The Washington Post Company (now Graham Holdings Company): Q3 2011 Form 10-Q
Business context and period. The filing is by The Washington Post Company, the issuer’s name at the time. It covers the 13 weeks ended October 2, 2011, and the 39 weeks ended October 2, 2011. The company operated education business Kaplan alongside cable television, newspaper publishing, television broadcasting and other businesses. Comparative periods reflect discontinued-operations reclassifications, including Newsweek and certain Kaplan operations.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Revenue | $1,032.6 million | $1,183.5 million | $3,151.4 million | $3,501.9 million |
| Operating income | $52.0 million | $137.5 million | $188.2 million | $411.6 million |
| Income (loss) from continuing operations attributable to common stockholders | $(3.7) million | $85.5 million | $60.3 million | $241.1 million |
| Net income (loss) attributable to common stockholders | $(6.2) million | $60.9 million | $54.5 million | $198.2 million |
| Diluted EPS | $(0.82) | $6.84 | $6.81 | $21.75 |
- Revenue declined 13% in Q3 and 10% year to date. Operating margin was approximately 5.0% in Q3 versus 11.6% a year earlier, and 6.0% year to date versus 11.8%.
- Operating cash flow was $263.6 million for the first nine months, down from $543.5 million. Capital expenditures were $145.6 million; investing cash outflow was $202.9 million and financing cash outflow was $185.5 million.
- Cash and cash equivalents were $311.2 million at October 2, down from $437.7 million at fiscal year-end. Working capital was $183.9 million, versus $353.6 million.
- Total borrowings were $453.2 million, including $397.0 million of 7.25% unsecured notes due 2019, $48.7 million drawn in Australian dollars under the revolving facility and $7.5 million of other debt. Long-term debt on the balance sheet was $450.1 million.
- The company reported total assets of $5.0 billion, total liabilities of $2.4 billion and common stockholders’ equity of $2.6 billion. Net interest expense was $21.6 million for the first nine months. The effective tax rate on continuing operations was 47.1%, versus 38.2% in 2010.
Material changes and segment trends
- Education: Revenue fell 16% in Q3 and 14% year to date; operating income fell 83% and 80%, respectively. Higher education revenue declined 33% in Q3 as average enrollments fell; International revenue increased, partly reflecting acquisitions and currency effects.
- Cable: Revenue was nearly flat in Q3 and slightly higher year to date, while operating income fell 9% in both periods. Internet and telephone growth was offset by fewer basic-video subscribers and higher programming, technical and sales costs.
- Newspaper publishing: Revenue fell 9% in Q3 and 5% year to date. Print advertising and online publishing revenue weakened; circulation also declined. The division reported operating losses in both periods.
- Television broadcasting: Revenue declined 11% in Q3 and 3% year to date. Lower political advertising and the absence of prior-year Winter Olympics advertising affected comparisons; year-to-date operating income edged higher.
- The company repurchased 442,325 Class B shares for $179.5 million in the first nine months. Average diluted shares were 12% lower year over year. A new authorization permitted purchases of up to 750,000 shares.
Outlook, commentary, risks and unusual items
- Management estimated 2011 capital expenditures of $190 million to $215 million and said existing cash and internally generated funds should provide ample liquidity through 2011.
- Management expected Kaplan Higher Education operating income to continue declining for the remainder of 2011, primarily due to lower enrollments. Kaplan estimated approximately $5.0 million of additional restructuring costs in Q4; the company reported $19.6 million of Kaplan severance and restructuring costs in the first nine months.
- The Kaplan Commitment gives first-time students a risk-free trial period. Management said the program had contributed to lower recognized revenue, but its longer-term effect on retention remained uncertain. New enrollments declined 42% for the first nine months; management estimated revenue would have been about $47 million higher absent the program.
- Higher-education regulatory exposure includes federal Title IV eligibility requirements. Management estimated that, if trends continued, 18 Kaplan Higher Education Campus reporting units—about 20% of KHE revenue—might exceed the 90/10 threshold in 2012. The filing says proposed mitigation measures may not prevent future threshold breaches. UK visa rules may also adversely affect Kaplan UK student numbers.
- Q3 results included a $23.1 million write-down of Corinthian Colleges shares, $6.7 million of unrealized foreign-exchange losses, an $11.9 million goodwill impairment at the online lead-generation business, a $9.2 million affiliate impairment and $5.6 million of Kaplan restructuring costs. The Corinthian investment had also been written down by $30.7 million in Q1.
- Kaplan acquired four businesses for $132.0 million in the first nine months. Kaplan Virtual Education was sold in July; Kaplan Compliance Solutions was sold in October, after quarter-end. A $50 million Australian-dollar facility borrowing was hedged with a swap fixing the interest rate at 4.5275% through March 2015.
- Credit ratings faced negative pressure: S&P lowered the long-term rating to A- in August and retained a negative outlook; Moody’s placed ratings on review for possible downgrade in September. The revolving credit agreement requires at least $1.5 billion of consolidated shareholders’ equity.
- Management stated that existing legal proceedings were not expected to have a material effect based on information then available. Three federal False Claims Act lawsuits against Kaplan businesses had been dismissed; remaining cases and two pending Department of Education program reviews remained unresolved.
Key facts for investors to verify
- Whether Kaplan Higher Education enrollment declines and the Kaplan Commitment’s effects on revenue, retention and operating costs continue as management anticipated.
- Whether Kaplan reporting units remain within Title IV 90/10 limits and whether other education regulations affect program eligibility or student demand.
- How much of the earnings decline reflects recurring operating weakness versus investment impairments, restructuring, foreign-exchange movements and tax valuation allowances.
- Whether cash generation, working capital and credit ratings remain adequate amid share repurchases, planned capital spending and the facility’s equity covenant.
- The outcomes of pending legal matters and Department of Education reviews, and the completion and financial effect of the post-quarter Kaplan Compliance Solutions sale.