tax impact of $8.8 million, or $0.95 per share); and
$19.8 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $12.3 million, or $1.31 per share).
Revenue for the second quarter of 2010 was $1,201.8 million, up 11% from $1,083.2 million in the second quarter of 2009. Operating income increased in the second quarter of 2010 to $163.5 million, from $19.5 million in the second quarter of 2009. Revenue and operating results improved at all of the Company’s divisions for the quarter.
For the first six months of 2010, the Company reported net income available for common shares of $137.3 million ($14.90 per share), compared to a net loss available for common shares of $6.9 million ($0.74 per share) for the same period of 2009. Net income includes $8.5 million ($0.92 per share) and $26.5 million ($2.83 per share) in losses from discontinued operations for the first six months of 2010 and 2009, respectively. Income from continuing operations available for common shares was $145.8 million ($15.82 per share) for the first six months of 2010, compared to $19.6 million ($2.09 per share) for the first six months of 2009.
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Items included in the Company’s income from continuing operations for the first six months of 2010:
$7.1 million in non-operating unrealized foreign currency losses arising from the strengthening of the U.S. dollar (after-tax impact of $4.4 million, or $0.48 per share).
Items included in the Company’s income from continuing operations for the first six months of 2009:
$32.1 million in restructuring charges related to Kaplan’s Score and Test Preparation operations (after-tax impact of $19.9 million, or $2.13 per share);
$27.7 million in accelerated depreciation at The Washington Post (after-tax impact of $17.2 million, or $1.84 per share); and
$18.4 million in non-operating unrealized foreign currency gains arising from the weakening of the U.S. dollar (after-tax impact of $11.4 million, or $1.22 per share).
Revenue for the first half of 2010 was $2,343.8 million, up 12% from $2,091.5 million in the first half of 2009, due to increased revenues at the Company’s education, television broadcasting and cable television divisions, offset by a slight revenue decline at the Company’s newspaper division. The Company reported operating income of $266.6 million for the first half of 2010, compared to $28.4 million for the first half of 2009. Operating results improved at all of the Company’s divisions for the first half of 2010.
Education Division. Education division revenue totaled $747.3 million for the second quarter of 2010, a 15% increase over revenue of $649.3 million for the same period of 2009. Kaplan reported operating income of $109.0 million for the second quarter of 2010, up 88% from $58.1 million in the second quarter of 2009.
For the first six months of 2010, education division revenue totaled $1,458.7 million, a 17% increase over revenue of $1,242.9 million for the same period of 2009. Kaplan reported operating income of $166.9 million for the first six months of 2010, up from $69.3 million for the first six months of 2009.
A summary of Kaplan’s operating results for the second quarter and the first six months of 2010 compared to 2009 is as follows:
Revenue
Test preparation, excluding Score
Score
Kaplan corporate
Operating Income
Kaplan stock compensation
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In the first quarter of 2010, Kaplan made several minor changes to its operating and reporting structure: Kaplan Compliance Solutions was moved from Kaplan Ventures to Test Preparation; Kaplan Continuing Education was moved from Test Preparation to Kaplan Ventures; and Colloquy (a business that provides online services to nonprofit higher education institutions) was moved from Kaplan Higher Education to Kaplan Ventures. The division results presented above reflect these changes.
Kaplan Higher Education (KHE) includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. Higher education revenue and operating income grew significantly in the first half of 2010 due to enrollment growth, improved student retention, and increased margins. Total KHE enrollments increased 18% in the first half of 2010, compared to 31% in the first half of 2009. A summary of KHE student enrollment at June 30, 2010, and June 30, 2009, is as follows:
Kaplan University
Kaplan Higher Education Campuses
Kaplan University and Kaplan Higher Education Campuses enrollment at June 30, 2010, and June 30, 2009, by degree and certificate programs is as follows:
Certificate
Associate’s
Bachelor’s
Master’s
In June 2010, the Department of Education released for public comment a notice of proposed rulemaking that addresses program integrity issues for postsecondary education institutions that participate in Title IV programs. The proposed regulations included, among other items, revised standards governing the payment of incentive compensation to admissions and financial aid advisors, standards around misrepresentation and the definition of “credit hour.” The Company cannot predict the substance of any final rules that may be adopted by the Department of Education with respect to program integrity issues.
