UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2012
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-6714
THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1150 15th Street, N.W. Washington, D.C.
20071
(Address of principal executive offices)
(Zip Code)
(202) 334-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨. No x.
Shares outstanding at November 2, 2012:
Class A Common Stock – 1,219,383 Shares
Class B Common Stock – 6,158,779 Shares
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2012 and October 2, 2011
1
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and October 2, 2011
2
c. Condensed Consolidated Balance Sheets at September 30, 2012 (Unaudited) and December 31, 2011
3
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and October 2, 2011
4
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
Item 4.
Controls and Procedures
31
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
32
Signatures
33
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
Nine Months Ended
September 30,
October 2,
(In thousands, except per share amounts)
2012
2011
Operating Revenues
Education
$
552,585
601,611
1,652,067
1,823,696
Advertising
195,158
170,552
555,994
541,289
Circulation and Subscriber
220,668
212,145
655,184
643,274
Other
42,923
28,190
104,312
82,465
1,011,334
1,012,498
2,967,557
3,090,724
Operating Costs and Expenses
Operating
483,622
486,615
1,411,343
1,438,495
Selling, general and administrative
382,961
387,735
1,195,103
1,232,208
Depreciation of property, plant and equipment
63,739
61,589
188,763
186,133
Amortization of intangible assets
5,091
6,320
13,392
17,293
935,413
942,259
2,808,601
2,874,129
Income from Operations
75,921
70,239
158,956
216,595
Equity in earnings (losses) of affiliates, net
4,099
(1,494)
11,301
5,381
Interest income
648
994
2,492
2,973
Interest expense
(8,738)
(8,667)
(26,880)
(24,588)
Other income (expense), net
4,163
(29,650)
12,116
(56,273)
Income from Continuing Operations Before Income Taxes
76,093
31,422
157,985
144,088
Provision for Income Taxes
31,200
18,600
63,600
59,900
Income from Continuing Operations
44,893
12,822
94,385
84,188
Income (Loss) from Discontinued Operations, Net of Tax
49,054
(18,788)
83,177
(28,762)
Net Income (Loss)
93,947
(5,966)
177,562
55,426
Net Loss (Income) Attributable to Noncontrolling Interests
71
(16)
(10)
10
Net Income (Loss) Attributable to The Washington Post Company
94,018
(5,982)
177,552
55,436
Redeemable Preferred Stock Dividends
(222)
(226)
(895)
(917)
Net Income (Loss) Attributable to The Washington Post
Company Common Stockholders
93,796
(6,208)
176,657
54,519
Amounts Attributable to The Washington Post Company
Common Stockholders
Income from continuing operations
44,742
12,580
93,480
83,281
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to The Washington Post Company
common stockholders
Per Share Information Attributable to The Washington
Post Company Common Stockholders
Basic income per common share from continuing operations
6.03
1.59
12.38
10.44
Basic income (loss) per common share from discontinued operations
6.61
(2.41)
11.01
(3.63)
Basic net income (loss) per common share
12.64
(0.82)
23.39
6.81
Basic average number of common shares outstanding
7,272
7,802
7,405
7,900
Diluted income per common share from continuing operations
Diluted income (loss) per common share from discontinued operations
Diluted net income (loss) per common share
Diluted average number of common shares outstanding
7,376
7,883
7,508
7,979
See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Other Comprehensive Income (Loss), Before Tax
Foreign currency translation adjustments:
Translation adjustments arising during the period
5,321
(32,969)
4,233
(19,911)
Adjustment for sales of businesses with foreign operations
(1,409)
―
(888)
3,912
3,345
Unrealized (losses) gains on available-for-sale securities:
Unrealized (losses) gains for the period
(47,237)
32,939
(62,342)
Reclassification adjustment for (gain) or write-down on
available-for-sale securities included in net income
23,097
(772)
53,793
(24,140)
32,167
(8,549)
Pension and other postretirement plans:
Amortization of net prior service credit included in net income
(469)
(465)
(1,390)
(1,397)
Amortization of net actuarial loss (gain) included in net income
2,592
(127)
6,839
(382)
Foreign affiliate pension adjustments
6,701
2,088
2,123
6,109
5,449
309
Cash flow hedge, net change
217
479
(1,160)
286
(50,521)
39,801
(27,672)
Income tax benefit (expense) related to items of other comprehensive
income
1,451
15,316
(14,580)
9,047
Other Comprehensive Income (Loss), Net of Tax
1,737
(35,205)
25,221
(18,625)
Comprehensive Income (Loss)
95,684
(41,171)
202,783
36,801
Comprehensive loss (income) attributable to noncontrolling interests
76
(54)
(31)
(92)
Total Comprehensive Income (Loss) Attributable to The Washington
Post Company
95,760
(41,225)
202,752
36,709
See accompanying Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
(Unaudited)
Assets
Current Assets
Cash and cash equivalents
305,654
381,099
Restricted cash
21,485
25,287
Investments in marketable equity securities and other investments
424,277
338,674
Accounts receivable, net
391,003
392,725
Income taxes receivable
51,160
16,990
Deferred income taxes
2,935
13,343
Inventories
4,424
6,571
Other current assets
77,181
70,936
Total Current Assets
1,278,119
1,245,625
Property, Plant and Equipment, Net
1,100,885
1,152,390
Investments in Affiliates
25,219
17,101
Goodwill, Net
1,406,930
1,414,997
Indefinite-Lived Intangible Assets, Net
525,833
530,641
Amortized Intangible Assets, Net
46,794
54,622
Prepaid Pension Cost
528,438
537,262
Deferred Charges and Other Assets
54,232
64,348
Total Assets
4,966,450
5,016,986
Liabilities and Equity
Current Liabilities
Accounts payable and accrued liabilities
493,040
495,041
Deferred revenue
390,650
387,532
Dividends declared
18,299
Short-term borrowings
3,043
112,983
Total Current Liabilities
905,032
995,556
Postretirement Benefits Other Than Pensions
69,749
67,864
Accrued Compensation and Related Benefits
225,625
228,304
Other Liabilities
115,421
107,741
Deferred Income Taxes
536,515
545,361
Long-Term Debt
453,471
452,229
Total Liabilities
2,305,813
2,397,055
Redeemable Noncontrolling Interest
6,750
6,740
Redeemable Preferred Stock
11,096
11,295
Preferred Stock
Common Stockholders’ Equity
Common stock
20,000
Capital in excess of par value
248,937
252,767
Retained earnings
4,665,007
4,561,989
Accumulated other comprehensive income, net of tax
Cumulative foreign currency translation adjustment
24,683
21,338
Unrealized gain on available-for-sale securities
99,659
80,358
Unrealized gain on pensions and other postretirement plans
66,895
63,625
Cash flow hedge
(687)
8
Cost of Class B common stock held in treasury
(2,481,703)
(2,398,189)
Total Equity
2,642,791
2,601,896
Total Liabilities and Equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows from Operating Activities:
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
190,111
191,935
13,833
23,514
Goodwill impairment charges
11,923
Net pension expense (benefit)
9,980
(3,236)
Early retirement program expense
8,508
430
Foreign exchange (gain) loss
(3,179)
3,675
Net gain on sales and disposition of businesses
(23,759)
(516)
Impairment write-down of a marketable equity security
Equity in earnings of affiliates, net of distributions
(10,577)
(5,381)
(Benefit) provision for deferred income taxes
(15,756)
17,317
Net (gain) loss on sale or write-down of property, plant and equipment and other assets
(6,215)
6,155
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net
(11,984)
38,835
Decrease (increase) in inventories
1,690
(2,268)
Decrease in accounts payable and accrued liabilities
(24,885)
(88,643)
Increase in deferred revenue
20,070
1,771
(Increase) decrease in income taxes receivable
(35,341)
9,291
Decrease (increase) in other assets and other liabilities, net
5,460
(51,564)
(8)
1,107
Net Cash Provided by Operating Activities
295,510
263,564
Cash Flows from Investing Activities:
Purchases of property, plant and equipment
(152,391)
(145,622)
Net proceeds from sales of businesses, property, plant and equipment and other assets
75,106
28,842
Purchase of marketable equity securities and other investments
(46,324)
(5,260)
Investments in certain businesses, net of cash acquired
(8,971)
(79,223)
1,477
(1,599)
Net Cash Used in Investing Activities
(131,103)
(202,862)
Cash Flows from Financing Activities:
Repayment of commercial paper, net
(109,671)
Common shares repurchased
(97,545)
(179,454)
Dividends paid
(56,235)
(57,126)
Issuance of debt
52,476
19,561
Net Cash Used in Financing Activities
(243,890)
(185,494)
Effect of Currency Exchange Rate Change
4,038
(1,789)
Net Decrease in Cash and Cash Equivalents
(75,445)
(126,581)
Beginning Cash and Cash Equivalents
437,740
Ending Cash and Cash Equivalents
311,159
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 – In the fourth quarter of 2011, the Company changed its fiscal quarter from a thirteen week quarter ending on the Sunday nearest the calendar quarter-end to a quarterly month end. The fiscal quarters for 2012 and 2011 ended on September 30, 2012, June 30, 2012, March 31, 2012, October 2, 2011, July 3, 2011, and April 3, 2011, respectively. Subsidiaries of the Company report on a calendar-quarter basis, with the exception of most of the newspaper publishing operations, which report on a thirteen week quarter ending on the Sunday nearest the calendar quarter-end.
