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, 2013
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 definitions 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 1, 2013:
Class A Common Stock – 1,169,073 Shares
Class B Common Stock – 6,214,516 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, 2013 and 2012
1
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012
2
c. Condensed Consolidated Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012
3
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2013 and 2012
4
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
25
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
32
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Item 6.
Exhibits
33
Signatures
34
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
Nine Months Ended
September 30,
(In thousands, except per share amounts)
2013
2012
Operating Revenues
Education
$
546,452
551,696
1,622,497
1,650,155
Advertising
84,444
105,855
264,108
283,104
Subscriber and circulation
190,302
185,326
569,365
545,987
Other
81,281
34,760
172,945
80,433
902,479
877,637
2,628,915
2,559,679
Operating Costs and Expenses
Operating
430,889
407,364
1,213,369
1,176,637
Selling, general and administrative
331,247
314,359
992,294
997,254
Depreciation of property, plant and equipment
55,633
57,588
173,344
170,347
Amortization of intangible assets
2,837
5,090
9,867
13,336
820,606
784,401
2,388,874
2,357,574
Income from Operations
81,873
93,236
240,041
202,105
Equity in earnings of affiliates, net
5,892
4,099
13,178
11,301
Interest income
642
648
1,674
2,492
Interest expense
(9,221)
(8,738)
(27,229)
(26,880)
Other income (expense), net
8,110
4,163
(8,831)
12,116
Income from Continuing Operations Before Income Taxes
87,296
93,408
218,833
201,134
Provision for Income Taxes
31,000
37,000
83,300
78,100
Income from Continuing Operations
56,296
56,408
135,533
123,034
(Loss) Income from Discontinued Operations, Net of Tax
(25,872)
37,539
(54,716)
54,528
Net Income
30,424
93,947
80,817
177,562
Net (Income) Loss Attributable to Noncontrolling Interests
(75)
71
(425)
(10)
Net Income Attributable to The Washington Post Company
30,349
94,018
80,392
177,552
Redeemable Preferred Stock Dividends
(205)
(222)
(855)
(895)
Net Income Attributable to The Washington Post
Company Common Stockholders
30,144
93,796
79,537
176,657
Amounts Attributable to The Washington Post Company
Common Stockholders
Income from continuing operations
56,016
56,257
134,253
122,129
(Loss) 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
Basic income per common share from continuing operations
7.55
7.58
18.09
16.17
Basic (loss) income per common share from discontinued operations
(3.48)
5.06
(7.37)
7.22
Basic net income per common share
4.07
12.64
10.72
23.39
Basic average number of common shares outstanding
7,231
7,272
7,229
7,405
Diluted income per common share from continuing operations
7.53
18.07
Diluted (loss) income per common share from discontinued operations
Diluted net income per common share
4.05
10.70
Diluted average number of common shares outstanding
7,337
7,376
7,316
7,508
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
5,639
5,321
(2,061)
4,233
Adjustment for sales of businesses with foreign operations
―
(1,409)
(888)
3,912
3,345
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) for the period
938
(5,966)
81,439
32,939
Reclassification adjustment for gain on available-for-sale securities
included in net income
(884)
(772)
80,555
32,167
Pension and other postretirement plans:
Amortization of net prior service credit included in net income
(384)
(469)
(1,205)
(1,390)
Amortization of net actuarial loss included in net income
2,004
2,592
6,325
6,839
Settlement gain included in net income
(3,471)
1,620
2,123
1,649
5,449
Cash flow hedge gain (loss)
15
217
259
(1,160)
Other Comprehensive Income, Before Tax
8,212
286
80,402
39,801
Income tax (expense) benefit related to items of other comprehensive income
(1,028)
1,451
(32,985)
(14,580)
Other Comprehensive Income, Net of Tax
7,184
1,737
47,417
25,221
Comprehensive Income
37,608
95,684
128,234
202,783
Comprehensive (income) loss attributable to noncontrolling interests
76
(447)
(31)
Total Comprehensive Income Attributable to The Washington
Post Company
37,533
95,760
127,787
202,752
See accompanying Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
(Unaudited)
Assets
Current Assets
Cash and cash equivalents
440,810
512,431
Restricted cash
47,205
28,538
Investments in marketable equity securities and other investments
497,662
418,938
Accounts receivable, net
375,223
399,204
Deferred income taxes
3,974
Inventories
2,484
7,985
Other current assets
76,936
82,692
Current assets of discontinued operations (includes $849 in cash)
70,360
Total Current Assets
1,510,680
1,453,762
Property, Plant and Equipment, Net
910,636
1,081,237
Investments in Affiliates
32,997
15,535
Goodwill, Net
1,293,482
1,317,915
Indefinite-Lived Intangible Assets, Net
541,478
539,728
Amortized Intangible Assets, Net
43,542
45,577
Prepaid Pension Cost
529,165
604,823
Deferred Charges and Other Assets
49,161
46,492
Noncurrent Assets of Discontinued Operations
184,740
Total Assets
5,095,881
5,105,069
Liabilities and Equity
Current Liabilities
Accounts payable and accrued liabilities
478,827
486,396
Income taxes payable
22,341
726
29,669
Deferred revenue
402,074
395,837
Dividends declared
206
Short-term borrowings
3,022
243,327
Current liabilities of discontinued operations
57,823
Total Current Liabilities
993,962
1,126,286
Postretirement Benefits Other Than Pensions
36,301
59,949
Accrued Compensation and Related Benefits
215,649
216,280
Other Liabilities
86,021
109,774
Deferred Income Taxes
521,489
529,427
Long-Term Debt
448,067
453,384
Noncurrent Liabilities of Discontinued Operations
45,732
Total Liabilities
2,347,221
2,495,100
Redeemable Noncontrolling Interest
5,982
12,655
Redeemable Preferred Stock
10,665
11,096
Preferred Stock
Common Stockholders’ Equity
Common stock
20,000
Capital in excess of par value
261,751
240,746
Retained earnings
4,626,311
4,546,775
Accumulated other comprehensive income, net of tax
Cumulative foreign currency translation adjustment
24,011
26,072
Unrealized gain on available-for-sale securities
158,886
110,553
Unrealized gain on pensions and other postretirement plans
118,159
117,169
Cash flow hedge
(785)
(940)
Cost of Class B common stock held in treasury
(2,476,613)
(2,474,347)
Total Common Stockholders’ Equity
2,731,720
2,586,028
Noncontrolling Interests
293
190
Total Equity
2,732,013
2,586,218
Total Liabilities and Equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
191,388
190,111
13,833
Net pension expense
11,425
9,980
Early retirement program expense
22,700
8,508
Stock-based compensation expense
34,429
10,570
Foreign exchange loss (gain)
9,350
(3,179)
Net loss (gain) on sales and disposition of businesses
70
(23,759)
Net gain on sales or write-downs of marketable equity securities and cost method investments
(714)
(7,237)
Equity in earnings of affiliates, net of distributions
(13,168)
(10,577)
Benefit for deferred income taxes
(8,802)
(15,756)
Net loss on sale or write-down of property, plant and equipment and other assets
1,476
545
Increase in accounts receivable, net
(32,717)
(11,984)
Decrease in inventories
1,138
1,690
Increase (decrease) in accounts payable and accrued liabilities
8,587
(24,885)
Increase in deferred revenue
31,885
20,070
Increase (decrease) in income taxes payable
21,884
(35,341)
Increase in other assets and other liabilities, net
(23,329)
(7,315)
1,340
2,674
Net Cash Provided by Operating Activities
347,626
295,510
Cash Flows from Investing Activities
Purchases of property, plant and equipment
(143,298)
(152,391)
Investments in certain businesses, net of cash acquired
(19,927)
(8,971)
Purchases of marketable equity securities and other investments
(12,029)
(46,324)
Net proceeds from sales of businesses, property, plant and equipment and other assets
5,800
75,106
(3)
1,477
Net Cash Used in Investing Activities
(169,457)
(131,103)
Cash Flows from Financing Activities
Repayment of short-term borrowing
(240,121)
(109,671)
Common shares repurchased
(4,196)
(97,545)
Purchase of shares from a noncontrolling interest
(3,115)
Dividends paid
(649)
(56,235)
536
19,561
Net Cash Used in Financing Activities
(247,545)
(243,890)
Effect of Currency Exchange Rate Change
(1,396)
4,038
Net Decrease in Cash and Cash Equivalents
(70,772)
(75,445)
Beginning Cash and Cash Equivalents
381,099
Ending Cash and Cash Equivalents
441,659
305,654
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 and television broadcasting (through the ownership and operation of six television broadcast stations).
