WASHINGTON POST CO
Item 1. Business.
The Washington Post Company (the Company) is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations consist of the ownership and operation of cable television systems, newspaper publishing (principally The Washington Post) and television broadcasting (through the ownership and operation of six television broadcast stations).
Information concerning the consolidated operating revenues, consolidated income from operations and identifiable assets attributable to the principal segments of the Company’s business for the last three fiscal years is contained in Note 18 to the Company’s Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K, as required by Item 101(b) and 101(d) of Regulation S-K. Revenues for each segment are shown in Note 18 gross of intersegment sales. Consolidated revenues are reported net of intersegment sales, which did not exceed 0.1% of consolidated operating revenues.
The Company’s operations in geographic areas outside the U.S. consist primarily of Kaplan’s non-U.S. operations. During the fiscal years 2011, 2010 and 2009, these operations accounted for approximately 15%, 12% and 12%, respectively, of the Company’s consolidated revenues, and the identifiable assets attributable to non-U.S. operations represented approximately 15% and 13% of the Company’s consolidated assets at December 31, 2011, and January 2, 2011, respectively.
Education
Kaplan, Inc., a subsidiary of the Company, provides an extensive range of education and related services worldwide for students and professionals. Kaplan conducts its operations through four segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International and Kaplan Ventures.
The following table presents revenues for the three years ended December 31, 2011, 2010 and 2009 for each of Kaplan’s segments:
Year Ended December 31,
(in thousands)
Kaplan Higher Education
$
1,399.6
$
1,905.0
$
1,653.3
Kaplan Test Preparation
303.1
314.9
336.8
Kaplan International
690.2
585.9
537.2
Kaplan Ventures
74.9
59.3
57.2
Kaplan Corporate and Intersegment Eliminations
(2.8)
(2.8)
(8.3)
Total Kaplan Revenue
$
2,465.0
$
2,862.3
$
2,576.2
Kaplan Higher Education
Kaplan Higher Education (KHE) provides a wide array of certificate, diploma and degree programs-on campus and online-designed to meet the needs of students seeking to advance their education and career goals.
In 2011, Kaplan’s U.S.-based KHE division included the following businesses: Kaplan University and KHE Campuses. Each of these businesses is described briefly below.
Kaplan University. Kaplan University specializes in online education, is accredited by the Higher Learning Commission of the North Central Association of Colleges and Schools and holds other programmatic accreditations. Most of Kaplan University’s programs are offered online, while some are offered in a traditional classroom format at 11 campuses in Iowa, Maine, Maryland and Nebraska, and six Kaplan University Learning Centers and Education Centers in four additional states. Kaplan University also includes Concord Law School, a fully online law school. At year-end 2011, Kaplan University had approximately 44,000 students enrolled in online programs and approximately 5,800 students enrolled in its classroom-based programs.
In early 2011, Kaplan’s Professional and Licensure business, which previously operated as part of Kaplan Test Preparation, combined with Kaplan University’s continuing education business to form the School of Professional and Continuing Education (PACE), a separate non-degree-granting school within Kaplan University. In connection with this
reorganization, PACE also integrated the Kaplan certification preparation business, which had previously operated under Kaplan Ventures.
PACE offers a wide range of education solutions to assist professionals in advancing their careers by obtaining professional licenses, designations and certifications. This includes solutions for insurance, securities, real estate, mortgage and appraisal licensing exams and for advanced designations, such as CFA® and CPA exams, along with industry-recognized certifications such as Microsoft, Oracle, Novell and Cisco. PACE serves more than 2,900 business-to-business clients, including more than 70 Fortune 500 companies. In 2011, over 500,000 students used PACE's exam preparation offerings.
In October 2011, PACE sold its Kaplan Compliance Solutions business, which assisted insurance carriers, agencies and broker/dealers with their licensure and/or registration filings. Additionally, in December 2011, Kaplan acquired certain assets of Stalla Seminars; Kaplan Schweser plans to repurpose Stalla content to further assist candidates who are preparing for the CFA examinations.
KHE Campuses. At the end of 2011, the KHE Campuses business consisted of 64 schools in 18 states that were providing classroom-based instruction to approximately 24,400 students, which did not include the approximately 5,800 students enrolled at Kaplan University’s on-ground campuses. Each of these schools is accredited by one of several regional or national accrediting agencies recognized by the U.S. Department of Education (DOE).
Program Offerings and Enrollment
Kaplan University and KHE Campuses offer degree and certificate programs in a variety of subject areas. Among them are the following:
Master’s
Bachelor’s
Associate’s
Certificate
• Arts and Sciences
• Business Management
• Criminal Justice
• Health Sciences
• Higher Education Studies
• Information Systems and Technology
• Legal and Paralegal Studies
• Nursing
• Teacher Education
• Arts and Sciences
• Business Management
• Criminal Justice
• Fire Safety and Emergency Management
• Health Sciences
• Information Systems
and Technology
• Legal and Paralegal Studies
• Nursing
• Political Science and Public
and Environmental Policy
• Arts and Sciences
• Business Management
• Criminal Justice
• Fire Safety and Emergency Management
• Health Sciences
• Information Systems and Technology
• Legal and Paralegal Studies
• Nursing
• Political Science and Public
and Environmental Policy
• Criminal Justice
• Health Sciences
• Information Systems and Technology
• Nursing
Kaplan University and KHE Campuses combined enrollment at December 31, 2011, 2010 and 2009 totaled by degree and certificate programs were as follows:
At December 31,
Certificate
23.6
%
23.6
%
27.6
%
Associate's
30.3
%
33.8
%
33.0
%
Bachelor's
34.6
%
35.1
%
34.7
%
Master's
11.5
%
7.5
%
4.7
%
Total
100.0
%
100.0
%
100.0
%
Financial Aid Programs and Regulatory Environment
Funds provided under the U.S. Federal student financial aid programs that have been created under Title IV of the U.S. Federal Higher Education Act of 1965, as amended (the Higher Education Act), historically have been responsible for a majority of the KHE revenues. During 2011, funds received under Title IV programs accounted for approximately $1,110 million, or approximately 79%, of total KHE revenues, and 45% of Kaplan, Inc. revenues. The Company estimates that funds received from students borrowing under third-party private loan programs comprised approximately 1% of its KHE revenues. Beginning in 2008 and continuing through 2011, as the private loan market deteriorated, KHE provided loans directly to some Kaplan students under its third-party institutional loan program. Lending under Kaplan’s institutional loan program totaled approximately 1% of its KHE revenues in 2011. Direct student payments, funds received under various state and agency grant programs and corporate reimbursement under tuition assistance programs accounted for most of
the remaining 2011 KHE revenues. The significant role of Title IV funding in the operations of KHE is expected to continue.
The U.S. Federal student financial aid programs created under Title IV of the U.S. Federal Higher Education Act (Title IV programs) encompass various forms of student loans and non-repayable grants. In some cases, the U.S. Federal government subsidizes part of the interest expense of Title IV loans. Subsidized loans and grants are only available to students who can demonstrate financial need. During 2011, about 69% of the approximate $1,110 million of Title IV funds received by KHE came from student loans, and approximately 31% of such funds came from grants.
Title IV Eligibility and Compliance With Title IV Program Requirements. To maintain eligibility to participate in Title IV programs, a school must comply with extensive statutory and regulatory requirements relating to its financial aid management, educational programs, financial strength, administrative capability, compensation practices, facilities, recruiting practices and various other matters. In addition, the school must be licensed, or otherwise legally authorized, to offer postsecondary educational programs by the appropriate governmental body in the state or states in which it is physically located or has students, be accredited by an accrediting agency recognized by the DOE and be certified to participate in the Title IV programs by the DOE. Schools are required periodically to apply for renewal of their authorization, accreditation or certification with the applicable state governmental bodies, accrediting agencies and the DOE. In accordance with DOE regulations, some KHE schools operate individually or are combined into groups of two or more schools for the purpose of determining compliance with certain Title IV requirements, and each school or school group is assigned its own identification number, known as an OPEID number. As a result, the schools in KHE have a total of 32 OPEID numbers. No assurance can be given that the Kaplan schools, or individual programs within schools, will maintain their Title IV eligibility, accreditation and state authorization in the future or that the DOE might not successfully assert that one or more of such schools have previously failed to comply with Title IV requirements.
The DOE may place a school on provisional certification status under certain circumstances, including, but not limited to, failure to satisfy certain standards of financial responsibility or administrative capability or upon a change in ownership resulting in a change of control. Provisional certification status carries fewer due process protections than full certification. As a result, the DOE may withdraw an institution’s provisional certification more easily than if it is fully certified. In addition, the DOE may subject an institution on provisional certification status to greater scrutiny in some instances, for example, when it applies for approval to add a new location or program or makes another substantive change. Provisional certification does not otherwise limit access to Title IV program funds by students attending the institution. Currently, one KHE OPEID, which had 539 students at the end of 2011, is provisionally certified.
In addition, the DOE may fine a school, require a school to repay Title IV program funds, limit or terminate a school’s eligibility to participate in the Title IV programs, initiate an emergency action to suspend the school’s participation in the Title IV programs without prior notice or opportunity for a hearing, transfer a school to a method of Title IV payment that would adversely affect the timing of the institution’s receipt of Title IV funds, deny or refuse to consider a school’s application for renewal of its certification to participate in the Title IV programs or for approval to add a new campus or educational program, refer a matter for possible civil or criminal investigation or take other enforcement measures if it finds that the school has failed to comply with Title IV requirements or improperly disbursed or retained Title IV program funds. There can be no assurance that the DOE will not take any of these or other actions in the future, whether as a result of a lawsuit, program review or otherwise. This list is not exhaustive. There may be other actions the DOE may take and other legal theories under which a school could be sued as a result of alleged irregularities in the administration of student financial aid. See
Item 1A. Risk Factors.
The Company faces a number of significant risks and uncertainties in connection with its operations. The most significant of these are described below. These risks and uncertainties may not be the only ones facing the Company. Additional risks and uncertainties not presently known, or currently deemed immaterial, may adversely affect the Company in the future. In addition to the other information included in this Annual Report on Form 10-K, investors should carefully consider the following risk factors. If any of the events or developments described below occurs, it could have a material adverse effect on the Company’s business, financial condition or results of operations.
· Failure to Comply With Statutory and Regulatory Requirements Could Result in Loss of Access to U.S. Federal Student Loans and Grants Under Title IV, a Requirement to Pay Fines or Monetary Liabilities or Other Sanctions
To maintain Title IV eligibility, each group of schools combined into an OPEID unit must comply with the extensive statutory and regulatory requirements of the Higher Education Act and other laws relating to its financial aid management, educational programs, financial strength, facilities, recruiting practices and various other matters. Failure to comply with these requirements could result in the loss or limitation of the eligibility of one or more of the KHE schools to participate in Title IV programs, a requirement to pay fines or to repay Title IV program funds, a denial or refusal by the DOE to consider a school’s application for renewal of its certification to participate in the Title IV programs or for approval to add a new campus or education program, civil or criminal penalties or other sanctions. No assurance can be given that the Kaplan schools and programs currently participating in Title IV programs will maintain their Title IV eligibility, accreditation
and state authorization in the future or that the DOE might not successfully assert that one or more of such schools or programs have previously failed to comply with Title IV requirements. The loss of Title IV eligibility by either (1) the single OPEID unit that includes Kaplan University or (2) a combination of other OPEID units would have a material adverse effect on Kaplan’s operating results.
· Program Reviews, Audits, Investigations and Other Reviews of KHE Schools Could Result in Findings of Failure to Comply With Statutory and Regulatory Requirements
KHE schools are subject to program reviews, audits, investigations and other compliance reviews conducted by various regulatory agencies and auditors, including, among others, the DOE, the DOE’s Office of the Inspector General, accrediting bodies and state and various other agencies, as well as annual audits by an independent certified public accountant of each OPEID unit’s compliance with Title IV statutory and regulatory requirements. These compliance reviews can result in findings of noncompliance with statutory and regulatory requirements that can, in turn, result in proceedings to impose fines, liabilities, civil or criminal penalties or other sanctions against the school, including loss or limitation of its eligibility to participate in Title IV programs. Certain KHE schools are the subject of ongoing compliance reviews and lawsuits related to their compliance with statutory and regulatory requirements and may be subject to future compliance reviews.
KHE schools also may be subject to complaints and lawsuits by present or former students or employees or other persons related to compliance with statutory, common law and regulatory requirements that, if successful, could result in monetary liabilities or fines or other sanctions.
· Reductions in the Amount of Funds Available to Students, Including under Title IV Programs, in KHE Schools, Changes in the Terms on Which Such Funds Are Made Available or Loss or Limitation of Eligibility to Receive Such Funds
During the Company’s 2011 fiscal year, funds provided under the student financial aid programs created under Title IV accounted for approximately $1,110 million of the revenues of the schools in KHE. Any legislative, regulatory or other development that has the effect of materially reducing the amount of Title IV financial assistance or other funds available to the students of those schools would have a material adverse effect on Kaplan’s business and operations. In addition, any development that has the effect of making the terms on which Title IV financial assistance or other funds are available to students of those schools materially less attractive could have a material adverse effect on Kaplan’s business and operations.
· Recent Regulatory Changes Could Have a Material Adverse Effect on Kaplan’s Business and Operations
New regulations went into effect on July 1, 2011, relating to various “program integrity” topics. The topics covered in the new regulations include, but are not limited to, the following:
• Revisions to the incentive compensation rule (see separate risk factor discussed below);
• Expansion of the notice and approval requirements for adding new academic programs and new reporting and disclosure requirements for academic programs;
• Revision and expansion of the types of activities that are deemed a “substantial misrepresentation” and the ability of the DOE to enforce the provisions;
• Requirement that states authorize institutions and set forth certain minimum requirements to obtain such authorizations;
• Limiting agreements between related institutions;
• Defining a “credit hour”;
• Administration of ability-to-benefit examinations;
• Student attendance requirements;
• Proof of high school graduation;
• Verification of information included on student aid applications;
• Satisfactory academic progress;
• Retaking coursework;
• Return of Title IV funds; and
• Disbursements of Title IV funds.
The implementation of these new regulations required Kaplan to change its practices to comply with these requirements and has increased its administrative costs. The changes to its practices or its inability to comply with the final regulations could have a material adverse effect on Kaplan’s business and results of operations.
· Compliance With Recently Adopted Regulations Regarding Incentive Compensation Can Make It Difficult for Kaplan to Attract Students and Retain Qualified Personnel
Under the incentive compensation rule, an institution participating in the Title IV programs may not provide any commission, bonus or other incentive payment to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV funds if such payment is based directly or indirectly on success in securing enrollments or financial aid. On July 1, 2011, new regulations went into effect that amended the incentive compensation rule by reducing the scope of permissible payments under the rule and expanding the scope of payments and employees subject to the rule. The Company cannot predict how the DOE will interpret and enforce the revised incentive compensation rule or the full effect the new rule will have on the results of KHE. KHE modified some of its compensation practices as a result of the revisions to the incentive compensation rule. These changes to compensation arrangements can make it difficult to attract students and to provide adequate incentives to promote superior job performance and retain qualified personnel, and could have a material adverse effect on Kaplan’s business and results of operations.
· New DOE Rule Regarding Gainful Employment Resulted in Regulatory Changes That Could Have a Material Adverse Effect on Kaplan’s Business and Operations
In June 2011, the DOE issued final regulations that tie an education program’s Title IV eligibility to whether the program leads to gainful employment. The regulations define an education program that leads to gainful employment as one that complies with the following gainful employment metrics as calculated under the complex formulas prescribed in the regulations: (1) the average annual loan payment for program graduates is 12% or less of annual earnings; (2) the average annual loan payment for program graduates is 30% or less of discretionary income (generally defined as annual earnings above 150% of the U.S. Federal poverty level); and (3) the U.S. Federal loan repayment rate must be at least 35% for loans owed by students for attendance in the program regardless of whether they graduated.
If a program fails all three of the gainful employment metrics in a single U.S. Federal fiscal year, the DOE requires the institution, among other things, to disclose to current and prospective students the amount by which the program under-performed the metrics and the institution’s plan for program improvement, and to establish a three-day waiting period before students can enroll. Should a program fail to achieve the metrics twice within three years, the Department requires the institution, among other things, to disclose to current and prospective students that they should expect to have difficulty repaying their student loans; that the program is at risk of losing eligibility to receive U.S. Federal financial aid; and that transfer options exist (including providing resources to students to research other educational options and compare program costs). Should a program fail three times within a four-year period, the DOE would terminate the program’s eligibility for U.S. Federal student aid, and the institution would not be able to reestablish the program’s eligibility for at least three years, although the program could continue to operate without student aid. The final rule is scheduled to go into effect on July 1, 2012. However, the first final debt measures will not be released until 2013, and a program cannot lose eligibility until 2015.
The continuing eligibility of Kaplan’s education programs for Title IV funding may be affected by factors beyond its control, such as changes in the actual or deemed income level of Kaplan graduates, changes in student borrowing levels, increases in interest rates, changes in the U.S. Federal poverty income level relevant for calculating the discretionary income test, changes in the percentage of former students who are current in repayment of their student loans and other factors. To the extent any of these events occur, Kaplan may need to eliminate or limit enrollments in certain educational programs at some or all of its schools in order to comply with the new regulations, which could have a material adverse effect on its business and operations.
· Congressional Examination of For-Profit Education Could Lead to Legislation or Other Governmental Action That May Materially and Adversely Affect Kaplan’s Business
Throughout 2010 and 2011, there was increased attention by Congress on the role that for-profit educational institutions play in higher education, including their participation in Title IV programs and U.S. Department of Defense oversight of tuition assistance for military service members attending for-profit colleges. Since June 2010, the HELP Committee has held a series of hearings to examine the for-profit education sector.
At this time, the Company cannot predict the ultimate impact that the investigation may have on KHE, or the likelihood of or content of any future legislation.
Other committees of the Congress have also held hearings into, among other things, the standards and procedures of accrediting agencies, credit hours and program length and the portion of U.S. Federal student financial aid going to for-profit institutions. Several legislators have variously requested the U.S. Government Accountability Office to review and make recommendations regarding, among other things, student recruitment practices; educational quality; student outcomes; the sufficiency of integrity safeguards against waste, fraud and abuse in Title IV programs; and the percentage of proprietary institutions’ revenue coming from Title IV and other U.S. Federal funding sources. This increased activity may result in legislation, further rulemaking affecting participation in Title IV programs and other governmental actions. In addition, concerns generated by congressional or other activity, or media reports, may adversely affect enrollment in for-profit educational institutions.
Kaplan cannot predict the extent to which these activities could result in further investigations, legislation or rulemaking affecting its participation in Title IV programs, other governmental actions and/or actions by state agencies or legislators or by accreditors. If any laws or regulations are adopted that significantly limit Kaplan’s participation in Title IV programs or the amount of student financial aid for which Kaplan’s students are eligible, Kaplan’s results of operations and cash flows would be adversely and materially impacted.
· The Kaplan Commitment Has Materially Impacted Operating Results and Is Expected to Continue to Do So
In the fourth quarter of 2010, KHE phased in a new program, called the Kaplan Commitment. Under this program students of Kaplan University, Kaplan College and other KHE schools enroll in classes for several weeks and assess whether their educational experience meets their needs and expectations before they incur any significant financial obligation. Kaplan also conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who choose to withdraw from the program during the risk-free period, and students who do not pass the academic evaluation do not have to pay for the coursework. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for associate’s, bachelor’s and master’s degree programs.
The Kaplan Commitment program, along with generally lower demand, has resulted in 37% declines in new enrollments in 2011. Kaplan estimates that without the Kaplan Commitment, this decline would have been approximately 20% in 2011. Kaplan also estimates that revenue for 2011 would have been approximately $63 million higher if the Kaplan Commitment had not been implemented. This program and related initiatives will likely continue to have a significant impact on the future operations of KHE, including student enrollment and retention, tuition revenues, operating income and cash flow. However, Kaplan is not able to estimate whether the Kaplan Commitment will cause student retention patterns to differ from historical levels. The Kaplan Commitment is expected to continue to have a material impact on Kaplan’s operating results.
· Student Loan Defaults Could Result in Loss of Eligibility to Participate in Title IV Programs
A school may lose its eligibility to participate in Title IV programs if student defaults on the repayment of Title IV loans exceed specified rates, referred to as “cohort default rates.” The DOE calculates a cohort default rate for each of KHE’s OPEID numbers. The schools in an OPEID number whose cohort default rate exceeds 40% for any single year lose their eligibility to participate in the FFEL and Direct Loan programs effective 30 days after notification from the DOE and for at least two fiscal years, except in the event of a successful adjustment or appeal. The schools in an OPEID number whose cohort default rate equals or exceeds 25% for three consecutive years lose their Title IV eligibility to participate in FFEL, Direct Loan and U.S. Federal Pell Grant programs effective 30 days after notification from the DOE and for at least two fiscal years, except in the event of a successful adjustment or appeal. The schools in an OPEID number whose cohort default rate equals or exceeds 25% in any one of the three most recent fiscal years for which rates have been issued by the DOE may be placed on provisional certification by the DOE.
The enactment in August 2008 of HEOA (which reauthorized the Higher Education Act) changed the methodology that will be used to calculate cohort default rates for future years. Under the revised law, the period of time for which student defaults are tracked and included in the cohort default rate calculation is extended by a year, which is expected to increase the cohort default rates for most institutions. That change became effective with the calculation of institutions’ cohort default rates for the U.S. Federal fiscal year ending September 30, 2009; those rates are expected to be calculated and issued by the DOE in 2012. The DOE will not impose sanctions based on rates calculated under this new methodology until rates for three consecutive years have been calculated, which is expected to occur in 2014. Until that time, the DOE will continue to calculate rates under the old method and impose sanctions based on those rates. The revised law also increases the threshold for ending an institution’s participation in certain Title IV programs from 25% to 30% for three consecutive years, effective for three-year cohort default rates issued beginning in fiscal year 2012. The revised law changes the threshold for placement on provisional certification to 30% for two of the three most recent fiscal years for which the DOE has published official three-year cohort default rates.
The two-year cohort default rate for Kaplan University (which comprises 68.1% of KHE’s revenue) for the U.S. Federal fiscal year periods 2009, 2008 and 2007 were 17.3%, 17.2%, and 13.3%, respectively. The cohort default rates for the remaining KHE reporting units for those U.S. Federal fiscal year periods ranged from 9.8% to 23.9%, 5.8% to 25.7%, and 7.8% to 28.7%, respectively.
For the 2009 cohort year, no reporting unit had a cohort default rate of 25% or more, and none had two or more years above 25%. Two-year cohort default rates for the 2010 cohort year and three-year cohort default rates for the 2009 cohort year will be issued in final form by the DOE in September 2012. The loss of Title IV eligibility by either (1) the single OPEID unit that includes Kaplan University or (2) a combination of two or more other OPEID units would have a material adverse effect on Kaplan’s operating results.
· Loss of Eligibility to Participate in Title IV Programs If Title IV Revenues Exceed U.S. Federally-Set Percentage
Under regulations referred to as the 90/10 rule, a KHE OPEID unit would lose its eligibility to participate in the Title IV programs for a period of at least two fiscal years if it derives more than 90% of its receipts from the Title IV programs for two consecutive fiscal years, commencing with the unit’s first fiscal year that ends after August 14, 2008. Any OPEID reporting unit with receipts from the Title IV programs exceeding 90% for a single fiscal year ending after August 14, 2008, would be placed on provisional certification and may be subject to other enforcement measures. The enactment of the U.S. Federal Ensuring Continued Access to Student Loans Act of 2008 increased student loan limits and the maximum amount of Pell Grants, which could result in an increase in the percentage of KHE’s receipts from Title IV programs. These increases, and any future increases or changes in the 90/10 calculation formula, make it more difficult for institutions to comply with the 90/10 rule. HEOA has provided temporary relief from the impact of the loan limit increases by treating as non-Title IV revenue any amounts received between July 1, 2008, and June 30, 2011, that are attributable to the increased annual loan limits. Absent relief from the loan limit increases, Kaplan University would have a 90/10 ratio of 82.4% in 2011, and the remaining KHE OPEID numbers would have 90/10 percentages ranging between 74.2% and 91.4%. The loss of Title IV eligibility by either (1) the single OPEID unit that includes Kaplan University or (2) a combination of other OPEID units would have a material adverse effect on Kaplan’s operating results.
· Failure to Maintain Institutional Accreditation Could Lead to Loss of Ability to Participate in Title IV Programs
KHE’s online university and all of its ground campuses are institutionally accredited by one or another of a number of national and regional accreditors recognized by the DOE. Accreditation by an accrediting agency recognized by the DOE is required for an institution to become and remain eligible to participate in Title IV programs. The loss of accreditation would, among other things, render the affected Kaplan schools and programs ineligible to participate in Title IV programs and would have a material adverse effect on its business and operations.
· Failure to Maintain Programmatic Accreditation Could Lead to Loss of Ability to Provide Certain Education Programs and Failure to Obtain Programmatic Accreditation May Lead to Declines in Enrollments in Unaccredited Programs.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry- and program-specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV eligibility, such accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career. Failure to obtain or maintain such programmatic accreditation may require schools to discontinue programs that would not provide appropriate outcomes without that accreditation or may lead to a decline in enrollment in programs due a perceived or real reduction in program value.
· Failure to Maintain State Authorizations Could Cause Loss of Ability to Operate and to Participate in Title IV Programs in Some States
KHE’s ground campuses and online university are subject to state-level regulation and oversight by state licensing agencies, whose approval is necessary to allow an institution to operate and grant degrees or diplomas in the state. Institutions that participate in Title IV programs must be legally authorized to operate in the state in which the institution is physically located. The loss of such authorization would preclude the campuses or online university from offering postsecondary education and render students ineligible to participate in Title IV programs. Loss of authorization at those state campus locations, or, in states that require it, for Kaplan University online, could have a material adverse effect on KHE’s business and operations.
Some states have sought to assert jurisdiction over online education institutions that offer education services to residents in the state or to institutions that advertise or recruit in the state, notwithstanding the lack of a physical location in the state. State regulatory requirements for online education vary among the states, are not well developed in many states,
are imprecise or unclear in some states and are subject to change. If KHE is found not to be in compliance with an applicable state regulation and a state seeks to restrict one or more of its business activities within its boundaries, it may not be able to recruit or enroll students in that state and may have to cease providing services and advertising in that state.
New regulations went into effect on July 1, 2011, that expand the requirements for an institution to be considered legally authorized in the state in which it is physically located, for Title IV purposes. In some cases, the regulations require states to revise their current requirements and/or to license schools in order for institutions to be deemed legally authorized in those states and, in turn, to participate in the Title IV programs. If the states do not amend their requirements where necessary and if schools do not receive approvals where necessary that comply with these new requirements, then the institution could be deemed to lack the state authorization necessary to participate in the Title IV programs.
In addition, new DOE rules currently under judicial review may require institutions offering postsecondary education to students through distance education in a state in which the institution is not physically located or in which it is otherwise subject to state jurisdiction, as determined by the state, to meet any state requirements for it to legally offer postsecondary distance education in that state. The regulations require an institution to document upon request by the DOE that it has the applicable state approval. As a result, some of KHE’s schools and distance education programs may be required to obtain additional or revised state authorizations. If KHE is unable to obtain the required approvals, its students in the affected schools or programs may be unable to receive Title IV funds, which could have a material adverse effect on its business and operations.
