UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
For the Quarterly Period Ended October 2, 2011
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 (§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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨. No x.
Shares outstanding at November 4, 2011:
Class A Common Stock
Class B Common Stock
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
a.
Condensed Consolidated Statements of Operations (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 2, 2011 and October 3, 2010
b.
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 2, 2011 and October 3, 2010
c.
Condensed Consolidated Balance Sheets at October 2, 2011 (Unaudited) and January 2, 2011
d.
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirty-Nine Weeks Ended October 2, 2011 and October 3, 2010
e.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
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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
Impairment of goodwill and other intangible assets
Operating income
Other income (expense)
Equity in (losses) earnings of affiliates
Interest income
Interest expense
Other, net
Income from continuing operations before income taxes
Provision for income taxes
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net (loss) income
Net (income) loss attributable to noncontrolling interests
Net (loss) income attributable to The Washington Post Company
Redeemable preferred stock dividends
Net (loss) income attributable to The Washington Post Company common stockholders
Amounts attributable to The Washington Post Company common stockholders:
Per share information attributable to The Washington Post Company common stockholders:
Basic (loss) income per common share from continuing operations
Basic loss per common share from discontinued operations
Basic net (loss) income per common share
Basic average number of common shares outstanding
Diluted (loss) income per common share from continuing operations
Diluted loss per common share from discontinued operations
Diluted net (loss) income 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
Cash flow hedge, net change
Less reclassification adjustment for write-down on available-for-sale security included in net income
Income tax benefit (expense) related to other comprehensive (loss) income
Comprehensive (loss) income
Comprehensive (loss) income attributable to noncontrolling interests
Total comprehensive (loss) income attributable to The Washington Post Company
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Condensed Consolidated Balance Sheets
Assets
Current assets
Cash and cash equivalents
Restricted cash
Investments in marketable equity securities and other investments
Accounts receivable, net
Income taxes receivable
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
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 stockholders’ equity
Common stock
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income, net of taxes
Cumulative foreign currency translation adjustment
Unrealized gain on available-for-sale securities
Unrealized gain on pensions and other postretirement plans
Cash flow hedge
Cost of Class B common stock held in treasury
Total common stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
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Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill and other intangible asset impairment charges
Net pension benefit
Multiemployer pension plan withdrawal charge
Early retirement program expense
Foreign exchange loss (gain)
Net (gain) loss on sales of businesses
Net loss on write-down of marketable equity securities
Equity in (earnings) losses of affiliates including impairment charges, net of distributions
Provision (benefit) for deferred income taxes
Net loss on sale or write-down of property, plant and equipment and other assets
Change in assets and liabilities:
Decrease in accounts receivable, net
(Increase) decrease in inventories
(Decrease) increase in accounts payable and accrued liabilities
Increase in deferred revenue
Income taxes receivable/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 and other assets
Purchase of marketable equity securities and other investments
Investments in certain businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Common shares repurchased
Dividends paid
Issuance of debt
Net cash used in financing activities
Effect of currency exchange rate change
Net (decrease) increase 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).
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 October 2, 2011, July 3, 2011, April 3, 2011, October 3, 2010, 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 thirty-nine weeks ended October 2, 2011 and October 3, 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 and certain operations of the education division 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
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(“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. 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.
In June 2011, the FASB issued an amended standard to increase the prominence of items reported in other comprehensive income. The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the amendment requires companies to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendment does not affect how earnings per share is calculated or presented. This amendment is effective for interim and fiscal years beginning after December 15, 2011 and must be applied retrospectively. The amended standard will impact the presentation of other comprehensive income but will not impact the Company’s financial position or results of operations.
In September 2011, the FASB issued new guidance that amends the current goodwill impairment testing process. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Previous guidance required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The new guidance is effective for goodwill and interim impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity’s financial statements for the most recent period have not yet been issued. The Company plans to early adopt this guidance at the beginning of the fourth quarter of 2011 and the guidance will not have an effect on the Company’s condensed consolidated financial statements.
Note 2: Discontinued Operations
On August 18, 2011, Kaplan entered into an agreement to sell Kaplan Compliance Solutions. Under the terms of the asset purchase agreement, the buyer will receive Kaplan Compliance Solutions’ net working capital, tangible and intangible assets, and assume certain liabilities. The transaction closed in October 2011. The resulting gain at closing is not expected to be material to the financial position of the Company. The assets and liabilities of Kaplan Compliance Solutions have been classified on the Company’s condensed consolidated balance sheet as assets and liabilities of discontinued operations as of October 2, 2011. The Company did not reclassify its condensed consolidated balance sheet as of January 2, 2011 to reflect the discontinued operations.
In July 2011, Kaplan completed the sale of Kaplan Virtual Education. Under the terms of the asset purchase agreement, the buyer received Kaplan Virtual Education’s intellectual property, education programs and selected other long-lived assets. The Company recorded an after-tax loss on the transaction of $1.2 million, which is included in “Loss from discontinued operations, net of tax” in the Company’s condensed consolidated statement of operations for the third quarter and first nine months of 2011.