The Company announced on August 5, 2013 that it had entered into an agreement to sell The Washington Post, and some other newspaper publishing entities. On October 1, 2013, the Company completed such sale. The operating results of The Washington Post and publishing businesses sold have been presented in (loss) income from discontinued operations, net of tax, for all periods presented.
Financial Periods – The Company and its subsidiaries report on a calendar-quarter basis.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and nine months ended September 30, 2013 and 2012 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, 2012.
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 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.
Assets Held for Sale – An asset or business is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or business is available for immediate sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets and related liabilities are aggregated and reported separately in the Company’s condensed consolidated balance sheet.
Recently Adopted and Issued Accounting Pronouncements –In February 2013, the Financial Accounting Standards Board (FASB) issued final guidance on the presentation of reclassifications out of other comprehensive income to net income. The amendment requires an entity to provide information about the amounts reclassified out of other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in a footnote, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, only if the amount reclassified is required by GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their
entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide detail about those amounts. This amendment is effective for interim and fiscal years beginning after December 15, 2012. The adoption of the amendment in the first quarter of 2013 is reflected in the Company's Notes to Condensed Consolidated Financial Statements.
2. DISCONTINUED OPERATIONS
On August 5, 2013, after approval by the Company’s Board of Directors on the same day, the Company announced that it had entered into a binding letter agreement (the Letter Agreement) with Nash Holdings LLC, a Delaware limited liability company (the Purchaser), and Explore Holdings LLC, a Washington limited liability company, as guarantor (the Guarantor), to sell all the issued and outstanding equity securities of each of WP Company LLC, Express Publications Company, LLC, El Tiempo Latino, LLC, Robinson Terminal Warehouse, LLC, Greater Washington Publishing, LLC and Post-Newsweek Media, LLC (the Publishing Subsidiaries). The Publishing Subsidiaries together conducted most of the Company’s publishing businesses, including publishing The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Times and El Tiempo Latino and related websites, and operating Washington Post Live and Washington Post News Media Services and the Company’s commercial printing and distribution business and paper handling and storage business (collectively, the Publishing Business), subject to satisfying certain conditions.
On October 1, 2013, the Company entered into a Purchase Agreement and completed the sale. Under the terms of the Purchase Agreement, the Purchaser acquired all the issued and outstanding equity securities of each of the entities that comprise the Publishing Subsidiaries for $250 million, subject to customary adjustment for cash, debt and working capital of the Publishing Subsidiaries at closing. The Purchaser also acquired all other assets of the Company primarily related to the Publishing Business, including all of the Company’s rights in the name “The Washington Post”. The Company will change its corporate name within 60 days of the October 1 closing. The Company retained its interest in Classified Ventures, LLC, Slate magazine, TheRoot.com and Foreign Policy, as well as the WaPo Labs and SocialCode business and certain real estate, including the headquarters building in downtown Washington, DC and certain land and property in Alexandria, VA. The liabilities under the Retirement Plan for The Washington Post Companies relating to the active employees of the Publishing Business will be transferred to the Purchaser, along with pension assets that have a value equal to the projected benefit obligation in respect of these active employees plus an additional $50 million. The results of operations of Publishing Subsidiaries for the three and nine months ended September 30, 2013 and 2012, are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax.
The Company will not record the gain or the net proceeds on the sale until the fourth quarter of 2013; however, the Company recognized $28.4 million (after-tax impact of $18.3 million) in expenses related to the sale that are included in discontinued operations in the third quarter of 2013. These costs include the net impact of accelerated vesting provisions and forfeitures of restricted stock awards and stock options that were made in contemplation of the sale, and certain other transaction-related expenses. Also included in discontinued operations is $22.7 million (after-tax basis of $14.5 million) in early retirement program expense for the first nine months of 2013 and $7.5 million (after-tax basis of $4.6 million) and $8.5 million (after-tax basis of $5.3 million) for the third quarter and first nine months of 2012, respectively. The historical pension and postretirement benefits expense for retirees has been excluded from the reclassification of the Publishing Subsidiaries’ results to discontinued operations, since the associated assets and liabilities will be retained by the Company. Although the Company has retained ownership of certain real estate assets, including the headquarters building in downtown Washington, DC, related operating costs are included in the reclassification of the Publishing Subsidiaries’ results to discontinued operations since the Purchase Agreement includes a lease to the buyer for the real estate assets that provides for recovery of operating costs by the Company.
All corresponding prior period operating results presented in the Company’s Condensed Consolidated Financial Statements and the accompanying notes have been reclassified to reflect the discontinued operations presented. The assets and liabilities of the Publishing Subsidiaries have been classified on the Company’s condensed consolidated balance sheet as assets and liabilities of discontinued operations as of September 30, 2013. The Company did not reclassify its Statements of Cash Flows or prior Condensed Consolidated Balance Sheets to reflect the discontinued operations.
6
The carrying amounts of the major classes of assets and liabilities of the Publishing Subsidiaries included in discontinued operations at September 30, 2013 are as follows:
849
60,369
3,965
5,177
Current Assets of Discontinued Operations
Property, plant and equipment, net
116,639
Goodwill, net
13,602
Prepaid pension cost
50,000
Deferred charges and other assets
4,499
35,616
22,207
Current Liabilities of Discontinued Operations
Postretirement benefits other than pensions
24,999
Accrued compensation and related benefits
8,998
Other liabilities
11,735
In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. Under the terms of the agreement, the purchaser received most of the assets and liabilities; however, certain land and buildings and other assets and liabilities were retained by the Company. The results of operations of The Herald for the three and nine months ended September 30, 2013 and 2012, are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax.
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 had no value. The income tax benefit was 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. 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. 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. 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. The results of operations of Kidum, Avenue100, EduNeering, and KLT, for the three and nine months ended September 30, 2012 are included in the Company’s Condensed Consolidated Statement of Operations as Income (Loss) from Discontinued Operations, Net of Tax.