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 quarterly periods ended September 30, 2012 and October 2, 2011 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 certain Kaplan and Other businesses 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.
Recently Adopted and Issued Accounting Pronouncements – In June 2011, the Financial Accounting Standards Board (“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. In December 2011, the FASB deferred the requirements related to the presentation of reclassification adjustments until further deliberations have taken place. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the issuance of the June 2011 amended standard. The adoption of the amendment not deferred by the FASB in the first quarter of 2012 is reflected in the Company’s Condensed Consolidated Statements of Comprehensive Income.
In July 2012, the FASB issued new guidance that amends the current indefinite-lived intangible assets 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 its indefinite-lived intangible assets is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative impairment test. Previous guidance required an entity to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of an indefinite-lived intangible asset with its carrying amount. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. 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 2012 and the guidance will not have an effect on the Company’s condensed consolidated financial statements.
2. DISCONTINUED OPERATIONS
In August 2012, the Company completed the sale of Kidum and recorded a pre-tax gain of $3.6 million and an after-tax gain of $10.2 million related to this sale in the third quarter of 2012. On July 31, 2012, the Company disposed of its interest in Avenue100 Media Solutions, Inc. and recorded a pre-tax loss of $5.7 million related to the disposition. An income tax benefit of $44.5 million was also recorded in the third quarter of 2012 as the Company determined that Avenue100 has no value. The income tax benefit is due to the Company’s tax basis in the stock of Avenue100 exceeding its net book value, as a result of goodwill and other intangible asset impairment charges recorded in 2008, 2010 and 2011 for which no tax benefit was previously recorded. This activity is included in Income (Loss) from Discontinued Operations, Net of Tax in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012.
In April 2012, the Company completed the sale of Kaplan EduNeering. Under the terms of the agreement, the purchaser acquired the stock of EduNeering and received substantially all the assets and liabilities. In the second quarter of 2012, the Company recorded an after-tax gain of $18.5 million related to this sale, subject to final net working capital adjustments, which is included in Income (Loss) from Discontinued Operations, Net of Tax in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012. In February 2012, Kaplan completed the stock sale of Kaplan Learning Technologies (KLT) and recorded an after-tax loss on the sale of $1.9 million, which is included in Income (Loss) from Discontinued Operations, Net of Tax in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012.
The Company recorded $23.2 million of income tax benefits in the first quarter of 2012 in connection with the sale of its stock in EduNeering and KLT related to the excess of the outside stock tax basis over the net book value of the net assets disposed.
In October 2011, Kaplan completed the sale of Kaplan Compliance Solutions (KCS) and in July 2011, Kaplan completed the sale of Kaplan Virtual Education (KVE). The results of operations of Kidum, Avenue100, EduNeering, KLT, KCS and KVE, for the third quarter and first nine months of 2012 and 2011, where applicable, are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax. All corresponding prior period operating results presented in the Company’s condensed consolidated financial statements
6
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 or prior year Condensed Consolidated Balance Sheet to reflect the discontinued operations.
The summarized income (loss) from discontinued operations, net of tax, is presented below:
(in thousands)
Operating revenues
4,861
23,956
35,342
95,219
Operating costs and expenses
(5,579)
(44,359)
(42,583)
(131,096)
Loss from discontinued operations
(718)
(20,403)
(7,241)
(35,877)
Provision for (benefit from) income taxes
232
(2,782)
(2,068)
(8,282)
Net Loss from Discontinued Operations
(950)
(17,621)
(5,173)
(27,595)
(Loss) gain on sales and disposition of discontinued operations
(2,174)
516
23,759
(Benefit from) provision for income taxes on sales and disposition
of discontinued operations
(52,178)
1,683
(64,591)
The following table summarizes the 2012 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
March 31,
June 30,
(in thousands, except per share amounts)
547,280
552,202
170,750
190,086
Circulation and subscriber
215,230
219,286
27,939
33,450
961,199
995,024
463,106
464,615
411,466
400,676
62,275
62,749
3,873
4,428
940,720
932,468
20,479
62,556
Equity in earnings of affiliates, net
3,888
3,314
1,069
775
(9,163)
(8,979)
8,588
(635)
Income from Continuing Operations before Income Taxes
24,861
57,031
11,400
21,000
13,461
36,031
Income from Discontinued Operations, Net of Tax
18,107
16,016
31,568
52,047
Net Income Attributable to Noncontrolling Interests
(70)
(11)
Net Income Attributable to The Washington Post Company
31,498
52,036
(451)
Net Income Attributable to The Washington Post Company Common Stockholders
31,047
51,814
Amounts Attributable to The Washington Post Company Common Stockholders
12,940
35,798
Income from discontinued operations, net of tax
Net income attributable to the Washington Post Company common stockholders
Per Share Information Attributable to The Washington Post Company Common Stockholders
1.66
4.72
Basic income per common share from discontinued operations
2.41
2.12
Basic net income per common share
4.07
6.84
Diluted income per common share from discontinued operations
Diluted net income per common share
7
The following table summarizes the 2011 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
April 3,
July 3,
611,714
610,371
580,763
177,385
193,352
213,255
214,523
216,606
213,183
25,299
28,976
33,220
1,028,921
1,049,305
1,040,421
463,303
488,577
465,666
438,744
405,729
397,518
61,929
62,615
62,932
5,176
5,797
5,042
969,152
962,718
931,158
59,769
86,587
109,263
3,737
3,138
568
982
997
1,174
(7,961)
(7,960)
(8,638)
Other (expense) income, net
(24,032)
(2,591)
1,073
32,495
80,171
103,440
12,100
29,200
42,000
20,395
50,971
61,440
(Loss) Income from Discontinued Operations, Net of Tax
(4,766)
(5,208)
291
15,629
45,763
61,731
Net (Income) Loss Attributable to Noncontrolling Interests
(14)
40
(17)
15,615
45,803
61,714
(461)
(230)
15,154
45,573
19,920
50,781
61,423
(Loss) income from discontinued operations, net of tax
Net income (loss) attributable to the Washington Post
Company common stockholders
Per Share Information Attributable to The Washington Post
2.43
6.40
8.00
Basic (loss) income per common share from discontinued operations
(0.56)
(0.66)
0.03
1.87
5.74
8.03
Diluted (loss) income per common share from discontinued operations
The following table summarizes the operating results of the Company following the reclassification of operations discussed above as discontinued operations:
Fiscal Year Ended
January 2,
2,404,459
2,804,840
754,544
833,605
856,457
857,290
115,685
90,682
4,131,145
4,586,417
1,904,161
1,850,402
1,629,726
1,869,194
249,065
242,405
22,335
21,552
3,805,287
3,983,553
325,858
602,864
5,949
(4,133)
4,147
2,576
(33,226)
(30,503)
(55,200)
7,515
247,528
578,319
101,900
222,400
145,628
355,919
Loss from Discontinued Operations, Net of Tax
(28,471)
(77,899)
117,157
278,020
Net (Income) Loss attributable to noncontrolling interests
(7)
94
117,150
278,114
(922)
116,233
277,192
144,704
355,091
Loss from discontinued operations, net of tax
Per Share Information Attributable to The Washington Post Company Common
Stockholders
18.30
39.78
Basic loss per common share from discontinued operations
(3.60)
(8.72)
14.70
31.06
39.76
Diluted loss per common share from discontinued operations
31.04
9
3. INVESTMENTS
Investments in marketable equity securities comprised the following:
Total cost
213,831
169,271
Net unrealized gains
166,097
133,930
Total Fair Value
379,928
303,201
The Company invested $45.0 million in marketable equity securities during the first nine months of 2012. There were no new investments in marketable equity securities during the first nine months of 2011. During the first nine months of 2012, proceeds from sales of marketable equity securities were $2.0 million, and net realized gains on such sales were $0.5 million. There were no sales of marketable equity securities in the first nine months of 2011.