· Failure to Correctly Calculate or Timely Return Title IV Funds for Students Who Withdraw Prior to Completing Programs Could Result in a Requirement to Post a Letter of Credit or Other Sanctions
DOE regulations require schools participating in Title IV programs to calculate correctly and return on a timely basis unearned Title IV funds disbursed to students who withdraw from a program of study prior to completion. These funds must be returned in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn. Under DOE regulations, failure to make timely returns of Title IV program funds for 5% or more of students sampled in a school’s annual compliance audit in either of its two most recently completed fiscal years could result in a requirement that the school post a letter of credit in an amount equal to 25% of its prior year-returns of Title IV program funds. If unearned funds are not properly calculated and returned in a timely manner, an institution is also subject to monetary liabilities, fines or other sanctions.
· Failure to Demonstrate Financial Responsibility Could Result in a Requirement to Submit Letters of Credit to the DOE, Loss of Eligibility to Participate in Title IV Programs or Other Sanctions
An institution participating in the Title IV programs must comply with certain measures of financial responsibility under the Higher Education Act and under DOE regulations. Among other things, the applicable regulations require an institution to achieve a composite score of at least 1.5, as calculated under DOE regulations, based on data in annual financial statements submitted to the DOE. If an institution fails to achieve a composite score of 1.5 or fails to comply with other financial responsibility standards, the DOE may place conditions on the institution’s participation in the Title IV programs and may require the institution to submit to the DOE a letter of credit in an amount of at least 10% to 50% of the institution’s annual Title IV participation for its most recent fiscal year. The DOE has measured the compliance of KHE schools, based on the composite score of the division. If one or more of the institutions in KHE fail to meet the composite score standard or any of the other financial responsibility standards, those institutions may be required to post a letter of credit in favor of the DOE and possibly may be subject to other sanctions, including limitation or termination of their participation in Title IV programs. A requirement to post a letter of credit or the imposition of any one or more other sanctions by the DOE could have a material adverse effect on Kaplan’s results of operations.
· Failure to Demonstrate Administrative Capability Could Result in Loss of Eligibility to Participate in Title IV Programs or Other Sanctions
DOE regulations specify extensive criteria that an institution must satisfy to establish that it has the required “administrative capability” to participate in Title IV programs. These criteria include, but are not limited to, requirements relating to the institution’s compliance with all applicable Title IV requirements; the institution’s administration of Title IV programs; the institution’s compliance with certain reporting, disclosure and record-keeping obligations; and the institution’s ability to maintain cohort default rates below prescribed thresholds. Failure to comply with these criteria could result in the loss or limitation of the eligibility of one or more of the schools in KHE to participate in the Title IV programs, a requirement to pay fines or to repay Title IV program funds, a denial or refusal by the DOE to consider a school’s application for renewal of its certification to participate in the Title IV programs, civil or criminal penalties or other
sanctions. Any one or more of these actions by the DOE could have a material adverse effect on Kaplan’s results of operations.
· Failure to Obtain Regulatory Approval of Transactions Involving a Change of Control May Result in Loss of Ability to Operate Schools or to Participate in U.S. Federal Student Financial Aid Programs.
If one or more of KHE’s schools experiences a change of control under the standards of applicable state agencies, accrediting agencies or the DOE, the schools governed by such agencies must seek the approval of the relevant agencies. Failure of any of KHE’s schools to reestablish its state authorization, accreditation or DOE certification following a change of control as defined by the applicable agency could result in a suspension of operating authority or suspension or loss of U.S. Federal student financial aid funding, which could have a material adverse effect on KHE’s student population and revenue.
· Actions of Other Postsecondary Education Institutions and Related Media Coverage May Negatively Influence the Regulatory Environment and Kaplan’s Reputation
The HELP Committee hearings, along with other recent investigations and lawsuits, have included allegations of, among other things, deceptive trade practices, false claims against the U.S. and noncompliance with state and DOE regulations. These allegations have attracted significant adverse media coverage. Allegations against the overall student lending and postsecondary education sectors may impact general public perceptions of private-sector educational institutions, including Kaplan, in a negative manner. Adverse media coverage regarding other educational institutions or regarding Kaplan directly could damage its reputation, reduce student demand for Kaplan programs, adversely impact its revenues and operating profit or result in increased regulatory scrutiny.
· Changes in the Extent to Which Standardized Tests Are Used in the Admissions Process by Colleges or Graduate Schools Could Reduce Demand for KTP Offerings
A substantial portion of Kaplan’s revenue is generated by KTP. The source of this income is fees charged for courses that prepare students for a broad range of admissions examinations that are required for admission to colleges and graduate schools. Historically, colleges and graduate schools have required standardized tests as part of the admissions process. There has been some movement away from this historical reliance on standardized admissions tests among a small number of colleges that have adopted “test-optional” admissions policies. Any significant reduction in the use of standardized tests in the college or graduate school admissions process could have an adverse effect on Kaplan’s operating results.
· Changes in the Extent to Which Licensing and Proficiency Examinations Are Used to Qualify Individuals to Pursue Certain Careers Could Reduce Demand for Kaplan Offerings
A substantial portion of PACE and Kaplan International’s revenue comes from preparing individuals for licensing or technical proficiency examinations in various fields. Any significant relaxation or elimination of licensing or technical proficiency requirements in those fields served by PACE and Kaplan International’s businesses could negatively impact Kaplan’s operating results.
· System Disruptions and Security Threats to the Company’s Technology Infrastructure Could Have a Material Adverse Effect on its Businesses
Kaplan’s reputation and ability to attract and retain students is highly dependent on the performance and reliability of its information technology platforms with respect to its online and campus-based education offerings. Kaplan’s delivery of these programs could be negatively affected due to events beyond its control, including natural disasters and network and telecommunications failures. Any such computer system error or failure could result in a significant outage that materially disrupts Kaplan’s online and on-ground operations.
The Company’s computer networks may also be vulnerable to unauthorized access, computer hackers, computer viruses and other security threats. The Company has, and will continue to, expend significant resources to protect against the threat of security breaches, but its systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause disruptions or malfunctions in operations. Any of these events could have a material adverse effect on the Company’s business and results of operations.
§ Failure to Successfully Assimilate Acquired Businesses
The Company’s Kaplan subsidiary has historically been an active acquirer of businesses that provide educational services. Consistent with this historical trend, during 2011 Kaplan completed five acquisitions. Acquisitions involve various inherent risks and uncertainties, including difficulties in efficiently integrating the service offerings, accounting and other
administrative systems of an acquired business; the challenges of assimilating and retaining key personnel; the consequences of diverting the attention of senior management from existing operations; the possibility that an acquired business does not meet or exceed the financial projections that supported the purchase price; and the possible failure of the due diligence process to identify significant business risks or undisclosed liabilities associated with the acquired business. A failure to effectively manage growth and integrate acquired businesses could have a material adverse effect on Kaplan’s operating results.
· Difficulties of Managing Foreign Operations
Kaplan has operations and investments in a growing number of foreign countries, including Canada, Mexico, the U.K., Ireland, France, Israel, Australia, New Zealand, Singapore, India and China. Operating in foreign countries presents a number of inherent risks, including the difficulties of complying with unfamiliar laws and regulations, effectively managing and staffing foreign operations, successfully navigating local customs and practices, preparing for potential political and economic instability and adapting to currency exchange rate fluctuations. Failure to effectively manage these risks could have a material adverse effect on Kaplan’s operating results.
· Changes in International Regulatory and Physical Environments Could Negatively Affect International Student Enrollments
A substantial portion of Kaplan International’s revenue comes from programs that prepare international students to study and travel to English-speaking countries, principally the U.S., the U.K., Australia and Singapore. Kaplan International’s ability to enroll students in these programs is directly dependent on its ability to comply with complex regulatory environments. A recent example of this is the immigration regulatory changes in the U.K., which impose recruitment quotas and stringent progress criteria as requirements for the maintenance of certain overseas student recruitment licenses. Any significant changes to the regulatory environment or a natural disaster or pandemic in either the students’ countries of origin or the countries to which they desire to travel or study could negatively affect Kaplan’s ability to attract and retain such students, which could negatively impact Kaplan’s operating results.
· Changing Preferences of Readers or Viewers Away From Traditional Media Outlets
The rates that the Company’s print publishing and television broadcasting businesses can charge for advertising are directly related to the number of readers and viewers of its publications and broadcasts. There is tremendous competition for readers and viewers from other media. The Company’s publishing and television broadcasting businesses will be adversely affected to the extent that individuals decide to obtain news, entertainment, classified listings and local shopping information from Internet-based or other media to the exclusion of the Company’s digital media offerings, print publications and broadcasts.
· Changing Perceptions About the Effectiveness of Publishing and Television Broadcasting in Delivering Advertising
Historically, newspaper publishing and television broadcasting have been viewed as cost-effective methods of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions by advertisers. To the extent that advertisers shift advertising expenditures to other media outlets, the profitability of the Company’s publishing and television broadcasting businesses will suffer.
· Increased Competition Resulting From Technological Innovations in News, Information and Video Programming Distribution Systems
The development of DBS systems has significantly increased the competition faced by the Company’s cable television systems. In addition, the continuing growth and technological expansion of Internet-based services has increased competitive pressure on the Company’s media businesses. The development and deployment of new technologies have the potential to negatively and dramatically affect the Company’s businesses in ways that cannot now be reliably predicted and that may have a material adverse effect on the Company’s operating results.
· Changes in the Nature and Extent of Government Regulations in the Case of Television Broadcasting, Cable Television and VoIP Services
The Company’s television broadcasting and cable television businesses operate in highly regulated environments. The Company’s VoIP services business also is subject to a growing degree of regulation. Complying with applicable regulations has significantly increased, and may continue to increase, the costs and has reduced the revenues of these businesses. Changes in regulations have the potential to further negatively impact those businesses, not only by increasing compliance costs and reducing revenues through restrictions on certain types of advertising, limitations on pricing flexibility or other means, but also by possibly creating more favorable regulatory environments for the providers of
competing services. More generally, all of the Company’s businesses could have their profitability or their competitive positions adversely affected by significant changes in applicable regulations.
· Potential Liability for Intellectual Property Infringement Could Adversely Affect the Company’s Businesses
The Company periodically receives claims from third parties alleging that the Company’s businesses infringe the intellectual property rights of others. It is likely that the Company will continue to be subject to similar claims, particularly as they relate to its media and cable businesses. For example, providers of services similar to those offered by Cable ONE have been the target of patent infringement claims from time to time, relating to such matters as cable system architecture, electronic program guides, cable modem technology and VoIP services. Other parts of the Company’s business could also be subject to such claims. Addressing intellectual product claims is a time-consuming and expensive endeavor, regardless of the merits of the claims. In order to resolve such a claim, the Company could determine the need to change its method of doing business, enter into a licensing agreement or incur substantial monetary liability. It is also possible that one of the Company’s businesses could be enjoined from using the intellectual property at issue, causing it to significantly alter its operations. Although the Company cannot predict the impact at this time, if any such claims are successful, the outcome would likely affect the businesses utilizing the intellectual property at issue and could have a material adverse effect on those businesses’ operating results or prospects.
· Failure to Comply With Privacy Laws or Regulations Could Have an Adverse Effect on the Company’s Business
Various federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. This area of the law is evolving and interpretations of applicable laws and regulations differ. Legislative activity in the privacy area may result in new laws that are relevant to the Company’s operations, for example, use of consumer data for marketing or advertising. Claims of failure to comply with the Company’s privacy policies or applicable laws or regulations could form the basis of governmental or private party actions against the Company. Such claims and actions may cause damage to the Company’s reputation and could have an adverse effect on the Company’s business.
· Changes in the Cost or Availability of Raw Materials, Particularly Newsprint
The Company’s newspaper publishing businesses collectively spend significant amounts each year on newsprint. Increases in the cost of newsprint or significant disruptions in the supply of newsprint could have a material adverse effect on the operating results of the Company’s newspaper publishing businesses.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Directly or through its subsidiaries, Kaplan owns a total of nine properties: a 30,000-square-foot six-story building located at 131 West 56th Street in New York City, which serves as an education center primarily for international students; a redeveloped 47,410-square-foot four-story brick building in Lincoln, NE, which is used by Kaplan University; a 4,000-square-foot office condominium in Chapel Hill, NC, which it utilizes for its KTP business; a 15,000-square-foot three- story building in Berkeley, CA, used for its KTP and English-language businesses; a 131,000-square-foot five-story brick building in Manchester, NH, used by Hesser College; a 25,000-square-foot building in Hammond, IN, used by Kaplan Career College (formerly Sawyer College); a 45,000-square-foot three-story brick building in Houston, TX, used by the Texas School of Business; a 34,000-square-foot building in London, U.K., which is used by Holborn College; and an 18,000-square-foot building in Dayton, OH, which is currently vacant and being marketed for sale. Kaplan, Inc. and Kaplan University maintain corporate offices, together with a data center, call center and employee-training facilities, in two 97,000-square-foot leased buildings located on adjacent lots in Fort Lauderdale, FL. Both of those leases will expire in 2017. In December 2009, KHE entered into an agreement to lease 76,515 square feet of corporate office space to house its corporate headquarters in Chicago, IL. This lease will expire in 2022. In December 2008, Kaplan University entered into an agreement to lease a two-story, 124,500-square-foot building in Orlando, FL, to house an additional support center. In June 2009, Kaplan, Inc. and KHE began sharing corporate office space in a 78,000-square-foot office building in Alpharetta, GA, under a lease that expires in 2019. In October 2009, Kaplan University entered into an agreement to lease 88,845 square feet of corporate office space in Plantation, FL. This lease expires in 2021. In December 2010, Kaplan, Inc. and its New York-based KTP business relocated from 888 7th Avenue and 1440 Broadway, respectively, to consolidated space at 395 Hudson Street, occupying two floors and approximately 159,540 square feet of space. Kaplan, Inc. is marketing the vacated space at 888 7th Avenue for sublease as the current lease will expire in 2017. Overseas, Dublin Business School’s facilities in Dublin, Ireland, are located in six buildings aggregating approximately 83,000 square
feet of space that have been rented under leases expiring between 2016 and 2029. Kaplan Publishing has an office and distribution warehouse in Wokingham, Berkshire, U.K., of 26,767 square feet, under a lease expiring in 2016. Kaplan Financial’s largest leaseholds are office and instructional space in London, U.K., of 33,000 square feet (which will expire in 2033) 22,520 square feet (which will expire in 2015) and 35,000 square feet (comprising six separate leases, which will expire in 2015); office and instructional space in Birmingham, U.K., of 23,500 square feet (comprising two separate leases, which will expire in 2017); office and instructional space in Manchester, U.K., of 26,909 square feet (comprising five separate leases, which will expire in 2022); and office and instructional space in Wales, U.K., of 34,000 square feet (on an open-ended lease with termination on 12 months’ notice). In addition, Kaplan has entered into two separate leases in Glasgow, Scotland, for 58,017 square feet and 22,357 square feet, respectively, of dormitory space that is in the process of being built. These leases will expire in 2033. Kidum has 19 locations throughout Israel, all of which are occupied under leases expiring between 2011 and 2015. All other Kaplan facilities in the U.S. and overseas (including administrative offices and instructional locations) occupy leased premises.
The headquarters offices of Cable ONE are located in a three-story office building in Phoenix, AZ, that was purchased by Cable ONE in 1998. Cable ONE purchased an adjoining two-story office building in 2005; that building is currently unused. The majority of the offices and head-end facilities of the division’s individual cable systems are located in buildings owned by Cable ONE. Most of the tower sites used by the division are leased. In addition, the division houses call-center operations in 60,000 square feet of rented space in Phoenix under a lease that will expire in 2013.
WP Company owns the principal offices of the Post in downtown Washington, DC, including both a seven-story building in use since 1950 and a connected nine-story office building, on contiguous property, completed in 1972 in which the Company’s principal executive offices are located. WP Company also owns and occupies a small office building on L Street that is connected to the Post’s office building. Additionally, WP Company owns land on the corner of 15th and L Streets, NW, in Washington, DC, adjacent to the Post’s office building. This land is leased on a long-term basis to the owner of a multistory office building that was constructed on the site in 1982.
WP Company owns a printing plant in Fairfax County, VA, which was built in 1980 and expanded in 1998. That facility is located on 19 acres of land owned by WP Company.
The Daily Herald Company owns its plant and office building in Everett, WA; it also owns two warehouses and a small rental building adjacent to its plant, as well as a small office building in Lynnwood, WA.
PNM owns a two-story combination office building and printing plant on a seven-acre plot in Laurel, MD. PNM also owns a one-story brick building in St. Mary’s County, MD, used by editorial and sales staff and office space in Montgomery and Charles counties, MD. In addition, PNM leases editorial and sales office space in Frederick and Calvert counties, MD, and Fairfax County, VA.
The headquarters offices of the Company’s broadcasting operations are located in Detroit, MI, in the same facilities that house the offices and studios of WDIV. That facility and those that house the operations of each of the Company’s other television stations are all owned by subsidiaries of the Company, as are the related tower sites (except in Houston, Orlando, Jacksonville and Miami, where the tower sites are 50% owned).
Robinson Terminal Warehouse Corporation (Robinson) owns two wharves and several warehouses in Alexandria, VA. These facilities are adjacent to the business district and occupy approximately seven acres of land. Robinson also owns two partially developed tracts of land in Fairfax County, VA, aggregating about 20 acres. These tracts are near the Post’s Virginia printing plant and include several warehouses. Robinson also owns 23 acres of undeveloped land on the Potomac River in Charles County, MD.
WP Company has assumed the lease of approximately 85,000 square feet of office space in Arlington, VA, that will expire in 2015. The space has been subleased. WP Company also leases office space in New York City, Chicago, Los Angeles and San Francisco. The Slate Group leases space in Washington, DC.
Greater Washington Publishing’s offices are located in leased space in Vienna, VA; El Tiempo Latino’s offices are located in leased space in Arlington, VA.
Avenue100 leases space in an office building in Woburn, MA. This lease expires in 2015.
Item 3. Legal Proceedings.
A purported class action complaint was filed against the Company, Donald E. Graham and Hal S. Jones on October 28, 2010, in the U.S. District Court for the District of Columbia, by the Plumbers Local #200 Pension Fund. The complaint alleged that the Company and certain of its officers made materially false and misleading statements, or failed to disclose material facts relating to KHE, in violation of the U.S. Federal securities laws. The complaint sought damages, attorneys’ fees, costs and equitable/injunctive relief. The Company moved to dismiss the complaint, and on December 23, 2011, the court granted the Company’s motion and dismissed the case with prejudice. On January 25, 2012, the Plaintiff filed a motion seeking leave to amend or alter that final judgment; the Company has opposed the motion.
On February 6, 2008, a purported class action lawsuit was filed in the U.S. District Court for the Central District of California by purchasers of BAR/BRI bar review courses from July 2006 onward alleging antitrust claims against Kaplan and West Publishing Corporation, BAR/BRI’s former owner. On April 10, 2008, the court granted defendants’ motion to dismiss. On May 7, 2008, the plaintiffs filed an appeal to the U.S. Court of Appeals for the Ninth Circuit. On October 18, 2010, the parties entered into a stipulation and settlement agreement. The District Court granted preliminary approval of this proposed settlement on March 21, 2011, but denied final approval thereof on July 1, 2011. On November 7, 2011, the Ninth Circuit reversed the District Court’s order of dismissal, but stayed the mandate and referred the matter to the Ninth Circuit mediator for renewed settlement discussions.
On or about January 17, 2008, an Assistant U.S. Attorney in the Civil Division of the U.S. Attorney’s Office for the Eastern District of Pennsylvania contacted KHE’s CHI-Broomall campus and made inquiries about the Surgical Technology program, including the program’s eligibility for Title IV U.S. Federal financial aid, the program’s student loan defaults, licensing and accreditation. Kaplan responded to the information requests and fully cooperated with the inquiry. The DOE also conducted a Program Review at the CHI-Broomall campus, and Kaplan likewise cooperated with the Program Review. On July 22, 2011, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced that it had entered into a comprehensive settlement agreement with Kaplan that resolved the U.S. Attorney’s inquiry, provided for the conclusion of the DOE’s program review and also settled a previously sealed U.S. Federal False Claims Act (False Claims Act) complaint (31 U.S.C. § 3729, et seq.) that had been filed by a former employee of the CHI-Broomall campus. The total amount of all required payments by CHI-Broomall under the agreements was $1.6 million. Pursuant to the comprehensive settlement agreement, the U.S. Attorney inquiry has been closed, the DOE will issue a final program review determination and the False Claims Act complaint (United States of America ex rel. David Goodstein v. Kaplan, Inc., et al. (unsealed July 22, 2011)) was unsealed and will be dismissed with prejudice. At this time, Kaplan cannot predict the contents of the pending final program review determination or the ultimate impact the proceedings may have on the CHI-Broomall campus or the KHE business generally.
Several Kaplan subsidiaries were or are subject to four other unsealed cases filed by former employees that include, among other allegations, claims under the U.S. Federal False Claims Act relating to eligibility for Title IV funding. The U.S. Government declined to intervene in all cases, and, as previously reported, court decisions in 2011 either dismissed the cases in their entirety or narrowed the scope of their allegations. The four cases are captioned: United States of America ex rel. Carlos Urquilla-Diaz et al. v. Kaplan University et al. (unsealed March 25, 2008); United States of America ex rel. Jorge Torres v. Kaplan Higher Education Corp. (unsealed April 7, 2008); United States of America ex rel. Victoria Gatsiopoulos et al. v. ICM School of Business & Medical Careers et al. (unsealed September 2, 2008); and United States of America ex rel. Charles Jajdelski v. Kaplan Higher Education Corp. et al. (unsealed January 6, 2009).
On August 17, 2011, the U.S. District Court for the Southern District of Florida issued a series of rulings in the Diaz case, which included three separate complaints: Diaz, Wilcox and Gillespie. The court dismissed the Wilcox complaint in its entirety; dismissed all False Claims Act allegations in the Diaz case, leaving only an individual employment claim; and dismissed in part the Gillespie case, thereby limiting the scope and time frame of its False Claims Act allegations regarding compliance with the U.S. Federal Rehabilitation Act. The case (now consisting of the individual employment claim in Diaz and the remaining False Claims Act allegations in Gillespie) is expected to proceed to the discovery and dispositive motion phases.
On August 23, 2011, the U.S. District Court for the Southern District of Florida dismissed the Torres case in its entirety and entered a final judgment in favor of Kaplan. That case has been appealed in the U.S. Court of Appeals for the 11th Judicial Circuit.
On August 9, 2011, the U.S. District Court for the Southern District of Florida granted in part Kaplan’s motion to dismiss the Gatsiopoulos case, which limited the allegations in that case to alleged violations of U.S. Federal incentive compensation regulations and so-called “70 percent rules” and an individual employment claim, and limited the time frame applicable to these claims. Thereafter, the court recommended that the case be transferred back to its original jurisdiction,
the U.S. District Court for the Western District of Pennsylvania, and the case was assigned to a judge in that venue in December 2011. The case is expected to proceed to the discovery and dispositive motion phases in that venue.
On July 7, 2011, the U.S. District Court for the District of Nevada dismissed the Jajdelski case in its entirety and entered a final judgment in favor of Kaplan. That case is currently on appeal in the U.S. Circuit Court of Appeals for the Ninth Judicial Circuit.
On August 5, 2010, Kaplan Higher Education Corporation, along with at least 28 other proprietary education organizations, received a letter of inquiry from the HELP Committee. As part of a general congressional review of the distribution of U.S. Federal financial aid for students, the letter requested information and correspondence relating to the online and on-campus schools operated by KHE. The requested information was provided to the HELP Committee. At this time, Kaplan cannot predict the ultimate impact the investigation may have on its business.
On October 21, 2010, Kaplan Higher Education Corporation received a subpoena from the office of the Florida Attorney General. The subpoena sought information pertaining to the online and on-campus schools operated by KHE in and outside of Florida. KHE has cooperated with the Florida Attorney General and provided the information requested in the subpoena. KHE also may receive further requests for information from the Florida Attorney General. The Company cannot predict the outcome of this inquiry.
On December 21, 2010, the U.S. Equal Employment Opportunities Commission filed suit against Kaplan Higher Education Corporation in the U.S. District Court for the Northern District of Ohio, alleging racial bias by Kaplan in requesting credit scores of job applicants seeking financial positions. The Company believes that the complaint lacks merit. In March 2011, the court granted in part the Company’s motion to dismiss the complaint. Since that time, the case is proceeding with the discovery phase.
On February 7, 2011, Kaplan Higher Education Corporation received a Civil Investigative Demand from the Office of the Attorney General of the State of Illinois. The demand primarily sought information pertaining to Kaplan University online students who are residents of Illinois. KHE has cooperated with the Illinois Attorney General and provided the requested information. KHE also may receive further requests for information from the Illinois Attorney General. The Company cannot predict the outcome of this inquiry.
On April 30, 2011, Kaplan Higher Education Corporation received a Civil Investigative Demand from the Office of the Attorney General of the State of Massachusetts. The demand primarily sought information pertaining to KHE Campuses’ students who are residents of Massachusetts. KHE has cooperated with the Massachusetts Attorney General and provided the requested information. KHE also may receive further requests for information from the Massachusetts Attorney General. The Company cannot predict the outcome of this inquiry.
On July 20, 2011, Kaplan Higher Education Corporation received a subpoena from the Office of the Attorney General of the State of Delaware. The demand primarily sought information pertaining to Kaplan University’s online and KHE Campuses’ students who are residents of Delaware. KHE has cooperated with the Delaware Attorney General and provided the information requested in the subpoena. KHE also may receive further requests for information from the Delaware Attorney General. The Company cannot predict the outcome of this inquiry.
The Company and its subsidiaries are also subject to complaints and administrative proceedings and are defendants in various other civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, invasion of privacy, trademark, copyright and patent infringement; False Claims Act violations; violations of applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. While it is not possible to predict the outcomes of these lawsuits, in the opinion of management, their ultimate dispositions should not have a material adverse effect on the Company’s business or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
The Company’s Class B Common Stock is traded on the New York Stock Exchange under the symbol “WPO.” The Company’s Class A Common Stock is not publicly traded.
The high and low sales prices of the Company’s Class B Common Stock during the last two years were:
Quarter
High
Low
High
Low
January-March
$
$
$
$
April-June
July-September
October-December
At January 31, 2012, there were 28 holders of record of the Company’s Class A Common Stock and 690 holders of record of the Company’s Class B Common Stock.
Dividend Information
Both classes of the Company’s Common Stock participate equally as to dividends. Quarterly dividends were paid at the rate of $2.35 and $2.25 per share during 2011 and 2010, respectively.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table and the footnote thereto set forth certain information as of December 31, 2011, concerning compensation plans of the Company under which equity securities of the Company are authorized to be issued.
Number of Securities
Number of Securities
Remaining Available for
to Be Issued Upon
Weighted Average
Future Issuance Under
Exercise of
Exercise Price of
Equity Compensation Plans
Outstanding Options,
Outstanding Options,
(Excluding Securities
Warrants and Rights
Warrants and Rights
Reflected in Column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
129,044
$
494.95
233,481
Equity compensation plans not approved by security holders
-
-
-
Total
129,044
$
494.95
233,481
_____________________________________
This table does not include information relating to restricted stock grants awarded under The Washington Post Company Incentive Compensation Plan, which plan has been approved by the stockholders of the Company. At December 31, 2011, there were 22,125 shares of restricted stock outstanding under the 2009-2012 Award Cycle and 31,090 shares of restricted stock outstanding under the 2011-2014 Award Cycle that had been awarded to employees of the Company and its subsidiaries under that Plan. In addition, the Company has from time to time awarded special discretionary grants of restricted stock to employees of the Company and its subsidiaries. At December 31, 2011, there were a total of 24,104 shares of restricted stock outstanding under special discretionary grants approved by the Compensation Committee of the Board of Directors. At December 31, 2011, a total of 239,486 shares of restricted stock were available for future awards.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended December 31, 2011, the Company purchased shares of its Class B Common Stock as set forth in the following table:
Total Number
Average
Total Number of Shares
Maximum Number of Shares That
of Shares
Price Paid
Purchased as Part of
May Yet Be Purchased
Period
Purchased
per Share
Publicly Announced Plan*
Under the Plan*
Oct. 3-Nov. 6, 2011
74,324
$
330.10
74,324
621,773
Nov. 7-Dec. 4, 2011
88,543
342.43
88,543
533,230
Dec. 5-Dec. 31, 2011
39,756
345.50
39,756
493,474
Total
202,623
$
338.51
202,623
__________________________________________
* On September 8, 2011, the Company’s Board of Directors authorized the Company to purchase, on the open market or otherwise, up to 750,000 shares of its Class B Common Stock. There is no expiration date for that authorization. All purchases made during the quarter ended December 31, 2011 were open market transactions.