The summarized income (loss) from discontinued operations, net of tax, is presented below:
Operating revenues
124,725
137,668
382,705
441,308
Operating costs and expenses
(165,380)
(155,701)
(467,434)
(491,698)
Loss from discontinued operations
(40,655)
(18,033)
(84,729)
(50,390)
Benefit from income taxes
(14,783)
(5,568)
(30,059)
(16,568)
Net Loss from Discontinued Operations
(12,465)
(54,670)
(33,822)
(Loss) gain on sales of discontinued operations
(2,174)
(70)
23,759
Benefit from income taxes on sales of discontinued operations
(52,178)
(24)
(64,591)
7
The following table summarizes the 2013 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)
527,815
548,230
82,994
96,670
186,790
192,273
39,241
52,423
836,840
889,596
381,965
400,515
337,865
323,182
59,895
57,816
3,717
3,313
783,442
784,826
53,398
104,770
3,418
3,868
510
522
(8,960)
(9,048)
Other expense, net
(4,083)
(12,858)
Income from Continuing Operations before Income Taxes
44,283
87,254
17,800
34,500
26,483
52,754
Loss from Discontinued Operations, Net of Tax
(21,224)
(7,620)
5,259
45,134
Net Income Attributable to Noncontrolling Interests
(97)
(253)
5,162
44,881
(444)
(206)
Net Income Attributable to The Washington Post Company Common Stockholders
4,718
44,675
Amounts Attributable to The Washington Post Company Common Stockholders
25,942
52,295
Loss 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
3.50
7.05
Basic loss per common share from discontinued operations
(2.86)
(1.03)
0.64
6.02
Diluted loss per common share from discontinued operations
8
The following table summarizes the 2012 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
546,685
551,774
546,341
82,600
94,649
117,696
178,022
182,639
186,383
20,305
25,368
45,471
827,612
854,430
895,891
382,106
387,167
389,620
347,841
335,054
336,262
56,165
56,594
73,731
3,839
4,407
7,610
Impairment of goodwill and other long-lived assets
111,593
789,951
783,222
918,816
Income (Loss) from Operations
37,661
71,208
(22,925)
3,888
3,314
2,785
1,069
775
901
(9,163)
(8,979)
(9,064)
8,588
(635)
(17,572)
Income (Loss) from Continuing Operations before Income Taxes
42,043
65,683
(45,875)
17,200
23,900
5,100
Income (Loss) from Continuing Operations
24,843
41,783
(50,975)
Income from Discontinued Operations, Net of Tax
6,725
10,264
5,600
Net Income (Loss)
31,568
52,047
(45,375)
(11)
(64)
Net Income (Loss) Attributable to The Washington Post Company
31,498
52,036
(45,439)
(451)
31,047
51,814
Income (loss) from continuing operations
24,322
41,550
(51,039)
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
Basic income (loss) per common share from continuing operations
3.17
5.48
(7.35)
Basic income per common share from discontinued operations
0.90
1.36
0.78
Basic net income (loss) per common share
6.84
(6.57)
Diluted income (loss) per common share from continuing operations
Diluted income per common share from discontinued operations
Diluted net income (loss) per common share
9
The following table summarizes the annual operating results of the Company following the reclassification of operations discussed above as discontinued operations:
2011
2,196,496
2,404,459
400,800
327,877
732,370
710,253
125,904
83,408
3,455,570
3,525,997
1,566,257
1,562,615
1,333,516
1,383,660
244,078
223,403
20,946
22,201
3,276,390
3,191,879
179,180
334,118
14,086
5,949
3,393
4,147
(35,944)
(33,226)
(5,456)
(55,200)
155,259
255,788
83,200
104,400
72,059
151,388
Income (Loss) from Discontinued Operations, Net of Tax
60,128
(34,231)
132,187
117,157
(74)
(7)
132,113
117,150
(917)
131,218
116,233
71,090
150,464
Income (loss) from discontinued operations, net of tax
Per Share Information Attributable to The Washington Post Company Common
Stockholders
9.22
19.03
Basic income (loss) per common share from discontinued operations
8.17
(4.33)
17.39
14.70
Diluted income (loss) per common share from discontinued operations
10
3. INVESTMENTS
Investments in marketable equity securities comprised the following:
As of
Total cost
193,159
195,832
Net unrealized gains
264,810
184,255
Total Fair Value
457,969
380,087
There were no new investments in marketable equity securities during the first nine months of 2013. The Company invested $45.0 million in marketable equity securities during the first nine months of 2012. During the first nine months of 2013 and 2012, the proceeds from sales of marketable equity securities were $3.6 million and $2.0 million, respectively, and net realized gains on such sales were $0.9 million and $0.5 million, respectively.
As of September 30, 2013, the Company has a $7.0 million unrealized loss on its investment in Strayer Education, Inc., a publicly traded company. At September 30, 2013, the investment has been in an unrealized loss position for under 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 ability and intent to hold the investment and concluded that the unrealized loss is not other-than-temporary as of September 30, 2013. 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.
4. ACQUISITIONS AND DISPOSITIONS
Acquisitions. In the first nine months of 2013, the Company acquired five small businesses included in other businesses and in its education division; the purchase price allocation mostly comprised goodwill and other intangible assets on a preliminary basis. In the first nine months of 2012, the Company acquired four small businesses included in its education division and in other businesses; the purchase price allocation mostly comprised goodwill and other intangible assets. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition.
On August 1, 2013, the Company completed its acquisition of Forney Corporation, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications. The operating results of Forney are included in other businesses.
In the second quarter of 2013, Kaplan purchased the remaining 15% noncontrolling interest in Kaplan China; this additional interest was accounted for as an equity transaction.
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 are included in other businesses.
Dispositions. On August 5, 2013, the Company announced that it had entered into an agreement to sell its Publishing Subsidiaries that together conducted most of the Company’s publishing business and related services, including publishingThe Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Times and El Tiempo Latinoand related websites. Slate magazine, TheRoot.com and Foreign Policy are not part of the transaction and will remain with The Washington Post Company, as will the WaPo Labs and SocialCode businesses, the Company’s interest in Classified Ventures and certain real estate assets, including the headquarters building in downtown Washington, DC. On October 1, 2013, the Company completed the sale.
In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. The Herald was previously reported in the newspaper publishing division.
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.
Consequently, the Company’s income from continuing operations excludes these sold businesses, which have been reclassified to discontinued operations, net of tax (see Note 2).
11
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended September 30, 2013 and 2012 was $2.8 million and $5.1 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2013 and 2012 was $9.9 million and $13.3 million, respectively. Amortization of intangible assets is estimated to be approximately $4 million for the remainder of 2013, $11 million in 2014, $9 million in 2015, $8 million in 2016, $5 million in 2017, $4 million in 2018 and $3 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, 2012
Goodwill
1,097,058
85,488
81,183
203,165
19,052
1,485,946
Accumulated impairment losses
(102,259)
(65,772)
(168,031)
994,799
15,411
Reallocation, net
(1,809)
1,809
Acquisitions
7,924
Reclassification to discontinued operations
(13,602)
Foreign currency exchange rate changes
(18,755)
Balance as of September 30, 2013
1,078,303
34,867
1,401,823
(6,082)
(108,341)
976,044
28,785
The changes in carrying amount of goodwill at the Company’s education division were as follows:
Higher
Test
Kaplan
Preparation
International
409,184
152,187
535,687
49,928
(79)
(18,676)
409,105
517,011
Other intangible assets consist of the following:
As of September 30, 2013
As of December 31, 2012
Gross
Net
Useful Life
Carrying
Accumulated
Range
Amount
Amortization
Amortized Intangible Assets
Non-compete agreements
2-5 years
14,054
13,038
1,016
14,008
12,546
1,462
Student and customer relationships
2-10 years
70,918
42,141
28,777
73,693
40,787
32,906
Databases and technology
3-5 years
10,539
6,457
4,082
5,707
750
Trade names and trademarks
26,100
19,124
6,976
26,634
18,185
8,449
1-25 years
9,828
7,137
2,691
8,849
2,010
131,439
87,897
129,641
84,064
Indefinite-Lived Intangible Assets
Franchise agreements
496,321
Wireless licenses
22,150
Licensure and accreditation
7,371
15,636
13,886
12
6. DEBT
The Company’s borrowings consist of the following:
7.25% unsecured notes due February 1, 2019
397,790
397,479
USD Revolving credit borrowing
240,121
AUD Revolving credit borrowing
46,589
51,915
Other indebtedness
6,710
7,196
Total Debt
451,089
696,711
Less: current portion
(3,022)
(243,327)
Total Long-Term Debt
The Company’s other indebtedness at September 30, 2013 and December 31, 2012 is at interest rates from 0% to 6% and matures from 2013 to 2017.