As of September 30, 2012, the Company has a $14.1 million unrealized loss on its investment in Strayer Education, Inc., a publicly traded company. At September 30, 2012, the investment has been in an unrealized loss position for under three 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 ability and intent to hold the investment and concluded that the unrealized loss is not other-than-temporary as of September 30, 2012. If any impairment is considered other-than-temporary, the investment will be written down to its fair market value with a corresponding charge to the Consolidated Statement of Operations.
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 $17.8 million of the total fair value of the Company’s investments in marketable equity securities at September 30, 2012.
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.
4. ACQUISITIONS AND DISPOSITIONS
In the first nine months of 2012, the Company acquired three small businesses in its education division and one small business included in other businesses; the purchase price allocation mostly comprised goodwill and other intangible assets on a preliminary basis. In the first nine months of 2011, the Company acquired four businesses. 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. The Company did not make any acquisitions during the third quarters of 2012 or 2011. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition.
In September 2012, the Company entered into a stock purchase agreement to acquire a controlling interest in Celtic Healthcare, Inc. (Celtic), a provider of home healthcare and hospice services in the northeastern and mid-Atlantic regions. The transaction closed on November 5, 2012. The operating results of Celtic will be included in other businesses.
The Company divested its interested in Avenue100 Media Solutions in July 2012, which was previously reported in other businesses. Kaplan completed the sales of Kidum in August 2012, EduNeering in April 2012 and Kaplan Learning Technologies in February 2012, which were part of the Kaplan Ventures division. In October 2011, Kaplan completed the sale of Kaplan Compliance Solutions, which was part of the Kaplan Higher Education division. In July 2011, Kaplan completed the sale of Kaplan Virtual Education, which was part of Kaplan Ventures division.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended September 30, 2012 and October 2, 2011 was $5.1 million and $9.3 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2012 and October 2, 2011 was $13.8 million and $23.5 million. Amortization of intangible assets is estimated to be approximately $5 million for the remainder of 2012, $15 million in 2013, $8 million in 2014, $5 million in 2015, $5 million in 2016, $5 million in 2017 and $4 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
Cable
Newspaper
Television
Publishing
Broadcasting
Businesses
Total
Balance as of December 31, 2011
Goodwill
1,116,615
85,488
81,183
203,165
100,152
1,586,603
Accumulated impairment losses
(8,492)
(65,772)
(97,342)
(171,606)
1,108,123
15,411
2,810
Acquisitions
7,364
4,098
11,462
Dispositions
(29,000)
Foreign currency exchange rate changes and other
9,471
Balance as of September 30, 2012
1,095,958
6,908
1,472,702
The changes in carrying amount of goodwill at the Company’s education division were as follows:
Higher
Test
Kaplan
Preparation
International
Ventures
409,128
152,187
515,936
39,364
30,872
89
11,254
(1,872)
409,217
534,554
Other intangible assets consist of the following:
As of September 30, 2012
As of December 31, 2011
Gross
Net
Useful Life
Carrying
Accumulated
Range
Amount
Amortization
Amortized Intangible Assets
Non-compete agreements
2-5 years
14,348
12,215
2,133
14,493
10,764
3,729
Student and customer relationships
2-10 years
65,185
38,944
26,241
75,734
47,888
27,846
Databases and technology
3-5 years
6,457
5,332
1,125
10,514
8,159
2,355
Trade names and trademarks
32,713
18,225
14,488
36,222
18,936
17,286
1-25 years
9,344
6,537
2,807
9,971
6,565
3,406
128,047
81,253
146,934
92,312
Indefinite-Lived Intangible Assets
Franchise agreements
496,321
Wireless licenses
22,150
Licensure and accreditation
7,362
7,862
4,308
11
6. DEBT
The Company’s borrowings consist of the following:
7.25% unsecured notes due February 1, 2019
397,375
397,065
Commercial paper borrowings
109,671
AUD 50M borrowing
51,877
51,012
Other indebtedness
7,262
7,464
Total Debt
456,514
565,212
Less: current portion
(3,043)
(112,983)
Total Long-Term Debt
The Company’s other indebtedness at September 30, 2012 and December 31, 2011 is at interest rates from 0% to 6% and matures from 2012 to 2017 and 2012 to 2016, respectively.
During the three months ended September 30, 2012 and October 2, 2011, the Company had average borrowings outstanding of approximately $456.3 million and $417.6 million, respectively, at average annual interest rates of approximately 7.0% and 7.2%. During the three months ended September 30, 2012 and October 2, 2011, the Company incurred net interest expense of $8.1 million and $7.7 million, respectively.
During the nine months ended September 30, 2012 and October 2, 2011, the Company had average borrowings outstanding of approximately $467.3 million and $406.9 million, respectively, at average annual interest rates of approximately 7.0% and 7.2%. During the nine months ended September 30, 2012 and October 2, 2011, the Company incurred net interest expense of $24.4 million and $21.6 million, respectively.
At September 30, 2012, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $485.2 million, compared with the carrying amount of $397.4 million. At December 31, 2011, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $460.5 million, compared with the carrying amount of $397.1 million. The carrying value of the Company’s other unsecured debt at September 30, 2012 approximates fair value.
7. EARNINGS PER SHARE
The Company’s earnings per share from continuing operations (basic and diluted) are presented below:
Income from continuing operations attributable to The
Washington Post Company common stockholders
Less: Amount attributable to participating securities
(190)
(1,830)
(835)
Basic income from continuing operations attributable to
The Washington Post Company common stockholders
43,854
12,390
91,650
82,446
Plus: Amount attributable to participating securities
888
190
1,830
835
Diluted income from continuing operations attributable to
Basic weighted average shares outstanding
Plus: Effect of dilutive shares related to stock options and restricted stock
104
81
103
79
Diluted weighted average shares outstanding
Income Per Share from Continuing Operations Attributable
to The Washington Post Company Common Stockholders:
Basic
Diluted
12
For the three and nine months ended September 30, 2012, the basic earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the if-converted method for participating securities, resulting in the presentation of the lower amount in diluted earnings per share. The diluted earnings per share amounts for the three and nine months ended September 30, 2012 exclude the effects of 123,494 and 111,994 stock options outstanding, respectively, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2012 exclude the effects of 42,500 restricted stock awards, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended October 2, 2011 exclude the effects of 137,544 and 101,794 stock options outstanding, respectively, as their inclusion would have been antidilutive.
In the three and nine months ended September 30, 2012, the Company declared regular dividends totaling $2.45 and $9.80 per share, respectively. In the three and nine months ended October 2, 2011, the Company declared regular dividends totaling $2.35 and $9.40 per share, respectively.