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 Compliance Solutions, Kaplan Virtual Education, Education Connection and the magazine publishing division for the third quarter and first nine months of 2011 and 2010, where applicable, are included in the Company’s condensed consolidated statements of operations 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 $25.8 million, respectively, for the third quarter and nine months of 2010 has been excluded from the reclassification of Newsweek results to discontinued operations. In the third quarter and first nine months of 2010, Newsweek recorded $0.8 million and $4.7 million, respectively, in accelerated depreciation and property, plant and equipment write-downs.
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The summarized loss from discontinued operations, net of tax, for the third quarter and first nine months of 2011 and 2010 is presented below (in thousands):
Loss from discontinued operations
Benefit from income taxes
Net loss from discontinued operations
Gain (loss) on sale of discontinued operations
Provision for income taxes on sale of discontinued operations
The following table summarizes the 2011 quarterly operating results of the Company for the quarters ended April 3 and July 3, following the reclassification of the operations discussed above as discontinued operations (in thousands, except per share amounts):
Equity in earnings of affiliates
Income from continuing operations
Net income attributable to The Washington Post Company
Net income attributable to The Washington Post Company common stockholders
Net income attributable to the Washington Post Company common stockholders
Basic income per common share from continuing operations
Basic net income per common share
Diluted income per common share from continuing operations
Diluted net income per common share
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The following table summarizes the 2010 quarterly operating results of the Company for the quarters ended April 4, 2010, July 4, 2010, October 3, 2010, and January 2, 2011, following the reclassification of the operations discussed above as discontinued operations (in thousands, except per share amounts):
Equity in earnings (losses) of affiliates
(Loss) income from discontinued operations, net of tax
Net income attributable to The Washington Post Company common Stockholders
Basic (loss) income per common share from discontinued operations
Diluted (loss) income per common share from discontinued operations
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The following table summarizes the operating results of the Company for fiscal year 2010 and 2009, following the reclassification of operations discussed above as discontinued operations (in thousands, except per share amounts):
Impairment of goodwill and other long-lived assets
Equity in losses of affiliates
Net loss attributable to noncontrolling interests
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Note 3: Investments
Investments in marketable equity securities at October 2, 2011 and January 2, 2011 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 nine 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 investment continued to decline and in the third quarter of 2011, the Company recorded another $23.1 million write-down on the investment. The Company’s investment in Corinthian Colleges, Inc. accounted for $12.0 million of the total fair value of the Company’s investments in marketable equity securities at October 2, 2011.
In the third quarter of 2011, the Company recorded a $9.2 million impairment charge on the Company’s interest in Bowater Mersey Paper Company, as a result of the challenging economic environment for newsprint producers.
Note 4: Acquisitions and Dispositions
In the first nine months of 2011, the Company acquired four businesses totaling $132.0 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 October 2011, Kaplan sold Kaplan Compliance Solutions, which was part of Kaplan Higher Education. In the third quarter of 2011, Kaplan sold Kaplan Virtual Education, which was part of Kaplan Ventures. The Company did not make any acquisitions during the third quarter of 2011. 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 the first quarter of 2011, Kaplan acquired one business in its Kaplan Ventures division.
The Company did not make any acquisitions during the third quarter of 2010. On September 30, 2010, the Company completed the sale of Newsweek. In the second quarter of 2010, the Company made two small acquisitions in its Cable division and in Other businesses and Kaplan completed the sale of Education Connection, which was part of the Kaplan Ventures division. In the first quarter of 2010, Kaplan made one small acquisition in its Kaplan Ventures division.
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 13). The changes resulted in the reassignment of the assets and liabilities to the reporting units affected. The goodwill was allocated to the reporting units affected using the relative fair value approach.
As a result of continued challenges in the lead generation industry, in both the third quarters of 2011 and 2010, the Company performed interim reviews of the carrying value of goodwill and other intangible asset at its online lead generation business, which is included within the other businesses segment. The Company failed the step one goodwill impairment tests and performed a step two analysis, resulting in a $11.9 million and $27.5 million goodwill and other intangible assets impairment charge in the third quarters of 2011 and 2010, respectively. The Company estimated the fair value utilizing a discounted cash flow model.
Amortization of intangible assets for the thirteen weeks ended October 2, 2011 and October 3, 2010 was $9.3 million and $6.5 million, respectively. Amortization of intangible assets for the thirty-nine weeks ended October 2, 2011 and October 3, 2010 was $23.5 and $20.6 million. Amortization of intangible assets is estimated to be approximately $8 million for the remainder of 2011, $13 million in 2012, $10 million in 2013, $8 million in 2014, $6 million in 2015, $3 million in 2016 and $8 million thereafter.