During the three months ended September 30, 2013 and 2012, the Company had average borrowings outstanding of approximately $449.8 million and $456.3 million, respectively, at average annual interest rates of approximately 7.0%. During the three months ended September 30, 2013 and 2012, the Company incurred net interest expense of $8.6 million and $8.1 million, respectively.
During the nine months ended September 30, 2013 and 2012, the Company had average borrowings outstanding of approximately $477.5 million and $467.3 million, respectively, at average annual interest rates of approximately 7.0%. During the nine months ended September 30, 2013 and 2012, the Company incurred net interest expense of $25.6 million and $24.4 million, respectively.
At September 30, 2013, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $475.1 million, compared with the carrying amount of $397.8 million. At December 31, 2012, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $481.4 million, compared with the carrying amount of $397.5 million. The carrying value of the Company’s other unsecured debt at September 30, 2013 approximates fair value.
13
7. FAIR VALUE MEASUREMENTS
Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
Level 1
Level 2
Money market investments (1)
296,914
Marketable equity securities (3)
Other current investments (4)
16,413
23,281
39,694
Total Financial Assets
474,382
320,195
794,577
Liabilities
Deferred compensation plan liabilities (5)
63,685
7.25% unsecured notes (6)
475,144
AUD revolving credit borrowing (6)
Interest rate swap (7)
1,308
Total Financial Liabilities
586,726
Money market investments (2)
432,670
14,134
24,717
38,851
394,221
457,387
851,608
62,297
481,424
1,567
597,203
____________
(1) The Company’s money market investments are included in cash and cash equivalents.
(2) The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(3) The Company’s investments in marketable equity securities are classified as available-for-sale.
(4) Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
(5) Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.
(6) See Note 6 for carrying amount of these notes and borrowing.
(7) Included in Other liabilities. The Company 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.
14
8. 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
(1,444)
(1,117)
(3,462)
(2,398)
Basic income from continuing operations attributable to
The Washington Post Company common stockholders
54,572
55,140
130,791
119,731
Plus: Amount attributable to participating securities
1,444
1,117
3,462
2,398
Diluted income from continuing operations attributable to
Basic weighted average shares outstanding
Plus: Effect of dilutive shares
Stock options
Restricted stock
91
104
79
103
Diluted weighted average shares outstanding
Income Per Share from Continuing Operations Attributable
to The Washington Post Company Common Stockholders:
Basic
Diluted
For the three and nine months ended September 30, 2013 and 2012, the basic earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock 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, 2013 exclude the effects of 13,000 and 63,000 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, 2013 exclude the effects of 8,800 restricted stock awards, 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 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 51,500 restricted stock awards, 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 December 2012, the Company declared and paid an accelerated cash dividend totaling $9.80 per share, in lieu of regular quarterly dividends that the Company otherwise would have declared and paid in calendar year 2013.
9. PENSION AND POSTRETIREMENT PLANS
Defined Benefit Plans.The total cost arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
Service cost
12,713
10,876
38,788
28,684
Interest cost
14,242
14,828
42,776
44,248
Expected return on assets
(26,817)
(23,779)
(78,606)
(72,301)
Amortization of prior service cost
908
919
2,726
2,775
Recognized actuarial loss
1,797
2,502
5,741
6,574
Net Periodic Cost
2,843
5,346
Early retirement programs expense
7,486
Total Cost
12,832
34,125
18,488
The total cost above includes $5.6 million and $42.2 million in costs associated with the Publishing Subsidiaries that are included in discontinued operations for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2012, the costs associated with the Publishing Subsidiaries were $13.9 million and $26.3 million, respectively.
The Company announced a Voluntary Retirement Incentive Program in February 2013, which was offered to certain employees of the Washington Post newspaper. The total early retirement program expense for this program for the nine months ended September 30, 2013 was $20.4 million. Of this amount, $12.0 million was recorded in the first quarter of 2013 and $8.4 million was recorded in the second quarter of 2013. In addition, the Washington Post newspaper recorded $2.3 million in special separation benefits for a group of employees in the first quarter of 2013. The early retirement program expense and special separation benefits for these programs are being funded from the assets of the Company’s pension plan and are included in discontinued operations, net of tax, in 2013.
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. The early retirement program expense for these programs was funded from the assets of the Company’s pension plan and are included in discontinued operations, net of tax, in 2012.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP), including a portion included in discontinued operations, consists of the following components:
429
367
1,288
1,100
1,023
1,060
3,069
3,181
41
711
458
2,133
1,375
2,177
1,899
6,531
5,697
The total cost above includes $0.2 million and $0.6 million in costs associated with the Publishing Subsidiaries that are included in discontinued operations for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2012, the costs associated with the Publishing Subsidiaries were $0.2 million and $0.5 million, respectively.
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 plan were allocated as follows:
U.S. equities
60
%
64
U.S. fixed income
International equities
28
23
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, 2013, 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, 2013. 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, 2013 and December 31, 2012, the pension plan held common stock in one investment
16
that exceeded 10% of total plan assets. This investment was valued at $389.3 million and $223.1 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 11%, respectively, of total plan assets. Assets also included $228.6 million and $179.9 million of Berkshire Hathaway common stock at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $406.4 million and $240.4 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 12%, respectively, of total plan assets.
Other Postretirement Plans.The total benefit arising from the Company’s other postretirement plans, including a portion included in discontinued operations, consists of the following components:
728
778
2,183
2,335
508
684
1,525
2,052
Amortization of prior service credit
(1,306)
(1,402)
(3,972)
(4,206)
Recognized actuarial gain
(504)
(370)
(1,549)
(1,110)
Net Periodic Benefit
(574)
(310)
(1,813)
(929)
Settlement gain
Total Periodic Benefit
(5,284)
The total benefit above includes $1.5 million and $2.8 million in benefits associated with the Publishing Subsidiaries that are included in discontinued operations for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2012, the benefit associated with the Publishing Subsidiaries was $0.6 million and $1.8 million, respectively.
As part of the sale of The Herald, changes were made with respect to its postretirement medical plan, resulting in a $3.5 million settlement gain that is included in discontinued operations, net of tax, for the first quarter of 2013.
Disposition of Publishing Business. In connection with the October 1, 2013 sale of the Publishing Business, the liabilities under the Retirement Plan for The Washington Post Companies relating to the active employees of the Publishing Business will be transferred to the Purchaser, along with pension assets that have a value equal to the projected benefit obligation in respect of these active employees plus an additional $50 million. In the fourth quarter of 2013, the Company will recognize net curtailment and settlement gains (losses) related to this transfer as well as a remeasurement of each of the Company’s pension and postretirement benefit plans. Additionally, the Company excluded the historical pension and postretirement benefits expense for retirees from the reclassification of the Publishing Subsidiaries’ results to discontinued operations, since the associated assets and liabilities will be retained by the Company.