8. PENSION AND POSTRETIREMENT PLANS
Defined Benefit Plans. The total cost (benefit) arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
Pension Plans
Service cost
10,876
6,760
28,684
20,734
Interest cost
14,828
14,964
44,248
45,033
Expected return on assets
(23,779)
(24,095)
(72,301)
(71,648)
Amortization of prior service cost
919
882
2,775
2,645
Recognized actuarial loss
2,502
6,574
Net Periodic Cost (Benefit)
5,346
(1,489)
Early retirement programs expense
7,486
Total Cost (Benefit)
12,832
18,488
(2,806)
In the third quarter of 2012, the Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper and recorded early retirement program expense of $7.5 million. In the first quarter of 2012, the Company offered a Voluntary Retirement Incentive Program to certain employees of Post-Newsweek Media and recorded early retirement program expense of $1.0 million. In the first quarter of 2011, the Company offered a Voluntary Retirement Incentive Program to certain employees of Robinson Terminal Warehouse and recorded early retirement program expense of $0.4 million. The early retirement program expense for these programs is funded from the assets of the Company’s pension plans.
Effective August 1, 2012, the Company’s defined benefit pension plan was amended to provide most of the current participants with a new cash balance benefit. The new cash balance benefit will be funded by the assets of the Company’s pension plans. As a result of this new benefit, effective August 1, 2012, the Company’s matching contribution for its 401(k) Savings Plans was reduced.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) consists of the following components:
SERP
367
380
1,100
1,140
1,060
1,084
3,181
3,252
14
65
41
195
458
353
1,375
1,059
Total Cost
1,899
1,882
5,697
5,646
13
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. The assets of the Company’s pension plans were allocated as follows:
U.S. equities
66
%
69
U.S. fixed income
International equities
21
100
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of September 30, 2012, the managers can invest no more than 24% of the assets in international stocks at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
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, 2012. 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, 2012 the Company held common stock in one investment which exceeded 10% of total plan assets. This investment was valued at $206.3 million and $222.4 million at September 30, 2012 and December 31, 2011, respectively, or approximately 10% and 12%, respectively, of total plan assets. Assets also included $178.1 million and $154.0 million of Berkshire Hathaway common stock at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 the Company held investments in one foreign country which exceeded 10% of total plan assets. These investments were valued at $222.6 million and $241.4 million at September 30, 2012 and December 31, 2011, respectively, or approximately 11% and 13%, respectively, of total plan assets.
Other Postretirement Plans. The total benefit arising from the Company’s other postretirement plans consists of the following components:
778
718
2,335
2,154
684
766
2,052
2,297
Amortization of prior service credit
(1,402)
(1,412)
(4,206)
(4,237)
Recognized actuarial gain
(370)
(481)
(1,110)
(1,441)
Total Periodic Benefit
(310)
(409)
(929)
(1,227)
9. OTHER NON-OPERATING INCOME (EXPENSE)
A summary of non-operating income (expense) is as follows:
Foreign exchange gain (loss)
3,111
(6,707)
3,179
(3,675)
Impairment write-down on a cost method investment
(112)
(231)
(498)
(3,379)
Gain on sales of cost method investments
7,258
4,031
(23,097)
(53,793)
Other, net
1,164
385
2,177
543
Total Other Non-Operating Income (Expense)
10. CONTINGENCIES
Litigation and Legal Matters. The Company is involved in various legal proceedings that arise in the ordinary course of its business. Although the outcome of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company's business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that the exposure to future material losses from existing legal proceedings is not reasonably possible, or that future material losses in excess of the amounts accrued are not reasonably possible.
DOE Program Reviews. The U.S. Department of Education (DOE) undertakes program reviews at Title IV participating institutions. Currently, there is pending program review activity at Kaplan University and one open review at KHE’s Broomall, PA location. In May 2012, the DOE issued a preliminary report on its 2009 onsite program review at Kaplan University. Several of the preliminary findings require Kaplan University to conduct additional, detailed file reviews, with Kaplan University’s review and response due in January 2013. In August 2012, the DOE notified Kaplan University that it was conducting an offsite program review focused on more recent years and the DOE began this review in September 2012. In addition, the Company is awaiting the DOE’s final report on the program review at KHE’s Broomall, PA, location. The results of these open reviews and their impact on Kaplan’s operations are uncertain.
Other. In June 2012, the Accrediting Commission of Career Schools and Colleges (ACCSC), a KHE accreditor, issued a notice to three campuses (Baltimore, Dayton and Indianapolis Northwest), to “show cause” as to why their accreditation should not be withdrawn for failure to meet certain student achievement threshold requirements. These campuses represent approximately 2% of KHE’s year-to-date revenue for 2012. Each of these campuses failed to meet student placement thresholds or student graduation rate thresholds or both in some programs or aggregated over all programs. The Baltimore and Dayton campuses responded in September 2012, providing their plans to improve these rates and come into compliance with the ACCSC standards. The Indianapolis Northwest responded in October 2012, indicating that this campus will be closing and consolidating into an existing campus, also in Indianapolis. KHE cannot be certain that its remedial measures will satisfy all of ACCSC's concerns; in the event that ACCSC determines that some or all of these campuses may lose accreditation, a loss of accreditation would mean that the school would no longer be eligible to participate in Title IV programs and may also lose programmatic accreditation necessary for students to obtain licensure and/or employment in specific professions.
11. FAIR VALUE MEASUREMENTS
Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
15
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
Level 1
Level 2
At September 30, 2012
Money market investments(1)
160,217
Marketable equity securities(3)
Other current investments(4)
22,115
22,234
44,349
Total Financial Assets
402,043
182,451
584,494
Liabilities
Deferred compensation plan liabilities(6)
60,996
7.25% unsecured notes(7)
485,164
AUD 50M borrowing(7)
Interest rate swap(8)
1,146
Total Financial Liabilities
599,183
At December 31, 2011
Money market investments(2)
180,136
15,223
20,250
35,473
Interest rate swap(5)
318,424
200,400
518,824
63,403
460,500
574,915
____________
(1) The Company’s money market investments at September 30, 2012 are included in cash and cash equivalents.
(2) The Company’s money market investments at December 31, 2011 are included in cash, cash equivalents and restricted cash.
(3) The Company’s investments in marketable equity securities are classified as available-for-sale.
(4) Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
(5) Included in Deferred charges and other assets. The fair value utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
(6) Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.
(7) See Note 6 for carrying amount of these notes and borrowing.
(8) Included in Other liabilities. The fair value utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
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.
12. BUSINESS SEGMENTS
The Company has six reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International, cable television, newspaper publishing, and television broadcasting.
Education. Kaplan sold Kidum in August 2012, EduNeering in April 2012, KLT in February 2012, KCS in October 2011 and KVE in July 2011; therefore, the education division’s operating results exclude these businesses. Due to the sale of Kidum, the Kaplan Ventures segment is no longer included as a separate segment as its results have been reclassified to discontinued operations. Also, Kaplan’s Colloquy and U.S. Pathways businesses moved from Kaplan Ventures to Kaplan International. Segment operating results of the education division have been restated to reflect these changes.
16
For the first nine months of 2012, Kaplan International results benefited from a favorable $3.9 million out of period expense adjustment related to certain items recorded in 2011 and 2010. With respect to this out of period expense adjustment, the Company has concluded that it was not material to the Company’s financial position or results of operations for 2012, 2011 and 2010 and the related interim periods, based on its consideration of quantitative and qualitative factors.
Other Businesses. In the third quarter of 2012, Social Code has been moved from the newspaper publishing segment to other businesses. Due to the disposal of Avenue100 Media Solutions, it is no longer included in the other businesses segment, as its results have been reclassified to discontinued operations. The other businesses operating results have been restated to reflect these changes.
Identifiable Assets. In the third quarter of 2012, the Company has excluded prepaid pension cost from identifiable assets by segment. The 2011 amounts have been revised to reflect this change; the 2010 revised amounts are not included.
