UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
or
Commission file number 1-6714
THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)
(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 is an accelerated filer as defined by Rule 12b-2 of the Exchange Act). Yes x. No ¨.
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 May 1, 2006:
Class A Common Stock
Class B Common Stock
Index to Form 10-Q
PART I.
Item 1.
a. Condensed Consolidated Statements of Income (Unaudited) for the Thirteen Weeks Ended April 2, 2006 and April 3, 2005
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen Weeks Ended April 2, 2006 and April 3, 2005
c. Condensed Consolidated Balance Sheets at April 2, 2006 (Unaudited) and January 1, 2006
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirteen Weeks Ended April 2, 2006 and April 3, 2005
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Item 3.
Item 4.
PART II.
Item 6.
Signatures
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
Operating revenues
Advertising
Circulation and subscriber
Education
Other
Operating costs and expenses
Operating
Selling, general and administrative
Depreciation of property, plant and equipment
Amortization of intangible assets
Income from operations
Other income (expense)
Equity in losses of affiliates
Interest income
Interest expense
Other, net
Income before income taxes and cumulative effect of change in accounting principle
Provision for income taxes
Income before cumulative effect of change in accounting principle
Cumulative effect of change in method of accounting for share-based payments, net of taxes
Net income
Redeemable preferred stock dividends
Net income available for common shares
Basic earnings per share:
Before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle
Net income available for common stock
Diluted earnings per share:
Dividends declared per common share
Basic average number of common shares outstanding
Diluted average number of common shares outstanding
3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
April 2,
2006
April 3,
2005
Other comprehensive income (loss)
Foreign currency translation adjustment
Change in unrealized gain on available-for-sale securities
Less: reclassification adjustment for realized gains included in net income
Income tax (expense) benefit related to other comprehensive income
Comprehensive income
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Condensed Consolidated Balance Sheets
January 1,
Assets
Current assets
Cash and cash equivalents
Investments in marketable equity securities
Accounts receivable, net
Inventories
Deferred income taxes
Income taxes receivable
Other current assets
Property, plant and equipment
Buildings
Machinery, equipment and fixtures
Leasehold improvements
Less accumulated depreciation
Land
Construction in progress
Investments in affiliates
Goodwill, net
Indefinite-lived intangible assets, net
Amortized intangible assets, net
Prepaid pension cost
Deferred charges and other assets
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Deferred revenue
Dividends declared
Income taxes payable
Short-term borrowings
Postretirement benefits other than pensions
Other liabilities
Long-term debt
Redeemable preferred stock
Preferred stock
Common shareholders’ equity
Common stock
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income
Cumulative foreign currency translation adjustment
Unrealized gain on available-for-sale securities
Cost of Class B common stock held in treasury
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Condensed Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of goodwill and other intangibles
Net pension benefit
Gain from sale of land
Gain on disposition of marketable equity securities
Foreign exchange(gain)loss
Cost method and other investment write-downs
Equity in losses of affiliates, net of distributions
Provision for deferred income taxes
Change in assets and liabilities:
Decrease in accounts receivable, net
Increase in inventories
Decrease in accounts payable and accrued liabilities
Increase in deferred revenue
Increase in income taxes payable
Decrease in other assets and other liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from the sale of property, plant and equipment
Investments in certain businesses
Proceeds from sale of marketable equity securities
Net cash used in investing activities
Cash flows from financing activities:
Net repayment of commercial paper
Principal payments on debt
Dividends paid
Cash overdraft
Proceeds from exercise of stock options
Excess tax benefit on stock options
Net cash used in financing activities
Effect of currency exchange rate change
Net increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. Results of operations at the Kaplan education division, when examined on quarterly basis, reflect the volatility of Kaplan stock compensation charges. All adjustments reflected in the interim financial statements are of a normal recurring nature.
The Washington Post Company (the “Company”) generally reports on a 13 week fiscal quarter ending on the Sunday nearest the calendar quarter-end. With the exception of the newspaper publishing operations, subsidiaries of the Company report on a calendar-quarter basis.
