Business context and reporting period
The Washington Post Company, identified in the request as Graham Holdings Co, filed this unaudited Form 10-Q for the 13 weeks ended April 3, 2011; the comparable quarter ended April 4, 2010. Its businesses included Kaplan education, cable television, newspaper publishing, television broadcasting and other activities. Newsweek was sold in September 2010, and its prior-period results are presented as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $1,063.6 | $1,142.0 | Down 6.9% |
| Operating income | $52.0 | $103.1 | Down 49.6% |
| Operating margin | 4.9% | 9.0% | Down 4.1 percentage points |
| Income from continuing operations attributable to common stockholders | $15.2 | $51.6 | Down 70.6% |
| Net income attributable to common stockholders | $15.2 | $45.4 | Down 66.6% |
| Diluted earnings per share | $1.87 | $4.91 | Prior year includes discontinued-operation loss |
| Cash provided by operating activities | $49.4 | $178.7 | Down $129.4 |
Q1 2011 results included a $30.7 million pretax impairment of Corinthian Colleges equity securities, with a stated after-tax impact of $19.8 million, or $2.44 per share. Net income in Q1 2010 included a $6.2 million after-tax loss from discontinued operations.
At April 3, 2011, cash and cash equivalents were $329.2 million, marketable equity securities were $348.1 million, and working capital was $221.7 million. Total debt was $399.8 million, including $396.8 million of 7.25% unsecured notes due February 2019 and $3.0 million of other debt. The company reported no borrowings under its commercial paper program or revolving credit facility during the quarter. Current assets were $1,217.6 million and current liabilities $995.9 million. The filing does not provide a consolidated gross margin.
Cash declined $108.6 million during the quarter. Financing used $115.5 million, including $121.4 million of Class B share repurchases and $19.4 million of dividends paid; investing used $44.8 million, including $39.3 million of capital expenditures. The company declared regular quarterly dividends totaling $4.70 per share.
Material changes and segment results
- Education: Revenue fell 10% to $640.6 million and operating income fell 73% to $15.5 million. Higher education revenue declined 18% and operating income declined 45%, principally due to lower enrollment and increased compliance costs. Kaplan International revenue increased 11%, but operating income declined.
- Cable television: Revenue edged up to $190.3 million; operating income declined to $37.7 million, mainly from higher programming, technical and sales costs. Revenue-generating units increased 5% year over year.
- Newspaper publishing: Revenue was nearly flat at $155.0 million and the operating loss narrowed to $12.8 million. Print advertising at The Washington Post fell 8%, while newspaper online publishing revenue increased 8%.
- Television broadcasting: Revenue declined 2% to $72.2 million and operating income declined 6% to $19.6 million, partly reflecting the absence of prior-year Winter Olympics advertising and lower political advertising.
- Other: Operating results at other businesses worsened, with lower Avenue100 lead volume cited as a factor. Equity earnings from affiliates improved to $3.7 million from an $8.1 million loss.
Compared with January 2, 2011, total assets decreased to $5,005.1 million from $5,158.4 million; shareholders’ equity declined to $2,698.0 million from $2,814.4 million. Cash fell from $437.7 million, while debt was broadly unchanged.
Outlook, risks and unusual items
- Management expected Kaplan Higher Education operating income to continue declining very substantially for the remainder of 2011 versus the prior year. Kaplan was developing plans expected to result in potentially material restructuring and other costs in 2011. Separately, test-preparation restructuring was expected to incur about $10 million of additional costs and be largely completed by year-end.
- Management estimated 2011 capital expenditures of $250 million to $275 million. It said liquidity should be ample for 2011 and expected to fund needs primarily from cash and internally generated funds.
- The $500 million revolving credit facility was due to expire in August 2011; the company expected to replace it before the end of Q2 2011. Moody’s and S&P had negative long-term outlooks, while the disclosed ratings were A2 and A, respectively.
- Education-sector regulation presents significant uncertainty. The filing discusses pending Department of Education program reviews, proposed gainful-employment requirements that could restrict Title IV eligibility, and 90/10 compliance. Management estimated that, if trends continued, 19 Kaplan Higher Education Campus reporting units representing about 18% of KHE revenue could exceed the 90% Title IV receipts threshold in 2012.
- On May 3, 2011, Kaplan received a Massachusetts Attorney General inquiry concerning recruitment and education financing at its Boston campus. Kaplan also had five pending Department of Education program reviews; outcomes were uncertain. The filing says management did not believe other existing legal matters were likely to have a material effect.
- The filing cautions that quarterly results may not indicate future results. It provides no consolidated earnings guidance.
Most important facts for investors to verify
- Whether Kaplan Higher Education enrollment and operating-income declines persist, and the size and timing of restructuring costs.
- Final Department of Education rules, program-review outcomes, and Kaplan’s exposure under gainful-employment and 90/10 requirements.
- Completion and terms of the replacement revolving credit facility before the existing facility expires.
- Cash generation and capital spending against the $250 million to $275 million full-year estimate, particularly after substantial share repurchases.
- Further developments affecting the Corinthian Colleges investment, including valuation and any additional impairment.