10. OTHER NON-OPERATING INCOME (EXPENSE)
A summary of non-operating income (expense) is as follows:
Foreign currency gain (loss), net
7,886
3,111
(9,350)
3,179
(Loss) gain on sales of marketable equity securities
(28)
879
477
Gain (loss) on sales or write-downs of cost method investments, net
18
(112)
(160)
6,760
Other, net
1,192
(200)
1,700
Total Other Non-Operating Income (Expense)
17
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income (loss) consists of the following components:
Three Months Ended September 30,
Before-Tax
Income
After-Tax
Tax
(375)
563
2,387
(3,579)
154
(230)
187
(282)
(801)
1,203
(1,036)
1,556
(647)
973
(849)
1,274
Cash flow hedge:
Gain for the period
(6)
(87)
130
Other Comprehensive Income
Nine Months Ended September 30,
Unrealized gains on available-for-sale securities:
Unrealized gains for the period
(32,575)
48,864
(13,175)
19,764
Reclassification adjustment for gain on available-for-sale
securities included in net income
353
(531)
309
(463)
(32,222)
48,333
(12,866)
19,301
482
(723)
556
(834)
(2,529)
3,796
(2,735)
4,104
1,388
(2,083)
(659)
990
(2,179)
3,270
Gain (loss) for the period
(104)
155
465
(695)
The accumulated balances related to each component of other comprehensive income (loss) are as follows:
Cumulative
Unrealized Gain
Foreign
on Pensions
Currency
and Other
Translation
on Available-for-
Postretirement
Cash Flow
Comprehensive
(in thousands, net of taxes)
Adjustment
Sale Securities
Plans
Hedge
252,854
Other comprehensive income (loss) before
reclassifications
(198)
46,605
Net amount reclassified from accumulated
other comprehensive income
812
Net other comprehensive income (loss)
300,271
The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income are as follows:
Amount Reclassified from Accumulated Other Comprehensive Income
Affected Line Item in the
Condensed Consolidated
Statement of Operations
Foreign Currency Translation Adjustments:
(Loss) Income from Discontinued
Operations, Net of Tax
Unrealized Gains on Available-for-sale Securities:
Realized gains for the period
Net of Tax
Pension and Other Postretirement Plans:
Amortization of net prior service credit
(1)
Amortization of net actuarial loss
Before tax
Cash Flow Hedge
205
132
588
167
(82)
(53)
(235)
(67)
123
Total reclassification for the period
1,096
(56)
2,019
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension and postretirement plan cost (see Note 9).
12. CONTINGENCIES
Litigation and Legal Matters. The Company and its subsidiaries are involved in various legal proceedings that arise in the ordinary course of its business. Although the outcomes 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 are four open and/or pending program reviews (including Kaplan University and Broomall, PA.) The Company is awaiting the DOE’s final report on the program 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 containing several findings that required Kaplan University to conduct additional, detailed file reviews and submit additional data. In January 2013, Kaplan submitted a response to the DOE’s data request and is awaiting a final report on this review. The Company does not expect the final program review reports to have a material impact on KHE; however, the results of these and the other open reviews and their impact on Kaplan’s operations are uncertain.
The 90/10 Rule. Under regulations referred to as the 90/10 rule, a KHE OPEID unit would lose its eligibility to participate in Title IV programs for a period of at least two fiscal years if it derives more than 90% of its receipts from Title IV programs, as calculated on a cash basis in accordance with the Higher Education Act and applicable DOE regulations, in each of two consecutive fiscal years, commencing with the unit’s first fiscal year that ends after August 14, 2008. Any OPEID unit with Title IV receipts exceeding 90% for a single fiscal year ending after August 14, 2008, will 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 modifying student payment options; emphasizing direct-pay and employer-paid education programs; encouraging students to carefully evaluate the amount of their Title IV borrowing; eliminating some programs; cash-matching; and developing and offering additional non-Title IV-eligible certificate preparation, professional development and continuing education programs. Some of the other programs may currently be offered by other Kaplan businesses. 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 2013. Kaplan continues 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 at some or all of the schools from exceeding 90% in the future.
19
Accreditation. In March 2011, Kaplan University’s institutional accreditor, the Higher Learning Commission of the North Central Association of Colleges and Schools (HLC), sent a request to Kaplan University asking for documents and a report detailing Kaplan University’s admissions practices and describing Kaplan University’s compliance with HLC Care Components and policies. Kaplan University complied with this request on April 29, 2011. Kaplan University provided additional information to the HLC in response to a follow-up request received on January 19, 2012. On June 19, 2013, the HLC notified Kaplan University of their intention to conduct a focused evaluation regarding these matters and that is expected to take place in early 2014. At this time the Company cannot predict how the HLC will follow-up or what impact their additional inquires may have on Kaplan University.
13. BUSINESS SEGMENTS
The Company has six reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International, cable television, television broadcasting and other businesses.
Education. Kaplan’s Colloquy business moved from Kaplan International to Kaplan Corporate effective January 1, 2013. Segment operating results of the education division have been restated to reflect this change.
For the first nine months of 2012, Kaplan International results benefitted 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.
Newspaper Publishing. Due to the sale of the Publishing Subsidiaries on October 1, 2013, the newspaper publishing segment is no longer included as a separate segment as its results have been reclassified to discontinued operations, net of tax, for all periods presented In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. As a result, The Herald results are included in discontinued operations, net of tax, for all periods presented.
Other Businesses. The Slate Group and the FP Group have been moved to Other Businesses since the newspaper publishing segment is no longer a separate segment. The results for these entities are included in Other Businesses for all periods presented. In August 2013, the Company acquired Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications, which is also included in Other Businesses.