The following table summarizes the 2012 quarterly financial information related to each of the Company’s business segments:
Cable television
190,210
195,579
199,625
Newspaper publishing
137,553
144,721
137,276
Television broadcasting
81,497
95,591
106,411
Other businesses
4,768
7,177
15,834
Corporate office
Intersegment elimination
(109)
(246)
(397)
Income (Loss) From Operations
(11,915)
3,728
14,693
32,777
38,446
39,913
(21,431)
(13,079)
(21,825)
30,999
43,728
54,082
(4,643)
(6,775)
(5,248)
(5,308)
(3,492)
(5,694)
Equity in Earnings of Affiliates, Net
Interest Expense, Net
(8,094)
(8,204)
(8,090)
Other Income (Expense), Net
Depreciation of Property, Plant and Equipment
20,717
21,011
22,024
32,197
32,234
32,310
6,236
6,282
6,274
3,125
3,222
3,126
Amortization of Intangible Assets
3,236
3,803
4,489
54
53
52
183
172
150
400
Net Pension Expense (Credit)
2,392
1,969
3,522
530
514
694
8,601
7,772
16,181
960
1,055
1,432
18
(9,298)
(8,896)
(9,021)
3,195
2,424
12,826
17
The following table summarizes the 2011 quarterly financial information related to each of the Company’s business segments:
190,280
191,231
187,892
190,818
151,053
155,863
143,495
172,121
72,183
84,940
73,830
88,253
3,944
6,909
5,764
8,890
(253)
(9)
(94)
(424)
21,029
23,556
20,808
30,893
37,707
40,425
36,795
41,917
(13,712)
(3,524)
(10,761)
6,793
19,591
32,571
24,073
40,854
(1,918)
(2,008)
(1,745)
(3,064)
(2,928)
(4,433)
(8,130)
Equity in Earnings (Losses) of Affiliates, Net
(6,979)
(6,963)
(7,673)
(7,464)
Other (Expense) Income, Net
19,989
21,308
20,338
22,100
31,786
31,533
31,661
31,322
6,900
6,540
6,453
6,443
3,110
3,134
3,137
3,067
144
4,413
5,568
4,394
73
62
290
289
182
1,552
1,652
1,655
1,486
518
497
455
454
Newspaper publishing(1)
6,700
5,285
5,241
8,057
646
335
325
363
(9,297)
(9,247)
(9,185)
(9,254)
124
(1,474)
(1,505)
1,110
(1) Includes a $2.4 million charge in the fourth quarter of 2011 related to the withdrawal from a multiemployer pension plan.
The following table summarizes financial information related to each of the Company’s business segments:
585,414
569,403
760,221
759,884
419,550
450,411
622,532
675,931
283,499
230,953
319,206
342,164
27,779
16,617
25,507
4,442
(752)
(356)
(780)
(844)
Income (Loss) from Operations
6,506
65,393
96,286
359,584
111,136
114,927
156,844
163,945
(56,335)
(27,997)
(21,204)
(11,115)
128,809
76,235
117,089
121,348
(16,666)
(5,671)
(8,735)
(6,326)
(14,494)
(6,292)
(14,422)
(24,572)
(24,388)
(21,615)
(29,079)
(27,927)
63,752
61,635
83,735
73,351
96,741
94,980
126,302
124,834
18,792
19,893
26,336
30,341
9,473
9,381
12,448
12,720
244
1,159
11,528
15,023
19,417
19,202
159
201
267
327
505
869
1,051
1,223
1,200
1,600
800
4,859
6,345
5,707
1,738
1,470
1,924
1,919
32,554
17,226
25,283
42,287
3,447
1,306
1,669
1,113
38
(27,215)
(27,729)
(36,983)
(34,599)
18,445
(2,855)
16,427
(1) Includes a $2.4 and $20.4 million charge in 2011 and 2010, respectively, related to the withdrawal from a multiemployer pension plan
19
Asset information for the Company’s business segments are as follows:
As of
Identifiable Assets
1,915,268
2,217,719
1,175,151
1,164,756
272,203
314,405
381,795
376,259
25,844
15,381
262,604
70,902
4,032,865
4,159,422
Investments in Marketable Equity Securities
The following table summarizes the 2012 quarterly financial information related to the operating segments of the Company’s education division:
Higher education
308,384
290,861
273,703
Test preparation
62,829
79,787
81,151
Kaplan international
176,385
181,656
197,858
Kaplan corporate and other
1,157
1,003
998
(1,475)
(1,105)
(1,125)
8,959
5,860
1,510
(10,219)
2,706
3,446
3,423
9,294
20,619
(14,272)
(14,293)
(11,106)
194
161
224
11,757
11,673
12,168
4,315
4,449
5,544
4,200
4,472
3,841
445
417
471
20
The following table summarizes the 2011 quarterly financial information related to the reportable segments within the Company’s education division:
386,883
358,312
330,856
323,532
73,365
83,197
79,630
66,901
152,135
169,016
192,609
190,821
1,117
1,065
1,293
(1,786)
(1,219)
(2,777)
(1,601)
50,650
45,157
25,083
28,025
(12,676)
(11,597)
(4,745)
520
(682)
8,642
10,775
22,771
(16,032)
(18,664)
(9,225)
(20,596)
(1,080)
173
11,241
11,897
11,825
13,416
3,796
3,445
3,799
3,468
4,751
4,384
4,350
831
864
535
The following table summarizes financial information related to the operating segments of the Company’s education division segments:
2010
872,948
1,076,051
1,399,583
1,905,038
223,767
236,192
303,093
314,879
555,899
513,760
704,581
587,781
3,158
3,475
4,585
5,537
(3,705)
(5,782)
(7,383)
(8,395)
16,329
120,890
148,915
406,880
(4,067)
(29,018)
(28,498)
(32,583)
33,336
18,735
41,506
49,309
(39,671)
(43,921)
(64,517)
(63,788)
579
(1,293)
(1,120)
(234)
35,598
34,963
48,379
42,412
14,308
11,690
15,489
14,095
12,513
12,603
16,953
12,993
1,333
2,379
2,914
3,851
Identifiable assets for the Company’s education division consist of the following:
683,253
919,443
325,143
334,343
884,285
810,140
22,587
153,793
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company reported net income attributable to common shares of $93.8 million ($12.64 per share) for the third quarter ended September 30, 2012, compared to $6.2 million ($0.82 per share) for the third quarter of last year. Net income includes $49.1 million in income from discontinued operations ($6.61 per share) and $18.8 million ($2.41 per share) in losses from discontinued operations for the third quarter of 2012 and 2011, respectively. Income from continuing operations attributable to common shares was $44.7 million ($6.03 per share) for the third quarter of 2012, compared to $12.6 million ($1.59 per share) for the third quarter of 2011.
Items included in the Company’s income from continuing operations for the third quarter of 2012:
§ $12.2 million in early retirement, severance and restructuring charges at the newspaper publishing division and Kaplan (after-tax impact of $7.6 million, or $1.02 per share); and
§ $3.1 million in non-operating unrealized foreign currency gains (after-tax impact of $1.9 million, or $0.26 per share).
Items included in the Company’s income 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);
§ 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); and
§ $6.7 million in non-operating unrealized foreign currency losses (after-tax impact of $4.2 million, or $0.54 per share).
Revenue for the third quarter of 2012 was $1,011.3 million, flat compared to $1,012.5 million in the third quarter of 2011. The Company reported operating income of $75.9 million in the third quarter of 2012, compared to operating income of $70.2 million in the third quarter of 2011. Revenues and operating income increased at the television broadcasting and cable television divisions, offset by declines at the education and newspaper publishing divisions.
For the first nine months of 2012, the Company reported net income attributable to common shares of $176.7 million ($23.39 per share), compared to $54.5 million ($6.81 per share) for the same period of 2011. However, net income includes $83.2 million ($11.01 per share) in income from discontinued operations and $28.8 million ($3.63 per share) in losses from discontinued operations for the first nine months of 2012 and 2011, respectively (refer to “Discontinued Operations” discussion below). Income from continuing operations attributable to common shares was $93.5 million ($12.38 per share) for the first nine months of 2012, compared to $83.3 million ($10.44 per share) for the first nine months of 2011. As a result of the Company’s share repurchases, there were 6% fewer diluted average shares outstanding in the first nine months of 2012.