In July 2010, the Department of Education released another notice of proposed rulemaking addressing substantive measurements for whether an educational program leads to gainful employment in a recognized occupation for purposes of that program’s eligibility for Title IV funds. The proposed rulemaking addressing the definition of gainful employment includes provisions whereby students at a program level must demonstrate certain levels of student loan repayment and/or a program’s graduates must achieve certain debt-to- income ratios for the institution’s program to remain eligible for participation in the Title IV program. Under the proposed regulation, if a program fails to meet some or all of these proposed requirements, the program’s eligibility to participate in the Title IV program may be restricted or lost entirely. The data needed to compute program eligibility under this proposed regulation is not readily accessible to the institution, but is compiled by the Department of Education. Accordingly, the Company cannot currently predict with reasonable accuracy the impact the proposed regulation will have on its program offerings if it were enacted in its current form.
Management has filed public comments related to the proposed rules issued in June 2010 and also plans to file comments regarding the proposed gainful employment regulation.
In the summer of 2010, the Health, Education, Labor and Pension Committee (“the Committee”) of the U.S. Senate commenced an industry-wide review of private sector higher education institutions. The institutions owned and operated by Kaplan’s Higher Education Division (KHE) are included in the scope of this industry-wide review. The scope of the hearings are being established and directed by the chairman of the Committee. Two hearings have been conducted thus far and additional hearings are anticipated. The ultimate outcome of the hearings and implications to the operation of KHE’s institutions are presently unknown.
As part of the Committee’s review of private sector higher education institutions, investigators from the United Sates Government Accountability Office (GAO) performed undercover tests at 15 private sector higher education institutions, including two campuses of KHE. In August 2010, the GAO issued a report which was critical of the recruiting tactics at several schools, including the two Kaplan campuses. The Company is in the process of evaluating the GAO findings and completing its own internal investigation.
In addition, in August 2010, Kaplan and other companies that operate private sector higher education institutions received a request from the Committee to provide extensive information dating back to 2006 covering financial results, management, operations, personnel, recruiting, enrollment, graduation, student withdrawals, receipt of Title IV funds, accreditation, regulatory compliance and other items. The Company is working to cooperate fully with the Committee’s request.
Test Preparation includes Kaplan’s standardized test preparation and tutoring offerings, as well as the professional domestic training business, K12 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, assets write-offs and other closure costs were recorded in the second quarter and first half of 2010, respectively, in connection with this plan. Test preparation revenue declined 5% and 6% in the second quarter and first half of 2010, respectively. Excluding acquisitions, test preparation revenue declined 8% in both the second quarter and first half of 2010 due
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mostly to the termination of certain K12 offerings. Test Preparation operating results were also down in the first half of 2010 due to K12, reduced prices at the traditional test preparation programs and higher spending to expand online offerings and innovate various programs. The declines were offset by improved results at Test Preparation’s professional domestic training businesses due to expense reductions; total restructuring-related expenses of $1.8 million and $7.2 million were recorded in the second quarter and first half of 2009, respectively.
At the end of March 2009, the Company approved a plan to offer tutoring services, previously provided by Score, in Kaplan test preparation centers. The plan was substantially completed by the end of the second quarter of 2009. The Company recorded charges of $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009. Of this amount, $13.4 million was recorded in the second quarter of 2009.
Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. Kaplan International revenue increased 9% and 11% in the second quarter and first six months of 2010, respectively. The increase for 2010 is the result of strong enrollment growth in the University pathways business and favorable exchange rates in the U.K., Europe, Australia and Asia. Kaplan International operating income increased in the second quarter of 2010, but was down for the first six months of 2010 largely due to increased costs at Kaplan’s English-language programs.