20
The following table summarizes the 2013 quarterly financial information related to each of the Company’s business segments:
Cable television
200,138
204,550
202,381
Television broadcasting
85,270
99,320
87,063
Other businesses
23,814
37,572
66,632
Corporate office
Intersegment elimination
(197)
(76)
(49)
Income (Loss) From Operations
(4,056)
23,726
17,035
36,613
44,710
39,715
35,362
47,704
36,304
(8,542)
(5,968)
(5,046)
(5,979)
(5,402)
(6,135)
Equity in Earnings of Affiliates, Net
Interest Expense, Net
(8,450)
(8,526)
(8,579)
Other Income (Expense), Net
Depreciation of Property, Plant and Equipment
22,588
20,064
18,978
33,733
33,964
32,946
3,145
3,151
3,109
577
555
45
Amortization of Intangible Assets
2,518
2,363
2,287
50
57
61
1,149
893
489
Net Pension (Credit) Expense
4,106
4,231
4,169
882
913
1,213
1,251
116
134
173
(9,121)
(9,129)
(9,299)
(2,729)
(2,638)
(2,733)
21
The following table summarizes the 2012 quarterly financial information related to each of the Company’s business segments:
190,210
195,579
199,625
201,703
81,497
95,591
106,411
116,192
9,329
11,666
20,187
31,655
(109)
(180)
(11,915)
3,728
14,693
(111,874)
32,777
38,446
39,913
43,445
30,999
43,728
54,082
62,833
(6,746)
(9,005)
(7,324)
(9,935)
(7,454)
(5,689)
(8,128)
(7,394)
(8,094)
(8,204)
(8,090)
(8,163)
Income (Loss) from Continuing Operations Before Income Taxes
20,717
21,011
22,024
37,431
32,197
32,234
32,310
32,366
3,125
3,222
3,126
3,545
126
127
128
389
Amortization of Intangible Assets and
Impairment of Goodwill and Other Long-Lived Assets
3,236
3,803
4,489
117,784
54
53
52
549
551
1,367
119,203
2,392
1,969
3,522
3,701
530
514
694
802
960
1,055
1,432
1,523
36
55
(7,393)
(6,939)
(6,827)
(6,712)
(3,475)
(3,368)
(1,134)
(631)
22
The following table summarizes financial information related to each of the Company’s business segments:
Fiscal Year Ended
607,069
585,414
787,117
760,221
271,653
283,499
399,691
319,206
128,018
41,182
72,837
42,891
(322)
(571)
(780)
36,705
6,506
(105,368)
96,286
121,038
111,136
154,581
156,844
119,370
128,809
191,642
117,089
(19,556)
(23,075)
(33,010)
(16,771)
(17,516)
(21,271)
(28,665)
(19,330)
(25,555)
(24,388)
(32,551)
(29,079)
Other (Expense) Income, Net
61,630
63,752
101,183
83,735
100,643
96,741
129,107
126,302
9,405
9,473
13,018
12,448
1,561
381
770
674
105
244
Impairment of Goodwill and Other Intangible Assets
7,168
11,528
129,312
19,417
168
159
211
267
2,531
3,016
2,517
132,539
12,506
7,883
11,584
6,345
2,768
1,738
2,540
1,924
3,752
3,447
4,970
1,669
423
114
169
(27,549)
(21,159)
(27,871)
(33,289)
(8,100)
(7,977)
(8,608)
(23,219)
Asset information for the Company’s business segments are as follows:
Identifiable Assets
1,739,301
1,988,015
1,189,084
1,187,603
371,726
374,075
137,068
88,393
383,471
466,538
3,820,650
4,104,624
Investments in Marketable Equity Securities
Assets of Discontinued Operations
255,100
The Company’s education division comprises the following operating segments:
Higher education
266,061
273,703
811,013
872,948
Test preparation
77,431
81,151
232,064
223,767
Kaplan international
201,305
194,158
574,086
546,862
Kaplan corporate and other
2,223
3,809
6,496
10,283
(568)
(1,125)
(1,162)
(3,705)
14,719
1,510
42,354
16,329
3,820
3,446
7,306
(4,067)
12,020
20,365
24,907
34,293
(13,680)
(10,852)
(38,243)
(40,628)
156
224
579
9,739
12,168
33,919
35,598
5,034
5,544
14,658
14,308
3,903
3,841
12,015
12,490
302
471
1,038
1,356
Pension Expense
3,201
2,234
8,815
5,408
731
554
2,012
1,381
99
112
273
113
138
622
1,406
981
Identifiable assets for the Company’s education division consist of the following:
Identifiable assets
643,342
949,260
182,450
197,672
878,123
818,613
35,386
22,470
24
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 income from continuing operations attributable to common shares of $56.0 million ($7.53 per share) for the third quarter of 2013, compared to $56.3 million ($7.58 per share) for the third quarter of 2012. Net income attributable to common shares was $30.1 million ($4.05 per share) for the third quarter ended September 30, 2013, compared to $93.8 million ($12.64 per share) for the third quarter of last year. Net income includes $25.9 million ($3.48 per share) in losses and $37.5 million ($5.06 per share) in income from discontinued operations for the third quarter of 2013 and 2012, respectively.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses, including The Washington Post. Consequently, the Company's income from continuing operations for the third quarter and year-to-date periods excludes these sold businesses, which have been reclassified to discontinued operations for all periods presented.
Items included in the Company’s income from continuing operations for the third quarter of 2013:
§ $4.0 million in severance and restructuring charges at the education division (after-tax impact of $3.1 million, or $0.42 per share); and
§ $7.9 million in non-operating unrealized foreign currency gains (after-tax impact of $5.0 million, or $0.69 per share).
Items included in the Company’s income from continuing operations for the third quarter of 2012:
§ $4.3 million in severance and restructuring charges at the education division (after-tax impact of $2.7 million, or $0.37 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).
Revenue for the third quarter of 2013 was $902.5 million, up 3% from $877.6 million in the third quarter of 2012. The Company reported operating income of $81.9 million in the third quarter of 2013, compared to operating income of $93.2 million in the third quarter of 2012. Revenues increased at the cable television division and in other businesses, offset by declines at the television broadcasting and education divisions. Operating results declined at the television broadcasting division and declined very slightly at the cable television division, offset by improved results at the education division.
For the first nine months of 2013, the Company reported income from continuing operations attributable to common shares of $134.3 million ($18.07 per share), compared to $122.1 million ($16.17 per share) for the first nine months of 2012. Net income attributable to common shares was $79.5 million ($10.70 per share) for the first nine months of 2013, compared to $176.7 million ($23.39 per share) for the same period of 2012. Net income includes $54.7 million ($7.37 per share) in losses and $54.5 million ($7.22 per share) in income from discontinued operations for the first nine months of 2013 and 2012, respectively (refer to “Discontinued Operations” discussion below). As a result of the Company’s share repurchases, there were 3% fewer diluted average shares outstanding in the first nine months of 2013.
Items included in the Company’s income from continuing operations for the first nine months of 2013:
§ $18.3 million in severance and restructuring charges at the education division (after-tax impact of $13.1 million, or $1.79 per share); and
§ $9.4 million in non-operating unrealized foreign currency losses (after-tax impact of $6.0 million, or $0.83 per share).
Items included in the Company’s income from continuing operations for the first nine months of 2012:
§ $9.3 million in severance and restructuring charges at the education division (after-tax impact of $5.8 million, or $0.78 per share);
§ a $5.8 million gain on the sale of a cost method investment (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).
Revenue for the first nine months of 2013 was $2,628.9 million, up 3% from $2,559.7 million in the first nine months of 2012. Revenues increased at the cable television division and in other businesses, offset by declines at the television broadcasting and education divisions. The Company reported operating income of $240.0 million for the first nine months of 2013, compared to $202.1 million for the first nine months of 2012. Operating results improved at the education and cable television divisions, offset by a decline at the television broadcasting division.
Division Results
Education division revenue totaled $546.5 million for the third quarter of 2013, a 1% decline from revenue of $551.7 million for the third quarter of 2012. Kaplan reported third quarter 2013 operating income of $17.0 million, compared to $14.7 million in the third quarter of 2012.
For the first nine months of 2013, education division revenue totaled $1,622.5 million, a 2% decline from revenue of $1,650.2 million for the same period of 2012. Kaplan reported operating income of $36.7 million for the first nine months of 2013, compared to operating income of $6.5 million for the first nine months of 2012.
In response to student demand levels, Kaplan has formulated and implemented restructuring plans at its various businesses, with the objective of establishing lower cost levels in future periods. Across all businesses, restructuring costs totaled $4.0 million and $18.3 million in the third quarter and first nine months of 2013, respectively, compared to $4.3 million and $9.3 million in the third quarter and first nine months of 2012, respectively. In conjunction with completing these restructuring plans at Kaplan Higher Education (KHE) and Kaplan International, Kaplan currently plans to incur approximately $5.0 million in additional restructuring costs for the remainder of 2013. Kaplan may also incur additional restructuring charges in 2013 as Kaplan management continues to evaluate its cost structure.