Performance Graph
The following graph is a comparison of the yearly percentage change in the Company’s cumulative total shareholder return with the cumulative total return of the Standard & Poor’s 500 Stock Index, the Standard & Poor’s 1500 Publishing Index and a custom peer group index comprised of education companies. The Standard & Poor’s 500 Stock Index is comprised of 500 U.S. companies in the industrial, transportation, utilities and financial industries and is weighted by market capitalization. The Standard & Poor’s 1500 Publishing Index is comprised of Gannett Co., Inc., The McGraw-Hill Companies, The Meredith Corporation, The New York Times Company, The E.W. Scripps Company, Scholastic Corporation, Valassis Communications, Inc., John Wiley & Sons, Inc. and The Washington Post Company and also is weighted by market capitalization. The custom peer group of education companies includes American Public Education, Apollo Group Inc., Bridgepoint Education Inc., Capella Education Co., Career Education Corp., Corinthian Colleges, Inc., DeVry Inc., Education Management Corp., ITT Educational Services Inc. and Strayer Education Inc. The Company is using a custom peer index of education companies because the Company is a diversified education and media company. Its largest business is Kaplan, Inc., a leading global provider of educational services to individuals, schools and businesses. The graph reflects the investment of $100 on December 31, 2006, in the Company’s Class B Common Stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s 1500 Publishing Index and the custom
peer group index of education companies. For purposes of this graph, it has been assumed that dividends were reinvested on the date paid in the case of the Company and on a quarterly basis in the case of the Standard & Poor’s 500 Index, the Standard & Poor’s 1500 Publishing Index and the custom peer group index of education companies.
December 31
The Washington Post Company
100.00
107.26
53.67
61.70
62.96
55.27
S&P 500 Index
100.00
105.49
66.46
84.05
96.71
98.76
S&P 1500 Publishing Index
100.00
79.01
34.71
52.47
56.42
60.31
Education Peer Group
100.00
156.36
166.63
156.96
117.55
119.81
Item 6. Selected Financial Data.
See the information for the years 2007 through 2011 contained in the table titled “Five-Year Summary of Selected Historical Financial Data,” which is included in this Annual Report on Form 10-K and listed in the index to financial information on page 51 hereof (with only the information for such years to be deemed filed as part of this Annual Report on Form 10-K).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
See the information contained under the heading “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which is included in this Annual Report on Form 10-K and listed in the index to financial information on page 51 hereof.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its non-U.S. business operations, which are subject to foreign exchange rate risk.
Equity Price Risk. The Company has common stock investments in two publicly traded companies (as discussed in Note 4 to the Company’s Consolidated Financial Statements) that are subject to market price volatility. The fair value of these common stock investments totaled $303.2 million at December 31, 2011.
Interest Rate Risk. The Company’s long-term debt consists of $400 million principal amount of 7.25% unsecured notes due February 1, 2019 (the “Notes”). At December 31, 2011, the aggregate fair value of the Notes, based upon quoted market prices, was $460.5 million. An increase in the market rate of interest applicable to the Notes would not increase the Company’s interest expense with respect to the Notes since the rate of interest the Company is required to pay on the Notes is fixed, but such an increase in rates would affect the fair value of the Notes. Assuming, hypothetically, that the market interest rate applicable to the Notes was 100 basis points higher than the Notes’ stated interest rate of 7.25%, the fair value of the Notes at December 31, 2011, would have been approximately $378.8 million. Conversely, if the market interest rate applicable to the Notes was 100 basis points lower than the Notes’ stated interest rate, the fair value of the Notes at such date would have been approximately $422.6 million.
On September 7, 2011, the Company borrowed AUD 50 million under its revolving credit facility. On the same date, the Company entered into interest rate swap agreements with a total notional value of AUD 50 million and a maturity date of March 7, 2015. These interest rate swap agreements will pay the Company variable interest on the AUD 50 million notional amount at the three-month bank bill rate, and the Company will pay the counterparties a fixed rate of 4.5275%. These interest rate swap agreements were entered into to convert the variable rate Australian dollar borrowing under the revolving credit facility into a fixed rate borrowing.
Foreign Exchange Rate Risk. The Company is exposed to foreign exchange rate risk at its Kaplan international operations and its Corporate entity, and the primary exposure relates to the exchange rate between the U.S. dollar and both the British pound and the Australian dollar. This exposure includes British pound and Australian dollar denominated intercompany loans on U.S. based Kaplan entities with a functional currency in U.S. dollars, and the AUD 50 million borrowing. Net unrealized foreign currency losses on intercompany loans and the AUD 50 million borrowing of $3.3 million were recorded in 2011. In 2010 and 2009, the Company reported unrealized foreign currency gains of $6.7 million and $16.9 million, respectively.
If the values of the British pound and the Australian dollar relative to the U.S. dollar had been 10% lower than the values that prevailed during 2011, the Company’s pre-tax income for fiscal 2011 would have been approximately $17 million lower. Conversely, if such values had been 10% higher, the Company’s reported pre-tax income for fiscal 2011 would have been approximately $17 million higher.
Item 8. Financial Statements and Supplementary Data.
See the Company’s Consolidated Financial Statements at December 31, 2011, and for the periods then ended, together with the report of PricewaterhouseCoopers LLP thereon and the information contained in Note 19 to said Consolidated Financial Statements titled “Summary of Quarterly Operating Results and Comprehensive Income (Unaudited),” which are included in this Annual Report on Form 10-K and listed in the index to financial information on page 51 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Senior Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of December 31, 2011. Based on that evaluation, the Company’s Chief
Executive Officer and Senior Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Senior Vice President-Finance, in a manner that allows timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management’s report set forth on page 71 is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information contained under the heading “Executive Officers” in Item 1 hereof and the information contained under the headings “Nominees for Election by Class A Shareholders,” “Nominees for Election by Class B Shareholders,” “Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for the Company’s 2012 Annual Meeting of Stockholders is incorporated herein by reference thereto.
The Company has adopted codes of conduct that constitute “codes of ethics” as that term is defined in paragraph (b) of Item 406 of Regulation S-K and that apply to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and to any persons performing similar functions. Such codes of conduct are posted on the Company’s Internet website, the address of which is www.washpostco.com, and the Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K with respect to certain amendments to, and waivers of the requirements of, the provisions of such codes of conduct applicable to the officers and persons referred to above by posting the required information on its Internet website.
In addition to the certifications of the Company’s Chief Executive Officer and Chief Financial Officer filed as exhibits to this Annual Report on Form 10-K, on June 13, 2011, the Company’s Chief Executive Officer submitted to the New York Stock Exchange the annual certification regarding compliance with the NYSE’s corporate governance listing standards required by Section 303A.12(a) of the NYSE Listed Company Manual.
Item 11. Executive Compensation.
The information contained under the headings “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Compensation Committee Report” in the definitive Proxy Statement for the Company’s 2012 Annual Meeting of Stockholders is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the heading “Stock Holdings of Certain Beneficial Owners and Management” in the definitive Proxy Statement for the Company’s 2012 Annual Meeting of Stockholders is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information contained under the headings “Transactions with Related Persons, Promoters and Certain Control Persons” and “Controlled Company” in the definitive Proxy Statement for the Company’s 2012 Annual Meeting of Stockholders is incorporated herein by reference thereto.
Item 14. Principal Accounting Fees and Services.
The information contained under the heading “Audit Committee Report” in the definitive Proxy Statement for the Company’s 2012 Annual Meeting of Stockholders is incorporated herein by reference thereto.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed as part of this report:
1. Financial Statements. As listed in the index to financial information on page 51 hereof.
2. Exhibits. As listed in the index to exhibits on page 114 hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 29, 2012.
THE WASHINGTON POST COMPANY
(Registrant)
By
/s/ Hal S. Jones
Hal S. Jones
Senior Vice President-Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 29, 2012:
Donald E. Graham
Chairman of the Board, Chief Executive
Officer (Principal Executive Officer) and
Director
Hal S. Jones
Senior Vice President--Finance (Principal
Financial Officer)
Wallace R. Cooney
Principal Accounting Officer
Lee C. Bollinger
Director
Christopher C. Davis
Director
Barry Diller
Director
John L. Dotson Jr.
Director
Thomas S. Gayner
Director
Anne M. Mulcahy
Director
Ronald L. Olson
Director
Larry D. Thompson
Director
G. Richard Wagoner, Jr.
Director
Katharine Weymouth
Director
By
/s/ Hal S. Jones
Hal S. Jones
Attorney-in-Fact
An original power of attorney authorizing Donald E. Graham, Hal S. Jones and Veronica Dillon, and each of them, to sign all reports required to be filed by the Registrant pursuant to the Securities Exchange Act of 1934 on behalf of the above-named directors and officers has been filed with the Securities and Exchange Commission.
INDEX TO FINANCIAL INFORMATION
THE WASHINGTON POST COMPANY
Management’s Discussion and Analysis of Results of Operations and Financial Condition (Unaudited)
Financial Statements:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income for the Three Fiscal Years Ended December 31, 2011
Consolidated Balance Sheets at December 31, 2011 and January 2, 2011
Consolidated Statements of Cash Flows for the Three Fiscal Years Ended December 31, 2011
Consolidated Statements of Changes in Common Stockholders’ Equity for the Three Fiscal Years Ended December 31, 2011
Notes to Consolidated Financial Statements
Five-Year Summary of Selected Historical Financial Data (Unaudited)
All schedules have been omitted either because they are not applicable or because the required information is included in the Consolidated Financial Statements or the notes thereto referred to above.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto.
OVERVIEW
The Washington Post Company is a diversified education and media company, with education as the largest business. Through its subsidiary Kaplan, Inc., the Company provides education services for individuals, schools and businesses. The Company also operates principally in three areas of the media industry: cable television, newspaper publishing and television broadcasting. The Company’s business units are diverse and subject to different trends and risks.
The Company’s education division is the largest operating division of the Company, accounting for about 58% of the Company’s consolidated revenues in 2011. The Company has devoted significant resources and attention to this division for many years, given the attractiveness of investment opportunities and growth prospects during this time. With recent revenue declines and other business challenges, Kaplan has formulated and implemented restructuring plans at many of its businesses, resulting in significant costs in order to establish lower cost levels in future periods. Kaplan is organized into the following four operating segments: Kaplan Higher Education (KHE), Kaplan Test Preparation (KTP), Kaplan International and Kaplan Ventures.
KHE is the largest segment of Kaplan, representing 57% of total Kaplan revenues in 2011. KHE’s revenue and operating income were down very substantially in 2011, largely due to enrollment declines arising from generally lower demand, along with marketing and admissions changes to increase student selectivity and help KHE comply with recent regulations. KHE implemented a new program, the Kaplan Commitment, starting in the fourth quarter of 2010 that provides first-time students with a risk-free trial period.
Kaplan International reported revenue growth for 2011 due to several acquisitions, favorable exchange rates and enrollment growth in the pathways and English-language programs. Kaplan International results declined in 2011 due to overall losses from newly acquired businesses, increased expenses and declines at its U.K. professional training schools due to new pending student visa restrictions. Operating results for KTP were adversely impacted by restructuring activity in connection with the migration of students to less expensive online and hybrid test preparation offerings. Also, price reductions for many programs related to increased competition resulted in reduced revenues. Kaplan Ventures reported losses of $10.1 million in 2011; the Company is exploring other alternatives, including possible sales, with respect to the remaining Kaplan Ventures businesses.
Kaplan made five acquisitions in 2011, four acquisitions in 2010 and two acquisitions in 2009. None of these was individually significant; however, two of the 2011 acquisitions were in Australia, where the Company sees attractive growth opportunities in higher education.
The cable television division continues to grow in certain service categories and make substantial capital investments. The cable television division has also experienced increased competition, particularly from satellite television service providers and, to a lesser extent, other telephony providers. Cable telephone subscribers and high-speed data subscribers grew by 18% and 6%, respectively, to approximately 180,000 and 451,100 subscribers, respectively, at the end of 2011. The cable television division’s basic video subscriber base was down in 2011 (decrease of 27,000 subscribers to approximately 621,400 at the end of 2011). The cable television division continues to focus on subscriber retention and growth in overall Primary Service Units (PSUs) and has not raised rates since June 2009. The cable television division has expanded promotional discount offerings to new subscribers and existing subscribers adding new services, as well as subscribers who take more than one offered service (video service, high-speed data service and telephony service).
The Company’s newspaper publishing and television broadcasting divisions derive revenue from advertising and, at the publishing units, circulation and subscriptions. The results of these divisions tend to fluctuate with the overall advertising cycle, among other business factors.
Like many other large metropolitan newspapers, The Washington Post (the Post) has experienced a significant continued downward trend in print advertising revenue over the past several years, including an 11% decline in 2011. This follows a 6% print advertising decline at the Post in 2010 and a 23% decline in 2009. Circulation volume also continued a downward trend, although revenues were even compared to 2010 due to home-delivery price increases. The Company’s online publishing activities, primarily at washingtonpost.com and The Slate Group, reported an 8% revenue decline in 2011, following a 14% increase in 2010. The Post has implemented many cost-saving initiatives in the past few years, which resulted in significantly improved operating results for the newspaper publishing division in 2010, however,
newspaper publishing division operating results declined in 2011 due to revenue reductions, offset by a small decrease in costs.
The Company’s television broadcasting division reported a decline in revenues and in operating income in 2011 due primarily to significant political and Olympics-related advertising included in 2010.
The Company generates a significant amount of cash from its businesses that is used to support its operations, to pay down debt and to fund capital expenditures, share repurchases, dividends, acquisitions and other investments.
RESULTS OF OPERATIONS - 2011 COMPARED TO 2010
Net income attributable to common shares was $116.2 million ($14.70 per share) for the fiscal year ended December 31, 2011, down from net income attributable to common shares of $277.2 million ($31.04 per share) for the fiscal year ended January 2, 2011. Net income includes $4.2 million ($0.53 per share) and $42.1 million ($4.71 per share) in losses from discontinued operations for fiscal year 2011 and 2010, respectively. Income from continuing operations attributable to common shares was $120.4 million ($15.23 per share) for fiscal year 2011, compared to $319.3 million ($35.75 per share) for fiscal year 2010. As a result of the Company’s share repurchases, there were 11% fewer diluted average shares outstanding in 2011.
Items included in the Company’s income from continuing operations for 2011:
• $29.2 million in severance and restructuring charges at Kaplan (after-tax impact of $18.1 million, or $2.30 per share);
• a $2.4 million charge recorded at the newspaper publishing division in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $1.5 million, or $0.19 per share);
• an $11.9 million goodwill impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $11.9 million, or $1.51 per share);
• a $9.2 million impairment charge at one of the Company’s affiliates (after-tax impact of $5.7 million, or $0.72 per share);
• a $53.8 million write-down of a marketable equity security (after-tax impact of $34.6 million, or $4.34 per share); and
• $3.3 million in non-operating unrealized foreign currency losses (after-tax impact of $2.1 million, or $0.26 per share).
Items included in the Company’s income from continuing operations for 2010:
• a $20.4 million charge recorded at the Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $12.7 million, or $1.38 per share);
• $39.0 million in severance and restructuring charges (after-tax impact of $24.2 million, or $2.83 per share);
• a $27.5 million goodwill and other intangible assets impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $26.3 million, or $2.96 per share); and
• $6.7 million in non-operating unrealized foreign currency gains (after-tax impact of $4.2 million, or $0.47 per share).
Revenue for 2011 was $4,214.8 million, down 10% from $4,684.0 million in 2010. Revenues were down at the education, newspaper publishing and television broadcasting divisions, while revenues were up slightly at the cable television division. In 2011, education revenue decreased 14%, advertising revenue decreased 9%, circulation and subscriber revenue was flat and other revenue increased 6%. Revenue declines at Kaplan accounted for the decrease in education revenue. The decrease in advertising revenue is due to declines at the television broadcasting and newspaper publishing divisions. Both subscriber revenue at the cable television division and circulation revenue at the Post were even with last year.
Operating costs and expenses for the year decreased 5% to $3,918.9 million in 2011, from $4,121.4 million in 2010. The decline is due to lower expenses at the education, television broadcasting and newspaper publishing divisions, offset by increased costs at the cable television division.
Operating income for 2011 decreased to $296.0 million, from $562.7 million in 2010. Operating results declined at all of the Company’s divisions.
DIVISION RESULTS
Education Division. Education division revenue in 2011 totaled $2,465.0 million, a 14% decline from revenue of $2,862.3 million in 2010. Excluding revenue from acquired businesses, education division revenue declined 16% in 2011. Kaplan reported operating income of $89.4 million for 2011, down from $346.7 million in 2010.
In light of recent revenue declines and other business challenges, Kaplan has formulated and implemented restructuring plans at its various businesses that have resulted in significant costs in 2010 and 2011, with the objective of establishing lower cost levels in future periods. Across all businesses, severance and restructuring costs totaled $29.2 million in 2011 and $27.5 million in 2010.
A summary of Kaplan’s operating results for 2011 compared to 2010 is as follows:
(in thousands)
% Change
Revenue
Higher education
$
1,399,582
$
1,905,038
(27)
Test preparation
303,093
314,879
(4)
Kaplan international
690,225
585,924
Kaplan ventures
74,946
59,296
Kaplan corporate
4,585
5,537
(17)
Intersegment elimination
(7,383)
(8,395)
-
$
2,465,048
$
2,862,279
(14)
Operating Income (Loss)
Higher education
$
148,915
$
406,880
(63)
Test preparation
(28,498)
(32,583)
Kaplan international
46,498
56,152
(17)
Kaplan ventures
(10,093)
(17,490)
Kaplan corporate
(45,101)
(44,586)
(1)
Amortization of intangible assets
(21,167)
(21,406)
Intersegment elimination
(1,120)
(234)
-
$
89,434
$
346,733
(74)
Kaplan sold Kaplan Compliance Solutions (KCS) in October 2011, Kaplan Virtual Education (KVE) in July 2011 and Education Connection in April 2010. Consequently, the education division’s operating results exclude these businesses.
KHE includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the Kaplan University School of Professional and Continuing Education. In 2011, KHE revenue declined 27% due to declines in average enrollments. Operating income decreased 63% in 2011 due to lower revenue, increased regulatory compliance costs and $13.2 million in severance and restructuring costs in 2011. Offsetting the decline were lower advertising costs, other expense reductions associated with lower enrollments, incentive compensation credits recorded in 2011 related to amounts previously accrued and $9.3 million in 2010 severance costs.
KHE has implemented a number of marketing and admissions changes to increase student selectivity and help KHE comply with recent regulations. KHE also implemented the Kaplan Commitment program, which provides first-time students with a risk-free trial period. Under the program, KHE also monitors academic progress and conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who withdraw or are subject to academic dismissal during the risk-free trial period do not incur any significant financial obligation. These changes, along with generally lower demand, have resulted in ­a 37% decline in new enrollments for 2011 as a whole, in comparison to 2010. Management estimates that without the Kaplan Commitment, the decline for 2011 would have been approximately 20%. Management also estimates that revenue for 2011 would have been approximately $63 million higher if the Kaplan Commitment had not been implemented. KHE does not recognize tuition revenue for students during the risk-free period.
For those first-time students enrolled to date under the Kaplan Commitment, the attrition rate during the risk-free period has been approximately 27%, of which about 59% is due to Kaplan’s dismissal of students from the program because of the students’ lack of academic progress during the period and the remainder due to students who have elected not to continue their studies. Given that the Kaplan Commitment program has only been in place for a short period of time, management is unable to estimate with confidence to what degree the program will cause student retention patterns to differ from historical levels. However, based on limited preliminary data, it appears that most of the historical early term attrition has been accelerated into the commitment period, having the desired effect of providing these students with a
risk-free trial period and ultimately improving student outcome results for the institution. Management believes the Kaplan Commitment program is unique and reflects Kaplan’s commitment to student success.
Student enrollments at December 31, 2011, excluding the School of Professional and Continuing Education, were down 23% compared to December 31, 2010, as follows:
As of December 31,
% Change
Kaplan University
50,190
65,643
(24)
KHE Campuses
24,360
31,058
(22)
74,550
96,701
(23)
Kaplan University enrollments included 5,799 and 7,426 campus-based students as of December 31, 2011, and December 31, 2010, respectively.
Kaplan University and KHE Campuses enrollments at December 31, 2011, and December 31, 2010, by degree and certificate programs, are as follows:
As of December 31,
Certificate
23.6
%
23.6
%
Associate’s
30.3
%
33.8
%
Bachelor’s
34.6
%
35.1
%
Master’s
11.5
%
7.5
%
100.0
%
100.0
%
KTP includes Kaplan’s standardized test preparation and tutoring offerings and other businesses. In the first quarter of 2010, the Company discontinued certain offerings of the K12 business; $7.8 million in severance and other closure costs were recorded in the first half of 2010 in connection with this plan. In the fourth quarter of 2010, KTP began implementing a plan to reorganize its business consistent with the migration of students to Kaplan’s online and hybrid test preparation offerings, reducing the number of leased test preparation centers; $10.4 million in costs were incurred, mostly comprised of charges related to early lease termination and property, plant and equipment write-downs. In 2011, implementation of the plan was completed and $12.5 million in additional restructuring and severance costs were incurred.
KTP revenue declined 4% in 2011. Higher enrollment, particularly in the health and bar review programs, was offset by reduced prices for many programs related to increased competition and a shift in demand to lower priced online test preparation offerings. KTP operating results improved in 2011 due to a $5.7 million decline in restructuring costs and lower operating expenses, offset by revenue reductions.
Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. In May 2011, Kaplan Australia acquired Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia. In June 2011, Kaplan acquired Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain. Kaplan International revenue increased 18% in 2011. Excluding revenue from acquired businesses, Kaplan International revenue increased 10% in 2011 due to favorable exchange rates and enrollment growth in the pathways and English-language programs. Kaplan International operating income declined in 2011 due to overall losses from newly acquired businesses, as well as up-front spending for admission and occupancy at its Asian and United Kingdom businesses to support expanding operations. In addition, Kaplan International operating income decreased due to enrollment declines at its UK professional training schools arising from new pending student visa restrictions.
Kaplan Ventures is made up of several businesses in various stages of development that are managed separately from the other education businesses. Revenue at Kaplan Ventures increased 26% in 2011. Kaplan Ventures reported an operating loss of $10.1 million in 2011 compared to an operating loss of $17.5 million in 2010. Kaplan Ventures sold one small business in February 2012 and is exploring other alternatives with respect to the remaining Kaplan Ventures businesses, including possible sales.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor shared activities. Corporate results decreased slightly in 2011.
Cable Television Division. Cable television division revenue for 2011 increased slightly to $760.2 million, from $759.9 million in 2010. The revenue results reflect continued growth of the division’s Internet and telephone service revenues, offset by an increase in promotional discounts and a decline in basic video subscribers.
Cable television division operating income in 2011 decreased to $156.8 million, from $163.9 million in 2010. The cable television division’s operating income for 2011 declined primarily due to increased programming, technical and sales costs. Operating margin at the cable television division was 21% in 2011 and 22% in 2010.
At December 31, 2011, Primary Service Units (PSUs) were up 2% from the prior year due to growth in high-speed data and telephony subscribers, offset by a decrease in basic video subscribers. A summary of PSUs is as follows:
As of December 31,
Basic video
621,423
648,413
High-speed data
451,082
425,402
Telephony
179,989
153,044
Total
1,252,494
1,226,859
PSUs include about 6,300 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by various franchise agreements.
Below are details of the cable television division’s capital expenditures for 2011 and 2010 in the NCTA Standard Reporting Categories:
(in thousands)
Customer premise equipment
$
53,087
$
22,413
Commercial
3,487
1,338
Scaleable infrastructure
34,748
50,458
Line extensions
6,318
7,118
Upgrade/rebuild
12,951
7,192
Support capital
32,582
21,059
Total
$
143,173
$
109,578
Newspaper Publishing Division. Newspaper publishing division revenue in 2011 declined 5% to $648.0 million, from $680.4 million in 2010. Print advertising revenue at the Post in 2011 declined 11% to $264.5 million, from $297.9 million in 2010. The decline is largely due to reductions in classified, zoned and general advertising. Revenue generated by the Company’s newspaper online publishing activities, primarily washingtonpost.com and Slate, decreased 8% to $105.8 million, from $114.8 million in 2010. Display online advertising revenue declined 11% in 2011, and online classified advertising revenue decreased 2% in 2011. The revenue declines from print advertising and newspaper online publishing activities were partially offset by increased revenue from new lines of business in 2011.
Daily circulation at the Post declined 6.3%, and Sunday circulation declined 4.0% in 2011. For 2011, average daily circulation at the Post totaled 516,200 (unaudited) and average Sunday circulation totaled 732,300 (unaudited).
The newspaper publishing division reported an operating loss of $18.2 million in 2011, compared to an operating loss of $9.8 million in 2010. As previously disclosed, The Herald recorded a $2.4 million charge in the fourth quarter of 2011 in connection with its withdrawal from the CWA-ITU Negotiated Pension Plan (CWA-ITU Plan); in 2010, the Post recorded a $20.4 million charge in connection with its withdrawal from the CWA-ITU Plan. Excluding these charges and a $3.1 million loss recorded on an office lease in the first quarter of 2010, operating results declined in 2011 due to the revenue reductions discussed above, offset by a small decrease in overall costs. Newsprint expense was down 7% in 2011 due to a decline in newsprint consumption.
Television Broadcasting Division. Revenue for the television broadcasting division declined 7% to $319.2 million in 2011, from $342.2 million in 2010. Television broadcasting division operating income for 2011 declined 4% to $117.1 million, from $121.3 million in 2010.
The decline in revenue is due primarily to the absence of $4.7 million in incremental winter Olympics-related advertising in the first quarter of 2010 and a $32.8 million decrease in political advertising revenue for 2011. For 2011, operating results declined as a result of revenue reductions discussed above, offset by expense reductions from various cost control initiatives. Operating margin at the television broadcasting division was 37% in 2011 and 35% in 2010.
KSAT in San Antonio ranked number one in the November 2011 ratings period, Monday through Friday, sign-on to sign-off; WPLG in Miami, WJXT in Jacksonville and WKMG in Orlando ranked second; and WDIV in Detroit and KPRC in Houston ranked third.
Other Businesses. Other businesses includes the operating results of Avenue100 Media Solutions, the Company’s digital marketing business that sources leads for academic institutions and recruiting organizations, and other small businesses. In 2011, revenues declined substantially due to volume declines as a result of changes implemented at Avenue100 Media Solutions to improve lead quality. Goodwill and other intangible assets impairment charges of $11.9 million and $27.5 million were recorded at Avenue100 Media Solutions in 2011 and 2010, respectively. Excluding these charges, operating losses increased in 2011 due to the revenue declines discussed above and increased costs at other small businesses.
