UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
For the Quarterly Period Ended April 1, 2007
or
Commission File Number 1-6714
THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(202) 334-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
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 April 30, 2007:
Index to Form 10-Q
a. Condensed Consolidated Statements of Income (Unaudited) for the Thirteen Weeks Ended April 1, 2007 and April 2, 2006
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen Weeks Ended April 1, 2007 and April 2, 2006
c. Condensed Consolidated Balance Sheets at April 1, 2007 (Unaudited) and December 31, 2006
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirteen Weeks Ended April 1, 2007 and April 2, 2006
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
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The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
April 1,
2007
Operating revenues
Education
Advertising
Circulation and subscriber
Other
Operating costs and expenses
Operating
Selling, general and administrative
Depreciation of property, plant and equipment
Amortization of intangible assets
Income from operations
Other income (expense)
Equity in earnings (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
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Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Other comprehensive income
Foreign currency translation adjustment
Change in unrealized gain on available-for-sale securities
Pension and other postretirement plan adjustments
Income tax benefit (expense) related to other comprehensive income
Comprehensive income
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Condensed Consolidated Balance Sheets
December 31,
2006
Assets
Current assets
Cash and cash equivalents
Investments in marketable equity securities
Accounts receivable, net
Inventories
Deferred income taxes
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
Unrealized gain on pension and other postretirement plans
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 intangibles
Net pension benefit
Foreign exchange gain
Cost method and other investment write-downs
Equity in (earnings) losses of affiliates, net of distributions
Provision for deferred income taxes
Change in assets and liabilities:
Decrease in accounts receivable, net
Decrease (increase) in inventories
Decrease in accounts payable and accrued liabilities
Increase in deferred revenue
Increase in income taxes payable
(Increase) decrease in other assets and other liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from the sale of property, plant and equipment
Investments in certain businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Principal payments on debt
Dividends paid
Common shares repurchased
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 (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Results of operations at the Kaplan education division, when examined on a quarterly basis, reflect the volatility of Kaplan stock compensation charges, as well as other seasonal effects. Results of operations, when examined on a quarterly basis, also 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. 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.
In the first quarter of 2007, the Company made changes to certain departments and cost centers at several of its divisions. Prior year amounts were reclassified to conform with the current year presentation, resulting in a net increase to selling, general and administrative expenses and a net decrease to operating expenses. Certain other amounts in previously issued financial statements have also been reclassified to conform with the current year presentation.
Note 1: Acquisitions.
In the first quarter of 2007, Kaplan acquired two businesses in their professional division totaling $115.8 million. These acquisitions included EduNeering Holdings, Inc., a Princeton, N.J. based provider of knowledge management solutions for organizations in the pharmaceutical, medical device, healthcare, energy and manufacturing sectors. In addition, the cable division acquired subscribers in the Boise, Idaho area for $4.1 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.
In April 2007, Kaplan’s higher education division completed the acquisition of Sagemont Virtual, a leader in the growing field of online high school instruction that has been doing business as the University of Miami Online High School, and Virtual Sage, a developer of online high school courses. Also in April 2007, Kaplan formed a joint venture with ACE Education, a provider of education in China, to provide preparation courses for entry to U.K. universities, along with degree and professional training programs at campuses throughout China. Also in April 2007, Kaplan Professional announced an agreement to acquire the education division of the Financial Services Institute of Australia for 36 million Australian dollars.
In the first quarter of 2006, Kaplan acquired two businesses in their professional and higher education divisions; these acquisitions totaled $7.4 million.
Note 2: Investments.
Investments in marketable equity securities at April 1, 2007 and December 31, 2006 consist of the following (in thousands):
Total cost
Gross unrealized gains
Total fair value
There were no additional investments in marketable equity securities during the first quarter of 2007. The Company made $42.9 million in investments in marketable equity securities during the first quarter of 2006.
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As of April 1, 2007 and December 31, 2006, the Company had commercial paper and money market investments of $104.5 million and $142.9 million, respectively, that are classified as “cash and cash equivalents” on the Company’s consolidated balance sheet.
In the first quarter of 2007, $8.9 million of the equity in earnings of affiliates is due to a gain on the sale of land at the Company’s Bowater Mersey Paper Company Limited affiliate.
Note 3: Borrowings.
Long-term debt consists of the following (in millions):
5.5 percent unsecured notes due February 15, 2009
Other indebtedness
Total
Less current portion
Total long-term debt
The Company’s other indebtedness at April 1, 2007 and December 31, 2006 is at interest rates of 5% to 7% and matures from 2007 to 2009.
