Graham Holdings Co annual report, FY2011

Business context and reporting period

The filing is The Washington Post Company’s Form 10-K for the fiscal year ended December 31, 2011, with comparative fiscal-year results. Although the request identifies Graham Holdings Co., the registrant named in this filing is The Washington Post Company. The filing also presents unaudited fourth-quarter results.

The company is a diversified education and media business. Education, principally Kaplan, generated about 58% of 2011 consolidated revenue. Other major operations were Cable ONE, newspaper publishing and six television stations.

Financial performance and position

Operating cash flow less capital expenditures was approximately $176.9 million in 2011, versus $450.0 million in 2010; this is a simple calculation, not a company-reported non-GAAP measure. Cash and cash equivalents were $381.1 million at year-end, down from $437.7 million; restricted cash was an additional $25.3 million. Working capital was $250.1 million, compared with $353.6 million.

Total borrowings were $565.2 million, versus $399.7 million a year earlier; this comprised $397.1 million carrying value of 7.25% notes due 2019, $109.7 million of commercial paper, $51.0 million of Australian-dollar facility borrowings and $7.5 million of other debt. Long-term debt on the balance sheet was $452.2 million. The company reported a $450 million U.S.-dollar and AUD 50 million revolving facility, expiring in 2015, and said it expected ample liquidity for 2012. Standard & Poor’s long-term rating was BBB+ and Moody’s was A3; both had downgraded the company during 2011.

Segment results

• Education: Revenue fell 14% to $2,465.0 million; operating income fell to $89.4 million from $346.7 million. Higher education revenue declined 27%, while Kaplan International revenue grew 18%.
• Cable television: Revenue was essentially flat at $760.2 million; operating income declined to $156.8 million from $163.9 million. Data and telephone subscriptions grew, while basic video subscribers fell.
• Newspaper publishing: Revenue declined 5% to $648.0 million; operating loss widened to $18.2 million. The Post’s print advertising revenue declined 11% and online publishing revenue declined 8%.
• Television broadcasting: Revenue declined 7% to $319.2 million and operating income declined 4% to $117.1 million, mainly reflecting lower political and Olympics-related advertising than in 2010.

Unaudited fourth-quarter 2011 revenue was $1,063.4 million, versus $1,182.2 million in fourth-quarter 2010. Operating income was $107.7 million versus $151.0 million; income from continuing operations was $60.1 million versus $78.2 million; and diluted EPS was $8.03 versus $9.42.

Material changes versus the prior comparable period

Consolidated revenue declined 10%, operating income declined 47%, and common-stockholder net income declined 58% year over year. The steepest operating deterioration was at Kaplan Higher Education, where lower enrollments, a new student trial program and regulatory compliance costs weighed on results. The company repurchased 644,948 Class B shares for approximately $248.1 million in 2011, below the prior year’s 1,057,940 shares and $404.8 million. Cash from operations fell by $300.4 million.

Outlook, risks, contingencies and unusual items

• Outlook: Management estimated 2012 capital expenditures of $220 million to $245 million and expected net pension expense of approximately $9 million. It stated that liquidity should be ample for 2012. The filing does not provide clear consolidated revenue or earnings guidance.
• Kaplan enrollment and regulation: The Kaplan Commitment risk-free trial program, along with weaker demand and admissions changes, contributed to a 37% decline in new KHE enrollments in 2011. Management estimated that revenue would have been about $63 million higher without the program. Approximately 79% of KHE revenue came from Title IV funds. Regulatory eligibility, student default rates, gainful-employment rules, state authorization and 90/10 requirements are material risks.
• Legal and accreditation matters: Kaplan paid $1.6 million to settle the CHI-Broomall inquiry and related False Claims Act matter; a DOE program-review determination remained pending. Other lawsuits and government inquiries continued. Certain Kaplan programs also faced accreditation or licensing concerns.
• Unusual charges and gains: 2011 included $29.2 million of Kaplan severance and restructuring charges, a $2.4 million newspaper pension-plan withdrawal charge, an $11.9 million goodwill impairment at the online lead-generation business, a $9.2 million affiliate impairment and a $53.8 million write-down of the Corinthian Colleges investment. The company also recorded $3.3 million of unrealized foreign-currency losses. The 2010 comparison included $39.0 million of severance and restructuring charges and a $27.5 million lead-generation impairment.
• Other risks: The company cited ongoing structural pressure on print advertising and circulation, media and cable competition, and exposure to regulatory changes affecting cable, broadcasting and voice services. Goodwill and indefinite-lived intangible assets totaled $1.95 billion; the filing noted that Kaplan Test Preparation’s estimated fair value exceeded carrying value by only 15%, leaving it susceptible to impairment if assumptions weaken.

Important facts for investors to verify

• Whether Kaplan’s enrollment and operating performance stabilize, and whether the Kaplan Commitment improves student outcomes enough to offset lost near-term revenue.
• Developments in Title IV eligibility, cohort default rates, gainful-employment measures, state authorizations, accreditation matters and outstanding program reviews.
• Cash generation and debt trends, including commercial-paper balances, facility availability, credit-rating effects and the timing of contractual obligations.
• Whether print and digital advertising declines continue, and whether Cable ONE’s broadband and voice growth can offset video subscriber losses and higher programming costs.
• Potential additional impairment charges, particularly for Kaplan Test Preparation and other goodwill-sensitive businesses, and the valuation of the company’s investment holdings.