Kaplan Ventures is made up of a number of businesses in various stages of development that are managed separately from the other education businesses. Kaplan Ventures includes Kaplan EduNeering, Kaplan Continuing Education, Kaplan Virtual Education, Kidum, Kaplan IT Learning and other smaller businesses. Revenues at Kaplan Ventures declined 11% in the second quarter and increased 1% in the first six months of 2010, respectively; these revenue comparisons were adversely impacted by the April 2010 sale of Education Connection. Kaplan Ventures reported operating losses of $7.2 million and $13.9 million in the second quarter and first six months of 2010, respectively, compared to operating losses of $4.2 million and $6.3 million in the second quarter and first six months of 2009, respectively. The decline in results for 2010 is due to increased losses at Kaplan Virtual Education, a developing group of online high school institutions, and declines at some of the other Kaplan Ventures businesses.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor shared activities.
Stock compensation charges relate to incentive compensation arising from equity awards under the Kaplan stock option plan. Kaplan recorded stock compensation expense of $0.6 million and $1.7 million in the second quarter of 2010 and 2009, respectively, and $1.1 million and $3.5 million in the first six months of 2010 and 2009, respectively, related to this plan.
Cable Television Division. Cable television division revenue of $190.6 million for the second quarter of 2010 represents a 2% increase from $186.7 million for the second quarter of 2009; for the first six months of 2010, revenue increased 3% to $379.9 million, from $370.2 million in the same period of 2009. The 2010 revenue increase is due to continued growth in the division’s cable modem and telephone revenues, and a $4 monthly rate increase for most basic subscribers in June 2009.
Cable division operating income increased 10% to $43.8 million in the second quarter of 2010, versus $39.8 million in the second quarter of 2009; cable division operating income for the first six months of 2010 increased 6% to $86.3 million, from $81.8 million for the first six months of 2009. The increase in operating income is due to the division’s revenue growth, offset by increased technical and sales costs.
At June 30, 2010, Revenue Generating Units (RGUs) were down 1% from the prior year due to a reduction in basic and digital subscribers, offset by growth in high-speed data and telephony subscribers. RGUs include about 6,300 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by the various franchise agreements. A summary of RGUs is as follows:
Cable Television Division Subscribers
Digital
High-speed data
Telephony
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Below are details of Cable division capital expenditures for the first six months of 2010 and 2009, as defined by the NCTA Standard Reporting Categories (in millions):
Customer Premise Equipment
Commercial
Scaleable Infrastructure
Line Extensions
Upgrade/Rebuild
Support Capital
Newspaper Publishing Division. Newspaper publishing division revenue totaled $172.7 million for the second quarter of 2010, an increase of 2% from revenue of $168.8 million for the second quarter of 2009; division revenue declined slightly to $328.5 million for the first six months of 2010, from $329.7 million for the first six months of 2009. Print advertising revenue at The Washington Post in the second quarter of 2010 declined 6% to $75.2 million, from $80.0 million in the second quarter of 2009, and decreased 7% to $143.9 million for the first six months of 2010, from $154.3 million for the first six months of 2009. The print revenue decline in the second quarter of 2010 is largely due to reductions in retail and classified advertising; the decline in the first half of 2010 is largely due to reductions in retail, classified and general advertising. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com and Slate, increased 14% to $26.9 million for the second quarter of 2010, versus $23.5 million for the second quarter of 2009; newspaper online revenues increased 11% to $50.6 million for the first six months of 2010, versus $45.6 million for the first six months of 2009. Display online advertising revenue grew 20% and 19% for the second quarter and first six months of 2010, respectively. Online classified advertising revenue on washingtonpost.com increased 5% for the second quarter of 2010, but decreased 4% for the first six months of 2010.
For the first six months of 2010, Post daily and Sunday circulation declined 10.7% and 9.5%, respectively, compared to the same periods of the prior year. A portion of this decline relates to increased circulation volumes in the first quarter of 2009 due to the Presidential Inauguration. For the six months ended July 4, 2010, average daily circulation at The Washington Post totaled 556,300, and average Sunday circulation totaled 776,900.