Certain amounts in previously issued financial statements have been reclassified to conform with the 2005 presentation.
Note 1: Acquisitions.
In the first quarter of 2006, Kaplan acquired two businesses in their professional and higher education divisions; these acquisitions totaled $7.4 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.
In the first quarter of 2005, the Company acquired Slate, an online magazine, and Kaplan acquired two businesses in their higher education division; these acquisitions totaled $26.5 million.
Note 2: Investments.
Investments in marketable equity securities at April 2, 2006 and January 1, 2006 consist of the following (in thousands):
Total cost
Gross unrealized gains
Total fair value
There were no sales of marketable equity securities in the first quarter of 2006. During the first quarter of 2005, the Company sold marketable equity securities for a pre-tax gain of $3.3 million. The Company made $42.9 million in investments in marketable equity securities during the first quarter of 2006.
At April 2, 2006 and January 1, 2006, the carrying value of the Company’s cost method investments was $11.1 million and $11.9 million, respectively. The Company recorded charges of $0.8 million during the first quarter of 2006, to write-down certain of its investments to estimated fair value.
As of April 2, 2006 and January 1, 2006, the Company had commercial paper investments of $114.3 million and $59.2 million, respectively, that are classified as “cash and cash equivalents” on the Company’s consolidated balance sheet.
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Note 3: Borrowings.
Long-term debt consists of the following (in millions):
5.5 percent unsecured notes due February 15, 2009
4.0 percent notes due 2006 (£8.4 million)
Other indebtedness
Total
Less current portion
Total long-term debt
During 2003, notes of £16.7 million were issued to current employees of The Financial Training Company (FTC) who were former FTC shareholders in connection with the March 2003 acquisition by Kaplan. In 2004, 50% of the balance on the notes was paid. The remaining balance outstanding of £8.4 million is due for repayment in August 2006.
The Company’s other indebtedness at April 2, 2006 and January 1, 2006 is at interest rates of 6% to 7% and matures from 2006 to 2009.
During the first quarter of 2006 and 2005, the Company had average borrowings outstanding of approximately $426.0 million and $457.8 million, respectively, at average annual interest rates of approximately 5.4 percent and 5.2 percent, respectively. During the first quarter of 2006 and 2005, the Company incurred net interest expense of $4.7 million and $5.9 million, respectively.
Note 4: Business Segments.
The following table summarizes financial information related to each of the Company’s business segments. The 2006 and 2005 asset information is as of April 2, 2006 and January 1, 2006, respectively.
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First Quarter Period
(in thousands)
Income (loss) from operations
Interest expense, net
Income before income taxes
Depreciation expense
Amortization expense
Net pension credit (expense)
Identifiable assets
Total assets
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The Company’s education division comprises the following operating segments:
Kaplan stock-based incentive compensation
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Newspaper publishing includes the publication of newspapers in the Washington, D.C. area and Everett, Washington; newsprint warehousing and recycling facilities; and the Company’s online media publishing business (primarily washingtonpost.com and Slate).
The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions; the publication of Arthur Frommer’s Budget Travel; online operations (primarily newsweek.com and budgettravelonline.com) and the publication of business periodicals for the computer services industry and the Washington-area technology community.
Television broadcasting operations are conducted through six VHF, television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville) with revenues derived primarily from sales of advertising time.
Cable television operations consist of cable systems offering basic cable, digital cable, pay television, cable modem and other services to subscribers in midwestern, western, and southern states. The principal source of revenue is monthly subscription fees charged for services.
Education products and services are provided through the Company’s wholly-owned subsidiary Kaplan, Inc. Kaplan’s businesses include supplemental education services, which is made up of Kaplan Test Prep and Admissions, providing test preparation services for college and graduate school entrance exams; Kaplan Professional, providing education and career services to business people and other professionals; and Score!, offering multi-media learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include higher education services, which includes all of Kaplan’s post-secondary education businesses, including fixed facility colleges which offer Bachelor’s degrees, Associate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; and online post-secondary and career programs (various distance-learning businesses). For segment reporting purposes, the education division has two primary segments, supplemental education and higher education. Kaplan corporate overhead and “other” is also included; “other” includes Kaplan stock compensation expense and amortization of certain intangibles.