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The changes in the carrying amount of goodwill related to continuing operations, by segment, for the thirty-nine weeks ended October 2, 2011 were as follows (in thousands):
Balance as of January 2, 2011:
Goodwill
Accumulated impairment losses
Acquisitions
Impairment
Dispositions
Reclassification to discontinued operations
Foreign currency exchange rate changes and other
Balance as of October 2, 2011:
The changes in carrying amount of goodwill at the Company’s education division for the thirty-nine weeks ended October 2, 2011 were as follows (in thousands):
Reallocation, net (Note 13)
Balance as of October 3, 2010:
Other intangible assets consist of the following (in thousands):
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
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Note 6: Income Taxes
The effective tax rate for income from continuing operations for the first nine months of 2011 was 47.1%. The higher effective rate in 2011 is primarily due to $4.5 million from nondeductible goodwill in connection with an impairment charge and $5.2 million in income tax expense related to valuation allowances, both recorded in the third quarter of 2011.
The effective tax rate for income from continuing operations for the first nine months of 2010 was 38.2%. The effective rate in 2010 was adversely impacted by $9.1 million from nondeductible goodwill in connection with an impairment charge recorded in the third quarter of 2010.
Note 7: Borrowings
The Company’s borrowings consist of the following (in thousands):
7.25% unsecured notes due February 1, 2019
AUS $50M borrowing
Other indebtedness
Total
Less: current portion
Total long-term debt
The Company’s other indebtedness at October 2, 2011 is at interest rates from 0% to 6% and matures from 2011 to 2016. The Company’s other indebtedness at January 2, 2011 is at an interest rate of 6%, and matures in 2011.
During the third quarter of 2011 and 2010, the Company had average borrowings outstanding of approximately $417.6 million and $399.5 million, respectively, at average annual interest rates of approximately 7.2%. During the third quarter of 2011 and 2010, the Company incurred net interest expense of $7.7 million and $7.0 million, respectively.
During the first nine months of 2011 and 2010, the Company had average borrowings outstanding of approximately $406.9 million and $399.4 million, respectively, at average annual interest rates of approximately 7.2%. During the first nine months of 2011 and 2010, the Company incurred net interest expense of $21.6 million and $21.3 million, respectively.
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.
On September 7, 2011, the Company borrowed AUS $50 million under its revolving credit facility. On the same date, the Company entered into interest rate swap agreements with a total notional value of AUS $50.0 million and a maturity date of March 7, 2015. These interest rate swap agreements will pay the Company variable interest on the AUS $50 million notional amount at the three-month bank bill rate, and the Company will pay the counterparties a fixed rate of 4.5275%.
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These interest rate swap agreements were entered into to convert the variable rate AUS dollar borrowing under the revolving credit facility into a fixed rate borrowing. Based on the terms of the interest rate swap agreements and the underlying borrowing, these interest rate swap agreements were determined to be effective, and thus qualify as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps are recorded in other comprehensive income on the accompanying condensed consolidated balance sheets until earnings are affected by the variability of cash flows.
The Company did not borrow funds under its commercial paper program in the first nine months of 2011.
At October 2, 2011, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $468.0 million, compared with the carrying amount of $397.0 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 October 2, 2011 approximates fair value.
Note 8: (Loss) Earnings Per Share
The Company’s (loss) earnings per share from continuing operations (basic and diluted) for the third quarter and first nine months of 2011 and 2010 are presented below (in thousands, except per share amounts):
(Loss) income from continuing operations attributable to The Washington Post Company common stockholders
Less: Amount attributable to participating securities
Basic (loss) income from continuing operations attributable to The Washington Post Company common stockholders
Plus: Amount attributable to participating securities
Diluted (loss) 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
(Loss) income per share from continuing operations attributable to The Washington Post Company common stockholders:
Basic
Diluted
The diluted earnings per share amounts for the third quarter of 2011 and the first nine months of 2011 exclude the effects of 137,544 and 101,794 stock options outstanding, respectively, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the third quarter of 2010 and the first nine months of 2010 exclude the effects of 59,069 and 36,125 stock options outstanding, respectively, as their inclusion would have been antidilutive.
In the third quarter and the first nine months of 2011, the Company declared regular dividends totaling $2.35 and $9.40 per share, respectively.
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Note 9: Pension and Postretirement Plans
Defined Benefit Plans. The total (benefit) cost arising from the Company’s defined benefit pension plans for the third quarter and nine months ended October 2, 2011 and October 3, 2010, consists of the following components (in thousands):
Service cost
Interest cost
Expected return on assets
Amortization of transition asset
Amortization of prior service cost
Net periodic benefit
Early retirement programs expense
Special termination benefits
Recognition of prior service cost
Total (benefit) cost
In connection with the Newsweek sale, the Company recorded $5.3 million in special termination benefits expense and $2.4 million in prior service cost expense; these amounts are included in discontinued operations for the third quarter and nine months ended October 3, 2010.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) for the third quarter and nine months ended October 2, 2011 and October 3, 2010, including a portion included in 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 September 30, 2011 and December 31, 2010, 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. 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.