A summary of Kaplan’s operating results for the third quarter and the first nine months of 2013 compared to 2012 is as follows:
% Change
Revenue
(5)
(42)
(37)
(2)
Operating Income (Loss)
(41)
(27)
(26)
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 2012, KHE began implementing plans to close or merge 13 ground campuses, consolidate other facilities and reduce its workforce. In connection with these and other plans, KHE incurred $2.5 million and $14.1 million in total restructuring costs in the third quarter and first nine months of 2013, respectively, compared to $2.7 million and $6.5 million in severance and restructuring costs for the third quarter and first nine months of 2012, respectively. For the third quarter of 2013, these costs included accelerated depreciation ($0.8 million), severance ($1.6 million) and lease obligation losses ($0.1 million). For the first nine months of 2013, these costs included accelerated depreciation ($5.8 million), severance ($3.0 million), lease obligation losses ($4.4 million) and other items ($0.9 million). In the first nine months of 2013, ten KHE campuses were closed. For the third quarter and first nine months of 2012, restructuring costs were mostly severance, but also included $0.6 million in accelerated depreciation.
In the third quarter and first nine months of 2013, higher education revenue declined 3% and 7%, respectively, due largely to declines in average enrollments that reflect weaker market demand over the past year and the impact of campuses in the process of closing.
26
KHE operating income increased significantly in the third quarter and first nine months of 2013, due largely to expense reductions associated with lower enrollments and recent restructuring efforts.
New student enrollments at KHE declined 7% and 1% in the third quarter and first nine months of 2013, respectively. New student enrollments were down due to the impact of closed campuses and those planned for closure that are no longer recruiting students, offset by the positive impact of trial period modifications and process improvements.
Total students at September 30, 2013, were down 11% compared to September 30, 2012, but increased 5% compared to June 30, 2013. Excluding campuses closed or planned for closure, total students at September 30, 2013, were down 7% compared to September 30, 2012, but up 5% compared to June 30, 2013. A summary of student enrollments is as follows:
Students as of
Kaplan University
46,340
43,601
49,132
Other Campuses
18,818
18,591
24,129
65,158
62,192
73,261
(excluding campuses closing)
18,619
18,181
21,066
64,959
61,782
70,198
Kaplan University and Other Campuses’ enrollments at September 30, 2013 and 2012, by degree and certificate programs, are as follows:
As of September 30,
Certificate
21.3
23.6
Associate’s
30.8
30.7
Bachelor’s
32.6
32.7
Master’s
15.3
13.0
100.0
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. KTP revenue declined 5% for the third quarter of 2013, but increased 4% for the first nine months of 2013. Enrollment declined 8% and 2% for the third quarter and first nine months of 2013, respectively, due to declines in graduate programs, offset by growth in nursing and bar review programs. KTP operating results improved in the first nine months of 2013 due largely to increased revenues.
Kaplan International includes English-language programs and postsecondary education and professional training businesses outside the United States. Kaplan International revenue increased 4% and 5% in the third quarter and first nine months of 2013, respectively, due to enrollment growth in the pathways, English-language and Singapore higher education programs. Kaplan International operating income declined in the third quarter of 2013 due to reduced earnings in professional training, and increased investment to support growth in English-language and Singapore higher education programs. For the first nine months of 2013, operating income declined due to reduced earnings in professional training, and increased investment to support growth in English-language programs, offset by better results in Singapore. The results in Australia included restructuring costs of $1.5 million and $4.1 million for the third quarter and first nine months of 2013, respectively, compared to $1.0 million in the third quarter and first nine months of 2012. In the third quarter and first nine months of 2012, respectively, Kaplan International results benefited from a $2.0 million and $3.9 million favorable adjustment to certain items recorded in prior periods.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities.
27
Cable Television
Cable television division revenue increased 1% in the third quarter of 2013 to $202.4 million, from $199.6 million for the third quarter of 2012; for the first nine months of 2013, revenue increased 4% to $607.1 million, from $585.4 million in the same period of 2012. The revenue increase for the first nine months of 2013 is due to recent rate increases for many subscribers, growth in commercial sales and a reduction in promotional discounts. The increase was partially offset by a decline in basic video subscribers, as the cable division focuses its efforts on churn reduction and retention of its high-value subscribers.
Cable television division operating income declined slightly in the third quarter of 2013 to $39.7 million, from $39.9 million in the third quarter of 2012; for the first nine months of 2013, operating income increased 9% to $121.0 million, from $111.1 million for the first nine months of 2012. The division’s operating income improved in the first nine months of 2013 due to increased revenues, partially offset by higher programming and depreciation costs.
At September 30, 2013, Primary Service Units (PSUs) were down 3% from the prior year due to a decline in basic video subscribers. PSUs include about 6,400 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
561,119
605,057
High-speed data
469,296
462,808
Telephony
182,643
185,647
1,213,058
1,253,512
Below are details of Cable division capital expenditures as defined by the NCTA Standard Reporting Categories:
Customer Premise Equipment
26,496
35,863
Commercial
3,613
3,387
Scaleable Infrastructure
13,062
17,557
Line Extensions
4,248
4,010
Upgrade/Rebuild
23,014
10,646
Support Capital
35,494
30,799
105,927
102,262
Television Broadcasting
Revenue at the television broadcasting division declined 18% to $87.1 million in the third quarter of 2013, from $106.4 million in the same period of 2012; operating income for the third quarter of 2013 was down 33% to $36.3 million, from $54.1 million in the same period of 2012. For the first nine months of 2013, revenue declined 4% to $271.7 million, from $283.5 million in the same period of 2012; operating income for the first nine months of 2013 was down 7% to $119.4 million, from $128.8 million in the same period of 2012.
The decline in revenue and operating income is due to a $15.9 million and $24.1 million decrease in political advertising revenue in the third quarter and first nine months of 2013, respectively, and $10.8 million in incremental summer Olympics-related advertising at the Company’s NBC affiliates in the third quarter of 2012. The decline in revenue and operating income was partially offset by incremental advertising revenue from the NBA finals broadcast at the division’s ABC affiliates in Miami and San Antonio, and increased retransmission revenues.
Other Businesses
Other businesses includes the operating results of Social Code, a marketing solutions provider helping companies with marketing on social media platforms; Celtic Healthcare, a provider of home health care and hospice services in the northeastern and mid-Atlantic regions, acquired by the Company in November 2012; Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications, acquired by the Company in August 2013; and WaPo Labs, a digital team focused on emerging technologies and new product development. Also included are the Slate Group and the FP Group, previously included as part of the Company’s newspaper publishing division.
The revenue increase in other businesses for the first nine months of 2013 is primarily due to growth at Social Code and Slate, and revenue from the Company’s recently acquired Celtic Healthcare and Forney 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 16.5% interest in Classified Ventures, LLC and interests in several other affiliates.
The Company’s equity in earnings of affiliates, net, was $5.9 million for the third quarter of 2013, compared to $4.1 million for the third quarter of 2012. For the first nine months of 2013, the Company’s equity in earnings of affiliates, net, totaled $13.2 million, compared to $11.3 million for the same period of 2012.
Other Non-Operating Income (Expense)
The Company recorded other non-operating income, net, of $8.1 million for the third quarter of 2013, compared to $4.2 million for the third quarter of 2012. The third quarter 2013 non-operating income, net, included $7.9 million in unrealized foreign currency gains and other items. The third quarter 2012 non-operating income, net, included $3.1 million in unrealized foreign currency gains and other items.
The Company recorded non-operating expense, net, of $8.8 million for the first nine months of 2013, compared to other non-operating income, net, of $12.1 million for the same period of the prior year. The 2013 non-operating expense, net, included $9.4 million in unrealized foreign currency losses, offset by other items. The 2012 non-operating income, net, included a net $6.8 million gain on sales or write-downs of cost method investments, $3.2 million in unrealized foreign currency gains and other items.
Net Interest Expense
The Company incurred net interest expense of $8.6 million and $25.6 million for the third quarter and first nine months of 2013, respectively, compared to $8.1 million and $24.4 million for the same periods of 2012. At September 30, 2013, the Company had $451.1 million in borrowings outstanding, at an average interest rate of 7.0%.