Corporate office includes the expenses of the Company’s corporate office.
Note 5: Goodwill and Other Intangible Assets.
The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable division, as the Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable division historically has obtained renewals and extensions of such agreements for nominal costs and without any material modifications to the agreements. Amortized intangible assets are primarily mastheads, customer relationship intangibles and non-compete agreements, with amortization periods up to ten years.
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The Company’s goodwill and other intangible assets as of April 2, 2006 and January 1, 2006 were as follows (in thousands):
Goodwill
Indefinite-lived intangible assets
Amortized intangible assets
Activity related to the Company’s goodwill and other intangible assets during the three months ended April 2, 2006 was as follows (in thousands):
Beginning of year
Acquisitions
Foreign currency exchange rate changes
Balance at April 2, 2006
Indefinite-Lived Intangible Assets, net
Foreign currency ex-change rate changes
Amortization
Activity related to the Company’s goodwill and other intangible assets during the three months ended April 3, 2005 was as follows (in thousands):
Balance at April 3, 2005
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Note 6: Stock Options and Stock Awards.
Adoption of SFAS 123R.
In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (SFAS 123R), “Share–Based Payment.” SFAS 123R requires companies to record the cost of employee services in exchange for stock options based on the grant-date fair value of the awards. SFAS 123R did not have any impact on the Company’s results of operations for Company stock options as the Company adopted the fair-value-based method of accounting for Company stock options in 2002. However, the adoption of SFAS 123R required the Company to change its accounting for Kaplan equity awards from the intrinsic value method to the fair-value-based method of accounting. This change in accounting results in the acceleration of expense recognition for Kaplan equity awards. As a result, in the first quarter of 2006, the Company reported a $5.1 million after-tax charge for the cumulative effect of change in accounting for Kaplan equity awards ($8.2 million in pre-tax Kaplan stock compensation expense).
Stock Options.
The Company’s employee stock option plan reserves shares of the Company’s Class B common stock for options to be granted under the plan. The purchase price of the shares covered by an option cannot be less than the fair value on the granting date. Options generally vest over 4 years and have a maximum term of 10 years. At April 2, 2006, there were 407,575 shares reserved for issuance under the stock option plan, of which 112,575 shares were subject to options outstanding, and 295,000 shares were available for future grants.
Changes in options outstanding for the quarter ended April 2, 2006 were as follows:
Weighted
Average
Exercise
Price
AggregateIntrinsicValue
Outstanding at January 1, 2006
Granted
Exercised
Forfeited
Outstanding at April 2, 2006
Options exercisable at April 2, 2006
Nonvested options at January 1, 2006
Nonvested options at April 2, 2006
* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of the Company’s stock was $776.75 at April 2, 2006.
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The Company recorded expense of $0.3 million during the first quarter of 2006 and 2005, with a related income tax benefit of $0.1 million in each quarter, related to this plan. As of April 2, 2006, total unrecognized stock-based compensation expense related to stock options was $2.5 million, which is expected to be recognized over a weighted-average period of approximately 1.7 years. The total intrinsic value of options exercised during the first quarter of 2006 was $0.3 million.
Information related to stock options outstanding at April 2, 2006 is as follows:
All options were granted at an exercise price equal to or greater than the fair market value of the Company’s common stock at the date of grant. No stock option awards were granted during the first quarter of 2006.
Kaplan Equity Awards.
The Company also maintains a stock option plan at its Kaplan subsidiary that provides for the issuance of Kaplan stock options to certain members of Kaplan’s management. The Kaplan stock option plan was adopted in 1997 and initially reserved 15%, or 150,000 shares, of Kaplan’s common stock for awards to be granted under the plan. Under the provisions of this plan, options are issued with an exercise price equal to the estimated fair value of Kaplan’s common stock and options vest ratably over the number of years specified (generally 4 to 5 years) at the time of the grant. Upon exercise, an option holder receives cash equal to the difference between the exercise price and the then fair value. The fair value of Kaplan’s common stock is determined by the Company’s compensation committee of the Board of Directors. In January 2006, the committee set the fair value price at $1,833 per share. Option holders have a 30-day window in which they may exercise at this price, after which time the compensation committee has the right to determine a new price in the event of an exercise.