Items included in the Company’s income from continuing operations for the first nine months of 2012:
§ $22.4 million in early retirement, severance and restructuring charges at the newspaper publishing division and Kaplan (after-tax impact of $13.9 million, or $1.85 per share);
§ a $5.8 million gain on sales of cost method investments (after-tax impact of $3.7 million, or $0.48 per share); and
§ $3.2 million in non-operating unrealized foreign currency gains (after-tax impact of $2.0 million, or $0.27 per share).
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); and
§ $3.7 million in non-operating unrealized foreign currency losses (after-tax impact of $2.3 million, or $0.29 per share).
Revenue for the first nine months of 2012 was $2,967.6 million, down 4% from $3,090.7 million in the first nine months of 2011. Revenues were down at the education and newspaper publishing divisions, partially offset by increases at the television broadcasting and cable television divisions. The Company reported operating income of $159.0 million for the first nine months of 2012, compared to $216.6 million for the first nine months of 2011. Operating results were down at all of the Company’s divisions, except for the television broadcasting division.
Division Results
Education division revenue totaled $552.6 million for the third quarter of 2012, an 8% decline from revenue of $601.6 million for the third quarter of 2011. Excluding revenue from acquired businesses, education division revenue declined 9% in the third quarter of 2012. Kaplan reported third quarter 2012 operating income of $14.7 million, down from $20.8 million in the third quarter of 2011.
For the first nine months of 2012, education division revenue totaled $1,652.1 million, a 9% decline from revenue of $1,823.7 million for the same period of 2011. Excluding revenue from acquired businesses, education division revenue declined 11% for the first nine months of 2012. Kaplan reported operating income of $6.5 million for the first nine months of 2012, compared to operating income of $65.4 million for the first nine months of 2011.
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 2012 and 2011, with the objective of establishing lower costs levels in future periods. Across all businesses, severance and restructuring costs totaled $4.3 million and $9.3 million in the third quarter and first nine months of 2012, respectively, compared to $5.6 million and $19.6 million in the third quarter and first nine months of 2011, respectively. Kaplan expects to incur significant additional restructuring costs in the fourth quarter of 2012 and in 2013 at Kaplan Higher Education and Kaplan International.
A summary of Kaplan’s operating results for the third quarter and the first nine months of 2012 compared to 2011 is as follows:
% Change
Revenue
(19)
(5)
Kaplan corporate
(23)
Operating Income (Loss)
(86)
86
91
78
(6,617)
(3,657)
(81)
(28,143)
(28,898)
(4,489)
(5,568)
(11,528)
(15,023)
23
(29)
(90)
Kaplan sold Kidum in August 2012, EduNeering in April 2012 and Kaplan Learning Technologies in February 2012. Consequently, the education division’s operating results exclude these businesses.
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 2012, higher education revenue declined 17% and 19%, respectively, due largely to declines in average enrollments that reflect weaker market demand over the past year. Operating income decreased 94% and 86% for the third quarter and first nine months of 2012, respectively. These declines were due primarily to lower revenue, offset by expense reductions associated with lower enrollments and recent restructuring efforts.
In September 2012, KHE finalized a plan to consolidate its market presence at certain of its fixed-facility campuses. Under this plan, KHE has ceased new enrollments at nine ground campuses as it considers alternatives for these locations, and is in the process of consolidating operations of four other campuses into existing, nearby locations. KHE will be teaching out the current students at these campuses. Revenues at these campuses represent approximately 4% of KHE’s total revenues. In connection with the plan, KHE expects to incur an estimated $18 million in restructuring costs from fixed asset write-downs and lease and severance obligations; $2.1 million of these restructuring costs were recorded in the third quarter of 2012, with the remainder to be recorded in the fourth quarter of 2012 and in 2013. In the third quarter and first nine months of 2012, KHE incurred $2.7 million and $6.5 million in total severance and restructuring costs, respectively, compared to $1.6 million and $7.1 million in the third quarter and first nine months 2011, respectively. KHE continues to assess and develop plans for both its fixed-facility and online programs and expects to incur significant additional restructuring costs in the fourth quarter of 2012 and in 2013.
Although revenues were down substantially compared to the first nine months of 2011, new student enrollments at Kaplan University and KHE Campuses increased 5% in the first nine months of 2012. For the third quarter of 2012, new student enrollments increased 9%. Totalenrollments at September 30, 2012, were down 8% compared to September 30, 2011, but increased 8% compared to June 30, 2012.
Student Enrollments as of
Kaplan University
49,132
44,756
53,473
KHE Campuses
24,129
22,849
26,184
73,261
67,605
79,657
Kaplan University enrollments included 6,822, 5,681 and 6,036 campus-based students as of September 30, 2012, June 30, 2012, and September 30, 2011, respectively.
Kaplan University and KHE Campuses enrollments at September 30, 2012, and September 30, 2011, by degree and certificate programs, are as follows:
As of September 30,
Certificate
23.6
23.5
Associate’s
30.7
31.0
Bachelor’s
32.7
34.7
Master’s
13.0
10.8
100.0
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. For those first-time students enrolled to date under the Kaplan Commitment, the attrition rate during the risk-free period has been approximately 28%. Management believes the Kaplan Commitment program is unique and reflects Kaplan’s commitment to student success.
24
Refer to KHE Regulatory Matters below for additional information.
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation and tutoring offerings. KTP revenue increased 2% in the third quarter of 2012, while revenues declined 5% for the first nine months of 2012. Enrollment increased 21% and 12% for the third quarter and first nine months of 2012, respectively, driven by strength in pre-college, medical and bar review programs. Enrollment increases were offset by competitive pricing pressure and a continued shift in demand to lower priced online test preparation offerings. The improvement in KTP operating results in the first nine months of 2012 is largely from lower operating expenses due to restructuring activities in prior years. Also, $3.5 million and $12.0 million in restructuring costs were recorded in the third quarter and first nine months of 2011, respectively.
Kaplan International includes English-language programs, and postsecondary education and professional training businesses outside the United States. In May 2011, Kaplan Australia acquired Franklyn Scholar and Carrick Education Group, 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 3% and 8% in the third quarter and first nine months of 2012, respectively. Excluding revenue from acquired businesses, Kaplan International revenue increased 2% in both the third quarter and the first nine months of 2012 due to enrollment growth in the English-language and Singapore higher education programs. Kaplan International operating income increased in the first nine months of 2012 due largely to strong results in Singapore, offset by combined losses from businesses acquired in 2011. These losses are primarily in Australia, where Kaplan is in the process of consolidating operations and expects to incur restructuring costs in the fourth quarter of 2012 and in 2013.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor shared activities.
As previously disclosed, in the first quarter of 2012, the Company performed an interim test of the carrying value of goodwill at the KTP reporting unit for possible impairment and the estimated fair value of the KTP reporting unit exceeded its carrying value by a margin of 10%. Also, Kaplan continues to formulate and implement restructuring plans and is likely to incur significant restructuring costs in the fourth quarter of 2012 and in 2013. The Company will perform its annual goodwill impairment test in the fourth quarter of 2012. There exists a reasonable possibility that operational changes, a decrease in the assumed projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of Kaplan’s reporting units, could result in an impairment charge.
Cable Television
Cable television division revenue increased 6% in the third quarter of 2012 to $199.6 million, from $187.9 million for the third quarter of 2011; for the first nine months of 2012, revenue increased 3% to $585.4 million, from $569.4 million in the same period of 2011. The revenue increase for the first nine months of 2012 is due to continued growth of the division’s Internet and telephone service revenues and rate increases for many subscribers in June 2012, offset by an increase in promotional discounts and a decline in basic video subscribers.