Corporate Office. Corporate office includes the expenses of the Company’s corporate office as well as the pension credit previously reported in the magazine publishing division (refer to Discontinued Operations discussion below). In the fourth quarter of 2010, certain Kaplan operations moved to the former Newsweek headquarters facility. In connection with this move, $11.5 million in lease termination and other charges were recorded by the corporate office in the fourth quarter of 2010.
Equity in Losses of Affiliates. The Company holds a 49% interest in Bowater Mersey Paper Company, a 16.5% interest in Classified Ventures, LLC and interests in several other affiliates. The Company’s equity in earnings of affiliates for 2011 was $5.9 million, compared with losses of $4.1 million in 2010. The results for 2011 reflect improved earnings at the Company’s Classified Ventures affiliate and other affiliates, offset by a $9.2 million impairment charge recorded in 2011 on the Company’s interest in Bowater Mersey Paper Company.
Other Non-Operating (Expense) Income. The Company recorded other non-operating expense, net, of $55.2 million in 2011, compared to other non-operating income, net, of $7.5 million in 2010.
The 2011 non-operating expense, net, included a $53.8 million write-down of a marketable equity security (Corinthian Colleges, Inc.), $3.3 million in unrealized foreign currency losses and other items. The 2010 non-operating income, net, included $6.7 million in unrealized foreign currency gains.
A summary of non-operating (expense) income for the years ended December 31, 2011 and January 2, 2011, is as follows:
(in thousands)
Impairment write-down of a marketable equity security
$
(53,793)
$
-
Foreign currency (losses) gains, net
(3,263)
6,705
Gain on sale of a cost method investment
4,031
-
Impairment write-down on a cost method investment
(3,612)
-
Other, net
1,437
Total
$
(55,200)
$
7,515
Net Interest Expense. The Company incurred net interest expense of $29.1 million in 2011, compared to $27.9 million in 2010. At December 31, 2011, the Company had $565.2 million in borrowings outstanding at an average interest rate of 5.7%; at January 2, 2011, the Company had $399.7 million in borrowings outstanding at an average interest rate of 7.2%.
Income Taxes. The effective tax rate for income from continuing operations in 2011 was 44.2%. This effective tax rate was adversely impacted by $17.8 million in valuation allowances provided against deferred income tax benefits where realization is doubtful, and $4.5 million from nondeductible goodwill in connection with an impairment charge recorded in 2011. The effective tax rate benefited from lower rates at jurisdictions outside the United States.
The effective tax rate for income from continuing operations in 2010 was 40.5%. This effective tax rate was adversely impacted by $16.8 million in valuation allowances provided against deferred income tax benefits where realization is doubtful, and $9.1 million from nondeductible goodwill in connection with an impairment charge recorded in 2010; these items were offset by permanent U.S. Federal tax benefit items and tax benefits from lower rates at jurisdictions outside the United States.
Discontinued Operations. On September 30, 2010, the Company completed the sale of Newsweek. In addition, Kaplan sold KCS in October 2011, KVE in July 2011 and Education Connection in April 2010. Consequently, the Company’s income from continuing operations excludes these businesses, which have been reclassified to discontinued operations, net of tax.
RESULTS OF OPERATIONS - 2010 COMPARED TO 2009
Net income attributable to common shares was $277.2 million ($31.04 per share) for the fiscal year ended January 2, 2011, up from net income attributable to common shares of $91.8 million ($9.78 per share) for the fiscal year ended January 3, 2010. Net income includes $42.1 million ($4.71 per share) and $65.0 million ($6.92 per share) in losses from discontinued operations for fiscal year 2010 and 2009, respectively. Income from continuing operations attributable to common shares was $319.3 million ($35.75 per share) for fiscal year 2010, compared to $156.9 million ($16.70 per share) for fiscal year 2009. As a result of the Company’s share repurchases, there were fewer diluted average shares outstanding in 2010.
Items included in the Company’s income from continuing operations for 2010:
• a $20.4 million charge recorded at the Post in connection with the withdrawal from a multiemployer pension plan (after-tax impact of $12.7 million, or $1.38 per share);
• $39.0 million in severance and restructuring charges (after-tax impact of $24.2 million, or $2.83 per share);
• a $27.5 million goodwill and other intangible assets impairment charge at the Company’s online lead generation business, included in other businesses (after-tax impact of $26.3 million, or $2.96 per share); and
• $6.7 million in non-operating unrealized foreign currency gains (after-tax impact of $4.2 million, or $0.47 per share).
Items included in the Company’s income from continuing operations for 2009:
• $57.9 million in early retirement program expense at the newspaper publishing division (after-tax impact of $35.9 million, or $3.82 per share);
• $33.2 million in restructuring charges at Kaplan (after-tax impact of $20.6 million, or $2.19 per share);
• $33.8 million in accelerated depreciation at the Post (after-tax impact of $21.0 million, or $2.23 per share);
• an $8.5 million goodwill impairment charge related to Kaplan Ventures (after-tax impact of $8.5 million, or $0.90 per share);
• a $29.0 million decline in equity in earnings (losses) of affiliates associated with impairment charges at two of the Company’s affiliates (after-tax impact of $18.8 million, or $2.00 per share); and
• $16.9 million in non-operating unrealized foreign currency gains (after-tax impact of $10.3 million, or $1.10 per share).
Revenue for 2010 was $4,684.0 million, up 8% compared to revenue of $4,326.0 million in 2009. The increase is due to strong revenue growth at the education and television broadcasting divisions, and increased revenue at the cable television division. In 2010, education revenue increased 11%, advertising revenue increased 7%, circulation and subscriber revenue increased 1% and other revenue increased 4%. Revenue growth at Kaplan accounted for the increase in education revenue. The increase in advertising revenue is due to increased revenues at the television broadcasting division and increases in newspaper publishing online revenue, offset by declines in print advertising at The Washington Post. The increase in circulation and subscriber revenue is due to a 1% increase in subscriber revenue at the cable television division and a 4% increase in circulation revenue at the Post.
Operating costs and expenses for the year increased 2% to $4,121.4 million in 2010, from $4,035.6 million in 2009. The increase is due to higher expenses at the education, cable television and television broadcasting divisions, offset by reduced costs at the newspaper publishing division.
Operating income for 2010 increased to $562.7 million, from $290.4 million in 2009, due to improved results at the education, newspaper publishing and television broadcasting divisions.
DIVISION RESULTS
Education Division. Education division revenue in 2010 increased to $2,862.3 million, an 11% increase from $2,576.2 million in 2009. Kaplan reported operating income of $346.7 million for 2010, compared to $227.3 million in 2009.
A summary of Kaplan’s operating results for 2010 compared to 2009 is as follows:
(in millions)
% Change
Revenue
Higher education
$
1,905,038
$
1,653,276
Test preparation, excluding Score
314,879
328,231
(4)
Score
-
8,557
-
Kaplan international
585,924
537,238
Kaplan ventures
59,296
57,210
Kaplan corporate
5,537
2,436
-
Intersegment elimination
(8,395)
(10,786)
-
$
2,862,279
$
2,576,162
Operating Income (Loss)
Higher education
$
406,880
$
284,357
Test preparation, excluding Score
(32,583)
18,758
-
Score
-
(36,787)
-
Kaplan international
56,152
53,772
Kaplan ventures
(17,490)
(9,286)
Kaplan corporate
(44,586)
(62,652)
(29)
Amortization of intangible assets
(21,406)
(21,191)
Intersegment elimination
(234)
-
$
346,733
$
227,281
Kaplan sold KCS in October 2011, KVE in July 2011 and Education Connection in April 2010. Consequently, the education division’s operating results exclude these businesses.
KHE includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the Kaplan University School of Professional and Continuing Education. KHE revenue and operating income grew in 2010 due to enrollment growth, improved student retention and increased margins during most of 2010. KHE also benefited from improved results at the Kaplan University School of Professional and Continuing Education, primarily due to expense reductions; total restructuring-related expenses of $8.3 million were recorded in 2009. The increased operating results were offset by a $9.3 million charge for severance costs associated with a workforce reduction, increased regulatory compliance costs and the implementation of the Kaplan Commitment program (discussed below).
During the fourth quarter of 2010, KHE phased in a new program, the Kaplan Commitment. Under this program, new students enroll in classes for several weeks and assess whether their educational experience meets their needs and expectations before incurring any significant financial obligation. Kaplan also conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who choose to withdraw from the program during this time frame (“risk-free period”) and students who do not pass the academic evaluation do not have to pay for the coursework. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for associate’s and bachelor’s degrees. Based on historical student withdrawal and performance patterns and assuming students who withdrew during early academic terms would have instead availed themselves of the Kaplan Commitment, management estimates that KHE revenues would have been approximately $140.0 million less in 2010 had the Kaplan Commitment commenced on January 1, 2010. For those first-time students enrolled to date under the Kaplan Commitment program, the attrition rate during the entire risk-free period has been approximately 28%, a majority of which is due to Kaplan’s dismissal of students from the program because of the students’ lack of academic progress during the period.
Student enrollments at December 31, 2010, excluding the Kaplan University School of Professional and Continuing Education, were down 8% compared to December 31, 2009, as follows:
As of December 31,
% Change
Kaplan University
65,643
67,794
(3)
KHE Campuses
31,058
37,093
(16)
96,701
104,887
(8)
In response to newly enacted and proposed regulations, KHE has proactively implemented a number of marketing and admission changes, the effect of which raises student selectivity. New student enrollments at KHE declined 47% in the fourth quarter of 2010 compared to the same period of 2009, mostly due to these marketing and admission changes,
along with overall weaker demand. New student enrollments were also adversely impacted by the number of students who did not continue beyond the risk-free period.
Kaplan University and KHE Campuses enrollments at December 31, 2010, and December 31, 2009, by degree and certificate programs are as follows:
As of December 31,
Certificate
23.6
%
27.6
%
Associate’s
33.8
%
33.0
%
Bachelor’s
35.1
%
34.7
%
Master’s
7.5
%
4.7
%
100.0
%
100.0
%
KTP includes Kaplan’s standardized test preparation and tutoring offerings and other businesses. In the first quarter of 2010, the Company discontinued certain offerings of the K12 business; $7.8 million in severance, asset write-offs and other closure costs were recorded in connection with this plan. In the fourth quarter of 2009, a $4.6 million charge was recorded for product development and other write-downs at the K12 business. In the fourth quarter of 2010, KTP announced a plan to reorganize its business consistent with the migration of students to Kaplan’s online and hybrid test preparation offerings. In conjunction with this plan, in the fourth quarter of 2010, KTP began to reduce the number of leased test preparation centers and incurred $10.4 million in costs, mostly comprised of charges related to early lease termination and property, plant and equipment write-downs. The plan is expected to be largely completed by the end of 2011.
KTP revenue declined 4% in 2010; excluding acquisitions, KTP revenue declined 9%, due mostly to the termination of certain K12 offerings. Revenue at the traditional test preparation programs in 2010 was essentially flat. Strong enrollment increases, particularly in the pre-college and nursing programs, were offset by reduced prices for many programs related to increased competition and increased demand for lower priced online test preparation offerings.
KTP operating results were down in 2010 due to the termination of certain K12 offerings and $7.8 million in related closure costs in 2010, reduced prices at the traditional test preparation programs and higher spending to expand online offerings and innovate various programs, as well as $10.4 million in 2010 restructuring-related charges. KTP operating results in 2009 were also adversely affected by a $4.6 million charge at the K12 business for product development and other write-downs.
In March 2009, the Company approved a plan to close its Score tutoring centers. The Company recorded charges of $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009.
Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. Kaplan International revenue increased 9% in 2010 and operating income rose 4% due to enrollment growth in the pathways and other higher education programs in the U.K. and Singapore. The rise in revenue is also due to increased English-language program revenue and favorable exchange rates in Australia and Singapore.
Kaplan Ventures is made up of a number of businesses in various stages of development that are managed separately from the other education businesses. Revenue at Kaplan Ventures increased 4% in 2010. Kaplan Ventures reported operating losses of $17.5 million in 2010, compared to operating losses of $9.3 million in 2009. The decline in results for 2010 is due to increased investment in certain developing business units. A goodwill impairment charge of $8.5 million was recorded at Kaplan in the third quarter of 2009 related to one of Kaplan Ventures’ businesses, as the book value of this business exceeded its estimated fair value.
Corporate represents unallocated expenses of Kaplan, Inc.’s corporate office and other minor shared activities. Corporate expenses declined in 2010, due largely to the reversal of incentive compensation accruals.
Cable Television Division. Cable television division revenue of $759.9 million for 2010 represents a 1% increase from $750.4 million in 2009 due to continued growth of the division’s cable modem and telephone revenues.
Cable television division operating income in 2010 decreased to $163.9 million, from $169.1 million in 2009. The cable television division’s operating results in 2009 included a $7.7 million gain arising from changes to the cable television
division retiree health care benefits program. Excluding this gain, the cable television division’s operating income in 2010 increased due to the division’s revenue growth, offset by increased technical and sales costs. Operating margin at the cable television division was 22% in 2010 and 23% in 2009.
At December 31, 2010, Primary Service Units (PSUs) were up 5% from the prior year due to growth in high-speed data and telephony subscribers, offset by a decrease in basic video subscribers. A summary of PSUs is as follows:
As of December 31,
Basic video
648,413
668,986
High-speed data
425,402
392,832
Telephony
153,044
109,619
Total
1,226,859
1,171,437
PSUs include about 6,300 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by various franchise agreements.
Below are details of the cable television division’s capital expenditures for 2010 and 2009 in the NCTA Standard Reporting Categories:
(in thousands)
Customer Premise Equipment
$
22,413
$
24,131
Commercial
1,338
-
Scaleable Infrastructure
50,458
23,938
Line Extensions
7,118
10,104
Upgrade/Rebuild
7,192
8,581
Support Capital
21,059
17,273
Total
$
109,578
$
84,027
Newspaper Publishing Division. For most of the newspaper publishing division's print publications, operating results in 2010 included 52 weeks, compared to 53 weeks in 2009. Newspaper publishing division revenue in 2010 increased slightly to $680.4 million, from $679.3 million in 2009. Print advertising revenue at the Post in 2010 declined 6% to $297.9 million, from $317.0 million in 2009. The print revenue declines in 2010 are due to reductions in general, classified and retail advertising, along with one less week in 2010 versus 2009. Revenue generated by the Company's newspaper online publishing activities, primarily washingtonpost.com and Slate, increased 14% to $114.8 million, from $100.4 million in 2009. Display online advertising revenue grew 18% in 2010, and online classified advertising revenue on washingtonpost.com increased slightly in 2010. Daily circulation at the Post declined 7.5%, and Sunday circulation declined 8.2% in 2010. For 2010, average daily circulation at the Post totaled 550,900 (unaudited), and average Sunday circulation totaled 763,100 (unaudited).
As previously disclosed, the Post contributes to multiemployer plans on behalf of three union-represented employee groups. The Post has negotiated in collective bargaining the contractual right to withdraw from two of these plans; the right to withdraw from the CWA-ITU Negotiated Pension Plan (CWA-ITU Plan) was the subject of contract negotiations that reached an impasse. In July 2010, the Post notified the union and the CWA- ITU Plan of its unilateral withdrawal from the Plan, effective November 30, 2010. In connection with this action, the Post recorded a $20.4 million charge based on an estimate of the withdrawal liability.
As previously reported, the Post recorded early retirement program expense of $56.8 million in the second quarter of 2009, and Robinson Terminal Warehouse Corporation recorded early retirement program expense of $1.1 million in the third quarter of 2009. The costs of these early retirement programs are funded mostly from the assets of the Company's pension plans. Also as previously reported, the Post closed a printing plant in July 2009 and consolidated its printing operations. The Post also completed the consolidation of certain other operations in Washington, DC, in the first quarter of 2010. In connection with these activities, accelerated depreciation of $33.8 million was recorded in 2009, along with $3.9 million in shutdown costs and lease losses. An additional $3.1 million loss on an office lease was recorded by the Company in the first quarter of 2010.
The newspaper publishing division reported an operating loss of $9.8 million in 2010, compared to an operating loss of $163.5 million in 2009. Excluding the multiemployer pension plan charge, early retirement program expense and accelerated depreciation, operating results improved in 2010 due to expense reductions in payroll, newsprint, depreciation, bad debt and agency fees, and expense reductions at washingtonpost.com. Newsprint expense decreased 16% in 2010 due to a decline in newsprint consumption, offset by an increase in newsprint prices.
Television Broadcasting Division. Revenue for the television broadcasting division increased 25% to $342.2 million in 2010, from $272.7 million in 2009. Television broadcasting division operating income for 2010 increased 72% to $121.3 million, from $70.5 million in 2009.
The increase in revenue and operating income is due to improved advertising demand in all markets and most product categories, particularly automotive. The increased revenue and operating income also includes $4.7 million in incremental winter Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2010, and a $32.2 million increase in political advertising revenue for 2010. Operating margin at the television broadcasting division was 35% in 2010 and 26% in 2009.
Competitive market position remained strong for the Company’s television stations. KSAT in San Antonio, WPLG in Miami and WJXT in Jacksonville ranked number one in the November 2010 ratings period, Monday through Friday, sign-on to sign-off; WDIV in Detroit and WKMG in Orlando ranked second; and KPRC in Houston ranked third.
Other Businesses. Other businesses includes the operating results of Avenue100 Media Solutions, the Company’s digital marketing business that sources leads for academic institutions and recruiting organizations, and other small businesses. In the third quarter of 2010, a goodwill and other intangible assets impairment charge of $27.5 million was recorded at Avenue100 Media Solutions.
Corporate Office. Corporate office includes the expenses of the Company’s corporate office and the pension credit previously reported in the magazine publishing division (refer to Discontinued Operations discussion below). In the fourth quarter of 2010, certain Kaplan operations moved to the former Newsweek headquarters facility. In connection with this move, $11.5 million in lease termination and other charges were recorded by the corporate office.
Equity in Losses of Affiliates. The Company holds a 49% interest in Bowater Mersey Paper Company, a 16.5% interest in Classified Ventures, LLC and interests in several other affiliates. The Company’s equity in losses of affiliates for 2010 was $4.1 million, compared to $29.4 million in losses for 2009. Results for 2009 included $29.0 million in write-downs at two of the Company’s affiliate investments; most of the loss related to an impairment charge recorded on the Company’s interest in Bowater Mersey Paper Company as a result of the challenging economic environment for newsprint producers in 2009.
Other Non-Operating Income (Expense). The Company recorded other non-operating income, net, of $7.5 million in 2010, compared to other non-operating income, net, of $13.2 million in 2009. The 2010 non-operating income, net, included $6.7 million in unrealized foreign currency gains and other items. The 2009 non-operating income, net, included $16.9 million in unrealized foreign currency gains, offset by $3.8 million in impairment write-downs on cost method investments and other items. As noted above, a large part of the Company's non-operating income (expense) is from unrealized foreign currency gains or losses arising from the translation of British pound and Australian dollar denominated intercompany loans into U.S. dollars.
A summary of non-operating income (expense) for the years ended January 2, 2011 and January 3, 2010, is as follows:
(in thousands)
Foreign currency gains, net
$
6,705
$
16,871
Impairment write-downs on cost method investments
-
(3,800)
Other, net
Total
$
7,515
$
13,197
Net Interest Expense. The Company incurred net interest expense of $27.9 million in 2010, compared to $29.0 million in 2009. At January 2, 2011, the Company had $399.7 million in borrowings outstanding at an average interest rate of 7.2%; at January 3, 2010, the Company had $399.3 million in borrowings outstanding at an average interest rate of 7.2%.
Income Taxes. The effective tax rate for income from continuing operations in 2010 was 40.5%. This effective tax rate was adversely impacted by $16.8 million in valuation allowances provided against deferred income tax benefits where realization is doubtful, and $9.1 million from nondeductible goodwill in connection with an impairment charge recorded in the third quarter of 2010; these items were offset by permanent U.S. Federal tax benefit items and tax benefits from lower rates at jurisdictions outside the United States.
The effective tax rate for income from continuing operations in 2009 was 36.3%. This effective rate in 2009 was adversely impacted by $7.4 million in valuation allowances provided against deferred income tax benefits where realization is doubtful, and $3.3 million from nondeductible goodwill in connection with impairment charges recorded in 2009; these
items were offset by favorable adjustments recorded for a reduction in state income taxes and for prior-year permanent U.S. Federal tax deductions.
Discontinued Operations. In connection with the 2011 sales of KCS and KVE and the 2010 sales of Newsweek and Education Connection, the Company’s income from continuing operations for 2010 and 2009 excludes these businesses, which have been reclassified to discontinued operations, net of tax.
Under the terms of the Newsweek sale agreement in 2010, The Washington Post Company retained the pension assets and liabilities, certain employee obligations arising prior to the sale and other items. A loss of $11.5 million from the Newsweek sale is included in discontinued operations. Newsweek employees were participants in The Washington Post Company Retirement Plan, and Newsweek was historically allocated a net pension credit. Since this net pension credit will be included in income from continuing operations in the future, it has been excluded from the reclassification of Newsweek results to discontinued operations. The pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.
FINANCIAL CONDITION: CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and Dispositions. The Company completed business acquisitions totaling approximately $136.5 million, $14.1 million and $26.1 million, in 2011, 2010 and 2009, respectively. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition.
During 2011, the Company completed five business acquisitions totaling approximately $136.5 million, including assumed debt of $5.5 million and other assumed liabilities. Kaplan acquired three businesses in its Kaplan International division, one business in its KHE division, and one business in its Kaplan Ventures division. These included the May 2011 acquisitions of Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia, and the June 2011 acquisition of Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain. The purchase price allocations mostly comprised goodwill, other intangible assets, and property, plant and equipment.
Kaplan completed the sales of KVE in July 2011 and KCS in October 2011, which were part of Kaplan Ventures and KHE, respectively. In April 2010, Kaplan completed the sale of Education Connection, which was part of Kaplan Ventures. Consequently, the Company’s income from continuing operations excludes results from these businesses, which have been reclassified to discontinued operations.
During 2010, the Company acquired six businesses for $14.1 million. Kaplan acquired two small businesses in its KTP division, one small business in its Ventures division and one small business in its International division. The Company made two small acquisitions in its cable television and other businesses divisions. The purchase price allocations for these acquisitions mostly comprised goodwill and other intangible assets.
In September 2010, the Company completed the sale of Newsweek. In December 2009, the Company completed the sale of Newsweek’s Budget Travel. Consequently, the Company’s income from continuing operations excludes magazine publishing division results, which have been reclassified to discontinued operations.
During 2009, the Company acquired three businesses for $26.1 million. Kaplan acquired one business in each of its International and KTP divisions, and the newspaper publishing division acquired a small publication. The purchase price allocations for these acquisitions mostly comprised goodwill and other intangible assets. Also in 2009, the Company recorded $3.2 million of additional purchase consideration in connection with the achievement of certain operating results by a company acquired in 2007 and allocated the additional purchase consideration to goodwill.
Capital expenditures. During 2011, the Company’s capital expenditures totaled $216.4 million. The Company’s capital expenditures for businesses included in continuing operations for 2011, 2010 and 2009 are disclosed in Note 18 to the Consolidated Financial Statements. The Company estimates that its capital expenditures will be in the range of $220 million to $245 million in 2012.
Investments in Marketable Equity Securities. At December 31, 2011, the fair value of the Company’s investments in marketable equity securities was $303.2 million, which includes $286.4 million in Berkshire Hathaway Inc. Class A and B common stock and $16.8 million in the common stock of Corinthian Colleges, Inc., a publicly traded education company.
At December 31, 2011, and January 2, 2011, the gross unrealized gain related to the Company’s Berkshire stock investment totaled $129.1 million and $143.4 million, respectively. During 2009, the Company invested $10.8 million in the Class B common stock of Berkshire.
At the end of the first quarter of 2011, the Company’s investment in Corinthian Colleges, Inc. had been in an unrealized loss position for over six months. The Company evaluated this investment for other-than-temporary impairment based on various factors, including the duration and severity of the unrealized loss, the reason for the decline in value and the potential recovery period, and the Company’s ability and intent to hold the investment. In the first quarter of 2011, the Company concluded the loss was other-than-temporary and recorded a $30.7 million write-down on the investment. The investment continued to decline, and in the third quarter of 2011, the Company recorded an additional $23.1 million write-down on the investment. The Company’s investment in Corinthian Colleges, Inc. accounted for $16.8 million of the total fair value of the Company’s investments in marketable equity securities at December 31, 2011.
Common Stock Repurchases and Dividend Rate. During 2011, 2010 and 2009, the Company purchased a total of 644,948, 1,057,940 and 145,040 shares, respectively, of its Class B common stock at a cost of approximately $248.1 million, $404.8 million and $61.0 million, respectively. In September 2011, the Company’s Board of Directors authorized the Company to acquire up to 750,000 shares of its Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 43,573 shares that remained under the previous authorization. At December 31, 2011, the Company had remaining authorization from the Board of Directors to purchase up to 493,474 shares of Class B common stock. The annual dividend rate for 2012 was increased to $9.80 per share, from $9.40 per share in 2011 and $9.00 per share in 2010.
Liquidity. During 2011, the Company’s borrowings, net of repayments, increased by $165.6 million and the Company’s cash and cash equivalents decreased by $56.6 million.
At December 31, 2011, the Company has $381.1 million in cash and cash equivalents, compared to $437.7 million at January 2, 2011. As of December 31, 2011, and January 2, 2011, the Company had money market investments of $180.1 million and $308.9 million, respectively, that are classified as cash, cash equivalents and restricted cash in the Company’s Consolidated Financial Statements. At December 31, 2011, the Company has approximately $18.0 million in cash and cash equivalents in countries outside the U.S. which is not immediately available for use in operations or for distribution.
On June 17, 2011, the Company terminated its U.S. $500 million five-year revolving credit agreement, dated as of August 8, 2006, among the Company, the lenders party thereto and Citibank, N.A. (the 2006 Credit Agreement), in connection with the entrance into a new revolving credit facility. No borrowings were outstanding under the 2006 Credit Agreement at the time of termination. On June 17, 2011, the Company entered into a credit agreement (the Credit Agreement) providing for a new U.S. $450 million, AUD 50 million four-year revolving credit facility (the Facility), with each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (JP Morgan), and J.P. Morgan Australia Limited, as Australian Sub-Agent. This agreement supports the issuance of the Company’s commercial paper, but the Company may also draw on the facility for general corporate purposes. The Credit Agreement provides for an option to increase the total U.S. dollar commitments up to an aggregate amount of U.S. $700 million. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term.
On September 7, 2011, the Company borrowed AUD 50 million under its revolving credit facility. On the same date, the Company entered into interest rate swap agreements with a total notional value of AUD 50 million and a maturity date of March 7, 2015. These interest rate swap agreements will pay the Company variable interest on the AUD 50 million notional amount at the three-month bank bill rate, and the Company will pay the counterparties a fixed rate of 4.5275%. These interest rate swap agreements were entered into to convert the variable rate Australian dollar borrowing under the revolving credit facility into a fixed rate borrowing. Based on the terms of the interest rate swap agreements and the underlying borrowing, these interest rate swap agreements were determined to be effective, and thus qualify as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps are recorded in other comprehensive income on the accompanying condensed consolidated balance sheets until earnings are affected by the variability of cash flows.
At December 31, 2011, and January 2, 2011, the Company had borrowings outstanding of $565.2 million and $399.7 million, respectively. The Company’s borrowings at December 31, 2011 are mostly from $400.0 million of 7.25% unsecured notes due February 1, 2019, $109.7 million in commercial paper borrowings and AUD 50 million under the Company’s revolving credit facility due March 7, 2015; the interest on $400.0 million of 7.25% unsecured notes is payable semiannually on February 1 and August 1. There were no commercial paper borrowings outstanding at January 2, 2011.