Changes in Kaplan stock options outstanding for the quarter ended April 2, 2006 were as follows:
ExercisePrice
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In December 2005, the compensation committee awarded to a senior manager Kaplan shares or share equivalents equal in value to $4.8 million, with the number of shares of share equivalents determined by the January 2006 valuation. In 2006, based on the $1,833 per share value, 2,619 shares or share equivalents will be issued. The expense of this award has been reflected in the 2005 results of operations.
Excluding Kaplan stock compensation expense of $8.2 million recorded as a result of the change in accounting under SFAS 123R, Kaplan recorded stock compensation expense of $1.9 million in the first quarter of 2006, compared to $7.0 million in the first quarter of 2005. At April 2, 2006, the Company’s accrual balance related to Kaplan stock-based compensation totaled $48.3 million.
As of April 2, 2006, total unrecognized stock-based compensation expense related to stock options was $13.9 million, which is expected to be recognized over a weighted-average period of approximately 3.25 years. The total intrinsic value of options exercised during the first quarter of 2006 was $25.0 million. A tax benefit from these stock option exercises of $9.6 million was realized.
Range of
Prices
$190
375
526
652
861
1,625
1,833
2,080
The fair value of Kaplan stock options at January 2, 2006, the adoption date of SFAS 123R, and at April 2, 2006, was estimated using the Black-Scholes method utilizing the following assumptions:
January 2,
Expected life (years)
Interest rate
Volatility
Dividend yield
Company Stock Awards.
In 1982, the Company adopted a long-term incentive compensation plan, which, among other provisions, authorizes the awarding of Class B common stock to key employees. Stock awards made under this incentive compensation plan are subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant’s employment terminates before the end of a specified period of service to the Company. At April 2, 2006, there were 186,850 shares reserved for issuance under the incentive compensation plan. Of this number, 29,275 shares were subject to awards outstanding, and 157,575 shares were available for future awards. Activity related to stock awards under the long-term incentive compensation plan for the quarter ended April 2, 2006, was as follows:
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Vested
As of April 2, 2006, there was $13.0 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted-average period of 1.7 years.
Stock-based compensation costs resulting from restricted stock reduced net income by $1.0 million during the first quarter of 2006.
Note 7: Antidilutive Securities.
The first quarter 2006 and 2005 diluted earnings per share amount excludes the effects of 13,000 stock options outstanding and 4,000 stock options outstanding, respectively, as their inclusion would be antidilutive.
Note 8: Pension and Postretirement Plans.
The total (income) cost arising from the Company’s defined benefit pension and postretirement plans for the first quarters ended April 2, 2006 and April 3, 2005 consists of the following components (in thousands):
Service cost
Interest cost
Expected return on assets
Amortization of transition asset
Amortization of prior service cost
Recognized actuarial gain
Total (benefit) cost for the quarter
At January 1, 2006, the Company reduced it assumption on the expected rate of return on plan assets from 7.5% to 6.5% for its pension plans.
The Washington Post implemented a voluntary early retirement program to the Mailers employees in April 2006; pre-tax charges of $1.1 million will be recorded in the second quarter of 2006 in connection with this program. In April 2006, the Company announced a voluntary early retirement program being offered to a large group of exempt and Guild-covered employees at The Washington Post and Corporate; the offer includes an incentive payment, enhanced retirement benefits and subsidized retiree health insurance; the enrollment period for this program expires at the end of May 2006 and the Company will record the costs associated with this program in the second quarter of 2006.
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Note 9 – Hurricane Losses
The Company’s cable division was significantly impacted by hurricane Katrina, which hit the Gulf Coast in August 2005. About 94,000 of the cable division’s pre-hurricane subscribers were located on the Gulf Coast of Mississippi, including Gulfport, Biloxi, Pascagoula and other neighboring communities where storm damage was significant.