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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.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 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 September 30, 2011 the Company held common stock in one investment which exceeded 10% of total plan assets. This investment was valued at $176.8 million and $134.8 million at September 30, 2011 and December 31, 2010, respectively, or approximately 11% and 8%, respectively, of total plan assets. Assets also included $143.3 million and $161.6 million of Berkshire Hathaway Class A and Class B common stock at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 the Company held investments in one foreign country which exceeded 10% of total plan assets. These investments were valued at $193.8 million and $155.0 million at September 30, 2011 and December 31, 2010, respectively, or approximately 12% and 9%, respectively, of total plan assets.
Other Postretirement Plans. The total benefit arising from the Company’s other postretirement plans for the third quarter and nine months ended October 2, 2011 and October 3, 2010, including a portion included in discontinued operations, consists of the following components (in thousands):
Amortization of prior service credit
Recognized actuarial gain
Net periodic (benefit) cost
Curtailment gain
Total benefit
The Company recorded a curtailment gain of $8.6 million in the third quarter of 2010 due to the sale of Newsweek; the gain is included in discontinued operations for the third quarter and nine months ended October 3, 2010.
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 $2.7 million and $20.4 million charge for the third quarter and nine months ended October 3, 2010, respectively, based on an estimate of the withdrawal liability.
Note 10: Other Non-Operating (Expense) Income
A summary of non-operating (expense) income for the thirteen and thirty-nine weeks ended October 2, 2011 and October 3, 2010, is as follows (in thousands):
Impairment write-down on a marketable equity security
Foreign currency (losses) gains, net
Gain on sale of cost method investments
Impairment write-down on a cost method investment
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Note 11: 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.
With regard to previously disclosed legal proceedings, three federal False Claims Act lawsuits against Kaplan Higher Education (KHE) businesses have been dismissed in their entirety: specifically, the lawsuits filed by Charles Jajdelski (U.S. District Court for the District of Nevada), Ben Wilcox (U.S. District Court for the Southern District of Florida) and Jorge Torres (U.S. District Court for the Southern District of Florida) have been dismissed, with final judgments entered in favor of the Company. To the extent these judgments are appealed, the Company will seek to affirm the rulings of the District Courts.
As for the three remaining federal False Claims Act cases (all pending in the U.S. District Court for the Southern District of Florida), the Company’s motions to dismiss were granted in part. Specifically: in the Carlos Diaz matter, all federal False Claims Act allegations have been dismissed, leaving an individual employment claim to be adjudicated; with respect to the remaining claims, the federal False Claims allegations were dismissed in part and narrowed in scope. The Company will proceed to vigorously defend the remaining elements of each case.
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. Six Program Reviews were recently finalized with no significant findings. Currently, there are two pending Program Reviews. The results of these open reviews and their impact on Kaplan’s operations are uncertain.
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.
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Note 12: 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):
At October 2, 2011:
Assets:
Money market investments(1)
Marketable equity securities(3)
Other current investments(4)
Interest rate swap(5)
Total financial assets
Liabilities:
Deferred compensation plan liabilities(6)
7.25% unsecured notes(7)
AUS $50M borrowing(7)
Total financial liabilities
At January 2, 2011:
Money market investments(2)
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 13: 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. Also, Kaplan sold Kaplan Compliance Solutions in October 2011, 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.
In light of recent revenue declines and other business challenges, Kaplan has formulated and implemented restructuring plans at its various businesses that have resulted in significant costs in 2010 and 2011, with the objective of establishing lower cost levels in future periods. Across all Kaplan businesses, severance and restructuring costs totaled $5.6 million and $19.6 million in the third quarter and first nine months of 2011, respectively, compared to $7.8 million in the first nine months of 2010 (from the first half of 2010). Kaplan estimates that approximately $5.0 million in additional costs will be incurred in the fourth quarter of 2011.
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 been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were retained by the Company, the associated credit 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.
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 the 2011 quarterly financial information related to each of the Company’s business segments for the quarters ended April 3, July 3, and October 2 (in thousands):
Cable television
Newspaper publishing
Television broadcasting
Other businesses
Corporate office
Intersegment elimination
Income (loss) from operations
Interest expense, net
Impairment of goodwill
Newspaper Publishing
Net pension (expense) credit
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The following table summarizes the 2010 quarterly financial information related to each of the Company’s business segments for the quarters ended April 4, 2010, July 4, 2010, October 3, 2010, and January 2, 2011 (in thousands):
Net pension credit (expense)
22
The following table summarizes financial information related to each of the Company’s business segments for the nine months ended October 2, 2011 and October 3, 2010, as well as for the fiscal years 2010 and 2009 (in thousands):
23
Asset information for the Company’s business segments are as follows (in thousands):
Identifiable assets
Investments in marketable equity securities
Assets of discontinued operations
The following table summarizes the 2011 quarterly financial information related to the operating segments of the Company’s education division for the quarters ended March 31, June 30, and September 30 (in thousands):
Higher education
Test preparation
Kaplan international
Kaplan ventures
Kaplan corporate and other
Kaplan stock-based incentive compensation (credit) expense
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The following table summarizes the 2010 quarterly financial information related to the operating segments within the Company’s education division for the quarters ended March 31, June 30, September 30, and December 31 (in thousands):
Kaplan stock-based incentive compensation expense (credit)
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The following table summarizes financial information related to the operating segments of the Company’s education division segments for the nine months ended September 30, 2011 and 2010, as well as for the fiscal years ended December 31, 2010 and 2009 (in thousands):
Test preparation(1)
Identifiable assets for the Company’s education division consist of the following (in thousands):
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This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company reported a net loss attributable to common shares of $6.2 million ($0.82 loss per share) for the third quarter ended October 2, 2011, compared to net income attributable to common shares of $60.9 million ($6.84 per share) for the third quarter of last year. Net (loss) income includes $2.5 million ($0.32 per share) and $24.6 million ($2.76 per share) in losses from discontinued operations for the third quarter of 2011 and 2010, respectively. (Loss) income from continuing operations attributable to common shares was a loss of $3.7 million ($0.50 loss per share) for the third quarter of 2011, compared to income of $85.5 million ($9.60 per share) for the third quarter of 2010.