In May 2011, Standard & Poor’s placed the Company’s long-term corporate credit and senior unsecured ratings and short-term commercial paper rating on CreditWatch with negative implications. In August 2011, Standard & Poor’s lowered the Company’s long-term rating to “A-” from “A,” lowered the commercial paper rating to “A-2” from “A-1” and kept the ratings outlook at negative. In November 2011, Standard & Poor’s lowered the Company’s long-term corporate debt rating from “A-” to “BBB+” and changed the outlook from Negative to Stable. Standard & Poor’s kept the short-term rating unchanged at “A-2.” In September 2011, Moody’s placed the Company’s long-term debt rating and commercial paper rating on review for possible downgrade. In November 2011, Moody’s downgraded the Company’s senior unsecured rating from “A2” to “A3” and the commercial paper rating from “Prime-1” to “Prime-2.” The outlook was changed from Rating Under Review to Negative. The Company’s current credit ratings are as follows:
Standard
Moody’s
& Poor’s
Long-term
A3
BBB+
Short-term
Prime-2
A-2
During 2011 and 2010, the Company had average borrowings outstanding of approximately $426.7 million and $399.5 million, respectively, at average annual interest rates of approximately 7.0% and 7.2%, respectively. The Company incurred net interest expense of $29.1 million and $27.9 million, respectively, during 2011 and 2010.
At December 31, 2011 and January 2, 2011, the Company had working capital of $250.1 million and $353.6 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments.
The Company’s net cash provided by operating activities, as reported in the Company’s Consolidated Statements of Cash Flows, was $393.3 million in 2011, compared to $693.7 million in 2010.
The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds and, to a lesser extent, commercial paper. In management’s opinion, the Company will have ample liquidity to meet its various cash needs in 2012.
The following reflects a summary of the Company’s contractual obligations as of December 31, 2011:
(in thousands)
Thereafter
Total
Debt and interest
$
144,733
$
31,750
$
31,750
$
81,750
$
29,000
$
472,500
$
791,483
Programming purchase
commitments (1)
213,876
191,621
114,210
17,814
1,286
539,188
Operating leases
135,911
116,435
99,335
78,955
69,597
243,736
743,969
Other purchase obligations (2)
182,948
73,371
43,965
11,572
6,059
2,943
320,858
Long-term liabilities (3)
5,906
6,238
6,513
6,830
7,162
67,377
100,026
Total
$
683,374
$
419,415
$
295,773
$
196,921
$
113,104
$
786,937
$
2,495,524
______________________________________________________________________________
(1) Includes commitments for the Company’s television broadcasting and cable television businesses that are reflected in the Company’s Consolidated Financial Statements and commitments to purchase programming to be produced in future years.
(2) Includes purchase obligations related to newsprint contracts, printing contracts, employment agreements, circulation distribution agreements, capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the table above. Any amounts for which the Company is liable under purchase orders are reflected in the Company’s Consolidated Balance Sheets as accounts payable and accrued liabilities.
(3) Primarily made up of postretirement benefit obligations other than pensions. The Company has other long-term liabilities excluded from the table above, including obligations for deferred compensation, long-term incentive plans and long-term deferred revenue.
Other. The Company does not have any off-balance-sheet arrangements or financing activities with special-purpose entities (SPEs). Transactions with related parties, as discussed in Note 4 to the Company’s Consolidated Financial Statements, are in the ordinary course of business and are conducted on an arm’s-length basis.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the amounts reported in the financial statements. On an ongoing basis, the Company evaluates its estimates and assumptions. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
An accounting policy is considered to be critical if it is important to the Company’s financial condition and results and if it requires management’s most difficult, subjective and complex judgments in its application. For a summary of all of the Company’s significant accounting policies, see Note 2 to the Company’s Consolidated Financial Statements.
Revenue Recognition, Trade Accounts Receivable, Sales Returns and Allowance for Doubtful Accounts. Education tuition revenue is recognized ratably over the period of instruction as services are delivered to students, net of any refunds, corporate discounts, scholarships and employee tuition discounts.
Starting in the fourth quarter of 2010, KHE implemented the Kaplan Commitment program, which provides first-time students with a risk-free trial period. Under the program, KHE also monitors academic progress and conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who withdraw or are subject to academic dismissal during the risk-free trial period do not incur any significant financial obligation. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for associate’s, bachelor’s and master’s degrees. The Company does not recognize revenues related to coursework until the students complete the risk-free period, meet the academic requirements and decide to continue with their studies, at which time the fees become fixed and determinable.
At KTP and Kaplan International, estimates of average student course length are developed for each course, along with estimates for the anticipated level of student drops and refunds from test performance guarantees, and these estimates are evaluated on an ongoing basis and adjusted as necessary. As Kaplan’s businesses and related course offerings have changed, including more online programs, the complexity and significance of management’s estimates have increased.
Revenue from media advertising is recognized, net of agency commissions, when the underlying advertisement is published or broadcast. Revenues from newspaper subscriptions and retail sales are recognized upon the later of delivery or publication date, with adequate provision made for anticipated sales returns. The Company records, as a reduction of revenue, the estimated impact of such returns. The Company bases its estimates for sales returns on historical experience and has not experienced significant fluctuations between estimated and actual return activity.
Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical trends and management’s evaluation of the financial condition of the customer. Accounts receivable also have been reduced by an estimate of advertising rate adjustments and discounts, based on estimates of advertising volumes for contract customers who are eligible for advertising rate adjustments and discounts.
Goodwill and Other Intangible Assets. The Company has a significant amount of goodwill and indefinite-lived intangible assets that are reviewed at least annually for possible impairment.
December 31,
January 2,
(in millions)
Goodwill and indefinite-lived intangible assets
$
1,945.6
$
1,907.2
Total assets
$
5,017.0
$
5,158.4
Percentage of goodwill and indefinite-lived intangible assets to total assets
39%
37%
The Company performs its annual goodwill and intangible assets impairment test as of November 30. Goodwill and other intangible assets are reviewed for possible impairment between annual tests if an event occurred or circumstances changed that would more likely than not reduce the fair value of the reporting unit or other intangible assets below its carrying value.
Goodwill
The Company tests its goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. In the fourth quarter of 2011, the Company adopted new accounting guidance that allows for an initial assessment of qualitative factors to determine if it is necessary to perform the two-step goodwill impairment test. The Company tests goodwill for impairment using the two-step process if, based on its assessment of the qualitative factors, it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if it decides to bypass the qualitative assessment. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. This step is performed to identify potential impairment, which occurs when the carrying amount of the reporting unit exceeds its estimated fair value. The second step of the goodwill impairment test is only performed when there is a potential impairment and is performed to measure the amount of impairment loss at the reporting unit. During the second step, the Company allocates the estimated fair
value of the reporting unit to all of the assets and liabilities of the unit (including any unrecognized intangible assets). The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The amount of the goodwill impairment is the difference between the carrying value of the reporting unit’s goodwill and the implied fair value determined during the second step.
In the third quarter of 2011, as a result of continued challenges facing the lead generation industry, the Company performed an interim review of the carrying value of goodwill and other intangible assets at its online lead generation business for possible impairment. The Company used a discounted cash flow model to determine the estimated fair value of the reporting unit. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine the reporting unit’s estimated fair value. The methodology used to estimate the fair value of the Company’s lead generation business reporting unit was consistent with the one used during the Company’s 2010 annual goodwill impairment test.
The key assumptions used by the Company were as follows:
• Expected cash flows underlying the reporting unit’s business plans for the periods 2011 through 2015 were used. The expected cash flows took into account historical growth rates, forecasts and long-term business plans, but also included an estimate for the possible impact of newly enacted for-profit education regulations on the Company’s lead generation business.
• Cash flows beyond 2015 were projected to grow at a long-term growth rate, which the Company estimated by considering historical market growth trends, anticipated reporting unit performance and expected market conditions.
• The Company used a discount rate of 20.5% to risk adjust the cash flow projections in determining the estimated fair value. This took into account the Company’s assessment of the risks inherent in the future cash flows of the reporting unit and the weighted average cost of capital of market participants in businesses similar to the reporting unit.
The online lead generation reporting unit failed step one of the interim goodwill impairment review, and the Company performed a step two analysis. The Company recorded a goodwill impairment charge of $11.9 million related to the reporting unit. Following the impairment, the reporting unit had no goodwill remaining.
The Company had 16 reporting units as of December 31, 2011. The reporting units with significant goodwill balances as of December 31, 2011, were as follows, representing 97% of the total goodwill of the Company:
(in millions)
Goodwill
Education
Higher education
$
409.1
Test preparation
152.2
Kaplan international
515.9
Cable television
85.5
Television broadcasting
203.2
Total
$
1,365.9
As of November 30, 2011, in connection with the Company’s annual impairment testing, the Company assessed the qualitative factors to determine reporting units in which it was necessary to perform the two-step goodwill impairment process. The Company decided to perform the two-step goodwill impairment process at all reporting units with the exception of the television broadcasting reporting unit. The decision was based on a combination of events and circumstances present at the reporting units, including negative financial performance, sustained declines in share price of industry peers, market changes for products and services, regulatory challenges, and the possibility of disposal of some reporting units; and some instances where the Company decided to bypass the qualitative assessment.
The estimated fair value of the television broadcasting reporting unit exceeded its carrying value by a margin in excess of 100% as of November 30, 2010. The Company’s qualitative assessment indicated that it is not more likely than not that the estimated fair value of the reporting unit is less than its carrying amount considering all factors, including the reporting unit’s financial performance and conditions in the television broadcasting industry.
In connection with the Company’s reporting units where the two-step goodwill impairment process was performed, the Company used a discounted cash flow model, and where appropriate, a market value approach was also utilized to supplement the discounted cash flow model to determine the estimated fair value of its reporting units. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. The methodology used to estimate the fair value of the Company’s reporting units on November 30, 2011, was consistent with the one used during the 2010 annual goodwill impairment test. The Company made changes to certain of its assumptions utilized in the discounted cash flow models for 2011 compared
with the prior year due largely to the somewhat improved economic environment, newly enacted for-profit education regulations and their impact on the Company’s businesses. The key assumptions used by the Company were as follows:
• Expected cash flows underlying the Company’s business plans for the periods 2012 through 2016 were used. The expected cash flows took into account historical growth rates, the effect of the improved economic outlook at some of the Company’s businesses, industry challenges, and an estimate for the possible impact of newly enacted for-profit education regulations. Expected cash flows also reflected the anticipated savings from restructuring plans at the newspaper publishing and certain education divisions’ reporting units, and other initiatives.
• Cash flows beyond 2016 were projected to grow at a long-term growth rate, which the Company estimated between 1% and 3% for each reporting unit.
• The Company used a discount rate of 8.0% to 22.5% to risk adjust the cash flow projections in determining the estimated fair value.
The fair value of each of the reporting units exceeded its respective carrying value as of November 30, 2011.
The estimated fair value of the KTP reporting unit exceeded its carrying value by a margin of 15% following a substantial decrease in its estimated fair value compared with the prior year. There exists a reasonable possibility that a decrease in the assumed projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of this reporting unit, could result in an impairment charge.
The estimated fair value of the Company’s other reporting units with significant goodwill balances exceeded their respective carrying values by a margin in excess of 25%. While less likely, additional impairment charges could occur at these reporting units as well, given the inherent variability in projecting future operating performance.
Indefinite-Lived Intangible Assets
The other intangible assets impairment test compares the fair value of the asset with its carrying value. The Company records an impairment loss if the carrying value of the other intangible assets exceeds the fair value of the assets for the difference in the values. The Company uses a discounted cash flow model, and in certain cases, a market value approach is also utilized to supplement the discounted cash flow model to determine the estimated fair value of the indefinite-lived intangible assets. The Company makes estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and other market values to determine the estimated fair value of the indefinite-lived intangible assets.
The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable television division. These franchise agreements result from agreements the Company has with state and local governments that allow the Company to contract and operate a cable business within a specified geographic area. The Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable television division historically has obtained renewals and extensions of such agreements for nominal costs and without material modifications to the agreements. The franchise agreements represent 94% of the $530.6 million of indefinite-lived intangible assets of the Company as of December 31, 2011. The Company grouped the recorded values of its various cable franchise agreements into regional cable television systems or units of account.
The key assumptions used by the Company to determine the fair value of its franchise agreements as of November 30, 2011, the date of its annual impairment review, were as follows:
• Expected cash flows underlying the Company’s business plans for the periods 2012 through 2021 were used, with the assumption that the only assets the unbuilt start-up cable television systems possess are the various franchise agreements. The expected cash flows took into account the estimated initial capital investment in the system region’s physical plant and related start-up costs, revenues, operating margins and growth rates. These cash flows and growth rates were based on forecasts and long-term business plans and take into account numerous factors, including historical experience, anticipated economic conditions, changes in the cable television systems’ cost structures, homes in each region’s service area, number of subscribers based on penetration of homes passed by the systems and expected revenues per subscriber.
• Cash flows beyond 2021 were projected to grow at a long-term growth rate, which the Company estimated by considering historical market growth trends, anticipated cable television system performance and expected market conditions.
• The Company used a discount rate of 8% to risk adjust the cash flow projections in determining the estimated fair value.
The estimated fair value of the Company’s franchise agreements exceeded their respective carrying values by a margin in excess of 50%. There is always a possibility that impairment charges could occur in the future, given changes in the cable television market and U.S. economic environment, as well as the inherent variability in projecting future operating performance.
Pension Costs. The Company sponsors a defined benefit pension plan for eligible employees in the U.S. Excluding special termination benefits, the Company’s net pension credit was $4.7 million, $3.9 million and $8.1 million for 2011, 2010 and 2009, respectively. The Company’s pension benefit obligation and related costs are actuarially determined and are impacted significantly by the Company’s assumptions related to future events, including the discount rate, expected return on plan assets and rate of compensation increases. The Company evaluates these critical assumptions at least annually, and periodically evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover, and updates them to reflect its experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
The Company assumed a 6.5% expected return on plan assets for fiscal year 2011, which is consistent with the expected return assumption for fiscal years 2010 and 2009. The Company’s actual return on plan assets was 14.7% in 2011, 20.3% in 2010 and 16.2% in 2009. The 10-year and 20-year actual returns on plan assets were 6.4% and 10.9%, respectively.
Accumulated and projected benefit obligations are measured as the present value of future cash payments. The Company discounts those cash payments using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and decrease subsequent-year pension credits; higher discount rates decrease present values and increase subsequent-year pension credits. The Company’s discount rate at December 31, 2011, January 2, 2011 and January 3, 2010, was 4.7%, 5.6%, and 6.0%, respectively, reflecting market interest rates.
Changes in key assumptions for the Company’s pension plan would have the following effects on the 2011 pension credit:
• Expected return on assets - Each 1% increase or decrease to the Company’s assumed expected return on plan assets would increase or decrease the pension credit by approximately $15 million.
• Discount rate - Each 1% increase or decrease to the Company’s assumed discount rate would increase or decrease the pension credit by approximately $5 million.
The Company’s net pension (credit) cost includes an expected return on plan assets component, calculated using the expected return on plan assets assumption applied to a market-related value of plan assets. The market-related value of plan assets is determined using a five-year average market value method, which recognizes realized and unrealized appreciation and depreciation in market values over a five-year period. The value resulting from applying this method is adjusted, if necessary, such that it cannot be less than 80% or more than 120% of the market value of plan assets as of the relevant measurement date. As a result, year-to-year increases or decreases in the market-related value of plan assets impact the return on plan assets component of pension (credit) cost for the year.
At the end of each year, differences between the actual return on plan assets and the expected return on plan assets are combined with other differences in actual versus expected experience to form a net unamortized actuarial gain or loss in accumulated other comprehensive income. Only those net actuarial gains or losses in excess of the deferred realized and unrealized appreciation and depreciation are potentially subject to amortization. The types of items that generate actuarial gains and losses that may be subject to amortization in net periodic pension (credit) cost include the following:
• Asset returns that are more or less than the expected return on plan assets for the year;
• Actual participant demographic experience different from assumed (retirements, terminations and deaths during the year);
• Actual salary increases different from assumed; and
• Any changes in assumptions that are made to better reflect anticipated experience of the plan or to reflect current market conditions on the measurement date (discount rate, longevity increases, changes in expected participant behavior and expected return on plan assets).
Amortization of the unrecognized actuarial gain or loss is included as a component of expense for a year if the magnitude of the net unamortized gain or loss in accumulated other comprehensive income exceeds 10% of the greater of the benefit obligation or the market-related value of assets (10% corridor). The amortization component is equal to that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. At the end of 2008, the Company had net unamortized actuarial losses in accumulated other comprehensive income potentially subject to amortization that were outside the 10% corridor that resulted in amortized losses of $40,000 being
included in the 2009 pension cost. During 2009, there were pension asset gains that resulted in no net unamortized actuarial gains or losses in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain or loss amounts were included in the pension cost in 2010. During 2010, there were pension asset gains offset by a decrease in the discount rate that resulted in no net unamortized actuarial gains or losses in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain or loss amounts were included in the pension credit in 2011.
During 2011, there were pension asset gains and a further decrease in the discount rate. Primarily as a result of the decrease in the discount rate, the Company currently estimates that there will be net unamortized actuarial losses in accumulated other comprehensive income subject to amortization outside the corridor, and therefore, an amortized loss amount of $6.0 million is included in the estimated pension expense for 2012.
Overall, the Company estimates that it will record a net pension expense of approximately $9.0 million in 2012.
Note 13 to the Company’s Consolidated Financial Statements provides additional details surrounding pension costs and related assumptions.
Income Tax Valuation Allowances. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of assets and liabilities. In evaluating its ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about forecasts of future taxable income.
As of December 31, 2011, the Company had state income tax net operating loss carryforwards of $669 million, which will expire at various dates from 2012 through 2031. Also at December 31, 2011, the Company had approximately $53.9 million of non-U.S. income tax loss carryforwards, of which $46.9 million may be carried forward indefinitely; $2.7 million of losses that, if unutilized, will expire in varying amounts through 2015; and $4.3 million of losses that, if unutilized, will start to expire after 2016. At December 31, 2011, the Company has established approximately $59.2 million in valuation allowances against deferred state and non-U.S. income taxes, net of U.S. Federal income taxes, as the Company believes that it is more likely than not that the benefit from certain state and non-U.S. net operating loss carryforwards and other deferred tax assets will not be realized. The Company has established valuation allowances against state income tax benefits recognized, without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing deferred tax benefits recognized since these temporary differences are not likely to reverse in the foreseeable future. The valuation allowances established against state and non-U.S. income tax benefits recorded may increase or decrease within the next 12 months, based on operating results, the market value of investment holdings or business and tax planning strategies; as a result, the Company is unable to estimate the potential tax impact, given the uncertain operating and market environment.
Recent Accounting Pronouncements. See Note 2 to the Company’s Consolidated Financial Statements for a discussion of recent accounting pronouncements.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of The Washington Post Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Management has concluded that, as of December 31, 2011, the Company’s internal control over financial reporting was effective based on these criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of The Washington Post Company:
In our opinion, the consolidated financial statements referred to under Item 15 (1) on page 49 and listed in the index on page 51 present fairly, in all material respects, the financial position of The Washington Post Company and its subsidiaries at December 31, 2011 and January 2, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 29, 2012
THE WASHINGTON POST COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
December 31,
January 2,
January 3,
(in thousands, except per share amounts)
Operating Revenues
Education
$
2,465,048
$
2,862,279
$
2,576,162
Advertising
754,544
833,605
778,158
Circulation and subscriber
856,457
857,290
845,848
Other
138,784
130,867
125,872
4,214,833
4,684,041
4,326,040
Operating Costs and Expenses
Operating
1,973,168
1,931,576
1,879,214
Selling, general and administrative
1,652,052
1,888,954
1,831,716
Depreciation of property, plant and equipment
253,373
246,630
290,609
Amortization of intangible assets
28,359
26,742
25,610
Impairment of goodwill and other intangible assets
11,923
27,477
8,492
3,918,875
4,121,379
4,035,641
Income from Operations
295,958
562,662
290,399
Equity in earnings (losses) of affiliates, net
5,949
(4,133)
(29,421)
Interest income
4,147
2,576
2,597
Interest expense
(33,226)
(30,503)
(31,565)
Other (expense) income, net
(55,200)
7,515
13,197
Income from Continuing Operations Before Income Taxes
217,628
538,117
245,207
Provision for Income Taxes
96,300
218,000
89,000
Income from Continuing Operations
121,328
320,117
156,207
Loss from Discontinued Operations, Net of Tax
(4,171)
(42,097)
(65,007)
Net Income
117,157
278,020
91,200
Net (Income) Loss Attributable to Noncontrolling Interests
(7)
1,574
Net Income Attributable to The Washington Post Company
117,150
278,114
92,774
Redeemable Preferred Stock Dividends
(917)
(922)
(928)
Net Income Attributable to The Washington Post Company Common Stockholders
$
116,233
$
277,192
$
91,846
Amounts Attributable to The Washington Post Company Common Stockholders
Income from continuing operations
$
120,404
$
319,289
$
156,853
Loss from discontinued operations, net of tax
(4,171)
(42,097)
(65,007)
Net income attributable to The Washington Post Company common stockholders
$
116,233
$
277,192
$
91,846
Per Share Information Attributable to The Washington Post Company Common Stockholders
Basic income per common share from continuing operations
$
15.23
$
35.77
$
16.70
Basic loss per common share from discontinued operations
(0.53)
(4.71)
(6.92)
Basic net income per common share
$
14.70
$
31.06
$
9.78
Basic average number of common shares outstanding
7,826
8,869
9,332
Diluted income per common share from continuing operations
$
15.23
$
35.75
$
16.70
Diluted loss per common share from discontinued operations
(0.53)
(4.71)
(6.92)
Diluted net income per common share
$
14.70
$
31.04
$
9.78
Diluted average number of common shares outstanding
7,905
8,931
9,392
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Year Ended
December 31,
January 2,
January 3,
(in thousands)
Net Income
$
117,157
$
278,020
$
91,200
Other Comprehensive (Loss) Income
Foreign currency translation adjustment
(21,375)
10,994
33,550
Change in unrealized (loss) gain on available-for-sale securities
(37,709)
(12,974)
9,742
Pension and other postretirement plan adjustments
(18,395)
126,471
130,492
Cash flow hedge, net change
-
-
Less reclassification adjustment for write-down on available-for-sale security included
in net income
53,794
-
-
(23,671)
124,491
173,784
Income tax benefit (expense) related to other comprehensive (loss) income
6,861
(46,864)
(58,592)
(16,810)
77,627
115,192
Comprehensive Income
100,347
355,647
206,392
Comprehensive (income) loss attributable to noncontrolling interests
(126)
(13)
1,574
Total Comprehensive Income Attributable to The Washington Post Company
$
100,221
$
355,634
$
207,966
See accompanying Notes to Consolidated Financial Statements.
THE WASHINGTON POST COMPANY
CONSOLIDATED BALANCE SHEETS
As of
December 31,
January 2,
(In thousands, except share amounts)
Assets
Current Assets
Cash and cash equivalents
$
381,099
$
437,740
Restricted cash
25,287
31,138
Investments in marketable equity securities and other investments
338,674
373,750
Accounts receivable, net
392,725
397,024
Income taxes receivable
16,990
33,307
Deferred income taxes
13,343
15,318
Inventories
6,571
4,984
Other current assets
70,936
68,637
Total Current Assets
1,245,625
1,361,898
Property, Plant and Equipment, Net
1,152,390
1,200,726
Investments in Affiliates
17,101
31,637
Goodwill, Net
1,414,997
1,376,357
Indefinite-Lived Intangible Assets, Net
530,641
530,816
Amortized Intangible Assets, Net
54,622
61,242
Prepaid Pension Cost
537,262
538,753
Deferred Charges and Other Assets
64,348
56,938
Total Assets
$
5,016,986
$
5,158,367
Liabilities and Equity
Current Liabilities
Accounts payable and accrued liabilities
$
495,041
$
626,188
Deferred revenue
387,532
379,089
Short-term borrowings
112,983
3,000
Total Current Liabilities
995,556
1,008,277
Postretirement Benefits Other Than Pensions
67,864
64,342
Accrued Compensation and Related Benefits
228,304
231,034
Other Liabilities
107,741
119,036
Deferred Income Taxes
545,361
506,405
Long-Term Debt
452,229
396,650
Total Liabilities
2,397,055
2,325,744
Commitments and Contingencies (Notes 15 and 16)
Redeemable Noncontrolling Interest
6,740
6,733
Redeemable Preferred Stock, Series A, $1 par value, with a redemption and liquidation value of
$1,000 per share; 23,000 shares authorized; 11,295 and 11,526 shares issued and outstanding
11,295
11,526
Preferred Stock, $1 par value; 977,000 shares authorized, none issued
-
-
Common Stockholders’ Equity
Common stock
Class A Common stock, $1 par value; 7,000,000 shares authorized; 1,229,383 and 1,240,883
shares issued and outstanding
1,229
1,241
Class B Common stock, $1 par value; 40,000,000 shares authorized; 18,770,617 and
18,759,117 shares issued; 6,361,617 and 6,952,973 shares outstanding
18,771
18,759
Capital in excess of par value
252,767
249,719
Retained earnings
4,561,989
4,520,332
Accumulated other comprehensive income, net of taxes
Cumulative foreign currency translation adjustment
21,338
37,606
Unrealized gain on available-for-sale securities
80,358
70,707
Unrealized gain on pensions and other postretirement plans
63,625
73,826
Cash flow hedge
-
Cost of 12,409,000 and 11,806,144 shares of Class B common stock held in treasury
(2,398,189)
(2,157,826)
Total Equity
2,601,896
2,814,364
Total Liabilities and Equity
$
5,016,986
$
5,158,367
See accompanying Notes to Consolidated Financial Statements.
THE WASHINGTON POST COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
December 31,
January 2,
January 3,
(In thousands)
Cash Flows from Operating Activities
Net income
$
117,157
$
278,020
$
91,200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
255,975
252,457
295,871
Amortization of intangible assets
30,333
27,191
26,642
Goodwill and other long-lived asset impairment charges
11,923
27,477
25,387
Net pension benefit
(4,726)
(3,863)
(8,069)
Multiemployer pension plan withdrawal charge
2,415
20,355
-
Early retirement program expense
-
64,541
Foreign exchange loss (gain)
3,263
(6,705)
(16,871)
Net (gain) loss on sales of businesses
(2,975)
11,824
(2,253)
Loss on write-down of a marketable equity security
53,793
-
-
Equity in (earnings) losses of affiliates, including impairment charges, net of distributions
5,492
4,133
30,072
Provision for deferred income taxes
42,265
37,056
Net loss on sale or write-down of property, plant and equipment and other assets
9,294
15,094
23,524
Change in assets and liabilities:
Decrease in accounts receivable, net
27,895
14,648
55,970
(Increase) decrease in inventories
(1,587)
8,571
24,195
(Decrease) increase in accounts payable and accrued liabilities
(126,771)
40,892
(Decrease) increase in deferred revenue
(9,186)
(10,410)
25,178
Decrease (increase) in Income taxes receivable
16,002
(41,398)
(Increase) decrease in other assets and other liabilities, net
(37,748)
18,251
17,198
Other
(157)
(2,597)
Net cash provided by operating activities
393,291
693,716
651,386
Cash Flows from Investing Activities
Purchases of property, plant and equipment
(216,381)
(243,712)
(257,758)
Investments in certain businesses, net of cash acquired
(83,699)
(13,345)
(26,133)
Net proceeds from sales of businesses, property, plant and equipment and other assets
49,157
39,007
4,788
Purchases of marketable equity securities and other investments
(8,165)
(8,070)
(10,520)
Other
(1,640)
16,248
8,496
Net cash used in investing activities
(260,728)
(209,872)
(281,127)
Cash Flows from Financing Activities
Common shares repurchased
(248,055)
(404,816)
(60,956)
Issuance (repayment) of commercial paper, net
109,671
-
(149,983)
Dividends paid
(75,493)
(82,090)
(81,772)
Issuance of debt
52,476
-
395,225
Principal payments on debt
(1,285)
-
(400,868)
Other
(24,275)
(4,266)
5,079
Net cash used in financing activities
(186,961)
(491,172)
(293,275)
Effect of Currency Exchange Rate Change
(2,243)
2,509
8,573
Net (Decrease) Increase in Cash and Cash Equivalents
(56,641)
(4,819)
85,557
Cash and Cash Equivalents at Beginning of Year
437,740
442,559
357,002
Cash and Cash Equivalents at End of Year
$
381,099
$
437,740
$
442,559
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
$
38,500
$
213,000
$
58,900
Interest
$
32,650
$
30,500
$
26,600
See accompanying Notes to Consolidated Financial Statements.