At December 31, 2005, the Company recorded a $5.0 million receivable for recovery of a portion of cable hurricane losses through December 31, 2005 under the Company’s property and business interruption insurance program; this recovery was recorded as a reduction of cable division expense in the fourth quarter of 2005. During the first quarter of 2006, a portion of this receivable has been received; however, no additional insurance recovery amounts have yet been recorded related to 2005 or 2006.
Note 10 – Other Non-Operating Income (Expense)
The Company recorded other non-operating expense, net, of $0.2 million for the first quarter of 2006, compared to other non-operating income, net, of $7.1 million for the first quarter of 2005.
A summary of non-operating income (expense) for the thirteen weeks ended April 2, 2006 and April 3, 2005, is as follows (in millions):
Foreign currency gains (losses), net
Gain on sale of non-operating property
Gain on sale of marketable equity securities
Impairment write-downs on cost method and other investments
Other gains (losses), net
Note 11: Contingencies.
Kaplan Inc. is a party to a proposed class action antitrust lawsuit in California filed on April 29, 2005. The suit alleges violations of the Sherman Act. The Company intends to defend the lawsuit vigorously. Management does not believe that any litigation pending against the Company will have a material adverse effect on its business or financial condition.
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This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.
Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume.
Results of Operations
Net income for the first quarter of 2006 was $76.9 million ($7.95 per share), up from net income of $66.6 million ($6.87 per share) for the first quarter of last year.
Results for the first quarter of 2006 included a charge for the cumulative effect of a change in accounting for Kaplan equity awards (after-tax impact of $5.1 million, or $0.53 per share) in connection with the Company’s adoption of Statement of Financial Accounting Standards No. 123R (SFAS 123R), “Share-Based Payment.” Results for the first quarter of 2005 included after-tax non-operating gains from the sales of non-operating land and marketable securities (after-tax impact of $5.4 million, or $0.56 per share).
Revenue for the first quarter of 2006 was $948.3 million, up 14% from $833.9 million in 2005. Operating income for the quarter increased 28% to $137.8 million, from $108.0 million in 2005. Each of the Company’s divisions reported an increase in revenue and operating income during the quarter, particularly at the education division.
The Company’s operating income for the first quarter of 2006 includes $5.7 million of net pension credits, compared to $9.2 million in the first quarter of 2005. At January 1, 2006, the Company reduced its expected return on plan assets from 7.5% to 6.5%. Overall, the pension credit for 2006 is expected to be down by about $15 million, excluding charges related to early retirement programs.
Newspaper Publishing Division. Newspaper publishing division revenue totaled $243.5 million for the first quarter of 2006, a 4% increase from revenue of $233.0 million for the first quarter of 2005. Division operating income was up 2% to $32.0 million, from $31.4 million in 2005. The increase in operating income reflects increased division revenues and improved results at the Company’s online publishing activities, both washingtonpost.com and Slate. This was offset by a 12% increase in newsprint expense for the entire newspaper division (including The Washington Post, Express, El Tiempo, The Herald, The Gazette newspapers, and Greater Washington Publishing publications) and increased pension expense.
Print advertising revenue at The Washington Post newspaper increased 3% to $149.8 million, from $145.7 million in 2005. This growth was driven by advertising revenue increases in zones and classified, offset by declines in national and retail. Classified recruitment advertising revenue was up slightly to $21.8 million, from $21.7 million in the first quarter of 2005.
For the first quarter of 2006, Post daily and Sunday circulation declined 2.0% and 3.4%, respectively, compared to the first quarter of 2005. For the three months ended April 2, 2006, average daily circulation at The Post totaled 690,700 and average Sunday circulation totaled 958,800.
Revenue generated by the Company’s online publishing activities, primarily washingtonpost.com, increased 34% to $22.8 million for the first quarter of 2006, versus $17.0 million for 2005. The increase is largely due to growth in local and national online advertising revenues of 58%, as well as a 24% increase in online classified advertising revenue on washingtonpost.com. A small portion of the Company’s online publishing revenues is included in the magazine publishing division.
