The Washington Post Company — FY2010 Form 10-K
Reporting period: Fiscal year ended January 2, 2011 (52 weeks), compared with fiscal 2009 (53 weeks). The filing is an annual report, not a standalone fourth-quarter filing. The company was a diversified education and media group, with Kaplan representing about 62% of 2010 consolidated revenue. Newsweek was sold on September 30, 2010; its results are classified as discontinued operations. The filing identifies the registrant as The Washington Post Company, notwithstanding the request metadata naming Graham Holdings Co.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $4,723.6 million | $4,386.5 million |
| Operating income | $546.8 million | $257.9 million |
| Operating margin | 11.6% | 5.9% |
| Continuing income attributable to common shareholders | $306.0 million; diluted EPS $34.26 | $136.9 million; diluted EPS $14.58 |
| Net income available to common shareholders | $277.2 million; diluted EPS $31.04 | $91.8 million; diluted EPS $9.78 |
| Cash from operating activities | $693.7 million | $651.4 million |
| Capital expenditures | $243.7 million | $257.8 million |
Operating cash flow less capital expenditures was approximately $450.0 million. Revenue rose 8%, while operating costs and expenses increased about 1%. The effective tax rate on continuing operations was 41.4%, versus 35.9% in 2009.
Segment results
- Education: Revenue $2,901.8 million, up 10%; operating income $330.9 million, up 70%. Higher Education revenue increased 16% and operating income 42%. However, year-end Higher Education enrollment fell 8% to 96,701; fourth-quarter new starts declined 47% year over year.
- Cable: Revenue $759.9 million, up 1%; operating income $163.9 million, down from $169.1 million. High-speed data and telephony subscribers grew, while basic video subscribers declined.
- Newspaper publishing: Revenue was nearly flat at $680.4 million. Operating loss narrowed to $9.8 million from $163.5 million, reflecting lower costs and fewer large prior-year charges. Washington Post print advertising fell 6%; online publishing revenue rose 14%.
- Television broadcasting: Revenue rose 25% to $342.2 million and operating income rose 72% to $121.3 million, helped by stronger advertising, political spending and Winter Olympics-related ads.
- Other businesses: Operating loss was $35.0 million, including a $27.5 million impairment charge at the online lead-generation business.
Fourth-quarter indicators
Consolidated fourth-quarter revenue was $1,190.0 million versus $1,186.2 million in 2009. Operating income was $149.7 million versus $154.8 million. Net income available to common shareholders was $79.0 million versus $81.7 million. The fourth quarter included $19.3 million after-tax of severance and restructuring charges; quarterly figures may not sum exactly to annual totals due to rounding.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $437.7 million at year-end, down from $442.6 million. Working capital was $353.6 million, versus $398.5 million.
- Total borrowings were $399.7 million, principally $400 million of 7.25% unsecured notes due February 2019. Net interest expense was $27.9 million. The company reported no commercial-paper or revolving-facility borrowings at year-end.
- A $500 million revolving credit facility was due to expire in August 2011; management expected to replace it during 2011. Management said liquidity would be ample for 2011 needs.
- 2010 capital expenditures were $243.7 million; management forecast $260–$295 million for 2011. The company repurchased approximately $404.8 million of common stock and paid $82.1 million in dividends during 2010. The 2011 annual dividend rate was increased to $9.40 per share.
- Credit ratings remained investment grade, but both Moody’s and S&P had a negative outlook; Moody’s lowered its long-term rating to A2.
Material changes, outlook and notable items
- Education outlook: Management expected Kaplan Higher Education operating income to be down “very substantially” in 2011. The Kaplan Commitment, introduced in late 2010, provides a risk-free introductory period and delays tuition recognition until students complete the period and meet academic requirements. Management estimated that 2010 KHE revenue would have been about $140 million lower if the program had applied from the start of that year; future enrollment, retention and financial effects were not yet predictable.
- Regulatory exposure: Approximately $1.46 billion, or 82%, of KHE revenue came from Title IV funding. New federal rules, proposed gainful-employment standards, incentive-compensation restrictions, state authorization requirements and student loan default rates could constrain programs, enrollment or access to funding. The DOE’s unofficial three-year trial default rate for Kaplan University was 30% for the 2008 cohort; these trial rates were informational and carried no sanctions.
- Restructuring and impairments: The company recorded $31.2 million in severance and restructuring charges, the $27.5 million lead-generation impairment, and a $20.4 million charge for the Washington Post’s withdrawal from a multiemployer pension plan. Kaplan Test Preparation expected about $10 million of additional restructuring costs in 2011.
- Newsweek sale: Discontinued operations produced a $28.8 million after-tax loss in 2010, including an $11.5 million after-tax loss on the sale. The company retained pension assets and liabilities and certain pre-sale obligations.
- Legal and regulatory matters: Kaplan faced ongoing DOE program reviews, False Claims Act cases, a Florida Attorney General inquiry, an EEOC lawsuit and other proceedings. Six KHE reporting units had DOE letters of credit totaling approximately $3.3 million. Management stated that ordinary-course litigation was not expected to materially affect the company, but outcomes of several Kaplan reviews and inquiries remained uncertain.
- Other risks: Newspaper print advertising and circulation remained under pressure; cable and broadcast operations faced technology, competition and regulatory risks. The company also had foreign-exchange exposure and $340.9 million of marketable equity securities, including a $25.5 million unrealized loss on its Corinthian Colleges investment.
The filing provided no consolidated revenue or EPS forecast. Management’s stated 2011 outlook included the KHE operating-income warning, capital expenditure range and expected pension credit of approximately $3 million. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether final DOE gainful-employment rules, incentive-compensation rules and state authorization requirements materially affect Kaplan’s eligible programs, enrollment, costs or Title IV access.
- How the Kaplan Commitment affects student starts, persistence, recognized tuition revenue, cash flow and operating income; the 2010 $140 million estimate was a counterfactual management estimate, not a recorded charge.
- Final outcomes of DOE program reviews, student loan default-rate calculations, pending investigations and litigation involving Kaplan.
- Whether media advertising, print circulation and cable subscriber trends continue to improve or deteriorate, and whether political advertising gains recur.
- Execution of the announced 2011 credit-facility replacement and delivery of the stated capital spending and liquidity plans.
- Reconciliation of reported earnings growth with unusual charges, discontinued Newsweek results, lower diluted share counts from buybacks and noncash foreign-exchange gains.