As previously disclosed, The Washington Post contributes to multiemployer plans on behalf of three union-represented employee groups. The Post has negotiated in collective bargaining the contractual right to withdraw from two of these plans; the right to withdraw from the CWA-ITU Negotiated Pension Plan (the Plan) has been the subject of contract negotiations that reached an impasse. In July 2010, the Post notified the union and the Plan of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post recorded a $17.7 million charge in the second quarter of 2010 based on an estimate of the withdrawal liability.
As previously reported, The Washington Post recorded early retirement program expense of $56.8 million in the second quarter of 2009, the costs of which are being funded primarily from the assets of the Company’s pension plans. Also as previously reported, the Post closed a printing plant in July 2009 and consolidated its printing operations. The Post also completed the consolidation of certain other operations in Washington, DC, in the first quarter of 2010. In connection with these activities, accelerated depreciation of $14.3 million and $27.7 million was recorded in the second quarter and first six months of 2009, respectively, and a $3.1 million loss on an office lease was recorded by the Company in the first quarter of 2010.
The newspaper division reported an operating loss of $14.3 million in the second quarter of 2010, compared to an operating loss of $89.3 million in the second quarter of 2009. For the first six months of 2010, the newspaper division reported an operating loss of $28.1 million, compared to an operating loss of $143.1 million for the first six months of 2009. Excluding the multiemployer pension plan charge, early retirement program expense and accelerated depreciation, operating results improved in the first half of 2010 due to expense reductions in payroll, newsprint, depreciation, bad debt and agency fees, and expense reductions at washingtonpost.com. Newsprint expense was down 17% and 26% for the second quarter and first six months of 2010, respectively, due to a decline in newsprint consumption and prices.
Television Broadcasting Division. Revenue for the television broadcasting division increased 24% in the second quarter of 2010 to $82.6 million, from $66.7 million in 2009; operating income for the second quarter of 2010 increased to $29.8 million, from $14.3 million in 2009. For the first six months of 2010, revenue increased 22% to $156.1 million, from $127.8 million in 2009; operating income for the first six months of 2010 increased 92% to $50.7 million, from $26.4 million in 2009.
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The increase in revenue and operating income is due to improved advertising demand in all markets and most product categories, particularly automotive. The increased revenue and operating income also includes $5.1 million in incremental winter Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2010, and a $3.3 million and $5.5 million increase in political advertising revenue for the second quarter and first six months of 2010, respectively.
Other Businesses and Corporate Office. Other businesses and corporate office included the expenses of the Company’s corporate office, the operating results of Avenue100 Media Solutions and the pension credit previously reported in the magazine publishing division (refer to Discontinued Operations discussion below).
Equity in Earnings (Losses) of Affiliates. The Company’s equity in earnings of affiliates for the second quarter of 2010 was $2.0 million, compared to losses of $0.2 million for the second quarter of 2009. For the first six months of 2010, the Company’s equity in losses of affiliates totaled $6.1 million, compared to losses of $1.0 million for the same period of 2009.
Other Non-Operating Income (Expense). The Company recorded other non-operating expense, net, of $5.2 million for the second quarter of 2010, compared to other non-operating income, net, of $19.7 million for the second quarter of 2009. The second quarter 2010 non-operating expense, net, included $3.8 million in unrealized foreign currency losses and other items. The second quarter 2009 non-operating income, net, included $19.8 million in unrealized foreign currency gains.
The Company recorded other non-operating expense, net, of $8.5 million for the first six months of 2010, compared to other non-operating income, net, of $15.7 million for the same period of the prior year. The 2010 non-operating expense, net, included $7.1 million in unrealized foreign currency losses and other items. The 2009 non-operating income, net, included $18.4 million in unrealized foreign currency gains, offset by $2.9 million in impairment write-downs on cost method investments and other items.
As noted above, a large part of the Company’s non-operating income (expense) is from unrealized foreign currency gains or losses arising from the translation of British pound and Australian dollar-denominated intercompany loans into U.S. dollars.
A summary of non-operating income (expense) for the twenty-six weeks ended July 4, 2010 and June 28, 2009, is as follows (in millions):
Net Interest Expense. The Company incurred net interest expense of $7.0 million and $14.3 million for the second quarter and first six months of 2010, respectively, compared to $7.2 million and $14.3 million for the same periods of 2009. At July 4, 2010, the Company had $399.5 million in borrowings outstanding at an average interest rate of 7.2%.