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In January 2006, The Washington Post announced an agreement to develop programming content for a new radio station (Washington Post Radio) owned by Bonneville International; Washington Post Radio began broadcasting at the end of March 2006.
Television Broadcasting Division. Revenue for the broadcast division rose 8% in the first quarter of 2006 to $85.9 million, from $79.3 million in 2005. The increase is due to $6.3 million in incremental winter Olympics-related advertising at the Company’s NBC affiliates. Operating income for the first quarter of 2006 increased 15% to $37.6 million, from $32.8 million in 2005, due to higher advertising revenues.
Magazine Publishing Division. Revenue for the magazine publishing division totaled $74.8 million for the first quarter of 2006, a 7% increase from $69.9 million for the first quarter of 2005. The increase in revenues is due to the combination of a 14% advertising revenue increase at Newsweek primarily from increased ad pages at the domestic edition and higher revenue at PostNewsweek Tech Media, whose primary trade show took place in the first quarter of 2006, versus the second quarter in 2005. The revenue increase was offset by a reduction in Newsweek domestic and international circulation revenues, due to subscription rate declines at the domestic edition of Newsweek, and subscription rate and rate base declines at certain of the international editions of Newsweek.
The division had an operating loss of $0.9 million in the first quarter of 2006, compared to an operating loss of $5.2 million in the first quarter of 2005. This improvement is due to the revenue increase discussed above and lower subscription acquisition expenses, offset by a reduced pension credit.
Cable Television Division. Cable division revenue of $135.2 million for the first quarter of 2006 represents a 7% increase over 2005 first quarter revenue of $126.4 million. The 2006 revenue increase is due to continued growth in the division’s cable modem revenues and a $3 monthly rate increase for basic cable service at most of its systems effective February 1, 2006. The cable division continues to be adversely impacted by subscriber losses due to Hurricane Katrina, which hit the Gulf Coast in August of 2005; first quarter 2006 revenues were adversely impacted by approximately $3.5 million.
Cable division operating income increased 9% to $25.4 million in the first quarter of 2006, versus $23.4 million in the first quarter of 2005. The increase in operating income is due mostly to the division’s revenue growth, offset by higher programming expenses and increases in technical and marketing costs. Hurricane Katrina had an estimated adverse impact on operating income of $4.0 million on the cable division’s results, due to subscriber losses and an estimated $1.8 million in additional expenses associated with the hurricane in the first quarter of 2006.
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At March 31, 2006, excluding the Gulf Coast region, the cable division shows an increase in Revenue Generating Units (RGUs) for each of the basic video, digital video and high-speed data subscriber categories, as compared to March 31, 2005. For the Gulf Coast region, there is a decline in basic and digital video RGUs due to Hurricane Katrina; however, the number of high-speed data subscribers has increased in the Gulf Coast region. RGUs include about 7,000 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by the various franchise agreements. A summary of RGUs broken down by Gulf Coast and all other regions is as follows:
March 31,
Gulf Coast Region
Basic
Digital
High-speed data
All Other Regions
Below are details of Cable division capital expenditures for the first quarter of 2006 and 2005, as defined by the NCTA Standard Reporting Categories (in millions):
Customer Premise Equipment
Commercial
Scaleable Infrastructure
Line Extensions
Upgrade/Rebuild
Support Capital
Education Division. Education division revenue totaled $408.9 million for the first quarter of 2006, a 26% increase over revenue of $325.4 million for the first quarter of 2005. Excluding revenue from acquired businesses, education division revenue increased 17% for the first quarter of 2006. Kaplan reported first quarter 2006 operating income of $52.6 million, an increase of 61% from $32.6 million in the first quarter of 2005.
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A summary of first quarter operating results compared to 2005 is as follows:
Revenue
Supplemental education
Higher education
Operating income (loss)
Kaplan corporate overhead
Other*
*Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles.