Cable television division operating income increased 8% to $39.9 million, from $36.8 million in the third quarter of 2011, due to increased revenues, offset by higher programming costs. Cable division operating income for the first nine months of 2012 decreased 3% to $111.1 million, from $114.9 million for the first nine months of 2011, primarily due to higher programming costs.
At September 30, 2012, Primary Service Units (PSUs) were up slightly from the prior year due to growth in high-speed data and telephony subscribers, offset by a decrease in basic video subscribers. PSUs include about 6,000 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
605,057
627,659
High-speed data
462,808
448,143
Telephony
185,647
176,527
1,253,512
1,252,329
25
Below are details of Cable division capital expenditures as defined by the NCTA Standard Reporting Categories:
Customer Premise Equipment
35,863
36,085
Commercial
3,387
2,549
Scaleable Infrastructure
17,557
25,355
Line Extensions
4,010
4,220
Upgrade/Rebuild
10,646
7,211
Support Capital
30,799
18,625
102,262
94,045
Newspaper Publishing
Newspaper publishing division revenue totaled $137.3 million for the third quarter of 2012, down 4% from revenue of $143.5 million for the third quarter of 2011; division revenue declined 7% to $419.6 million for the first nine months of 2012, from $450.4 million for the first nine months of 2011. Print advertising revenue at The Washington Post in the third quarter of 2012 declined 11% to $51.4 million, from $57.6 million in the third quarter of 2011, and declined 14% to $160.7 million for the first nine months of 2012, from $187.4 million for the first nine months of 2011. The decline is largely due to reductions in general and retail advertising. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com and Slate, increased 13% to $26.9 million for the third quarter of 2012, versus $23.8 million for the third quarter of 2011; newspaper online revenues increased 4% to $77.5 million for the first nine months of 2012, versus $74.3 million for the first nine months of 2011. Display online advertising revenue increased 18% and 5% for the third quarter and first nine months of 2012, respectively. Online classified advertising revenue increased 1% for the third quarter and decreased 1% for the first nine months of 2012.
For the first nine months of 2012, Post daily and Sunday circulation declined 9.2% and 6.5%, respectively, compared to the same periods of the prior year. For the nine months ended September 30, 2012, average daily circulation at The Washington Post totaled 471,200 and average Sunday circulation totaled 689,000.
The newspaper publishing division reported an operating loss of $21.8 million in the third quarter of 2012 and an operating loss of $10.8 million in the third quarter of 2011, including noncash pension expense of $16.2 million and $5.2 million, respectively. The newspaper publishing division reported an operating loss of $56.3 million for the first nine months of 2012 and an operating loss of $28.0 million for the first nine months of 2011, including noncash pension expense of $32.6 million and $17.2 million, respectively. Included in pension expense for the third quarter of 2012 was a $7.5 million Voluntary Retirement Incentive Program (VRIP) for certain employees.
The decline in operating results for the third quarter of 2012 is due to the revenue reductions discussed above and $7.8 million in early retirement and severance expense, offset partially by a decline in other operating expenses. The decline in operating results for the first nine months of 2012 is primarily due to the revenue reductions discussed above and $13.1 million in early retirement and severance expense, offset partially by a decline in other operating expenses. Newsprint expense was down 9% and 10% for the third quarter and first nine months of 2012, respectively, due to a decline in newsprint consumption.
Television Broadcasting
Revenue for the television broadcasting division increased 44% to $106.4 million in the third quarter of 2012, from $73.8 million in the same period of 2011; operating income for the third quarter of 2012 more than doubled to $54.1 million, from $24.1 million in the same period of 2011. For the first nine months of 2012, revenue increased 23% to $283.5 million, from $231.0 million in the same period of 2011; operating income for the first nine months of 2012 increased 69% to $128.8 million, from $76.2 million in the same period of 2011.
The increase in revenue and operating income for the third quarter and first nine months of 2012 reflects improved advertising demand across many product categories. This includes a $15.6 million and $22.1 million increase in political advertising revenue in the third quarter and first nine months of 2012, respectively; $10.8 million in incremental summer Olympics-related advertising at the Company’s NBC affiliates in the third quarter of 2012; and increased retransmission revenues.
26
Other Businesses
Other businesses includes the operating results of Social Code, an agency specializing in paid advertising on social-media platforms, and WaPo Labs, a digital team focused on emerging technologies and new product development.
In September 2012, The Washington Post Company entered into a stock purchase agreement to acquire a controlling interest in Celtic Healthcare, Inc. (Celtic), a provider of home healthcare and hospice services in the northeastern and mid-Atlantic regions. The transaction is expected to close in November 2012. The operating results of Celtic will be included in other businesses.
Corporate Office
Corporate office includes the expenses of the Company’s corporate office as well as a net pension credit.
Equity in Earnings (Losses) of 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.
The Company’s equity in earnings of affiliates, net, was $4.1 million for the third quarter of 2012, compared to a loss of $1.5 million for the third quarter of 2011. For the first nine months of 2012, the Company’s equity in earnings of affiliates, net, totaled $11.3 million, compared to $5.4 million for the same period of 2011. In the third quarter of 2011, a $9.2 million impairment charge was recorded on the Company’s interest in Bowater Mersey Paper Company.
Other Non-Operating Income (Expense)
The Company recorded other non-operating income, net, of $4.2 million for the third quarter of 2012, compared to other non-operating expense, net, of $29.7 million for the third quarter of 2011. The third quarter 2012 non-operating expense, net, included $3.1 million in unrealized foreign currency gains and other items. The third quarter 2011 non-operating expense, net, included a $23.1 million write-down of a marketable equity security (Corinthian Colleges, Inc.), $6.7 million in unrealized foreign currency losses and other items.
The Company recorded non-operating income, net, of $12.1 million for the first nine months of 2012, compared to other non-operating expense, net, of $56.3 million for the same period of the prior year. The 2012 non-operating income, net, included a $7.3 million gain on sales of cost method investments, $3.2 million in unrealized foreign currency gains and other items. The 2011 non-operating expense, net, included a $53.8 million write-down of a marketable equity security (Corinthian Colleges, Inc.), $3.7 million in unrealized foreign currency losses and other items.
Foreign currency gains (losses), net
Net Interest Expense
The Company incurred net interest expense of $8.1 million and $24.4 million for the third quarter and first nine months of 2012, respectively, compared to $7.7 million and $21.6 million for the same periods of 2011. At September 30, 2012, the Company had $456.5 million in borrowings outstanding, at an average interest rate of 7.0%.
27
The effective tax rate for income from continuing operations for the first nine months of 2012 was 40.3%, compared to 41.6% for the first nine months of 2011.
Discontinued Operations
Kaplan sold Kidum in August 2012, EduNeering in April 2012 and Kaplan Learning Technologies in February 2012. The Company also divested its interest in Avenue100 Media Solutions on July 31, 2012. Consequently, the Company’s income from continuing operations excludes these businesses, which have been reclassified to discontinued operations, net of tax.
The sale of Kaplan Learning Technologies resulted in a pre-tax loss of $3.1 million, which was recorded in the first quarter of 2012. The sale of EduNeering resulted in a pre-tax gain of $29.5 million, which was recorded in the second quarter of 2012. The sale of Kidum resulted in a pre-tax gain of $3.6 million, which was recorded in the third quarter of 2012.
In connection with each of the sales of the Company’s stock in EduNeering and Kaplan Learning Technologies, in the first quarter of 2012, the Company recorded $23.2 million of income tax benefits related to the excess of the outside stock tax basis over the net book value of the net assets disposed.
In connection with the disposal of Avenue100 Media Solutions, Inc., the Company recorded a pre-tax loss of $5.7 million in the third quarter of 2012. An income tax benefit of $44.5 million was also recorded in the third quarter of 2012 as the Company determined that Avenue100 Media Solutions, Inc. had no value. The income tax benefit is due to the Company’s tax basis in the stock of Avenue100 exceeding its net book value as a result of goodwill and other intangible asset impairment charges recorded in 2008, 2010 and 2011 for which no tax benefit was previously recorded.