Items included in the Company’s loss from continuing operations for the third quarter of 2011:
$5.6 million in severance and restructuring charges at Kaplan (after-tax impact of $3.5 million, or $0.44 per share);
an $11.9 million goodwill impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $11.9 million, or $1.51 per share);
a $9.2 million impairment charge at one of the Company’s affiliates (after-tax impact of $5.7 million, or $0.72 per share);
a $23.1 million write-down of a marketable equity security (after-tax impact of $14.9 million, or $1.89 per share);
$6.7 million in non-operating unrealized foreign currency losses (after-tax impact of $4.2 million, or $0.54 per share); and
charge of $5.2 million in income tax expense related to valuation allowances provided (impact of $0.67 per share).
Items included in the Company’s income from continuing operations for the third quarter of 2010:
a $2.7 million charge recorded at The Washington Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $1.6 million, or $0.18 per share);
a $27.5 million goodwill and other intangible assets impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $26.3 million, or $2.96 per share); and
$11.9 million in non-operating unrealized foreign currency gains (after-tax impact of $7.5 million, or $0.84 per share).
Revenue for the third quarter of 2011 was $1,032.6 million, down 13% from $1,183.5 million in the third quarter of 2010. The Company reported operating income of $52.0 million in the third quarter of 2011, compared to operating income of $137.5 million in the third quarter of 2010. Revenues and operating income were down at all of the Company’s divisions.
For the first nine months of 2011, the Company reported net income attributable to common shares of $54.5 million ($6.81 per share), compared to $198.2 million ($21.75 per share) for the same period of 2010. Net income includes $5.8 million ($0.73 per share) and $42.9 million ($4.71 per share) in losses from discontinued operations for the first nine months of 2011 and 2010, respectively. Income from continuing operations attributable to common shares was $60.3 million ($7.54 per share) for the first nine months of 2011, compared to $241.1 million ($26.46 per share) for the first nine months of 2010. As a result of the Company’s share repurchases, there were 12% fewer diluted average shares outstanding in the first nine months of 2011.
Items included in the Company’s income from continuing operations for the first nine months of 2011:
$19.6 million in severance and restructuring charges at Kaplan (after-tax impact of $12.2 million, or $1.52 per share);
a $53.8 million write-down of a marketable equity security (after-tax impact of $34.6 million, or $4.34 per share);
$3.7 million in non-operating unrealized foreign currency losses (after-tax impact of $2.3 million, or $0.29 per share); and
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Items included in the Company’s income from continuing operations for the first nine months of 2010:
a $20.4 million charge recorded at The Washington Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $12.7 million, or $1.38 per share);
$7.8 million in severance and restructuring charges at Kaplan (after-tax impact of $4.8 million, or $0.52 per share);
$4.8 million in non-operating unrealized foreign currency gains (after-tax impact of $3.1 million, or $0.36 per share).
Revenue for the first nine months of 2011 was $3,151.4 million, down 10% from $3,501.9 million in the first nine months of 2010. Revenues were down at the education, newspaper publishing and television broadcasting divisions, while revenues were up slightly at the cable television division. The Company reported operating income of $188.2 million for the first nine months of 2011, compared to $411.6 million for the first nine months of 2010. Operating results declined at the education and cable television divisions and improved slightly at the television broadcasting division. Excluding the multiemployer pension plan charge noted above, operating results also declined at the newspaper publishing division.
Division Results
Education division revenue totaled $615.9 million for the third quarter of 2011, a 16% decline from revenue of $737.1 million for the third quarter of 2010. Excluding revenue from acquired businesses, education division revenue declined 19% in the third quarter of 2011. Kaplan reported third quarter 2011 operating income of $18.0 million, down from $106.0 million in the third quarter of 2010.
For the first nine months of 2011, education division revenue totaled $1,867.4 million, a 14% decline from revenue of $2,170.3 million for the same period of 2010. Excluding revenue from acquired businesses, education division revenue declined 15% for the first nine months of 2011. Kaplan reported operating income of $57.2 million for the first nine months of 2011, down from $280.5 million for the first nine months of 2010.