During the first quarter of 2007 and 2006, the Company had average borrowings outstanding of approximately $404.9 million and $426.0 million, respectively, at average annual interest rates of approximately 5.5 percent and 5.4 percent, respectively. During the first quarter of 2007 and 2006, the Company incurred net interest expense of $2.6 million and $4.7 million, respectively.
Note 4: Business Segments.
The following table summarizes financial information related to each of the Company’s business segments. The 2007 and 2006 asset information is as of April 1, 2007 and December 31, 2006, respectively.
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First Quarter Period
(in thousands)
Income (loss) from operations
Equity in earnings of affiliates
Interest expense, net
Income before income taxes
Depreciation expense
Amortization expense
Net pension credit (expense)
Identifiable assets
Total assets
Equity in losses of affiliates
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The Company’s education division comprises the following operating segments:
Kaplan stock-based incentive compensation
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Education products and services are provided through the Company’s wholly-owned subsidiary Kaplan, Inc. Kaplan’s businesses include higher education services, which includes all of Kaplan’s post-secondary education businesses in the United States, 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. Kaplan’s businesses also include test preparation, which is made up of Kaplan Test Prep and Admissions, providing test preparation services for college and graduate school entrance exams; as well as K12 and Score!, which offer multi-media learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include Kaplan Professional, which provides education and career services to business people and other professionals domestically and internationally. For segment reporting purposes, in the first quarter of 2007, the education division now has three primary segments, as compared to two primary segments in 2006. The education division’s primary segments are higher education, test preparation and professional. Kaplan corporate overhead and “Other” is also included; “Other” includes Kaplan stock compensation expense and amortization of certain intangibles.
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 electronic media publishing business (primarily washingtonpost.com).
The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three English-language international editions (and, in conjunction with others, publishes eight foreign-language editions around the world) and the publication of Arthur Frommer’s Budget Travel. The first quarter 2006 results of the magazine publishing division also include revenue of $7.7 million and operating income of $1.3 million for PostNewsweek Tech Media, which was sold on December 22, 2006.
Revenues from both newspaper and magazine publishing operations are derived from advertising and, to a lesser extent, from circulation.
Television broadcasting operations are conducted through six VHF, television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville) with revenues derived primarily from sales of advertising time.
Cable television operations consist of cable systems offering basic cable, digital cable, pay television, cable modem, telephony and other services to subscribers in midwestern, western, and southern states. The principal source of revenue is monthly subscription fees charged for services.
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 1, 2007 and December 31, 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 1, 2007 was as follows (in thousands):
Beginning of year
Acquisitions
Foreign currency exchange rate changes
Balance at April 1, 2007
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 2, 2006 was as follows (in thousands):
Balance at April 2, 2006
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Note 6: Antidilutive Securities.
The first quarter 2007 and 2006 diluted earnings per share amount excludes the effects of 7,500 stock options outstanding and 13,000 stock options outstanding, respectively, as their inclusion would be antidilutive.
Note 7: Pension and Postretirement Plans.
The total (income) cost arising from the Company’s defined benefit pension plans for the first quarters ended April 1, 2007 and April 2, 2006, 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) loss
Total (benefit) cost for the quarter
At December 31, 2006, the Company raised its assumption on the discount rate from 5.75% to 6.0% for its defined benefit pension plans.
The total cost arising from the Company’s postretirement plan for the first quarters ended April 1, 2007 and April 2, 2006, consists of the following components (in thousands):
Recognized actuarial gain
Total cost for the quarter
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Note 8: Other Non-Operating Income (Expense)
The Company recorded other non-operating income, net, of $0.8 million for the first quarter of 2007, compared to other non-operating expense, net, of $0.2 million for the first quarter of 2006.
A summary of non-operating income (expense) for the thirteen weeks ended April 1, 2007 and April 2, 2006, is as follows (in millions):
Foreign currency gains
Impairment write-downs on cost method investments
Note 9: Earnings Per Share.