The effective tax rate for income from continuing operations for the first nine months of 2013 was 38.1%, compared to 38.8% for the first nine months of 2012.
Discontinued Operations
On August 5, 2013, the Company announced that it had entered into an agreement to sell its Publishing Subsidiaries that together conducted most of the Company’s publishing businesses and related services, including publishing The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Times and El Tiempo Latino and related websites. Slate magazine, TheRoot.com and Foreign Policy are not part of the transaction and remain with The Washington Post Company, as do the WaPo Labs and SocialCode businesses, the Company’s interest in Classified Ventures and certain real estate assets, including the headquarters building in downtown Washington, DC. On October 1, 2013, the Company completed the sale. Consequently, the Company’s income from continuing operations excludes these sold businesses, which have been reclassified to discontinued operations, net of tax, for all periods presented.
29
The Purchaser acquired all the issued and outstanding equity securities of the Publishing Subsidiaries for $250 million, subject to customary adjustments for cash, debt and working capital at closing. The Company will not record the gain on the sale until the fourth quarter of 2013; however, the Company recognized $28.4 million (after-tax impact of $18.3 million) in expenses related to the sale that are included in discontinued operations in the third quarter of 2013. These costs include the net impact of accelerated vesting provisions and forfeitures of restricted stock awards and stock options that were made in contemplation of the sale, and certain other transaction-related expenses. Also included in discontinued operations is $22.7 million (after-tax basis of $14.5 million) in early retirement program expense for the first nine months of 2013, and $7.5 million (after-tax basis of $4.6 million) and $8.5 million (after-tax basis of $5.3 million) for the third quarter and first nine months of 2012, respectively.
In March 2013, the Company sold The Herald. Kaplan sold Kidum in August 2012, EduNeering in April 2012 and Kaplan Learning Technologies (KLT) in February 2012. The Company divested its interest in Avenue100 Media Solutions in July 2012. Consequently, the Company’s income from continuing operations also excludes the operating results and related net gains on disposition of these businesses, which have been reclassified to discontinued operations, net of tax.
Earnings (Loss) Per Share
The calculation of diluted earnings per share for the third quarter and first nine months of 2013 was based on 7,336,752 and 7,315,971 weighted average shares outstanding, respectively, compared to 7,376,255 and 7,507,946, respectively, for the third quarter and first nine months of 2012. At September 30, 2013, there were 7,423,913 shares outstanding and the Company had remaining authorization from the Board of Directors to purchase up to 180,993 shares of Class B common stock.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions
Dispositions. On August 5, 2013, after approval by the Company’s Board of Directors on the same day, the Company announced that it had entered into a binding letter agreement (the Letter Agreement) with Nash Holdings LLC, a Delaware limited liability company (the Purchaser), and Explore Holdings LLC, a Washington limited liability company, as guarantor (the Guarantor), to sell all the issued and outstanding equity securities of each of WP Company LLC, Express Publications Company, LLC, El Tiempo Latino, LLC, Robinson Terminal Warehouse, LLC, Greater Washington Publishing, LLC and Post-Newsweek Media, LLC (the Publishing Subsidiaries). The Publishing Subsidiaries together conducted most of the Company’s publishing businesses, including publishing The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Fairfax County Timesand El Tiempo Latino and related websites, and operating Washington Post Live and Washington Post News Media Services and the Company’s commercial printing and distribution business and paper handling and storage business (collectively, the Publishing Business), subject to satisfying certain conditions.
On October 1, 2013, the Company entered into a Purchase Agreement and completed the sale. Under the terms of the Purchase Agreement, the Purchaser acquired all the issued and outstanding equity securities of each of the entities that comprise the Publishing Subsidiaries for $250 million, subject to customary adjustment for cash, debt and working capital
30
of the Publishing Subsidiaries at closing. The Purchaser also acquired all other assets of the Company primarily related to the Publishing Business, including all of the Company’s rights in the name “The Washington Post”. The Company will change its corporate name within 60 days of the October 1 closing. The Company retained its interest in Classified Ventures, LLC, Slate magazine, TheRoot.com and Foreign Policy, as well as the WaPo Labs and SocialCode business and certain real estate, including the headquarters building in downtown Washington, DC and certain land and property in Alexandria, VA. The liabilities under the Retirement Plan for The Washington Post Companies relating to the active employees of the Publishing Business will be transferred to the Purchaser, along with pension assets that have a value equal to the projected benefit obligation in respect of these active employees plus an additional $50 million. The results of operations of Publishing Subsidiaries for the three and nine months ended September 30, 2013 and 2012, are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax.
The Company will not record the gain or the net proceeds on the sale until the fourth quarter of 2013; however, the Company recognized $28.4 million (after-tax impact of $18.3 million) in expenses related to the sale that are included in discontinued operations in the third quarter of 2013. These costs include the net impact of accelerated vesting provisions and forfeitures of restricted stock awards and stock options that were made in contemplation of the sale, and certain other transaction-related expenses. Including the $28.4 million in expenses related to the sale recorded in the third quarter of 2013, the Company estimates a $125 million pre-tax gain and an $80 million after-tax gain on the sale. This includes a preliminary estimate of net curtailment and settlement gains from the Company’s pension and postretirement benefit plans, along with other estimates. As a result, the final gain amount reported in the fourth quarter of 2013 will likely differ from this preliminary estimate.
In October 2013, of the total restricted shares where vesting was accelerated, the Company purchased 21,774 shares from former employees for $13.5 million.
Capital Expenditures
During the first nine months of 2013, the Company’s capital expenditures totaled $143.3 million. The Company estimates that its capital expenditures will be in the range of $190 million to $215 million in 2013.
Liquidity
The Company’s borrowings decreased by $245.6 million, to $451.1 million at September 30, 2013, as compared to borrowings of $696.7 million at December 31, 2012. At September 30, 2013, the Company had $441.7 million in cash and cash equivalents, compared to $512.4 million at December 31, 2012. The Company had money market investments of $296.9 million and $432.7 million that are classified as cash, cash equivalents and restricted cash in the Company’s condensed consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, respectively.
The Company’s total debt outstanding of $451.1 million at September 30, 2013 included $397.8 million of 7.25% unsecured notes due February 1, 2019, $46.6 million of AUD 50M borrowing and $6.7 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 will expire on June 17, 2015, unless the Company and the banks agree to extend the term.
On September 6, 2013, Standard and Poor’s affirmed the “BBB” long-term corporate debt rating, but changed the outlook from Negative to Stable. In addition, S&P upgraded the Company’s short-term corporate debt rating from “A-3” to “A-2”. The Company’s current credit ratings are as follows:
Standard
Moody’s
& Poor’s
Long-term
Baa1
BBB
Short-term
Prime-2
A-2
31
During the third quarter of 2013 and 2012, the Company had average borrowings outstanding of approximately $449.8 million and $456.3 million, respectively, at average annual interest rates of approximately 7.0%. During the third quarter of 2013 and 2012, the Company incurred net interest expense of $8.6 million and $8.1 million, respectively.
At September 30, 2013 and December 31, 2012, the Company had working capital of $516.7 million and $327.5 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds and to a lesser extent borrowings supported by our Credit Agreement. In management’s opinion, the Company will have sufficient liquidity to meet its various cash needs throughout 2013.
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, 2012.
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 2012 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, 2013. 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, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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
The following financial information from The Washington Post Company Quarterly Report on Form 10-Q for the period ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012, (ii) Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012, (iii) Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012, 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 5, 2013
/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)