In light of recent revenue declines and other business challenges, Kaplan has formulated and implemented restructuring plans at its various businesses that have resulted in significant costs in 2010 and 2011, with the objective of establishing lower costs levels in future periods. Across all businesses, severance and restructuring costs totaled $5.6 million and $19.6 million in the third quarter and first nine months of 2011, respectively, compared to $7.8 million in the first nine months of 2010 (from the first half of 2010). Kaplan estimates that approximately $5.0 million in additional costs will be incurred in the fourth quarter of 2011.
A summary of Kaplan’s operating results for the third quarter and the first nine months of 2011 compared to 2010 is as follows (in thousands):
Revenue
Kaplan corporate
Operating Income (loss)
Kaplan stock compensation
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Kaplan sold Kaplan Compliance Solutions in October 2011, Kaplan Virtual Education in July 2011 and Education Connection in April 2010. Consequently, the education division’s operating results exclude these businesses.
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 Higher Education (KHE) 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 third quarter and first nine months of 2011, higher education revenue declined 33% and 27%, respectively, due to declines in average enrollments. Operating income decreased 79% and 64% for the third quarter and first nine months of 2011, respectively. These declines were due to lower revenue, increased regulatory compliance costs and $1.6 million and $7.1 million in severance costs associated with workforce reductions in the third quarter and first nine months of 2011, respectively, offset by lower advertising costs, other expense reductions associated with lower enrollments, and incentive compensation credits recorded in 2011 related to amounts previously accrued.
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 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 30% and 42% declines in new enrollments for the third quarter and first nine months of 2011, respectively. Management estimates that without the Kaplan Commitment, this decline would have been approximately 28% for the first nine months of 2011. Management also estimates that revenue for the first nine months of 2011 would have been approximately $47 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 2010 due primarily to lower student enrollment levels. In addition, KHE has incurred severance and restructuring costs totaling $7.1 million for the first nine months of 2011 and additional costs will be incurred in the fourth quarter of 2011 in order to 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 27%, of which about 58% 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.
Student enrollments at September 30, 2011, excluding the Kaplan University School of Continuing and Professional Education, were down 29% compared to September 30, 2010, but increased 1% compared to June 30, 2011, as follows:
Kaplan University
Kaplan Higher Education Campuses
Kaplan University enrollments included 6,036, 5,837 and 7,999 campus-based students as of September 30, 2011, June 30, 2011, and September 30, 2010, respectively.
Kaplan University and Kaplan Higher Education Campuses enrollments at September 30, 2011, and September 30, 2010, by degree and certificate programs, are as follows:
Certificate
Associate’s
Bachelor’s
Master’s
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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; $7.8 million in severance and other closure costs were recorded in the first nine months of 2010 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 nine months of 2011, implementation of the plan continued and $3.5 million and $12.0 million in restructuring and severance costs were incurred in the third quarter and first nine months of 2011, respectively. This plan is expected to be largely completed by the end of 2011, and the Company estimates that approximately $1.0 million in additional costs will be incurred.
Test preparation revenue declined 1% in the first nine months of 2011. Higher enrollment, particularly in the Pre-College and Health programs, was 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 nine months of 2011 due to reduced prices at the traditional test preparation programs, higher spending to expand online offerings and innovate various programs, and increased restructuring costs.
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 25% and 19% in the third quarter and first nine months of 2011, respectively. Excluding revenue from acquired businesses, Kaplan International revenue increased 13% in the third quarter and first nine months of 2011 due to favorable exchange rates and enrollment growth in the pathways and English-language programs. Kaplan International operating income declined in the first nine months of 2011 due to up-front spending for admission and occupancy at its Asian and United Kingdom businesses to support expanding operations, as well as overall losses from newly acquired businesses. In addition, Kaplan International operating income decreased due to enrollment declines at its UK professional training schools arising from new pending student visa restrictions.
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 27% and 29% for the third quarter and first nine months of 2011, respectively. Kaplan Ventures reported an operating loss of $3.9 million and $11.2 million in the third quarter and first nine months of 2011, compared to an operating loss of $5.1 million and $14.0 million in the third quarter and first nine months of 2010, respectively.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor shared activities. Kaplan corporate costs have declined in the first nine months of 2011 due to lower incentive compensation expense and other cost reductions.
Cable Television
Cable television division revenue declined slightly in the third quarter of 2011 to $187.9 million, from $188.7 million for the third quarter of 2010; for the first nine months of 2011, revenue increased slightly to $569.4 million, from $568.6 million in the same period of 2010. The revenue increase for the first nine months of 2011 is due to continued growth of the division’s Internet and telephone service revenues, offset by an increase in promotional discounts and a decline in basic video subscribers.
Cable television division operating income decreased 9% to $36.8 million, from $40.3 million in the third quarter of 2010; cable division operating income for the first nine months of 2011 decreased 9% to $114.9 million, from $126.6 million for the first nine months of 2010. The division’s operating income declined primarily due to increased programming, technical and sales costs.