The company’s earnings per share (basic and diluted) for the first quarters of 2007 and 2006, are presented below:
Income before cumulative effect of change in accounting principle, after redeemable preferred stock dividends
Cumulative effect of change in method of accounting for share-based payments
Weighted-average shares outstanding – basic
Effect of dilutive shares:
Stock options and restricted stock
Weighted-average shares outstanding – diluted
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Note 10: Recent Accounting Pronouncements
Income Taxes
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” FIN 48 prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company implemented FIN 48 in the first quarter of 2007 and there was no impact on the Company’s financial position or results of operations as a result of implementation. The Company has determined that there are no material transactions or material tax positions taken by the Company that would fail to meet the more likely than not threshold established by FIN 48 for recognizing transactions or tax positions in financial statements. In making this determination, the Company presumes that all matters will be examined with full knowledge of all relevant information by appropriate taxing authorities and that the Company will pursue, if necessary, resolution by related appeals or litigation. The Company has accrued a tax liability for certain tax positions reflected in the financial statements where it is uncertain the full tax benefit associated with the tax positions will ultimately be recognized. The amount of, and changes to, this accrued tax liability are not material to the Company’s financial position or results of operations.
In January 2007, the Internal Revenue Service completed their examinations of the Company’s consolidated federal corporate income tax returns through 2004.
Other Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” which defines fair value, establishes a framework for consistently measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that adoption of this statement will have on the company’s consolidated financial statements.
In February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at such subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that adoption of this statement will have on the company’s consolidated financial statements.
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This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.
Results of Operations
Net income for the first quarter of 2007 was $64.4 million ($6.70 per share), down from net income of $76.9 million ($7.95 per share) in the first quarter of last year.
Results for the first quarter of 2007 include a significant increase in equity in earnings of affiliates primarily as a result of a large gain on the sale of land at the Company’s Bowater Mersey Paper Company Limited affiliate (after-tax impact of $8.5 million, or $0.89 per share). 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.”
Revenue for the first quarter of 2007 was $985.6 million, up 4% from $948.3 million in 2006. The increase is due to revenue growth at the education and cable television divisions, while revenues were down at the newspaper publishing, magazine publishing and television broadcasting divisions. Operating income for the quarter declined 33% to $92.0 million, from $137.8 million in 2006. Operating results were down at each of the Company’s divisions, except the cable television division, which reported improved results for the quarter.
The Company’s operating income for the first quarter of 2007 includes $5.0 million of net pension credits, compared to $5.7 million in the first quarter of 2006.
Education Division. Education division revenue totaled $475.8 million for the first quarter of 2007, a 16% increase over revenue of $408.9 million for the first quarter of 2006. Excluding revenue from acquired businesses, education division revenue increased 9% for the first quarter of 2007. Kaplan reported first quarter 2007 operating income of $34.3 million, a 35% decline from $52.6 million in the first quarter of 2006.
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A summary of Kaplan’s first quarter operating results compared to 2006 is as follows:
Revenue
Higher education
Test preparation
Professional
Operating income (loss)
Kaplan corporate overhead
Other*
Higher education includes all of Kaplan’s post-secondary education businesses in the United States, including fixed-facility colleges as well as online post-secondary and career programs. Higher education revenue grew 17% for the first quarter of 2007. Enrollments increased 8% to 70,800 at March 31, 2007, compared to 65,800 at March 31, 2006, with most of the enrollment growth occurring in the online programs. Higher education results for the online programs in the first quarter of 2007 benefited from increases in both price and demand for higher priced advanced programs. Results at the fixed-facility colleges also benefited from course fee increases, but as previously disclosed, were adversely affected by $2.7 million in lease termination charges.
Test preparation includes Kaplan’s standardized test preparation and English-language course offerings, as well as the K12 and Score! businesses. Test preparation revenue grew 22% in the first quarter of 2007, largely due to the Aspect and PMBR acquisitions in October 2006. Excluding revenue from acquired businesses, revenue grew 4% in the first quarter of 2007 due to overall strength in the traditional test preparation courses, offset by declines in revenue from the K12 and Score! businesses. Operating income for test preparation was down in the first quarter largely due to weaker results from the K12 and Score! businesses. The K12 results in the first quarter of 2006 included approximately $3.0 million in revenue and operating income related to services provided in prior periods, but for which revenue was not recognized until 2006 when the underlying contracts governing the work were finalized. Score! revenue and operating results are down primarily due to a 12% enrollment decline.