Supplemental education includes Kaplan’s test preparation, professional training and Score! businesses. Excluding revenue from acquired businesses, supplemental education revenues grew by 11% in the first quarter of 2006. Test preparation revenue grew by 21% due to strong enrollment in the K12 business and GMAT and English-language course offerings, as well as from the August 2005 acquisition of The Kidum Group, the leading provider of test preparation services in Israel. Also included in supplemental education is FTC Kaplan Limited (FTC). Headquartered in London, FTC primarily provides training services for accountants and financial services professionals, with training centers in the United Kingdom and Asia. FTC revenues grew by 23% in the first quarter of 2006 compared to the first quarter of 2005 largely as a result of higher enrollment and price increases. Supplemental education results also include professional real estate, insurance, security and other professional courses, and related products. In April 2005, Kaplan Professional completed the acquisition of BISYS Education Services, a provider of licensing education and compliance solutions for financial services institutions and professionals. In the first quarter of 2006, the CFA courses contributed to growth in supplemental education, as did the BISYS business. These results were offset by soft market demand for Kaplan Professional’s real estate, insurance and securities course offerings. The final component of supplemental education is Score!, which provides academic enrichment to children. Revenues at Score! were up slightly in the first quarter of 2006. There were 165 Score! centers at the end of March 2006, compared to 166 at the end of March 2005.
Higher education includes all of Kaplan’s post-secondary education businesses, including fixed-facility colleges as well as online post-secondary and career programs. In May 2005, Kaplan acquired Singapore-based Asia Pacific Management Institute (APMI), a private education provider for undergraduate and postgraduate students in Asia. Excluding revenue from acquired businesses, higher education revenues grew by 22% in the first quarter of 2006. Higher education enrollments increased by 17% to 77,000 at March 31, 2006, compared to 66,000 at March 31, 2005, with most of the new enrollment growth occurring in the online programs, as well as from acquisitions. Higher education results for the online programs in the first quarter of 2006 benefited from increases in both price and demand, as well as an increase in the number of course offerings. In the first quarter of 2006, there was a continued increase in higher education operating costs associated with expansion activities at the online operations, and to a lesser extent, at the fixed-facility operations, including new program offerings and higher facility and advertising expenses. Higher education operating cost increases for the fixed-facility colleges are expected to moderate as the year progresses.
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Corporate overhead represents unallocated expenses of Kaplan, Inc.’s corporate office.
Other includes charges for incentive compensation arising from equity awards under the Kaplan stock option plan, which was established for certain members of Kaplan’s management. In addition, Other includes amortization of certain intangibles. In the first quarter of 2006, the Company adopted SFAS 123R, which required the Company to change its accounting for Kaplan equity awards from the intrinsic value method to the fair-value-based method of accounting (see additional discussion below regarding the cumulative effect of change in accounting principle). Excluding Kaplan stock compensation expense recorded as a result of this change in accounting, Kaplan recorded stock compensation expense of $1.9 million in the first quarter of 2006, compared to $7.0 million in the first quarter of 2005.
In December 2005, Kaplan announced an agreement to acquire Tribeca Learning Limited, a leading education provided to the Australian financial services sector. The acquisition is expected to close in the second quarter of 2006.
Equity in Losses of Affiliates. The Company’s equity in losses of affiliates for the first quarter of 2006 was $0.2 million, compared to losses of $0.5 million for the first quarter of 2005. The Company’s affiliate investments consist of a 49% interest in BrassRing LLC and a 49% interest in Bowater Mersey Paper Company Limited.
Other Non-Operating (Expense) Income. The Company recorded other non-operating expense, net, of $0.2 million for the first quarter of 2006, compared to $7.1 million of other non-operating income, net, in the first quarter of 2005. The first quarter 2006 non-operating expense, net, includes $0.6 million in pre-tax foreign currency gains offset by impairment write-downs on cost method investments.