THE WASHINGTON POST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY
Unrealized
Cumulative
Unrealized
Gain (Loss)
Foreign
Gain (Loss)
on Pensions
Class A
Class B
Capital in
Currency
on Available-
and Other
Cash
Common
Common
Excess of
Retained
Translation
for-Sale
Postretirement
Flow
Treasury
Noncontrolling
(in thousands)
Stock
Stock
Par Value
Earnings
Adjustment
Securities
Plans
Hedge
Stock
Interest
Balance, December 28, 2008
$
1,292
$
18,708
$
232,201
$
4,313,287
$
(3,412)
$
72,646
$
(79,914)
$
-
$
(1,697,268)
$
Net income for the year
91,200
Net loss attributable
to noncontrolling interest
(141)
Net loss attributable to redeemable
noncontrolling interest
1,433
Dividends paid on common stock
(80,844)
Dividends paid on
redeemable preferred stock
(928)
Repurchase of Class B common stock
(60,956)
Issuance of Class B common stock,
net of restricted stock award forfeitures
(7,677)
7,538
Amortization of unearned stock
compensation and stock option expense
9,346
Change in foreign currency translation
adjustment (net of taxes)
30,422
Change in unrealized
gain on available-for-sale
securities (net of taxes)
5,846
Adjustment for pensions and other
postretirement plans (net of taxes)
78,924
Taxes arising from employee stock plans
(1,719)
Other
9,284
(273)
Balance, January 3, 2010
1,292
18,708
241,435
4,324,289
27,010
78,492
(990)
-
(1,750,686)
Net income for the year
278,020
Net income attributable
to noncontrolling interest
(44)
Net loss attributable to redeemable
noncontrolling interest
Dividends paid on common stock
(81,168)
Dividends paid on redeemable
preferred stock
(922)
Repurchase of Class B common stock
(404,816)
Forfeitures of restricted stock, net of
issuance of Class B common stock
(2,324)
Amortization of unearned stock
compensation and stock option expense
8,054
Change in foreign currency translation
adjustment (net of taxes)
10,596
Change in unrealized gain on available-
for-sale securities (net of taxes)
(7,785)
Adjustment for pensions and other
postretirement plans (net of taxes)
74,816
Conversion of Class A common stock
to Class B common stock
(51)
Taxes arising from employee stock plans
(348)
Other
(19)
(515)
Balance, January 2, 2011
1,241
18,759
249,719
4,520,332
37,606
70,707
73,826
-
(2,157,826)
-
Net income for the year
117,157
Net income attributable to redeemable
noncontrolling interest
(7)
Dividends paid on common stock
(74,576)
Dividends paid on redeemable
preferred stock
(917)
Repurchase of Class B common stock
(248,055)
Issuance of Class B common stock,
net of restricted stock award forfeitures
(8,040)
7,692
Amortization of unearned stock
compensation and stock option expense
11,789
Change in foreign currency translation
adjustment (net of tax)
(16,268)
Change in unrealized gain on available-
for-sale securities (net of taxes)
9,651
Adjustment for pensions and other
postretirement plans (net of taxes)
(10,201)
Conversion of Class A common stock
to Class B common stock
(12)
Taxes arising from employee stock plans
(701)
Cash flow hedge
Balance, December 31, 2011
$
1,229
$
18,771
$
252,767
$
4,561,989
$
21,338
$
80,358
$
63,625
$
$
(2,398,189)
$
-
See accompanying Notes to Consolidated Financial Statements.
THE WASHINGTON POST COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
The Washington Post Company, Inc. (the “Company”) is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations consist of the ownership and operation of cable television systems, newspaper publishing (principally The Washington Post), and television broadcasting (through the ownership and operation of six television broadcast stations).
Education-Kaplan, Inc. provides an extensive range of educational services for students and professionals. Kaplan’s various businesses comprise four categories: Higher Education, Test Preparation, Kaplan International and Kaplan Ventures.
Media-The Company’s diversified media operations consist of cable television operations, newspaper publishing and television broadcasting.
Cable television. Cable ONE provides cable services that include basic video, digital video, high-speed data and telephone service in the midwestern, western and southern states of the United States.
Newspaper publishing. Washington Post Media publishes The Washington Post (the Post), which is the largest and most widely circulated morning daily and Sunday newspaper, primarily distributed by home delivery in the Washington, DC, metropolitan area (including large portions of Maryland and northern Virginia). Washington Post Media also produces washingtonpost.com, an Internet site that features news and information products, as well as the full editorial content of the Post. Through the Company’s other newspaper publishing businesses, the Company also publishes weekly publications and tabloids distributed within the Washington, DC, metropolitan area and elsewhere, and produces other websites.
Television broadcasting. The Company owns six VHF television stations located in Houston, TX; Detroit, MI; Miami, FL; Orlando, FL; San Antonio, TX; and Jacksonville, FL. Other than the Company’s Jacksonville station, WJXT, the Company’s television stations are affiliated with one of the major national networks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year-In 2011, the Company changed its fiscal year from a 52 to 53-week fiscal year ending on the Sunday nearest December 31 to a quarterly month end, with the new fiscal year ending on December 31 of each year. Fiscal year 2011, which ended on December 31, 2011, included approximately 52 weeks. The fiscal years 2010 and 2009, which ended on January 2, 2011, and January 3, 2010, respectively, included 52 and 53 weeks, respectively. Subsidiaries of the Company report on a calendar-year basis, with the exception of most of the newspaper publishing operations, which report on a 52 to 53-week fiscal year ending on the Sunday nearest December 31.
Basis of Presentation and Principles of Consolidation-The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States and include the assets, liabilities, results of operations and cash flows of the Company and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications-Certain amounts in previously issued financial statements have been reclassified to conform with the 2011 presentation, which includes the reclassification of the results of operations of certain Kaplan businesses as discontinued operations for all periods presented.
Use of Estimates-The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. On an ongoing basis, the Company evaluates its estimates and assumptions.
Business Combinations-The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity over the net of the amounts assigned to the assets
acquired and liabilities assumed is recognized as goodwill. The net assets and results of operations of an acquired entity are included in the Company’s Consolidated Financial Statements from the acquisition date.
Cash and Cash Equivalents-Cash and cash equivalents consist of cash on hand, short-term investments with original maturities of three months or less and investments in money market funds with weighted average maturities of three months or less.
Restricted Cash-Restricted cash represents amounts held for students that were received from U.S. Federal and state governments under various aid grant and loan programs, such as Title IV of the U.S. Federal Higher Education Act of 1965, as amended, that the Company is required to maintain pursuant to U.S. Department of Education and other regulations. Restricted cash also includes certain funds that the Company may be required to return if a student who receives Title IV program funds withdraws from a program.
Concentration of Credit Risk-Cash and cash equivalents are maintained with several financial institutions domestically and internationally. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with investment grade credit ratings. The Company routinely assesses the financial strength of significant customers, and this assessment, combined with the large number and geographical diversity of its customers, limits the Company’s concentration of risk with respect to trade accounts receivable.
Allowance for Doubtful Accounts-Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical trends and management’s evaluation of the financial condition of the customer. Accounts receivable also have been reduced by an estimate of advertising rate adjustments and discounts, based on estimates of advertising volumes for contract customers who are eligible for advertising rate adjustments and discounts.
Investments in Marketable Equity Securities-The Company’s investments in marketable equity securities are classified as available-for-sale and, therefore, are recorded at fair value in the Consolidated Financial Statements, with the change in fair value during the period excluded from earnings and recorded net of income taxes as a separate component of other comprehensive income. If the fair value of a marketable equity security declines below its cost basis and the decline is considered other than temporary, the Company will record a write-down, which is included in earnings.
Fair Value of Financial Instruments-The carrying amounts reported in the Company’s Consolidated Financial Statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, the current portion of deferred revenue and the current portion of debt approximate fair value because of the short-term nature of these financial instruments. The fair value of long-term debt is determined based on a number of observable inputs, including the current market activity of the Company’s publicly traded notes, trends in investor demands and market values of comparable publicly traded debt. The fair value of the interest rate hedge is determined based on a number of observable inputs, including time to maturity and market interest rates.
Inventories-Inventories are stated at the lower of cost or current market value. Cost of newsprint is determined on the first-in, first-out (FIFO) method.
Property, Plant and Equipment-Property, plant and equipment is recorded at cost and includes interest capitalized in connection with major long-term construction projects. Replacements and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the property, plant and equipment: 3 to 20 years for machinery and equipment, and 20 to 50 years for buildings. The costs of leasehold improvements are amortized over the lesser of their useful lives or the terms of the respective leases.
The cable television division capitalizes costs associated with the construction of cable transmission and distribution facilities and new cable service installations. Costs include all direct labor and materials, as well as certain indirect costs. The cost of subsequent disconnects and reconnects are expensed as they are incurred.
Evaluation of Long-Lived Assets-The recoverability of long-lived assets and finite-lived intangible assets is assessed whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. A long-lived asset is considered to be not recoverable when the undiscounted estimated future cash flows are less than the asset’s recorded value. An impairment charge is measured based on estimated fair market value, determined primarily using estimated future cash flows on a discounted basis. Losses on long-lived assets to be disposed of are determined in a similar manner, but the fair market value would be reduced for estimated costs to dispose.
Goodwill and Other Intangible Assets-Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable television division, as the Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable television division historically has obtained renewals and extensions of such agreements for nominal costs and without any material modifications to the agreements. Amortized intangible assets are primarily student and customer relationships, noncompete agreements, trademarks and databases, with amortization periods up to 10 years.
The Company reviews goodwill and indefinite-lived intangible assets at least annually, as of November 30, for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company tests its goodwill and indefinite-lived intangible assets at the reporting unit level, which is an operating segment or one level below an operating segment. In reviewing the carrying value of indefinite-lived intangible assets at the cable television division, the Company aggregates its cable systems on a regional basis. The Company initially assesses qualitative factors to determine if it is necessary to perform the two-step goodwill impairment review. The Company reviews the goodwill for impairment using the two-step process if, based on its assessment of the qualitative factors, it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if it decides to bypass the qualitative assessment. The Company reviews the carrying value of goodwill and indefinite-lived intangible assets utilizing a discounted cash flow model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges.
Investments in Affiliates-The Company uses the equity method of accounting for its investments in and earnings or losses of affiliates that it does not control, but over which it exerts significant influence. The Company considers whether the fair values of any of its equity method investments have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate’s industry), a write-down would be recorded to estimated fair value.
Cost Method Investments-The Company uses the cost method of accounting for its minority investments in nonpublic companies where it does not have significant influence over the operations and management of the investee. Investments are recorded at the lower of cost or fair value as estimated by management. Charges recorded to write down cost method investments to their estimated fair value and gross realized gains or losses upon the sale of cost method investments are included in other (expense) income, net, in the Company’s Consolidated Financial Statements. Fair value estimates are based on a review of the investees’ product development activities, historical financial results and projected discounted cash flows.
Revenue Recognition-Revenue is recognized when persuasive evidence of an arrangement exists, the fees are fixed or determinable, the product or service has been delivered and collectability is reasonably assured. The Company considers the terms of each arrangement to determine the appropriate accounting treatment.
Education revenues. Tuition revenue is recognized ratably over the period of instruction as services are delivered to students, net of any refunds, corporate discounts, scholarships and employee tuition discounts. At Kaplan’s Test Preparation (KTP) and International divisions, estimates of average student course length are developed for each course, and these estimates are evaluated on an ongoing basis and adjusted as necessary. Online access revenue is recognized ratably over the period of access. Course material revenue is recognized over the same period as the tuition or online access, if related, or when the products are delivered, if not related. Other revenues, such as student support services, are recognized when the services are provided.
Starting in the fourth quarter of 2010, Kaplan Higher Education (KHE) implemented the Kaplan Commitment program, which provides first-time students with a risk-free trial period. Under the program, KHE also monitors academic progress and conducts academic assessments to help determine whether students are likely to be successful in their chosen course of study. Students who withdraw or are subject to academic dismissal during the risk-free trial period do not incur any significant financial obligation. In general, the risk-free period is approximately four weeks for diploma programs and five weeks for associate’s, bachelor’s and master’s degrees. The Company does not recognize revenues related to coursework until the students complete the risk-free period, meet the academic requirements and decide to continue with their studies, at which time the fees become fixed and determinable.
Cable television revenues. Cable television revenues are primarily derived from subscriber fees for video, high-speed Internet and phone services, and from advertising. Cable subscriber revenue is recognized monthly as services are delivered. Advertising revenue is recognized when the commercials or programs are aired.
Newspaper publishing and television broadcasting revenues. Media advertising revenues are recognized, net of agency commissions, when the underlying advertisement is published or broadcast. Revenues from newspaper subscriptions and retail sales are recognized upon the later of delivery or publication date, with adequate provision made for anticipated sales returns.
Sales returns. Consistent with industry practice, certain of the Company’s products, such as newspapers, are sold with the right of return. The Company records, as a reduction of revenue, the estimated impact of such returns. The Company bases its estimates for sales returns on historical experience and has not experienced significant fluctuations between estimated and actual return activity.
Deferred revenue. Amounts received from customers in advance of revenue recognition are deferred as liabilities. Deferred revenue to be earned after one year is included in other liabilities in the Company’s Consolidated Financial Statements.
Leases-The Company leases substantially all of its educational facilities and enters into various other lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease. Additionally, many of the Company’s lease agreements contain renewal options, tenant improvement allowances, rent holidays and/or rent escalation clauses. When such items are included in a lease agreement, the Company records a deferred rent asset or liability in the Consolidated Financial Statements and records these items in rent expense evenly over the terms of the lease.
The Company is also required to make additional payments under operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period; such items are expensed as incurred. Rental deposits are included as other assets in the Consolidated Financial Statements for lease agreements that require payments in advance or deposits held for security that are refundable, less any damages, at the end of the respective lease.
Pensions and Other Postretirement Benefits-The Company maintains various pension and incentive savings plans and contributes to several multiemployer plans on behalf of certain union-represented employee groups. Substantially all of the Company’s employees are covered by these plans. The Company also provides health care and life insurance benefits to certain retired employees. These employees become eligible for benefits after meeting age and service requirements.
The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and recognizes changes in that funded status in the fiscal year in which the changes occur through comprehensive income. The Company measures changes in the funded status of its plans using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate, the long-term rate of asset return and rate of compensation increase. The Company uses a measurement date of December 31 for its pension and other postretirement benefit plans.
Self-Insurance-The Company uses a combination of insurance and self-insurance for a number of risks, including claims related to employee health care and dental care, disability benefits, workers’ compensation, general liability, property damage and business interruption. Liabilities associated with these plans are estimated based on, among other things, the Company’s historical claims experience, severity factors and other actuarial assumptions. The expected loss accruals are based on estimates, and while the Company believes that the amounts accrued are adequate, the ultimate loss may differ from the amounts provided.
Income Taxes-The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including
future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations; this evaluation is made on an ongoing basis. In the event the Company were to determine that it was able to realize net deferred income tax assets in the future in excess of their net recorded amount, the Company would record an adjustment to the valuation allowance, which would reduce the provision for income taxes.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The Company records a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on the Company’s tax return. Changes in the estimate are recorded in the period in which such determination is made.
Foreign Currency Translation-Income and expense accounts of the Company’s non-U.S. operations where the local currency is the functional currency are translated into U.S. dollars using the current rate method, whereby operating results are converted at the average rate of exchange for the period, and assets and liabilities are converted at the closing rates on the period end date. Gains and losses on translation of these accounts and the Company’s equity investment in its non-U.S. affiliates are accumulated and reported as a separate component of equity and other comprehensive income. Gains and losses on foreign currency transactions, including foreign currency denominated intercompany loans on entities with a functional currency in U.S. dollars, are recognized in the Consolidated Statements of Operations.
Equity-Based Compensation-The Company measures compensation expense for awards settled in shares based on the grant date fair value of the award. The Company measures compensation expense for awards settled in cash, or that may be settled in cash, based on the fair value at each reporting date. The Company recognizes the expense over the requisite service period, which is generally the vesting period of the award.
Earnings Per Share-Earnings per share is calculated under the two-class method. Under the two-class method, the Company treats restricted stock as a participating security due to its nonforfeitable right to dividends. Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated similarly except that the computation includes the dilutive effect of the assumed exercise of options and restricted stock issuable under the Company’s stock plans.
Comprehensive Income-Comprehensive income consists of net income, foreign currency translation adjustments, the change in unrealized gains (losses) on investments in marketable equity securities, net changes in cash flow hedge, and pension and other postretirement plan adjustments.
Discontinued Operations-A business is classified as a discontinued operation when (i) the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from the Company’s ongoing operations; (ii) the business has either been disposed of or is classified as held for sale; and (iii) the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations (as well as the gain or loss on the disposal) are aggregated and separately presented in the Company’s Consolidated Statements of Operations, net of income taxes.
Recently Adopted and Issued Accounting Pronouncements-In October 2009, the Financial Accounting Standards Board (FASB) issued new guidance that modifies the fair value requirement of multiple element revenue arrangements. The new guidance allows the use of the "best estimate of selling price" in addition to vendor-specific objective evidence (VSOE) and third-party evidence (TPE) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. The guidance requires expanded qualitative and quantitative disclosures and is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The implementation of this guidance in the first quarter of 2011 did not have a material impact on the Consolidated Financial Statements of the Company.
In January 2010, the FASB issued additional disclosure requirements for fair value measurements. One of the fair value disclosure amendments requires more detailed disclosures of the changes in Level 3 instruments. This change became effective for interim and annual periods beginning after December 15, 2010, and did not impact the Consolidated Financial Statements of the Company.
In June 2011, the FASB issued an amended standard to increase the prominence of items reported in other comprehensive income. The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires that all changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In
addition, the amendment requires companies to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendment does not affect how earnings per share is calculated or presented. This amendment is effective for interim and fiscal years beginning after December 15, 2011 and must be applied retrospectively. In December 2011, the FASB deferred the requirements related to the presentation of reclassification adjustments until further deliberations have taken place. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the issuance of the June 2011 amended standard. The amended standard will not impact the Company's financial position or results of operations.
In September 2011, the FASB issued new guidance that amends the current goodwill impairment testing process. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Previous guidance required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The new guidance is effective for goodwill and interim impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity's financial statements for the most recent period have not yet been issued. The Company early adopted this guidance at the beginning of the fourth quarter of 2011.
3. DISCONTINUED OPERATIONS
In October 2011, Kaplan completed the sale of Kaplan Compliance Solutions (KCS). Under the terms of the asset purchase agreement, the buyer received KCS’ net working capital, tangible and intangible assets and assumed certain liabilities. The Company recorded an after-tax gain on the transaction of $1.5 million, which is included in loss from discontinued operations, net of tax in the Company's Consolidated Statement of Operations for fiscal year 2011. In July 2011, Kaplan completed the sale of Kaplan Virtual Education (KVE). Under the terms of the asset purchase agreement, the buyer received KVE’s intellectual property, education programs and selected other long-lived assets. The Company recorded an after-tax loss on the transaction of $1.2 million, which is included in loss from discontinued operations, net of tax in the Company's Consolidated Statement of Operations for fiscal year 2011.
In April 2010, Kaplan completed the sale of Education Connection and in September 2010, the Company completed the sale of Newsweek magazine. The results of operations of KCS, KVE, Education Connection and the magazine publishing division for fiscal years 2011, 2010 and 2009, where applicable, are included in the Company’s Consolidated Statements of Operations as loss from discontinued operations, net of tax. All corresponding prior period operating results presented in the Company’s Consolidated Financial Statements and the accompanying notes have been reclassified to reflect the discontinued operations presented. The Company did not reclassify its Consolidated Statements of Cash Flows or prior year Consolidated Balance Sheet to reflect the discontinued operations.
Newsweek employees were participants in The Washington Post Company Retirement Plan, and the Company had historically allocated Newsweek a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were retained by the Company, the associated credits of $25.8 million and $34.6 million, respectively, for fiscal years 2010 and 2009 have been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations (see Note 13). In fiscal year 2010, Newsweek recorded $4.7 million in accelerated depreciation and property, plant, and equipment write-downs in anticipation of the sale.
The summarized loss from discontinued operations, net of tax, for the years ended December 31, 2011, January 2, 2011 and January 3, 2010 follows:
(in thousands)
Operating revenues
$
34,769
$
133,013
$
243,691
Operating costs and expenses
42,133
176,454
340,098
Loss from discontinued operations
(7,364)
(43,441)
(96,407)
Benefit from income taxes
(2,834)
(16,369)
(31,400)
Net loss from discontinued operations
(4,530)
(27,072)
(65,007)
Gain (loss) on sale of discontinued operations
2,975
(9,156)
-
Provision for income taxes on sale of discontinued operations
2,616
5,869
-
Loss from discontinued operations, net of tax
$
(4,171)
$
(42,097)
$
(65,007)
4. INVESTMENTS
Investments in Marketable Equity Securities. Investments in marketable equity securities at December 31, 2011, and January 2, 2011 consist of the following:
(in thousands)
Total cost
$
169,271
$
223,064
Net unrealized gains
133,930
117,846
Total fair value
$
303,201
$
340,910
At December 31, 2011, and January 2, 2011, the Company owned 2,214 shares of Berkshire Hathaway Inc. ("Berkshire") Class A common stock and 424,250 shares of Berkshire Class B common stock, respectively. The Company's ownership of Berkshire accounted for $286.4 million, or 94%, and $300.7 million, or 88%, of the total fair value of the Company's investments in marketable equity securities at December 31, 2011 and January 2, 2011, respectively.
Berkshire is a holding company owning subsidiaries engaged in a number of diverse business activities, the most significant of which consists of property and casualty insurance businesses conducted on both a direct and reinsurance basis. Berkshire also owns approximately 23% of the common stock of the Company. The chairman, chief executive officer and largest shareholder of Berkshire, Mr. Warren Buffet, was a member of the Company’s Board of Directors until May 2011, at which time Mr. Buffet retired from the Company’s Board. The Company's investment in Berkshire common stock is less than 1% of the consolidated equity of Berkshire. At December 31, 2011 and January 2, 2011, the unrealized gain related to the Company's Berkshire stock investment totaled $129.1 million and $143.4 million, respectively.
At the end of the first quarter of 2011, the Company’s investment in Corinthian Colleges, Inc. had been in an unrealized loss position for over six months. The Company evaluated this investment for other-than-temporary impairment based on various factors, including the duration and severity of the unrealized loss, the reason for the decline in value and the potential recovery period, and the Company’s ability and intent to hold the investment. In the first quarter of 2011, the Company concluded the loss was other-than-temporary and recorded a $30.7 million write-down of the investment. The investment continued to decline, and in the third quarter of 2011, the Company recorded an additional $23.1 million write-down of the investment. The Company’s investment in Corinthian Colleges, Inc. accounted for $16.8 million of the total fair value of the Company’s investments in marketable equity securities at December 31, 2011.
There were no new investments or sales of marketable equity securities in 2011 and 2010. During 2009, the Company invested $10.8 million in the Class B common stock of Berkshire. There were no sales of marketable equity securities during 2011, 2010 and 2009.
Investments in Affiliates. At the end of 2011, the Company's investments in affiliates include a 49% interest in the common stock of Bowater Mersey Paper Company Limited, which owns and operates a newsprint mill in Nova Scotia. The Company also holds a 16.5% interest in Classified Ventures, LLC, which owns and operates several leading businesses in the online classified advertising space, and several other investments.
In the third quarter of 2011 and the third quarter of 2009, the Company recorded impairment charges of $9.2 million and $27.4 million on the Company’s interest in Bowater Mersey Paper Company, respectively, as a result of the challenging economic environment for newsprint producers. An additional $1.6 million impairment loss was recorded in 2009.
5. ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable at December 31, 2011 and January 2, 2011 consist of the following:
(in thousands)
Trade accounts receivable, less estimated returns, doubtful accounts and allowances
of $50,225 and $70,181
$
375,577
$
379,480
Other accounts receivable
17,148
17,544
$
392,725
$
397,024
The changes in allowance for doubtful accounts and returns and allowance for advertising rate adjustments and discounts during 2011, 2010 and 2009 were as follows:
Additions -
Balance
Balance at
Charged to
at
Beginning
Costs and
End of
(in thousands)
of Period
Expenses
Deductions
Period
Year Ended December 31,
Allowance for doubtful accounts and returns
$
67,007
$
61,327
$
(80,135)
$
48,199
Allowance for advertising rate adjustments and
discounts
3,174
11,868
(13,016)
2,026
$
70,181
$
73,195
$
(93,151)
$
50,225
Year Ended January 2,
Allowance for doubtful accounts and returns
$
98,286
$
137,888
$
(169,167)
$
67,007
Allowance for advertising rate adjustments and discounts
8,495
12,216
(17,537)
3,174
$
106,781
$
150,104
$
(186,704)
$
70,181
Year Ended January 3,
Allowance for doubtful accounts and returns
$
95,425
$
168,455
$
(165,594)
$
98,286
Allowance for advertising rate adjustments and discounts
9,228
24,208
(24,941)
8,495
$
104,653
$
192,663
$
(190,535)
$
106,781
The reduced activity for 2011 and 2010 in the table above is largely due to the sale of Newsweek on September 30, 2010.
Accounts payable and accrued liabilities at December 31, 2011 and January 2, 2011 consist of the following:
(in thousands)
Accounts payable and accrued liabilities
$
333,282
$
430,119
Accrued compensation and related benefits
161,759
196,069
$
495,041
$
626,188
Cash overdrafts of $2.1 million and $26.2 million are included in accounts payable and accrued liabilities at December 31, 2011 and January 2, 2011, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2011 and January 2, 2011 consist of the following:
(in thousands)
Land
$
41,093
$
41,145
Buildings
350,939
350,051
Machinery, equipment and fixtures
2,479,823
2,401,128
Leasehold improvements
304,421
308,863
Construction in progress
95,173
91,330
3,271,449
3,192,517
Less accumulated depreciation
(2,119,059)
(1,991,791)
$
1,152,390
$
1,200,726
Depreciation expense was $253.4 million, $246.6 million and $290.6 million in 2011, 2010 and 2009, respectively.
7. ACQUISITIONS AND DISPOSITIONS
The Company completed business acquisitions totaling approximately $136.5 million, $14.1 million and $26.1 million, in 2011, 2010 and 2009, respectively. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition.
During 2011, the Company completed five business acquisitions totaling approximately $136.5 million, including assumed debt of $5.5 million and other assumed liabilities. Kaplan acquired three businesses in its Kaplan International division, one business in its KHE division, and one business in its Kaplan Ventures division. These included the May 2011 acquisitions of Franklyn Scholar and Carrick Education Group, leading national providers of vocational training and higher education in Australia, and the June 2011 acquisition of Structuralia, a provider of e-learning for the engineering and infrastructure sector in Spain. The purchase price allocations mostly comprised goodwill, other intangible assets, and property, plant and equipment.