Professional includes Kaplan’s domestic and overseas professional businesses and certain other education businesses outside the United States. Professional revenue grew 9% in the first quarter of 2007 largely due to the May 2006 Tribeca acquisition and the March 2007 acquisition of EduNeering Holdings, Inc., a Princeton, NJ-based provider of knowledge management solutions for organizations in the pharmaceutical, medical device, healthcare, energy and manufacturing sectors. Excluding revenue from acquired businesses, Professional revenue grew 1% in the first quarter of 2007 as a result of increases at FTC Kaplan Limited (FTC) due primarily to favorable exchange rates, and from the Schweser CFA exam course offerings, offset by continued soft market demand for Professional’s real estate book publishing and real estate course offerings. Operating income is down largely due to weakness in Professional’s real estate businesses, as well as lower operating results at FTC.
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FTC results reflect increases in staffing, occupancy and business development expenses associated with the overall growth in FTC operations. FTC results also reflect the seasonality of its course offerings, which are fewer in the first quarter than in the second, third and fourth quarters.
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. Kaplan recorded stock compensation expense of $10.3 million in the first quarter of 2007, compared to $1.9 million in the first quarter of 2006 (excluding stock compensation recorded in the first quarter of 2006 related to a change in accounting discussed below). In addition, Other includes amortization of certain intangibles, which increased due to recent Kaplan acquisitions.
Newspaper Publishing Division. Newspaper publishing division revenue totaled $219.2 million for the first quarter of 2007, a 10% decrease from revenue of $243.5 million for the first quarter of 2006. Division operating income was down 53% to $14.9 million, from $32.0 million in 2006. The decrease in operating income reflects the decline in division revenues, which was partially offset by a reduction in newspaper division operating expenses, including a 16% decrease in newsprint expense at The Post.
Print advertising revenue at The Post declined 16% to $125.1 million, from $149.8 million in 2006. This decline is due to advertising revenue reductions in real estate, which was a very strong category in the first quarter of 2006, along with declines in classified recruitment, retail and zones; these declines were offset by an increase in preprint revenues. Classified recruitment advertising revenue was down to $15.8 million, from $21.8 million in the first quarter of 2006.
For the first quarter of 2007, Post daily and Sunday circulation declined 3.9% and 3.3%, respectively, compared to the first quarter of 2006. For the three months ended April 1, 2007, average daily circulation at The Post totaled 663,900 and average Sunday circulation totaled 927,400.
Revenue generated by the Company’s online publishing activities, primarily washingtonpost.com, increased 10% to $25.1 million for the first quarter of 2007, versus $22.8 million for 2006. Display online advertising revenue grew 20%, and online classified advertising revenue on washingtonpost.com increased 4%. A small portion of the Company’s online publishing revenues is included in the magazine publishing division.
Television Broadcasting Division. Revenue for the broadcast division declined 6% in the first quarter of 2007 to $80.8 million, from $85.9 million in 2006; operating income for the first quarter of 2007 declined 22% to $29.4 million, from $37.6 million in 2006. The decrease in revenue and operating income is primarily due to $6.3 million in incremental winter Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2006.
Magazine Publishing Division. Revenue for the magazine publishing division totaled $61.2 million for the first quarter of 2007, an 18% decrease from $74.8 million for the first quarter of 2006. The division had an operating loss of $6.0 million in the first quarter of 2007, compared to an operating loss of $0.9 million in the first quarter of 2006. Magazine publishing division results in the first quarter of 2006 included $7.7 million in revenue and $1.3 million in operating income from PostNewsweek Tech Media, which was sold in December 2006. The remainder of the revenue and operating income declines are due to a 14% reduction in advertising revenue at Newsweek due to fewer ad pages at both the domestic and international editions.
Cable Television Division. Cable division revenue of $149.0 million for the first quarter of 2007 represents a 10% increase over 2006 first quarter revenue of $135.2
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million. The 2007 revenue increase is due to continued growth in the division’s cable modem and digital revenues, as well as a full quarter impact of the $3 monthly rate increase for basic cable service at most of its systems effective February 1, 2006. The Company does not plan to implement an overall basic rate increase in 2007.
Cable division operating income increased 10% to $28.0 million in the first quarter of 2007, versus $25.4 million in the first quarter of 2006. The increase in operating income is due to the division’s revenue growth, offset by higher depreciation and programming expenses, and increases in technical and telephony costs. Also in the first quarter of 2006, the cable division incurred $1.8 million in incremental cleanup and repair expense associated with Hurricane Katrina.