Provision for Income Taxes. The effective tax rate for both the second quarter and first six months of 2010 was 38.4%, compared to 35.9% and 36.1%, respectively, for the second quarter and first six months of 2009.
Discontinued Operations. On August 2, 2010, the Company announced that it had entered into an agreement to sell Newsweek. Consequently, the Company’s income from continuing operations for the second quarter and year-to-date periods excludes magazine publishing operations, which have been reclassified to discontinued operations, net of tax. Under the terms of the asset purchase agreement, The Washington Post Company retains the pension assets and liabilities and certain employee obligations arising prior to the sale. The resulting gain or loss at closing is not expected to be material to the financial position of The Washington Post Company. The Company expects a closing date in the third quarter of 2010.
Newsweek employees are participants in The Washington Post Company Retirement Plan, and Newsweek has historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities will be retained by the Company, the associated credit has been excluded from the reclassification of Newsweek results to discontinued operations. The pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.
Earnings (Losses) Per Share. The calculation of diluted earnings per share for the second quarter and first six months of 2010 was based on 9,192,690 and 9,216,626 weighted average shares outstanding, respectively, compared to 9,400,420 and 9,400,050, respectively, for the second quarter and first six months of 2009. In the first half of 2010, the Company repurchased 99,935 shares of its Class B common stock at a cost of $43.5 million.
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Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions. In the second quarter of 2010, the Company made two small acquisitions in its Other Businesses and Corporate office and Cable divisions. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division. The Company made one small acquisition in the second quarter of 2009 and did not make any acquisitions during the first quarter of 2009.
Capital expenditures. During the first six months of 2010, the Company’s capital expenditures totaled $84.8 million. The Company estimates that its capital expenditures will be in the range of $240 million to $265 million in 2010.
Liquidity. The Company’s borrowings increased by $0.2 million, to $399.5 million at July 4, 2010, as compared to borrowings of $399.3 million at January 3, 2010. At July 4, 2010, the Company has $659.0 million in cash and cash equivalents, compared to $477.7 million at January 3, 2010. The Company had money market investments of $445.0 million and $327.8 million that are classified as cash and cash equivalents in the Company’s condensed consolidated Balance Sheets as of July 4, 2010 and January 3, 2010, respectively.
The Company’s total debt outstanding of $399.5 million at July 4, 2010 included $396.4 million of 7.25% unsecured notes due February 1, 2019 and $3.1 million in other debt.
The Company has a $500 million revolving credit facility that expires in August 2011, which supports the issuance of the Company’s short-term commercial paper and provides for general corporate purposes. The Company did not issue any commercial paper in the first six months of 2010.
During the first six months of 2010 and 2009, the Company had average borrowings outstanding of approximately $399.4 million and $450.2 million, respectively, at average annual interest rates of approximately 7.2% and 6.7%, respectively. During the first six months of 2010 and 2009, the Company incurred net interest expense of $14.3 million.
At July 4, 2010 and January 3, 2010, the Company had working capital of $540.5 million and $398.5 million, respectively. The working capital amount at July 4, 2010 excludes current assets and current liabilities of discontinued operations. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2010.
There were no significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended January 3, 2010.
Forward-Looking Statements
This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010.
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The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2009 Annual Report filed on Form 10-K have not otherwise changed significantly.
(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 4, 2010. Based on that evaluation, the Company’s Chief Executive Officer and Senior Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Senior Vice President-Finance, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended July 4, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended July 4, 2010, the Company purchased shares of its Class B Common Stock as set forth in the following table:
Period
Apr. 5 - May 9, 2010
May 10 - Jun. 6, 2010
Jun. 7 - Jul. 4, 2010
31
ExhibitNumber
Description
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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.
(Registrant)
/S/ DONALD E. GRAHAM
Donald E. Graham,
Chairman & Chief Executive Officer
(Principal Executive Officer)
/S/ HAL S. JONES
Hal S. Jones,
Senior Vice President-Finance
(Principal Financial Officer)
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