At September 30, 2011, Primary Service Units (PSUs) were up 4% 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:
Basic video
High-speed data
Telephony
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Below are details of Cable division capital expenditures for the first nine months of 2011 and 2010, 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 revenue totaled $149.3 million for the third quarter of 2011, down 9% from revenue of $163.4 million for the third quarter of 2010; division revenue declined 5% to $467.0 million for the first nine months of 2011, from $491.9 million for the first nine months of 2010. Print advertising revenue at The Washington Post in the third quarter of 2011 declined 20% to $57.6 million, from $72.0 million in the third quarter of 2010, and declined 13% to $187.4 million for the first nine months of 2011, from $215.9 million for the first nine 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 14% to $23.3 million for the third quarter of 2011, versus $27.0 million for the third quarter of 2010; newspaper online revenues declined 7% to $72.3 million for the first nine months of 2011, versus $77.6 million for the first nine months of 2010. Display online advertising revenue declined 17% and 9% for the third quarter and first nine months of 2011, respectively. Online classified advertising revenue decreased 5% for the third quarter of 2011, but was flat for the first nine months of 2011. The revenue declines from print advertising and newspaper online publishing activities were partially offset by increased revenue from new lines of business in the first nine months of 2011.
For the first nine months of 2011, Post daily and Sunday circulation declined 5.4% and 4.4%, respectively, compared to the same periods of the prior year. For the nine months ended October 2, 2011, average daily circulation at The Washington Post totaled 518,700 and average Sunday circulation totaled 736,800.
The newspaper publishing division reported an operating loss of $9.9 million in the third quarter of 2011, compared to an operating loss of $1.7 million in the third quarter of 2010. For the first nine months of 2011, the newspaper publishing division reported an operating loss of $25.6 million, compared to an operating loss of $29.8 million for the first nine months of 2010. As previously disclosed, The Washington Post recorded a $20.4 million charge in 2010 in connection with its withdrawal from the CWA-ITU Negotiated Pension Plan; $17.7 million of this charge was recorded in the second quarter of 2010, and $2.7 million was recorded in the third quarter of 2010. 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 nine months of 2011 due to the revenue reductions discussed above, offset by a small decrease in overall costs. Newsprint expense was down 15% and 6% for the third quarter and first nine months of 2011, respectively, due to a decline in newsprint consumption.
Television Broadcasting
Revenue for the television broadcasting division declined 11% in the third quarter of 2011 to $73.8 million, from $83.2 million in 2010; operating income for the third quarter of 2011 also declined 5% to $24.1 million, from $25.3 million in 2010. For the first nine months of 2011, revenue declined 3% to $231.0 million, from $239.3 million in 2010; operating income for the first nine months of 2011 increased slightly to $76.2 million, from $76.0 million in 2010.
The decline in revenue for the third quarter and first nine months of 2011 is due primarily to the absence of $4.7 million in incremental winter Olympics-related advertising in the first quarter of 2010 and a $9.6 million and $13.9 million decrease in political advertising revenue for the third quarter and first nine months of 2011, respectively. For the third quarter of 2011, operating results declined as a result of lower revenue, offset by expense reductions from various cost control initiatives. For the first nine months of 2011, operating results improved slightly due to expense reductions from various cost control initiatives, offset by lower revenue.
Other Businesses
Other businesses includes the operating results of Avenue100 Media Solutions and other small businesses.
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In the first nine months of 2011, revenues declined substantially due to volume declines as a result of changes implemented at Avenue100 Media Solutions to improve lead quality. In the third quarter of 2011, an $11.9 goodwill impairment charge was recorded at Avenue100 Media Solutions, the Company’s digital marketing business that sources leads for academic institutions and recruiting organizations. In the third quarter of 2010, a $27.5 million goodwill and other intangible assets impairment charge was recorded at Avenue100 Media Solutions.
Equity in (Losses) Earnings of Affiliates
The Company’s equity in losses of affiliates for the third quarter of 2011 was $1.5 million, compared to earnings of $2.1 million for the third quarter of 2010. For the first nine months of 2011, the Company’s equity in earnings of affiliates totaled $5.4 million, compared with losses of $3.9 million for the same period of 2010. The decline in the third quarter of 2011 is due to a $9.2 million impairment charge recorded on the Company’s interest in Bowater Mersey Paper Company, offset by improved results at the Company’s Classified Ventures affiliate and other affiliates. The results for the first nine months of 2011 reflect improved earnings at the Company’s Classified Ventures affiliate and other 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 (Expense) Income
The Company recorded other non-operating expense, net, of $29.7 million for the third quarter of 2011, compared to other non-operating income, net, of $12.5 million for the third quarter of 2010. The third quarter 2011 non-operating expense, net, included a $23.1 million write-down of a marketable equity security (Corinthian Colleges, Inc.) and $6.7 million in unrealized foreign currency losses and other items. The third quarter 2010 non-operating income, net, included $11.9 million in unrealized foreign currency gains.