Kaplan completed the sales of KVE in July 2011 and KCS in October 2011, which were part of Kaplan Ventures and KHE, respectively. In April 2010, Kaplan completed the sale of Education Connection, which was part of Kaplan Ventures. Consequently, the Company’s income from continuing operations excludes results from these businesses, which have been reclassified to discontinued operations (see Note 3).
During 2010, the Company acquired six businesses for $14.1 million. Kaplan acquired two small businesses in its KTP division, one small business in its Ventures division and one small business in its International division. The Company made two small acquisitions in its cable television and other businesses divisions. The purchase price allocations for these acquisitions mostly comprised goodwill and other intangible assets.
In September 2010, the Company completed the sale of Newsweek. In December 2009, the Company completed the sale of Newsweek’s Budget Travel. Consequently, the Company’s income from continuing operations excludes magazine publishing division results, which have been reclassified to discontinued operations (see Note 3).
During 2009, the Company acquired three businesses for $26.1 million. Kaplan acquired one business in each of its International and KTP divisions, and the newspaper publishing division acquired a small local publication. The purchase price allocations for these acquisitions mostly comprised goodwill and other intangible assets. Also in 2009, the Company recorded $3.2 million of additional purchase consideration in connection with the achievement of certain operating results by a company acquired in 2007 and allocated the additional purchase consideration to goodwill.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The education division made several changes to its operating and reporting structure in the first quarter of 2011 and 2010, changing the composition of the reporting units within KTP, Kaplan Ventures and KHE (see Note 18). The changes resulted in the reassignment of the assets and liabilities to the reporting units affected. The goodwill was allocated to the reporting units affected using the relative fair value approach.
As a result of continued challenges in the lead generation industry, in both the third quarters of 2011 and 2010, the Company performed interim reviews of the carrying value of goodwill and other intangible asset at its online lead generation business, which is included within the other businesses segment. The business failed the step one goodwill impairment tests and the Company performed a step two analysis, resulting in an $11.9 million and a $27.5 million goodwill and other intangible assets impairment charge in the third quarters of 2011 and 2010, respectively. The Company estimated the fair value utilizing a discounted cash flow model.
The education division reorganized its operations in the third quarter of 2009 into the following four operating segments for the purpose of making operating decisions and assessing performance: KHE, KTP, Kaplan International and Kaplan Ventures. The reorganization changed the composition of the reporting units within the education division and resulted in the reassignment of the assets and liabilities. The goodwill was allocated to the reporting units using the relative fair value approach. As a result of the reassignment and allocation, the Company performed an interim review of the carrying value of goodwill at the education division for possible impairment on both a prereorganization and postreorganization basis. No impairment of goodwill was indicated at the prereorganization reporting units. On a postreorganization basis, the Company failed the step one goodwill impairment test at Kaplan EduNeering and KCS and performed a step two analysis. The Company recorded a goodwill and other long-lived asset impairment charge of $25.4 million related to these two reporting units in 2009. The fair value of Kaplan EduNeering was determined utilizing a discounted cash flow model; the fair value of KCS was determined using a cost approach. Of the $25.4 million goodwill and other long-lived asset impairment charge, $16.9 million related to KCS and is included in “Loss from discontinued operation, net of tax” in the Company’s Consolidated Statements of Operations.
Amortization of intangible assets is estimated to be approximately $15 million in 2012, $12 million in 2013, $9 million in 2014, $8 million in 2015, $5 million in 2016 and $6 million thereafter.
The changes in the carrying amount of goodwill related to continuing operations, by segment, during 2011 and 2010 were as follows:
Cable
Newspaper
Television
Other
(in thousands)
Education
Television
Publishing
Broadcasting
Businesses
Total
Balance as of January 3,
Goodwill
$
1,073,852
$
85,488
$
81,186
$
203,165
$
97,342
$
1,541,033
Accumulated impairment losses
(15,529)
-
(65,772)
-
(60,785)
(142,086)
1,058,323
85,488
15,414
203,165
36,557
1,398,947
Acquisitions
4,200
-
-
-
2,810
7,010
Impairment
-
-
-
-
(24,634)
(24,634)
Dispositions
(19,851)
-
-
-
-
(19,851)
Foreign currency exchange rate changes and other
14,888
-
(3)
-
-
14,885
Balance as of January 2,
Goodwill
1,073,089
85,488
81,183
203,165
100,152
1,543,077
Accumulated impairment losses
(15,529)
-
(65,772)
-
(85,419)
(166,720)
1,057,560
85,488
15,411
203,165
14,733
1,376,357
Acquisitions
78,643
-
-
-
-
78,643
Impairment
-
-
-
-
(11,923)
(11,923)
Dispositions
(21,144)
-
-
-
-
(21,144)
Foreign currency exchange rate changes and other
(6,936)
-
-
-
-
(6,936)
Balance as of December 31, 2011
Goodwill
1,116,615
85,488
81,183
203,165
100,152
1,586,603
Accumulated impairment losses
(8,492)
-
(65,772)
-
(97,342)
(171,606)
$
1,108,123
$
85,488
$
15,411
$
203,165
$
2,810
$
1,414,997
The changes in carrying amount of goodwill at the Company’s education division for 2011 and 2010 were as follows:
Higher
Test
Kaplan
Kaplan
(in thousands)
Education
Preparation
International
Ventures
Total
Balance as of January 3,
Goodwill
$
335,226
$
236,779
$
432,973
$
68,874
$
1,073,852
Accumulated impairment losses
-
-
-
(15,529)
(15,529)
335,226
236,779
432,973
53,345
1,058,323
Reallocation, net
-
(14,534)
-
14,534
-
Acquisitions
-
-
3,999
4,200
Dispositions
-
-
-
(19,851)
(19,851)
Foreign currency exchange rate changes and other
-
11,766
2,918
14,888
Balance as of January 2,
Goodwill
335,226
229,486
444,940
63,437
1,073,089
Accumulated impairment losses
-
(7,037)
-
(8,492)
(15,529)
335,226
222,449
444,940
54,945
1,057,560
Reallocation, net
91,043
(70,262)
-
(20,781)
-
Acquisitions
-
74,803
3,418
78,643
Dispositions
(17,479)
-
-
(3,665)
(21,144)
Foreign currency exchange rate changes and other
(84)
-
(3,807)
(3,045)
(6,936)
Balance as of December 31, 2011
Goodwill
409,128
152,187
515,936
39,364
1,116,615
Accumulated impairment losses
-
-
-
(8,492)
(8,492)
$
409,128
$
152,187
$
515,936
$
30,872
$
1,108,123
Other intangible assets consist of the following:
As of December 31, 2011
As of January 2, 2011
Gross
Net
Gross
Net
Useful Life
Carrying
Accumulated
Carrying
Carrying
Accumulated
Carrying
(in thousands)
Range
Amount
Amortization
Amount
Amount
Amortization
Amount
Amortized intangible assets
Noncompete agreements
2 - 5 years
$
14,493
$
10,764
$
3,729
$
43,940
$
33,570
$
10,370
Student and customer relationships
2 - 10 years
75,734
47,888
27,846
66,510
41,958
24,552
Databases and technology
3 - 5 years
10,514
8,159
2,355
10,514
2,921
7,593
Trade names and trademarks
2 - 10 years
36,222
18,936
17,286
29,053
15,330
13,723
Other
1 - 25 years
9,971
6,565
3,406
11,502
6,498
5,004
$
146,934
$
92,312
$
54,622
$
161,519
$
100,277
$
61,242
Indefinite-lived intangible assets
Franchise agreements
$
496,321
$
496,166
Wireless licenses
22,150
22,150
Licensure and accreditation
7,862
7,877
Other
4,308
4,623
$
530,641
$
530,816
9. INCOME TAXES
Income from continuing operations before income taxes consists of the following:
(in thousands)
United States (U.S.)
$
207,527
$
518,769
$
245,532
Non-U.S.
10,101
19,348
(325)
$
217,628
$
538,117
$
245,207
2011 and 2009 non-U.S. results include losses from impairment charges with respect to an investment in a non-U.S. affiliate of $9.2 million and $27.4 million, respectively.
The provision for income taxes on income from continuing operations consists of the following:
(in thousands)
Current
Deferred
Total
U.S. Federal
$
40,365
$
26,635
$
67,000
State and Local
11,862
9,132
20,994
Non-U.S.
9,129
(823)
8,306
$
61,356
$
34,944
$
96,300
U.S. Federal
$
135,671
$
10,162
$
145,833
State and Local
28,737
33,390
62,127
Non-U.S.
11,030
(990)
10,040
$
175,438
$
42,562
$
218,000
U.S. Federal
$
75,231
$
2,685
$
77,916
State and Local
18,477
(13,445)
5,032
Non-U.S.
8,429
(2,377)
6,052
$
102,137
$
(13,137)
$
89,000
The provision for income taxes on continuing operations exceeds the amount of income tax determined by applying the U.S. Federal statutory rate of 35% to income from continuing operations before taxes as a result of the following:
(in thousands)
U.S. Federal taxes at statutory rate
$
76,170
$
188,341
$
85,822
State and local taxes (benefit), net of U.S. Federal tax
4,034
26,526
(4,508)
Valuation allowances against state tax benefits, net of U.S. Federal tax
9,748
13,856
7,414
Tax provided on non-U.S. subsidiary earnings and distributions at less
than the expected U.S. Federal statutory tax rate
(6,882)
(4,327)
(1,035)
Valuation allowances against non-U.S. income tax benefits
8,072
2,921
Goodwill impairments
4,173
8,066
2,972
U.S. Federal Manufacturing Deduction tax expense (benefit)
1,365
(8,419)
-
Other, net
(380)
(8,964)
(1,919)
Provision for income taxes
$
96,300
$
218,000
$
89,000
Results for 2011 include $1.4 million in income tax expense related to the U.S. Federal manufacturing deduction; this amount reflects a benefit in the current year, offset by a change in estimate for 2010.
During 2011, 2010 and 2009, in addition to the income tax provision presented above for continuing operations, the Company also recorded tax benefits on discontinued operations. Losses from discontinued operations and gains or losses on sales of discontinued operations have been reclassified from previously reported income from operations and reported separately as loss from discontinued operations, net of tax. Tax benefits of $0.2 million, $10.5 million and $31.4 million with respect to discontinued operations were recorded in 2011, 2010 and 2009, respectively.
Deferred income taxes at December 31, 2011 and January 2, 2011, consist of the following:
(in thousands)
Accrued postretirement benefits
$
28,525
$
27,012
Other benefit obligations
112,646
118,039
Accounts receivable
28,047
33,853
State income tax loss carryforwards
34,506
27,674
U.S. Federal income tax loss carryforwards
6,301
8,120
Non-U.S. income tax loss carryforwards
14,906
10,827
Other
60,881
39,524
Deferred tax assets
285,812
265,049
Valuation allowances
(59,179)
(41,359)
Deferred tax assets, net
$
226,633
$
223,690
Property, plant and equipment
200,054
187,934
Prepaid pension cost
213,663
214,470
Unrealized gain on available-for-sale securities
53,588
47,148
Goodwill and other intangible assets
291,346
265,225
Deferred tax liabilities
$
758,651
$
714,777
Deferred income tax liabilities, net
$
532,018
$
491,087
The Company has approximately $669 million of state income tax loss carryforwards available to offset future state taxable income. State income tax loss carryforwards, if unutilized, will start to expire approximately as follows:
(in millions)
$
2.6
7.0
18.4
8.0
4.3
2017 and after
628.7
Total
$
669.0
The Company has established at December 31, 2011 approximately $34.5 million in deferred state income tax assets, net of U.S. Federal income tax, with respect to these state income tax loss carryforwards. The Company has also established approximately $31.9 million in valuation allowances, with respect to state tax loss carryforwards, since all state tax losses may not be fully utilized in the future to reduce state taxable income.
The Company has approximately $17.9 million of U.S. Federal income tax loss carryforwards obtained as a result of prior stock acquisitions. U.S. Federal income tax loss carryforwards are expected to be fully utilized as follows:
(in millions)
$
5.2
5.2
0.9
0.7
0.7
2017 and after
5.2
Total
$
17.9
The Company has established at December 31, 2011 approximately $6.3 million in deferred U.S. Federal tax assets with respect to these U.S. Federal income tax loss carryforwards.
The Company has approximately $53.9 million of non-U.S. income tax loss carryforwards, as a result of operating losses and prior stock acquisitions, that are available to offset future non-U.S. taxable income, and has recorded with respect to these losses, approximately $14.9 million in deferred non-U.S. income tax assets. The Company has established approximately $13.3 million in valuation allowances against the deferred tax assets recorded for the portion of non-U.S. tax losses that may not be fully utilized to reduce future non-U.S. taxable income. The $53.9 million of non-U.S. income tax loss carryforwards consist of $46.9 million in losses that may be carried forward indefinitely; $2.7 million of losses that, if unutilized, will expire in varying amounts through 2015; and $4.3 million of losses that, if unutilized, will start to expire after 2016.
Deferred tax valuation allowances and changes in deferred tax valuation allowances were as follows:
Additions -
Charged
Balance at
to
Balance at
Beginning
Costs and
End of
(in thousands)
of Period
Expenses
Deductions
Period
Year ended
December 31, 2011
$
41,359
$
17,820
-
$
59,179
January 2, 2011
$
26,239
$
16,777
$
(1,657)
$
41,359
January 3, 2010
$
13,197
$
13,042
-
$
26,239
The Company has established $45.2 million in valuation allowances against deferred state tax assets recognized, net of U.S. Federal tax. As stated above, approximately $31.9 million of the valuation allowances, net of U.S. Federal income tax, relate to state income tax loss carryforwards. The Company has established valuation allowances against state income tax assets recognized, without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing deferred tax assets recognized since these temporary differences are not likely to reverse in the foreseeable future. The valuation allowances established against state income tax assets recorded may increase or decrease within the next 12 months, based on operating results or the market value of investment holdings; as a result, the Company is unable to estimate the potential tax impact, given the uncertain operating and market environment.
The Company has not established valuation allowances against any U.S. Federal deferred tax assets.
The Company has established $14 million in valuation allowances against non-U.S. deferred tax assets, and, as stated above, $13.3 million of the non-U.S. valuation allowances relate to non-U.S. income tax loss carryforwards.
Deferred U.S. Federal and state income taxes are recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries to the extent taxable dividend income would be recognized if such earnings were distributed. Deferred income taxes recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries are recorded net of foreign tax credits estimated to be creditable against future U.S. Federal tax liabilities. At December 31, 2011, about $0.7 million of net deferred U.S. Federal income tax assets were recorded since it is apparent that a portion of the temporary differences described below reverse in the subsequent year. At January 2, 2011, no net deferred U.S. Federal or state income tax asset or liability was recorded with respect to undistributed earnings of investments in non-U.S. subsidiaries based on the year-end position.
Deferred U.S. Federal and state income taxes have not been recorded for the full book value and tax basis differences related to investments in non-U.S. subsidiaries because such investments are expected to be indefinitely held. The book value exceeded the tax basis of investments in non-U.S. subsidiaries by approximately $60.6 million and $60.7 million at December 31, 2011 and January 2, 2011, respectively; these differences would result in approximately $13.4 million and $12.7 million of net additional U.S. Federal and state deferred tax liabilities, net of foreign tax credits related to undistributed earnings and estimated to be creditable against future U.S. Federal tax liabilities, at December 31, 2011 and January 2, 2011, respectively. If investments in non-U.S. subsidiaries were held for sale instead of expected to be held indefinitely, additional U.S. Federal and state deferred tax liabilities would be required to be recorded, and such deferred tax liabilities, if recorded, may exceed the above estimates.
The Company does not currently anticipate that within the next 12 months there will be any events requiring the establishment of any valuation allowances against U.S. Federal net deferred tax assets, or any events requiring significant increases or decreases in valuation allowances established against non-U.S. net deferred tax assets.
The Company files income tax returns with the U.S. Federal government and in various state, local and non-U.S. governmental jurisdictions, with the consolidated U.S. Federal tax return filing considered the only major tax jurisdiction. The statute of limitations has expired on all consolidated U.S. Federal corporate income tax returns filed through 2007, and the Internal Revenue Service is not currently examining any of the post-2007 returns filed by the Company.
The Company endeavors to comply with tax laws and regulations where it does business, but cannot guarantee that, if challenged, the Company’s interpretation of all relevant tax laws and regulations will prevail and that all tax benefits recorded in the financial statements will ultimately be recognized in full. The Company has taken reasonable efforts to address uncertain tax positions, and has determined that there are no material transactions or material tax positions taken by the Company that would fail to meet the more-likely-than-not threshold for recognizing transactions or tax positions in the financial statements. Accordingly, the Company has not recorded a reserve for uncertain tax positions in the financial statements, and the Company does not expect any significant tax increase or decrease to occur within the next 12 months with respect to any transactions or tax positions taken and reflected in the financial statements. In making these determinations, the Company presumes that taxing authorities pursuing examinations of the Company’s compliance with tax law filing requirements will have full knowledge of all relevant information, and, if necessary, the Company will pursue resolution of disputed tax positions by appeals or litigation.
10. DEBT
The Company’s borrowings consist of the following:
December 31.
January 2.
(in thousands)
7.25% unsecured notes due February 1, 2019
$
397,065
$
396,650
Commercial paper borrowings
109,671
-
AUD 50M borrowing
51,012
-
Other indebtedness
7,464
3,000
Total
565,212
399,650
Less: current portion
(112,983)
(3,000)
Total long-term debt
$
452,229
$
396,650
At December 31, 2011, the average interest rate on the Company’s outstanding commercial paper borrowing was 0.5%. The Company did not borrow funds under its commercial paper program in 2010. The Company’s other indebtedness at December 31, 2011 is at interest rates of 0% to 6% and matures from 2012 to 2016.
In January 2009, the Company issued $400 million in unsecured ten-year fixed-rate notes due February 1, 2019 (the Notes). The Notes have a coupon rate of 7.25% per annum, payable semiannually on February 1 and August 1. Under the terms of the Notes, unless the Company has exercised its right to redeem the Notes, the Company is required to offer to repurchase the Notes in cash at 101% of the principal amount, plus accrued and unpaid interest, upon the occurrence of both a Change of Control and Below Investment Grade Rating Events as described in the Prospectus Supplement of January 27, 2009.
On June 17, 2011, the Company terminated its U.S. $500 million five-year revolving credit agreement, dated as of August 8, 2006, among the Company, the lenders party thereto and Citibank, N.A. (the 2006 Credit Agreement), in connection with the entrance into a new revolving credit facility. No borrowings were outstanding under the 2006 Credit
Agreement at the time of termination. On June 17, 2011, the Company entered into a credit agreement (the Credit Agreement) providing for a new U.S. $450 million, AUD 50 million four-year revolving credit facility (the Facility), with each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (JP Morgan), and J.P. Morgan Australia Limited, as Australian Sub-Agent. The Facility consists of two tranches: (a) U.S. $450 million and (b) AUD 50 million (subject, at the Company’s option, to conversion of the unused Australian dollar commitments into U.S. dollar commitments at a specified exchange rate). This agreement supports the issuance of the Company’s commercial paper, but the Company may also draw on the facility for general corporate purposes. The Credit Agreement provides for an option to increase the total U.S. dollar commitments up to an aggregate amount of U.S. $700 million. The Facility replaced the Company’s 2006 Credit Agreement. The Company is required to pay a facility fee on a quarterly basis, based on the Company’s long-term debt ratings, of between 0.08% and 0.20% of the amount of the Facility. Any borrowings are made on an unsecured basis and bear interest at (a) for U.S. dollar borrowings, at the Company’s option, either (i) a fluctuating interest rate equal to the highest of JPMorgan’s prime rate, 0.50 percent above the Federal funds rate or the one-month eurodollar rate plus 1%, or (ii) the eurodollar rate for the applicable interest period, or (b) for Australian dollar borrowings, the bank bill rate, in each case plus an applicable margin that depends on the Company’s long-term debt ratings. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term. Any outstanding borrowings must be repaid on or prior to the final termination date. The Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and, among other things, requires the Company to maintain at least $1.5 billion of consolidated stockholders’ equity.
On September 7, 2011, the Company borrowed AUD 50 million under its revolving credit facility. On the same date, the Company entered into interest rate swap agreements with a total notional value of AUD 50 million and a maturity date of March 7, 2015. These interest rate swap agreements will pay the Company variable interest on the AUD 50 million notional amount at the three-month bank bill rate, and the Company will pay the counterparties a fixed rate of 4.5275%. These interest rate swap agreements were entered into to convert the variable rate Australian dollar borrowing under the revolving credit facility into a fixed rate borrowing. Based on the terms of the interest rate swap agreements and the underlying borrowing, these interest rate swap agreements were determined to be effective, and thus qualify as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps are recorded in other comprehensive income on the accompanying condensed consolidated balance sheets until earnings are affected by the variability of cash flows.
During 2011 and 2010, the Company had average borrowings outstanding of approximately $426.7 million and $399.5 million, respectively, at average annual interest rates of approximately 7.0% and 7.2%, respectively. The Company incurred net interest expense of $29.1 million, $27.9 million and $29.0 million during 2011, 2010 and 2009, respectively.
At December 31, 2011 and January 2, 2011, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $460.5 million and $457.2 million, respectively, compared with the carrying amount of $397.1 million and $396.7 million. The carrying value of the Company’s other unsecured debt at December 31, 2011 approximates fair value.
11. REDEEMABLE PREFERRED STOCK
The Series A preferred stock has a par value of $1.00 per share and a liquidation preference of $1,000 per share; it is redeemable by the Company at any time on or after October 1, 2015, at a redemption price of $1,000 per share. In addition, the holders of such stock have a right to require the Company to purchase their shares at the redemption price during an annual 60-day election period. Dividends on the Series A preferred stock are payable four times a year at the annual rate of $80.00 per share and in preference to any dividends on the Company’s common stock. The Series A preferred stock is not convertible into any other security of the Company, and the holders thereof have no voting rights except with respect to any proposed changes in the preferences and special rights of such stock.
12. CAPITAL STOCK, STOCK AWARDS AND STOCK OPTIONS
Capital Stock. Each share of Class A common stock and Class B common stock participates equally in dividends. The Class B stock has limited voting rights and as a class has the right to elect 30% of the Board of Directors; the Class A stock has unlimited voting rights, including the right to elect a majority of the Board of Directors. In 2011 and 2010, the Company’s Class A shareholders converted 11,500, or 1%, and 50,810, or 4%, respectively, of the Class A shares of the Company to an equal number of Class B shares. The conversions had no impact on the voting rights of the Class A and Class B common stock.
During 2011, 2010 and 2009, the Company purchased a total of 644,948, 1,057,940 and 145,040 shares, respectively, of its Class B common stock at a cost of approximately $248.1 million, $404.8 million and $61.0 million, respectively. In September 2011, the Board of Directors increased the authorization to repurchase a total of 750,000 shares of Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 43,573 shares that remained under the previous authorization. At December 31, 2011, the Company had authorization from the Board of Directors to purchase up to 493,474 shares of Class B common stock.
Stock Awards. In 1982, the Company adopted a long-term incentive compensation plan, which, among other provisions, authorizes the awarding of Class B common stock to key employees. Stock awards made under this incentive compensation plan are primarily subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant’s employment terminates before the end of a specified period of service to the Company. Some of the awards are also subject to performance conditions and will be forfeited and revert to Company ownership if the conditions are not met. At December 31, 2011, there were 316,805 shares reserved for issuance under the incentive compensation plan. Of this number, 77,319 shares were subject to awards outstanding and 239,486 shares were available for future awards. Activity related to stock awards under the long-term incentive compensation plan for the years ended December 31, 2011, January 2, 2011 and January 3, 2010, was as follows:
Number
Average
Number
Average
Number
Average
of
Award
of
Award
of
Award
Shares
Price
Shares
Price
Shares
Price
Beginning of year, unvested
48,359
$
498.95
66,020
$
494.97
32,785
$
796.52
Awarded
44,030
432.09
1,859
442.29
48,440
415.08
Vested
(13,132)
722.67
(2,644)
754.81
(13,386)
920.32
Forfeited
(1,938)
436.31
(16,876)
437.06
(1,819)
672.40
End of year, unvested
77,319
$
424.45
48,359
$
498.95
66,020
$
494.97
For the share awards outstanding at December 31, 2011, the aforementioned restriction will lapse in 2012 for 3,200 shares, in 2013 for 31,555 shares, in 2014 for 674 shares and in 2015 for 41,890 shares. Also, in early 2012, the Company made stock awards of 26,675 shares. Stock-based compensation costs resulting from Company stock awards were $5.3 million, $2.9 million and $4.6 million in 2011, 2010 and 2009, respectively.
As of December 31, 2011, there was $18.7 million of total unrecognized compensation expense related to this plan. That cost is expected to be recognized on a straight-line basis over a weighted average period of 1.8 years.
Stock Options. The Company’s employee stock option plan reserves 1,900,000 shares of the Company’s Class B common stock for options to be granted under the plan. The purchase price of the shares covered by an option cannot be less than the fair value on the granting date. Options generally vest over four years and have a maximum term of ten years. At December 31, 2011, there were 362,525 shares reserved for issuance under the stock option plan, of which 129,044 shares were subject to options outstanding and 233,481 shares were available for future grants.
Activity related to options outstanding for the years ended December 31, 2011, January 2, 2011 and January 3, 2010 was as follows:
Number
Average
Number
Average
Number
Average
of
Option
of
Option
of
Option
Shares
Price
Shares
Price
Shares
Price
Beginning of year
87,919
$
495.05
90,569
$
525.44
87,025
$
581.17
Granted
51,000
499.45
22,500
395.68
24,294
421.95
Expired or forfeited
(9,875)
519.04
(25,150)
515.59
(20,750)
637.99
End of year
129,044
$
494.95
87,919
$
495.05
90,569
$
525.44
Of the shares covered by options outstanding at the end of 2011, 45,585 are now exercisable; 27,886 will become exercisable in 2012; 24,448 will become exercisable in 2013; 18,375 will become exercisable in 2014; and 12,750 will become exercisable in 2015. For 2011, 2010 and 2009, the Company recorded expense of $2.7 million, $1.4 million and $1.3 million related to this plan, respectively. Information related to stock options outstanding and exercisable at December 31, 2011 is as follows:
Options Outstanding
Options Exercisable
Weighted
Weighted
Shares
Average
Weighted
Shares
Average
Weighted
Range of
Outstanding
Remaining
Average
Exercisable
Remaining
Average
Exercise
at
Contractual
Exercise
at
Contractual
Exercise
Prices
12/31/2011
Life (yrs.)
Price
12/31/2011
Life (yrs.)
Price
$343-396
36,250
8.4
$
385.62
14,938
7.8
$
380.08
419-439
23,294
8.0
423.25
11,647
8.0
423.25
50,000
10.0
502.58
-
-
-
2,000
7.0
651.91
1,500
7.0
651.91
729-763
13,000
3.4
731.94
13,000
3.4
731.94
1,500
2.0
816.05
1,500
2.0
816.05
3,000
3.0
953.50
3,000
3.0
953.50
129,044
8.2
$
494.95
45,585
6.1
$
552.49
At December 31, 2011, the intrinsic value for all options outstanding, exercisable and unvested was $0.1 million, $0.1 million and $0.1 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of the Company’s stock was $376.81 at December 31, 2011. At December 31, 2011, there were 83,459 unvested options related to this plan with an average exercise price of $463.53 and a weighted average remaining contractual term of 9.4 years. At January 2, 2011, there were 47,845 unvested options with an average exercise price of $407.68.