A summary of non-operating (expense) income for the thirteen weeks ended April 2, 2006, and April 3, 2005, follows (in millions):
Net Interest Expense. The Company incurred net interest expense of $4.7 million for the first quarter of 2006, compared to $5.9 million in 2005. At April 2, 2006, the Company had $423.6 million in borrowings outstanding at an average interest rate of 5.4%.
Provision for Income Taxes. The effective tax rate for the first quarter of 2006 was 38.3%, compared to 38.7% for 2005.
Cumulative Effect of Change in Accounting Principle. In the first quarter of 2006, the Company adopted SFAS 123R under the modified retrospective method. SFAS 123R
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requires companies to record the cost of employee services in exchange for stock options based on the grant-date fair value of the awards. SFAS 123R did not have any impact on the Company’s results of operations for Company stock options as the Company adopted the fair-value-based method of accounting for Company stock options in 2002. However, the adoption of SFAS 123R required the Company to change its accounting for Kaplan equity awards from the intrinsic value method to the fair-value-based method of accounting. As a result, in the first quarter of 2006, the Company reported a $5.1 million after-tax charge for the cumulative effect of change in accounting for Kaplan equity awards ($8.2 million in pre-tax Kaplan stock compensation expense). This change resulted in the acceleration of expense recognition for Kaplan equity awards, however, it will not impact the overall Kaplan stock compensation expense that will ultimately be recorded over the life of the award. Refer to Note 6 – Stock Options and Stock Awards in the “Notes to Condensed Consolidated Financial Statements” for additional information surrounding the impact of SFAS 123R and related disclosures.
Earnings Per Share. The calculation of diluted earnings per share for the first quarter 2006 was based on 9,606,000 weighted average shares outstanding, compared to 9,617,000 for the first quarter of 2005. The Company made no significant repurchases of its stock during the first quarter of 2006.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions. In the first quarter of 2006, Kaplan acquired two businesses in their professional and higher education divisions; these acquisitions totaled $7.4 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis. In December 2005, Kaplan announced an agreement to acquire Tribeca Learning Limited, a leading education provided to the Australian financial services sector. The acquisition is expected to close in the second quarter of 2006.
Capital expenditures. During the first three months of 2006, the Company’s capital expenditures totaled $58.3 million. The Company estimates that its capital expenditures will be in the range of $275 million to $300 million in 2006.
Liquidity. The Company’s borrowings have declined by $4.8 million, to $423.6 million at April 2, 2006, as compared to borrowings of $428.4 million at January 1, 2006. At April 2, 2006, the Company has $250.0 million in cash and cash equivalents, compared to $215.9 million at January 1, 2006. The Company had commercial paper investments of $114.3 million and $59.2 million that are classified ad “Cash and cash equivalents” in the Company’s Consolidated Balance Sheet as of April 2, 2006 and January 1, 2006, respectively.
At April 2, 2006, the Company had $423.6 million in total debt outstanding, which comprised $399.3 million of 5.5 percent unsecured notes due February 15, 2009, and $24.3 million in other debt.
At April 2, 2006 and January 1, 2006, the Company has working capital of $154.5 million and $123.6 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through internally generated funds and, to a lesser extent, commercial paper borrowings. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2006.
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The Washington Post implemented a voluntary early retirement program to the Mailers employees in April 2006; pre-tax charges of $1.1 million will be recorded in the second quarter of 2006 in connection with this program. In April 2006, the Company announced a voluntary early retirement program being offered to a large group of exempt and Guild-covered employees at The Washington Post and Corporate; the offer includes an incentive payment, enhanced retirement benefits and subsidized retiree health insurance; the enrollment period for this program expires at the end of May 2006 and the Company will record the costs associated with this program in the second quarter of 2006. The cost of these programs will be funded by the Company’s pension plans.
There were no significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended January 1, 2006.
Forward-Looking Statements
This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
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 2005 Annual Report filed on Form 10-K have not otherwise changed significantly.
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 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 April 2, 2006. Based on that evaluation, the Company’s Chief Executive Officer and 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.
There has been no change in the Company’s internal control over financial reporting during the quarter ended April 2, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: May 9, 2006
(Principal Executive Officer)
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