The Company recorded non-operating expense, net, of $56.3 million for the first nine months of 2011, compared to other non-operating income, net, of $5.4 million for the same period of the prior year. The 2011 non-operating expense, net, included a $53.8 million write-down of a marketable equity security (Corinthian Colleges, Inc.), and $3.7 million in unrealized foreign currency losses and other items. The 2010 non-operating expense, net, included $4.8 million in unrealized foreign currency gains.
A summary of non-operating (expense) income for the thirty-nine weeks ended October 2, 2011 and October 3, 2010, is as follows (in millions):
Impairment write-downs on cost method investments
Net Interest Expense
The Company incurred net interest expense of $7.7 million and $21.6 million for the third quarter and first nine months of 2011, respectively, compared to $7.0 million and $21.3 million for the same periods of 2010. At October 2, 2011, the Company had $453.2 million in borrowings outstanding, at an average interest rate of 7.0%.
Provision for Income Taxes
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Discontinued Operations
On September 30, 2010, the Company completed the sale of Newsweek. In addition, Kaplan sold Kaplan Compliance Solutions in October 2011, 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 (Loss) Per Share
The calculation of diluted earnings per share for the third quarter and first nine months of 2011 was based on 7,801,639 and 7,978,520 weighted average shares outstanding, respectively, compared to 8,904,453 and 9,112,564, respectively, for the third quarter and first nine months of 2010. In the first nine months of 2011, the Company repurchased 442,325 shares of its Class B common stock at a cost of $179.5 million. On September 8, 2011, the Company’s Board of Directors authorized the Company to acquire up to 750,000 shares of its Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 43,573 shares that remained under the previous authorization. At October 2, 2011, there were 7,793,806 shares outstanding.
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.
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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. Based on currently available information, management does not believe that any of the Kaplan OPEID units will have a 90/10 ratio over 90.0% in 2011. However, for 2012, absent changes and if current trends continue, management estimates that 18 OPEID units of Kaplan Higher Education Campuses (KHEC), representing approximately 20% 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; work study programs; program eliminations; cash matching programs; alternative lending programs and other measures. There can be no guarantee, however, 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
Capital expenditures
During the first nine months of 2011, the Company’s capital expenditures totaled $145.6 million. The Company estimates that its capital expenditures will be in the range of $190 million to $215 million in 2011.
Stock Repurchases
In the first nine months of 2011, the Company repurchased 442,325 shares of its Class B common stock at a cost of $179.5 million. On September 8, 2011, the Company’s Board of Directors authorized the Company to acquire up to 750,000 shares of its Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 43,573 shares that remained under the previous authorization.
Liquidity
The Company’s borrowings increased by $53.5 million, to $453.2 million at October 2, 2011, as compared to borrowings of $399.7 million at January 2, 2011. At October 2, 2011, the Company has $311.2 million in cash and cash equivalents, compared to $437.7 million at January 2, 2011. The Company had money market investments of $132.5 million and $308.9 million that are classified as cash and cash equivalents in the Company’s condensed consolidated Balance Sheets as of October 2, 2011 and January 2, 2011, respectively.
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The Company’s total debt outstanding of $453.2 million at October 2, 2011 included $397.0 million of 7.25% unsecured notes due February 1, 2019, $48.7 million of AUS $50M borrowing and $7.5 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 will expire on June 17, 2015, unless the Company and the banks agree to extend the term.
On September 7, 2011, the Company borrowed AUS $50 million under its revolving credit facility. On the same date, the Company entered into interest rate swap agreements with a total notional value of AUS $50.0 million and a maturity date of March 7, 2015. These interest rate swap agreements will pay the Company variable interest on the AUS $50 million notional amount at the three-month bank bill rate, and the Company will pay the counterparties a fixed rate of 4.5275%. These interest rate swap agreements were entered into to convert the variable rate AUS dollar borrowing under the revolving credit facility into a fixed rate borrowing. Based on the terms of the interest rate swap agreements and the underlying borrowing, these interest rate swap agreements were determined to be effective, and thus qualify as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps are recorded in other comprehensive income on the accompanying condensed consolidated balance sheets until earnings are affected by the variability of cash flows.
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’s 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. On September 27, 2011, Moody’s placed the Company’s long-term debt rating and commercial paper rating on review for possible downgrade. The Company’s current credit ratings are as follows:
Long-term
Short-term
At October 2, 2011 and January 2, 2011, the Company had working capital of $183.9 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.
In the third quarter of 2011, the Company executed lease agreements in the United Kingdom with a total commitment of approximately $67 million. The leases will commence in 2012 and 2013 and end in 2027. There were no other significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended January 2, 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 certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking 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.
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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 2010 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 October 2, 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 October 2, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended October 2, 2011, the Company purchased shares of its Class B Common Stock as set forth in the following table:
Period
Jul. 4 - Aug 7, 2011
Aug. 8 - Sept. 4, 2011
Sept. 5 - Oct. 2, 2011
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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.
/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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