Business context and reporting period
The filing is The Washington Post Company’s unaudited Form 10-Q for the 13 and 26 weeks ended July 3, 2011, compared with periods ended July 4, 2010. The company operated education businesses through Kaplan and media businesses in cable television, newspaper publishing and television broadcasting. The filing predates the company’s later Graham Holdings name.
Financial performance
Amounts below are in millions except per-share data. Operating margins are calculated from reported revenue and operating income.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $1,073.0 | $1,197.4 | $2,126.0 | $2,326.4 |
| Operating income | $81.1 | $166.9 | $136.1 | $273.5 |
| Operating margin | 7.6% | 13.9% | 6.4% | 11.8% |
| Income from continuing operations attributable to common shareholders | $47.0 | $101.5 | $64.0 | $155.3 |
| Net income attributable to common shareholders | $45.6 | $91.9 | $60.7 | $137.3 |
| Basic and diluted net income per share | $5.74 | $10.00 | $7.57 | $14.91 |
- First-half operating cash flow was $180.0 million, versus $317.3 million a year earlier. Capital expenditures were $92.8 million; investing activities used $169.0 million, including $79.1 million invested in businesses. Financing activities used $153.5 million, including $131.5 million for share repurchases.
- Cash and cash equivalents were $299.4 million at July 3, 2011, down from $437.7 million at January 2, 2011. Working capital was $160.7 million, down from $353.6 million.
- Total borrowings were $405.5 million, including $396.9 million of 7.25% unsecured notes due in 2019. The company had a new four-year revolving facility of $450 million plus A$50 million, expandable by option to $700 million in U.S. dollar commitments; it reported no facility or commercial-paper borrowings in the first half.
- Total assets were $5.09 billion and shareholders’ equity was $2.71 billion at quarter end. The new credit agreement requires at least $1.5 billion of consolidated shareholders’ equity.
Changes versus the prior comparable period
- Second-quarter revenue fell 10%, and first-half revenue fell 9%. Education revenue declined 15% in Q2 and 13% in the first half; newspaper publishing revenue declined 6% and 3%, respectively.
- Operating income fell about 51% in Q2 and 50% for the first half. Education operating income dropped to $20.5 million in Q2 from $112.4 million, and to $39.0 million for the first half from $173.8 million.
- First-half education weakness was concentrated in higher education: revenue declined 24% and operating income 56%. By contrast, first-half television broadcasting revenue and operating income rose 1% and 3%; cable revenue rose slightly while operating income declined 9%.
- First-half common-share diluted average shares fell 13%, reflecting repurchases, but diluted EPS from continuing operations still declined to $7.97 from $16.86.
- Discontinued operations generated after-tax losses of $1.4 million in Q2 and $3.2 million in the first half, versus $9.6 million and $18.0 million in the comparable 2010 periods. Kaplan Virtual Education was sold in July 2011; the closing gain or loss was not expected to be material.
Outlook, management commentary, risks and unusual items
- Management expected Kaplan Higher Education operating income to continue declining during the remainder of 2011 due to lower enrollment. Kaplan was developing further restructuring plans that could produce material 2011 costs. Management estimated 2011 capital expenditures of $210 million to $235 million and said liquidity should be ample through 2011.
- Kaplan Higher Education enrollments were down 30% year over year at June 30. Management attributed enrollment and revenue pressure to lower demand, regulatory changes and the Kaplan Commitment program, which provides first-time students a risk-free trial period. Management estimated first-half revenue would have been about $27 million higher without the program; it could not yet reliably estimate the program’s longer-term effect on retention.
- First-half results included a $30.7 million pretax impairment of the company’s Corinthian Colleges investment, a $3.1 million write-down of a cost-method investment, and $3.0 million of net foreign-currency gains. The 2010 comparison included a $17.7 million multiemployer pension withdrawal charge and $7.1 million in currency losses.
- Risks include pending Department of Education program reviews; potential consequences under federal gainful-employment and 90/10 rules; Texas programs placed on conditional approval, with possible enrollment restrictions if placement rates fall below required levels; and UK visa and sponsorship rules that could reduce international student enrollment.
- A July 2011 settlement resolved specified inquiries and a False Claims Act matter involving a discontinued Kaplan surgical technology program, without an admission of wrongdoing, for $1.6 million. Kaplan also received a Delaware Attorney General subpoena and said it intended to cooperate. Management stated that existing legal matters were not expected to have a material effect, based on information then available.
- A May 2011 tornado in Joplin temporarily reduced cable subscribers; the company estimated about $3.0 million to replace destroyed property and equipment. Credit ratings were downgraded by Standard & Poor’s on August 1, 2011, after quarter end, and the outlook remained negative.
Most important facts for investors to verify
- Whether Kaplan enrollment declines stabilize and whether the Kaplan Commitment improves student outcomes without further materially reducing revenue or increasing costs.
- The scale and timing of additional Kaplan restructuring charges and expected cost savings.
- Kaplan’s exposure to federal Title IV eligibility tests, 90/10 thresholds, program reviews, Texas placement requirements and UK student visa rules.
- Whether newspaper advertising and circulation declines continue, and whether cable subscriber growth offsets higher programming and operating costs.
- Cash generation, capital spending, share repurchases, debt and liquidity following the facility replacement and credit-rating downgrade.
- The carrying value and performance of marketable equity investments, particularly the Corinthian Colleges holding, and any further impairment risk.