Earnings (Loss) Per Share
The calculation of diluted earnings per share for the third quarter and first nine months of 2012 was based on 7,376,255 and 7,507,946 weighted average shares outstanding, respectively, compared to 7,882,709 and 7,978,520, respectively, for the third quarter and first nine months of 2011. In the first nine months of 2012, the Company repurchased 284,550 shares of its Class B common stock at a cost of $97.5 million. At September 30, 2012, there were 7,378,237 shares outstanding and the Company had remaining authorization from the Board of Directors to purchase up to 208,924 shares of Class B common stock.
KHE Regulatory Matters
Gainful employment. In June 2011, the DOE issued final regulations that tie an education program’s Title IV eligibility to whether the program leads to gainful employment. The regulations define an education program that leads to gainful employment as one that complies with the following gainful employment metrics as calculated under the complex formulas prescribed in the regulations: (1) the average annual loan payment for program graduates is 12% or less of annual earnings; (2) the average annual loan payment for program graduates is 30% or less of discretionary income, generally defined as annual earnings above 150% of the U.S. Federal poverty level; and (3) the U.S. Federal loan repayment rate must be at least 35% for loans owed by students for attendance in the program regardless of whether they graduated.
If a program fails all three of the gainful employment metrics in a single U.S. Federal fiscal year, the Department requires the institution, among other things, to disclose to current and prospective students the amount by which the program under-performed the metrics and the institution’s plan for program improvement, and to establish a three-day waiting period before students can enroll. Should a program fail to achieve the metrics twice within three years, the Department requires the institution, among other things, to disclose to current and prospective students that they should expect to have difficulty repaying their student loans; that the program is at risk of losing eligibility to receive U.S. Federal financial aid; and that transfer options exist, including providing resources to students to research other education options and compare program costs. Should a program fail three times within a four-year period, the DOE would terminate the program’s eligibility for U.S. 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 was scheduled to go into effect on July 1, 2012. However, the first final debt measures would not be released until 2013, and a program could not lose eligibility until 2015.
28
On June 30, 2012, the United States District Court for the District of Columbia overturned most of the final regulations on gainful employment. The DOE is reviewing the details of the Court’s decision in consultation with the Department of Justice and evaluating their plans which may include an appeal. The ultimate outcome of gainful employment regulations and their impact on Kaplan’s operations is uncertain.
The 90/10 Rule. 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. KHE is taking 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 their Title IV borrowing; program eliminations; cash-matching and developing and offering additional non-Title IV-eligible certificate preparation, professional development and continuing education programs. Based on currently available information, management does not believe that any of the Kaplan OPEID units will have a 90/10 ratio over 90% in 2012. However, absent the adoption of the changes mentioned above, and if current trends continue, management estimates that in 2013, at least 16 of the KHE Campuses OPEID units, representing approximately 16% of KHE’s 2011 revenues, could have a 90/10 ratio over 90%. As noted above, Kaplan is taking steps to address compliance with the 90/10 rule; however, there can be no guarantee that these measures will be adequate to prevent the 90/10 rule calculations from exceeding 90% in the future.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions
Capital Expenditures
During the first nine months of 2012, the Company’s capital expenditures totaled $152.4 million. The Company estimates that its capital expenditures will be in the range of $225 million to $250 million in 2012.
Liquidity
The Company’s borrowings decreased by $108.7 million, to $456.5 million at September 30, 2012, as compared to borrowings of $565.2 million at December 31, 2011. At September 30, 2012, the Company has $305.7 million in cash and cash equivalents, compared to $381.1 million at December 31, 2011. The Company had money market investments of $160.2 million and $180.1 million that are classified as cash, cash equivalents and restricted cash in the Company’s condensed consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, respectively.
29
The Company’s total debt outstanding of $456.5 million at September 30, 2012 included $397.4 million of 7.25% unsecured notes due February 1, 2019, $51.9 million of AUD 50M borrowing and $7.3 million in other debt.
In June 2011, the Company entered into a credit agreement (the “Credit Agreement”) providing for a U.S. $450 million, AUD 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 replaced the Company’s previous revolving credit agreement. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term.
In November 2011, Standard & Poor’s lowered the Company’s long-term corporate debt rating from “A-” to “BBB+” and changed the outlook from Negative to Stable. Standard & Poor’s kept the short-term rating unchanged at “A-2.” In November 2011, Moody’s downgraded the Company’s senior unsecured rating from “A2” to “A3” and the commercial paper rating from “Prime-1” to “Prime-2.” The outlook was changed from Rating Under Review to Negative. In May 2012, Standard & Poor’s affirmed the Company’s credit ratings, but revised the outlook from Stable to Negative. In August 2012, Standard & Poor’s placed the Company’s long and short-term credit ratings on Credit Watch with negative implications. In September 2012, Standard & Poor’s lowered the Company’s long-term and short-term corporate debt rating from “BBB+” to “BBB” and from “A2” to “A3,” respectively. S&P removed the Company from Credit Watch, but left the outlook at Negative. In July 2012, Moody’s changed the outlook of the Company’s long-term debt rating from Negative to Rating Under Review. In August 2012, Moody’s downgraded the Company’s senior unsecured rating from “A3” to “Baa1” and changed the outlook to Negative. The Company’s current credit ratings are as follows:
Standard
Moody’s
& Poor’s
Long-term
Baa1
BBB
Short-term
Prime-2
A-3
During the third quarter of 2012 and 2011, the Company had average borrowings outstanding of approximately $456.3 million and $417.6 million, respectively, at average annual interest rates of approximately 7.0% and 7.2%. During the third quarter of 2012 and 2011, the Company incurred net interest expense of $8.1 million and $7.7 million, respectively.
At September 30, 2012 and December 31, 2011, the Company had working capital of $373.1 million and $250.1 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 borrowings supported by our Credit Agreement. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2012.
Except for a lease commitment totaling $42.9 million from 2013 through 2019, there were no significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are
subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2011 Annual Report filed on Form 10-K have not otherwise changed significantly.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Senior Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of September 30, 2012. 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 September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended September 30, 2012, the Company purchased shares of its Class B Common Stock as set forth in the following table:
Average
Total Number of
Maximum Number
Total Number
Price
Shares Purchased
of Shares That May
of Shares
Paid per
as Part of Publicly
Yet Be Purchased
Period
Purchased
Share
Announced Plan*
Under the Plan*
Jul. 1 - Jul. 31, 2012
275,192
Aug. 1 - Aug. 31, 2012
44,986
347.66
230,206
Sep. 1 - Sep. 30, 2012
21,282
349.10
208,924
66,268
348.12
* On September 8, 2011, the Company’s Board of Directors authorized the Company to purchase, on the open market or otherwise, up to 750,000 shares of its Class B Common Stock. There is no expiration date for that authorization. All purchases made during the quarter ended September 30, 2012 were open market transactions.
Item 6. Exhibits.
ExhibitNumber
Description
3.1
Restated Certificate of Incorporation of the Company dated November 13, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003).
3.2
Certificate of Designation for the Company’s Series A Preferred Stock dated September 22, 2003 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Current Report on Form 8-K dated September 22, 2003).
3.3
By-Laws of the Company as amended and restated through November 8, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 14, 2007).
4.1
Second Supplemental Indenture dated January 30, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A., as successor to The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 30, 2009).
4.2
Four Year Credit Agreement, dated as of June 17, 2011, among the Company, JPMorgan Chase Bank, N.A., J.P. Morgan Australia Limited, Wells Fargo Bank, N.A., The Royal Bank of Scotland PLC, HSBC Bank USA, National Association, The Bank of New York Mellon, PNC Bank, National Association, Bank of America, N.A., Citibank, N.A. and The Northern Trust Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17, 2011).
31.1
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer.
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.*
* Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and October 2, 2011, (ii) Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and October 2, 2011, (iii) Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and October 2, 2011, and (v) Notes to Condensed Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 6, 2012
/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)