At March 31, 2007, Revenue Generating Units (RGUs) grew 7% due to continued growth in high-speed data subscribers and increases in the basic video and digital video subscriber categories. The cable division began offering telephone service on a very limited basis in the second quarter of 2006; as of March 31, 2007, telephone service is being offered in all or part of systems representing 63% of homes passed. 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 is as follows:
Cable Television Division Subscribers
March 31,
Basic
Digital
High-speed data
Telephony
Below are details of Cable division capital expenditures for the first quarter of 2007 and 2006, as defined by the NCTA Standard Reporting Categories (in millions):
Customer Premise Equipment
Commercial
Scaleable Infrastructure
Line Extensions
Upgrade/Rebuild
Support Capital
Equity in Losses of Affiliates. The Company’s equity in earnings of affiliates for the first quarter of 2007 was $9.1 million, compared to losses of $0.2 million in the first quarter of 2006. In the first quarter of 2007, $8.9 million of the equity in earnings of affiliates is due to a gain on the sale of land at the Company’s Bowater Mersey Paper Company Limited affiliate. The Company holds a 49% interest in Bowater Mersey Paper Company.
Other Non-Operating Income (Expense). The Company recorded other non-operating income, net, of $0.8 million for the first quarter of 2007, compared to other non-operating expense, net, of $0.2 million for the first quarter of 2006.
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A summary of non-operating income (expense) for the thirteen weeks ended April 1, 2007 and April 2, 2006, follows (in millions):
Net Interest Expense. The Company incurred net interest expense of $2.6 million for the first quarter of 2007, compared to $4.7 million for the first quarter of 2006. The reduction is due an increase in interest income, as well as lower average borrowings in the first quarter of 2007 versus the same period of the prior year. At April 1, 2007, the Company had $405.3 million in borrowings outstanding, at an average interest rate of 5.5%.
Provision for Income Taxes. The effective tax rate for the first quarter of 2007 was 35.1%, compared to 38.3% for the same period of 2006. The 2007 effective rate benefited from lower taxes provided on the gain on the sale of land at the Company’s Bowater Mersey Paper Company Limited affiliate investment. Excluding this gain, the effective tax rate for the first quarter of 2007 was 38.0%.
Cumulative Effect of Change in Accounting Principle.In the first quarter of 2006, the Company adopted SFAS 123R, which 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).
Earnings Per Share. The calculation of diluted earnings per share for the first quarter of 2007 was based on 9,547,097 weighted average shares outstanding, compared to 9,606,235 for the first quarter of 2006. The Company repurchased 20,506 shares of its Class B common stock at a cost of $15.6 million during the first quarter of 2007.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions. In the first quarter of 2007, Kaplan acquired two businesses in their professional division totaling $115.8 million. These acquisitions included EduNeering Holdings, Inc., a Princeton, N.J. based provider of knowledge management solutions for organizations in the pharmaceutical, medical device, healthcare, energy and manufacturing sectors. In addition, the cable division acquired a system in Boise, Idaho for $4.1 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.
Capital expenditures. During the first three months of 2007, the Company’s capital expenditures totaled $75.1 million. The Company estimates that its capital expenditures will be in the range of $260 million to $285 million in 2007.
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Liquidity. The Company’s borrowings have declined by $1.9 million, to $405.3 million at April 1, 2007, as compared to borrowings of $407.2 million at December 31, 2006. At April 1, 2007, the Company has $292.3 million in cash and cash equivalents, compared to $348.1 million at December 31, 2006. The Company had commercial paper and money market investments of $104.5 million and $142.9 million that are classified ad “Cash and cash equivalents” in the Company’s Consolidated Balance Sheet as of April 1, 2007 and December 31, 2006, respectively.
At April 1, 2007, the Company had $405.3 million in total debt outstanding, which comprised $399.5 million of 5.5 percent unsecured notes due February 15, 2009, and $5.8 million in other debt.
At April 1, 2007, the Company had a working capital deficit of $1.8 million and at December 31, 2006, the Company had working capital of $131.6 million. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2007.
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, 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 December 31, 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 2006 Annual Report filed on Form 10-K have not otherwise changed significantly.
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(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 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 1, 2007. 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 and is accumulated and communicated to management, including the Chief Executive Officer and 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 April 1, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended April 1, 2007, the Company purchased shares of its Class B Common Stock as set forth in the following table:
Period
Jan. 1 - Feb. 4, 2007
Feb. 5 - Mar. 4, 2007
Mar. 5 - Apr. 1, 2007
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Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Donald E. Graham
Chairman & Chief Executive Officer
(Principal Executive Officer)
/s/ John B. Morse, Jr.
Vice President-Finance
(Principal Financial Officer)
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