As of December 31, 2011, total unrecognized stock-based compensation expense related to this plan was $7.5 million, which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.9 years. There were no options exercised during 2011, 2010 and 2009.
During 2011, the Company granted 50,000 options at an exercise price above the fair market value of its common stock at the date of grant. All other options granted during 2011, and all options granted during 2010 and 2009, were at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The weighted average grant-date fair value of options granted during 2011, 2010, and 2009 was $110.67, $106.70, and $108.92, respectively. Also, in early 2012, an additional 1,000 stock options were granted.
The fair value of options at date of grant was estimated using the Black-Scholes method utilizing the following assumptions:
Expected life (years)
Interest rate
1.49%-2.85%
2.51%
Volatility
30.35%-31.24%
30.19%
Dividend yield
2.11%-2.74%
2.27%
The Company also maintains a stock option plan at Kaplan. Under the provisions of this plan, options were issued with an exercise price equal to the estimated fair value of Kaplan’s common stock, and options vested ratably over the number of years specified (generally four to five years) at the time of the grant. Upon exercise, an option holder may receive Kaplan shares or cash equal to the difference between the exercise price and the then fair value.
In December 2011, a Kaplan senior manager exercised 2,000 Kaplan stock options at an option price of $652 per option. At December 31, 2011, this individual holds 3,750 Kaplan restricted shares, as well as 3,456 Kaplan restricted shares issued in 2009 and 2010 that vest over a three-year period. The fair value of Kaplan’s common stock is determined by the Company’s compensation committee of the Board of Directors, and in January 2012, the committee set the fair value price at $1,165 per share. No options were awarded during 2011, 2010 or 2009, no options were exercised during 2010 or 2009 and there are no options outstanding at December 31, 2011.
Kaplan recorded a stock compensation credit of $1.3 million and $1.2 million in 2011 and 2010, respectively, compared to stock compensation expense of $0.9 million in 2009. At December 31, 2011, the Company’s accrual balance related to Kaplan stock-based compensation totaled $8.1 million. There were no payouts in 2011, 2010 or 2009. The total intrinsic value of options exercised during 2011 was $1.0 million.
Earnings Per Share. The Company’s earnings per share from continuing operations (basic and diluted) for 2011, 2010 and 2009 are presented below:
Fiscal Year Ended
December 31,
January 2,
January 3,
(in thousands, except per share amounts)
Income from continuing operations attributable to
The Washington Post Company common stockholders
$
120,404
$
319,289
$
156,853
Less: Amount attributable to participating securities
(1,211)
(1,970)
(1,075)
Basic income from continuing operations attributable to
The Washington Post Company common stockholders
$
119,193
$
317,319
$
155,778
Plus: Amount attributable to participating securities
1,211
1,970
1,075
Diluted income from continuing operations attributable to
The Washington Post Company common stockholders
$
120,404
$
319,289
$
156,853
Basic weighted average shares outstanding
7,826
8,869
9,332
Effect of dilutive shares:
Stock options and restricted stock
Diluted weighted average shares outstanding
7,905
8,931
9,392
Income per share from continuing operations attributable to
The Washington Post Company common stockholders
Basic
$
15.23
$
35.77
$
16.70
Diluted
$
15.23
$
35.75
$
16.70
The 2011, 2010 and 2009 diluted earnings per share amounts exclude the effects of 115,294, 30,225 and 74,569 stock options outstanding, respectively, as their inclusion would have been antidilutive.
In 2011, 2010 and 2009, the Company declared regular dividends totaling $9.40, $9.00 and $8.60 per share, respectively.
13. PENSIONS AND OTHER POSTRETIREMENT PLANS
The Company maintains various pension and incentive savings plans and contributes to several multiemployer plans on behalf of certain union-represented employee groups. Most of the Company’s employees are covered by these plans.
The Company also provides health care and life insurance benefits to certain retired employees. These employees become eligible for benefits after meeting age and service requirements.
The Company uses a measurement date of December 31 for its pension and other postretirement benefit plans.
Defined Benefit Plans. The Company’s defined benefit pension plans consist of various pension plans and a Supplemental Executive Retirement Plan (SERP) offered to certain executives of the Company.
In 2011, the Company offered a Voluntary Retirement Incentive Program to certain employees of Robinson Terminal Warehouse Corporation and the Post and recorded early retirement expense of $0.6 million. The early retirement program expense for these programs is funded mostly from the assets of the Company’s pension plans.
In connection with the Newsweek sale in 2010, the Company recorded $5.3 million in special termination benefits expense and $2.4 million in prior service cost expense; these amounts are included in discontinued operations.
In 2009, 44 Newsweek employees accepted a Voluntary Retirement Incentive Program. Early retirement program expense of $6.6 million was recorded in 2009 and is included in discontinued operations. The early retirement program expense for this program is funded mostly from the assets of the Company’s pension plans.
In 2009, a total of 221 employees of The Washington Post newspaper accepted a Voluntary Retirement Incentive Program, and early retirement program expense of $56.8 million was recorded, funded mostly from the assets of the Company’s pension plans. In 2009, the Company offered a Voluntary Retirement Incentive Program to certain employees at Robinson Terminal Warehouse Corporation; $1.1 million in early retirement program expense was recorded, also funded mostly from the assets of the Company’s pension plans.
The following table sets forth obligation, asset and funding information for the Company’s defined benefit pension plans at December 31, 2011 and January 2, 2011:
Pension Plans
(in thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year
$
1,113,205
$
1,031,371
Service cost
27,619
26,976
Interest cost
60,033
60,329
Amendments
2,776
5,295
Actuarial loss
140,126
53,822
Benefits paid and other
(64,444)
(64,588)
Benefit obligation at end of year
$
1,279,315
$
1,113,205
Change in Plan Assets
Fair value of assets at beginning of year
$
1,651,958
$
1,440,816
Actual return on plan assets
229,063
275,730
Benefits paid and other
(64,444)
(64,588)
Fair value of assets at end of year
$
1,816,577
$
1,651,958
Funded status
$
537,262
$
538,753
SERP
(in thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year
$
79,403
$
73,845
Service cost
1,655
1,381
Interest cost
4,342
4,244
Amendments
-
Actuarial loss
9,059
2,847
Benefits paid and other
(1,965)
(2,914)
Benefit obligation at end of year
$
92,863
$
79,403
Change in Plan Assets
Fair value of assets at beginning of year
$
-
$
-
Employer contributions and other
3,114
2,914
Benefits paid
(3,114)
(2,914)
Fair value of assets at end of year
$
-
$
-
Funded status
$
(92,863)
$
(79,403)
The accumulated benefit obligation for the Company’s pension plans at December 31, 2011 and January 2, 2011, was $1,191.9 million and $1,040.5 million, respectively. The accumulated benefit obligation for the Company’s SERP at December 31, 2011 and January 2, 2011, was $86.6 million and $72.0 million, respectively. The amounts recognized in the Company’s Consolidated Balance Sheets for its defined benefit pension plans at December 31, 2011 and January 2, 2011 are as follows:
Pension Plans
SERP
(in thousands)
Noncurrent asset
$
537,262
$
538,753
$
-
$
-
Current liability
-
-
(4,002)
(3,601)
Noncurrent liability
-
-
(88,861)
(75,802)
Recognized asset (liability)
$
537,262
$
538,753
$
(92,863)
$
(79,403)
Key assumptions utilized for determining the benefit obligation at December 31, 2011 and January 2, 2011 are as follows:
Pension Plans
SERP
Discount rate
4.7%
5.6%
4.7%
5.6%
Rate of compensation increase
4.0%
4.0%
4.0%
4.0%
The Company made no contributions to its pension plans in 2011, 2010 and 2009, and the Company does not expect to make any contributions in 2012. The Company made contributions to its SERP of $3.1 million and $2.9 million for the years ended December 31, 2011 and January 2, 2011, respectively. As the plan is unfunded, the Company makes contributions to the SERP based on actual benefit payments.
At December 31, 2011, future estimated benefit payments, excluding charges for early retirement programs, are as follows:
(in millions)
Pension Plans
SERP
$
70.9
$
4.3
$
69.2
$
4.5
$
69.2
$
4.8
$
69.1
$
4.9
$
70.1
$
5.5
2017-2021
$
375.2
$
29.8
The total (benefit) cost arising from the Company’s defined benefit pension plans for the years ended December 31, 2011, January 2, 2011 and January 3, 2010, including a portion included in discontinued operations, consists of the following components:
Pension Plans
(in thousands)
Service cost
$
27,619
$
26,976
$
29,214
Interest cost
60,033
60,329
56,994
Expected return on assets
(95,983)
(95,340)
(98,780)
Amortization of transition asset
-
(29)
(42)
Amortization of prior service cost
3,605
4,201
4,505
Recognized actuarial loss
-
-
Net periodic benefit for the year
(4,726)
(3,863)
(8,069)
Early retirement programs expense
-
64,541
Special termination benefits
-
5,295
-
Recognition of prior service cost
-
2,369
-
Total (benefit) cost for the year
$
(4,092)
$
3,801
$
56,472
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Current year actuarial loss (gain)
$
7,046
$
(126,568)
$
(141,362)
Amortization of transition asset
-
Amortization of prior service cost
(1,463)
(6,570)
(4,505)
Recognized actuarial loss
-
-
(40)
Total recognized in other comprehensive income (before tax effects)
$
5,583
$
(133,109)
$
(145,865)
Total recognized in total cost (benefit) and other
comprehensive income (before tax effects)
$
1,491
$
(129,308)
$
(89,393)
SERP
(in thousands)
Service cost
$
1,655
$
1,381
$
1,334
Interest cost
4,342
4,244
4,128
Plan amendment
-
-
Amortization of prior service cost
Recognized actuarial loss
1,411
1,068
1,676
Total cost for the year
$
8,037
$
7,099
$
7,584
Other Changes in Benefit Obligations Recognized in
Other Comprehensive Income
Current year actuarial loss
$
9,059
$
2,656
$
2,778
Amortization of prior service cost
(260)
(406)
(446)
Recognized net actuarial loss
(1,411)
(877)
(1,676)
Total recognized in other comprehensive income (before tax effects)
$
7,388
$
1,373
$
Total recognized in total cost and other comprehensive
income (before tax effects)
$
15,425
$
8,472
$
8,240
The costs for the Company’s defined benefit pension plans are actuarially determined. Below are the key assumptions utilized to determine periodic cost for the years ended December 31, 2011, January 2, 2011 and January 3, 2010:
Pension Plans
SERP
Discount rate
5.6%
6.0%
5.75%
5.6%
6.0%
5.75%
Expected return on plan assets
6.5%
6.5%
6.5%
-
-
-
Rate of compensation increase
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
At December 31, 2011 and January 2, 2011, accumulated other comprehensive income (AOCI) includes the following components of unrecognized net periodic cost for the defined benefit plans:
Pension Plans
SERP
(in thousands)
Unrecognized actuarial (gain) loss
$
(105,051)
$
(112,096)
$
26,385
$
18,742
Unrecognized prior service cost
19,626
21,089
Gross amount
(85,425)
(91,007)
26,630
19,248
Deferred tax liability (asset)
34,170
36,403
(10,652)
(7,698)
Net amount
$
(51,255)
$
(54,604)
$
15,978
$
11,550
During 2012, the Company expects to recognize the following amortization components of net periodic cost for the defined benefit plans:
(in thousands)
Pension Plans
SERP
Actuarial loss recognition
$
6,281
$
2,298
Prior service cost recognition
$
3,695
$
Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. As of December 31, 2011 and December 31, 2010, the assets of the Company’s pension plans were allocated as follows:
Pension Plan Asset Allocations
December 31,
December 31,
U.S. equities
%
%
U.S. fixed income
%
%
International equities
%
%
Total
%
%
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of December 31, 2011, the managers can invest no more than 24% of the assets in international stocks at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of December 31, 2011. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At December 31, 2011 the pension plan held common stock in one investment which exceeded 10% of total plan assets. This investment was valued at $222.4 million and $134.8 million at December 31, 2011 and December 31, 2010, respectively, or approximately 12% and 8%, respectively, of total plan assets. Assets also included $154.0 million and $161.6 million of Berkshire Hathaway Class A and Class B common stock at December 31, 2011 and December 31, 2010, respectively. At December 31, 2011 the pension plan held investments in one foreign country which
exceeded 10% of total plan assets. These investments were valued at $241.4 million and $155.0 million at December 31, 2011 and December 31, 2010, respectively, or approximately 13% and 9%, respectively, of total plan assets.
Fair value measurements are determined based on the assumption that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
The Company’s pension plan assets measured at fair value on a recurring basis were as follows:
(in thousands)
Level 1
Level 2
Total
At December 31, 2011
Cash equivalents and other short-term investments
$
120,101
$
43,166
$
163,267
Equity securities
U.S. equities
1,249,079
-
1,249,079
International equities
381,924
-
381,924
Fixed-income securities
U.S. Federal agency mortgage-backed securities
-
1,071
1,071
Corporate debt securities
-
9,203
9,203
Other fixed income
2,531
8,121
10,652
Total investments
$
1,753,635
$
61,561
$
1,815,196
Receivables
1,381
Total
$
1,816,577
At January 2, 2011
Cash equivalents and other short-term investments
$
207,929
$
68,091
$
276,020
Equity securities
U.S. equities
1,090,693
-
1,090,693
International equities
250,604
-
250,604
Fixed-income securities
U.S. Federal agency mortgage-backed securities
-
1,699
1,699
Corporate debt securities
-
15,854
15,854
Other fixed income
7,106
8,338
15,444
Total investments
$
1,556,332
$
93,982
$
1,650,314
Receivables
1,644
Total
$
1,651,958
Cash equivalents and other short-term investments. These investments are primarily held in U.S. Treasury securities and registered money market funds. These investments are valued using a market approach based on the quoted market prices of the security, or inputs that include quoted market prices for similar instruments, and are classified as either Level 1 or Level 2 in the valuation hierarchy.
U.S. equities. These investments are held in common and preferred stock of U.S. corporations and American Depositary Receipts (ADRs) traded on U.S. exchanges. Common and preferred shares and ADRs are traded actively on exchanges, and price quotes for these shares are readily available. These investments are classified as Level 1 in the valuation hierarchy.
International equities. These investments are held in common and preferred stock issued by non-U.S. corporations. Common and preferred shares are traded actively on exchanges, and price quotes for these shares are readily available. These investments are classified as Level 1 in the valuation hierarchy.
U.S. Federal agency mortgage-backed securities. These investments consist of fixed-income securities issued by Federal Agencies and are valued using a bid evaluation process, with bid data provided by independent pricing sources. These investments are classified as Level 2 in the valuation hierarchy.
Corporate debt securities. These investments consist of fixed-income securities issued by U.S. corporations and are valued using a bid evaluation process, with bid data provided by independent pricing sources. These investments are classified as Level 2 in the valuation hierarchy.
Other fixed income. These investments consist of fixed-income securities issued by the U.S. Treasury and in private placements and are valued using a quoted market price or bid evaluation process, with bid data provided by independent pricing sources. These investments are classified as Level 1 or Level 2 in the valuation hierarchy.
Other Postretirement Plans. The following table sets forth obligation, asset and funding information for the Company’s other postretirement plans at December 31, 2011 and January 2, 2011:
Postretirement Plans
(in thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year
$
68,818
$
79,031
Service cost
2,872
3,275
Interest cost
3,063
3,934
Amendments
-
(6,336)
Actuarial gain
(55)
(3,073)
Curtailment gain
-
(3,630)
Benefits paid, net of Medicare subsidy
(2,286)
(4,383)
Benefit obligation at end of year
$
72,412
$
68,818
Change in Plan Assets
Fair value of assets at beginning of year
$
-
$
-
Employer contributions
2,286
4,383
Benefits paid, net of Medicare subsidy
(2,286)
(4,383)
Fair value of assets at end of year
$
-
$
-
Funded status
$
(72,412)
$
(68,818)
The amounts recognized in the Company’s Consolidated Balance Sheets for its other postretirement plans at December 31, 2011 and January 2, 2011 are as follows:
Postretirement Plans
(in thousands)
Current liability
$
(4,548)
$
(4,476)
Noncurrent liability
(67,864)
(64,342)
Recognized liability
$
(72,412)
$
(68,818)
The Company recorded a curtailment gain of $8.5 million in 2010 due to the sale of Newsweek; the gain is included in discontinued operations.
In 2009, the Company made changes to the cable television division’s retiree health care benefits program, resulting in a $7.7 million curtailment gain. Also in 2009, the Company eliminated life insurance benefits for new retirees on or after January 1, 2009, resulting in a $0.7 million curtailment gain.
The discount rates utilized for determining the benefit obligation at December 31, 2011 and January 2, 2011 for the postretirement plans were 3.90% and 4.60%, respectively. The assumed health care cost trend rate used in measuring the postretirement benefit obligation at December 31, 2011 was 8.5% for pre-age 65, decreasing to 5.0% in the year 2019 and thereafter. The assumed health care cost trend rate used in measuring the postretirement benefit obligation at December 31, 2011 was 20.4% for the post-age 65 Medicare Advantage Prescription Drug (MA-PD) plan, decreasing to 5.0% in the year 2021 and thereafter, and was 7.5% for the post-age 65 non MA-PD plan, decreasing to 5.0% in the year 2017 and thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A change of one percentage point in the assumed health care cost trend rates would have the following effects:
1%
1%
(in thousands)
Increase
Decrease
Benefit obligation at end of year
$
5,934
$
(5,268)
Service cost plus interest cost
$
$
(626)
The Company made contributions to its postretirement benefit plans of $2.3 million and $4.4 million for the years ended December 31, 2011 and January 2, 2011, respectively. As the plans are unfunded, the Company makes contributions to its postretirement plans based on actual benefit payments.
At December 31, 2011, future estimated benefit payments are as follows:
Postretirement
(in millions)
Plans
$
4.5
$
4.8
$
5.1
$
5.3
$
5.6
2017-2021
$
29.8
The total cost (benefit) arising from the Company’s other postretirement plans for the years ended December 31, 2011, January 2, 2011 and January 3, 2010, including a portion included in discontinued operations, consists of the following components:
Postretirement Plans
(in thousands)
Service cost
$
2,872
$
3,275
$
3,871
Interest cost
3,063
3,934
4,168
Amortization of prior service credit
(5,650)
(5,026)
(4,607)
Recognized actuarial gain
(1,921)
(2,032)
(3,128)
Net periodic (benefit) cost
(1,636)
Curtailment gain
-
(8,583)
(8,353)
Total benefit for the year
$
(1,636)
$
(8,432)
$
(8,049)
Other changes in plan assets and benefit obligations in other comprehensive income:
Current year actuarial (gain) loss
$
(55)
$
(3,073)
$
10,673
Current year prior service credit
-
(6,336)
(1,399)
Amortization of prior service credit
5,650
5,026
4,607
Recognized actuarial gain
1,921
2,032
3,128
Curtailment loss (gain)
-
4,953
(719)
Total recognized in other comprehensive income (before tax effect)
$
7,516
$
2,602
$
16,290
Total recognized in net periodic cost (benefit) and other comprehensive income
(before tax effect)
$
5,880
$
(5,830)
$
8,241
The costs for the Company’s postretirement plans are actuarially determined. The discount rates utilized to determine periodic cost for the years ended December 31, 2011, January 2, 2011 and January 3, 2010 were 4.60%, 5.25% and 5.75%, respectively.
At December 31, 2011 and January 2, 2011, accumulated other comprehensive income (AOCI) included the following components of unrecognized net periodic benefit for the postretirement plans, respectively:
(in thousands)
Unrecognized actuarial gain
$
(15,510)
$
(17,376)
Unrecognized prior service credit
(31,736)
(37,386)
Gross amount
(47,246)
(54,762)
Deferred tax liability
18,898
21,905
Net amount
$
(28,348)
$
(32,857)
During 2012, the Company expects to recognize the following amortization components of net periodic cost for the other postretirement plans:
(in thousands)
Actuarial gain recognition
$
(1,479)
Prior service credit recognition
$
(5,607)
Multiemployer Pension Plans. The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain union-represented employees. The risks of participating in these multiemployer pension plans are different from single-employer plans as follows:
• Assets contributed to the multiemployer pension plan by one employer may be used to provide benefits to employees of other participating employers.
• If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
• If the Company chooses to stop participating in some of its multiemployer pension plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company, through The Washington Post and The Daily Herald newspapers, contributed to the CWA/ITU Negotiated Pension Plan (Employer Identification Number - 13-6212879, Plan Number 001) on behalf of mailers, helpers and utility mailers. As of December 31, 2010 and 2009, the CWA/ITU Negotiated Pension Plan (the Plan) was in critical (red) status as currently defined by the Pension Protection Act of 2006, and a rehabilitation plan was in effect. There are no surcharges for employers who have adopted the rehabilitation plan, and there is no minimum contribution requirement other than the normal requirement to contribute as provided in the collective bargaining agreement. The Company’s collective bargaining agreement expired on May 18, 2003. The Company’s contributions to the Plan amounted to $0.1 million in 2011, $0.6 million in 2010 and $0.7 million in 2009. The Washington Post was listed in the Plan’s Form 5500 as providing more than 5% of the total contribution to the Plan for the years ended December 31, 2010 and 2009.
In 2010, The Washington Post notified the union and the Plan of its unilateral withdrawal from the Plan effective November 30, 2010. In connection with this action, The Washington Post recorded a $20.4 million charge in 2010 based on an estimate of the withdrawal liability. In 2011, the Daily Herald notified the union and the Plan of its unilateral withdrawal from the Plan effective December 18, 2011. In connection with this action, The Daily Herald recorded a $2.4 million charge in 2011 based on an estimate of the withdrawal liability. Payment of the actual withdrawal liability will relieve The Washington Post and The Daily Herald of further liability to the Plan absent certain circumstances prescribed by law.
The Company’s total contributions to multiemployer pension plans that are not individually significant amounted to $0.3 million in 2011, $0.4 million in 2010 and $0.4 million in 2009. The Company’s total contributions to all multiemployer pension plans amounted to $0.4 million in 2011, $1.0 million in 2010 and $1.1 million in 2009.
Savings Plans. The Company recorded expense associated with retirement benefits provided under incentive savings plans (primarily 401(k) plans) of approximately $20.9 million in 2011, $19.1 million in 2010 and $19.9 million in 2009.
14. OTHER NON-OPERATING (EXPENSE) INCOME
A summary of non-operating (expense) income for the years ended December 31, 2011, January 2, 2011 and January 3, 2010 follows:
(in thousands)
Impairment write-down on a marketable equity security
$
(53,793)
$
-
$
-
Foreign currency (losses) gains, net
(3,263)
6,705
16,871
Gain on sale of a cost method investment
4,031
-
-
Impairment write-downs on cost method investments
(3,612)
-
(3,800)
Other, net
1,437
Total
$
(55,200)
$
7,515
$
13,197
15. LEASES AND OTHER COMMITMENTS
The Company leases real property under operating agreements. Many of the leases contain renewal options and escalation clauses that require payments of additional rent to the extent of increases in the related operating costs.
At December 31, 2011, future minimum rental payments under noncancelable operating leases approximate the following:
(in thousands)
$
135,911
116,435
99,335
78,955
69,597
Thereafter
243,736
$
743,969
Minimum payments have not been reduced by minimum sublease rentals of $14.5 million due in the future under noncancelable subleases.
Rent expense under operating leases, including a portion reported in discontinued operations, was approximately $127.8 million, $134.0 million and $131.7 million in 2011, 2010 and 2009, respectively. Sublease income was approximately $2.7 million, $0.5 million and $0.7 million in 2011, 2010 and 2009, respectively.
The Company’s broadcast subsidiaries are parties to certain agreements that commit them to purchase programming to be produced in future years. At December 31, 2011, such commitments amounted to approximately $33.7 million. If such programs are not produced, the Company’s commitment would expire without obligation.
16. CONTINGENCIES
Litigation and Legal Matters. The Company and its subsidiaries are subject to the items listed below, other complaints and administrative proceedings and are defendants in various other civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, invasion of privacy, trademark, copyright and patent infringement; U.S. Federal False Claims Act (False Claim Act) violations; violations of applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. Although the outcome of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that the exposure to future material losses from existing legal proceedings is not reasonably possible, or that future material losses in excess of the amounts accrued are not reasonably possible.
A purported class action complaint was filed against the Company, Donald E. Graham and Hal S. Jones on October 28, 2010, in the U.S. District Court for the District of Columbia, by the Plumbers Local #200 Pension Fund. The complaint alleged that the Company and certain of its officers made materially false and misleading statements, or failed to disclose
material facts relating to KHE, in violation of the federal securities laws. The complaint sought damages, attorneys’ fees, costs and equitable/injunctive relief. The Company moved to dismiss the complaint, and on December 23, 2011, the court granted the Company’s motion and dismissed the case with prejudice. On January 25, 2012, the Plaintiff filed a motion seeking to leave to amend or alter that final judgment; the Company has opposed the motion.
On February 6, 2008, a purported class action lawsuit was filed in the U.S. District Court for the Central District of California by purchasers of BAR/BRI bar review courses from July 2006 onwards alleging antitrust claims against Kaplan and West Publishing Corporation, BAR/BRI’s former owner. On April 10, 2008, the court granted defendants’ motion to dismiss. On May 7, 2008, the plaintiffs filed an appeal to the U.S. Court of Appeals for the Ninth Circuit. On October 18, 2010, the parties entered into a stipulation and settlement agreement. The District Court granted preliminary approval of this proposed settlement on March 21, 2011, but denied final approval thereof on July 1, 2011. On November 7, 2011, the Ninth Circuit reversed the District Court’s order of dismissal, but stayed the mandate and referred the matter to the Ninth Circuit mediator for renewed settlement discussions.
On or about January 17, 2008, an Assistant U.S. Attorney in the Civil Division of the U.S. Attorney’s Office for the Eastern District of Pennsylvania contacted KHE’s CHI-Broomall campus and made inquiries about the Surgical Technology program, including the program’s eligibility for Title IV U.S. Federal financial aid, the program’s student loan defaults,
licensing and accreditation. Kaplan responded to the information requests and fully cooperated with the inquiry. The U.S. Department of Education (DOE) also conducted a program review at the CHI-Broomall campus, and Kaplan likewise cooperated with the program review. On July 22, 2011, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced that it had entered into a comprehensive settlement agreement with Kaplan that resolved the U.S. Attorney’s inquiry, provided for the conclusion of the DOE’s program review, and also settled a previously sealed False Claims Act complaint (31 U.S.C. § 3729, et seq.) that had been filed by a former employee of the CHI-Broomall campus. The total amount of all required payments by CHI-Broomall under the agreements was $1.6 million. Pursuant to the comprehensive settlement agreement, the U.S. Attorney inquiry has been closed, the DOE will issue a final program review determination, and the False Claims Act complaint (United States of America ex rel. David Goodstein v. Kaplan, Inc., et al. (unsealed July 22, 2011)) was unsealed and will be dismissed with prejudice. At this time, Kaplan cannot predict the contents of the pending final program review determination or the ultimate impact the proceedings may have on the CHI-Broomall campus or the KHE business generally.
Several Kaplan subsidiaries were or are subject to four other unsealed cases filed by former employees that included, among other allegations, claims under the False Claims Act relating to eligibility for Title IV funding. The U.S. Government declined to intervene in all cases, and, as previously reported, court decisions in 2011 either dismissed the cases in their entirety or narrowed the scope of their allegations. The four cases are captioned: United States of America ex rel. Carlos Urquilla-Diaz et al. v. Kaplan University et al. (unsealed March 25, 2008); United States of America ex rel. Jorge Torres v. Kaplan Higher Education Corp. (unsealed April 7, 2008); United States of America ex rel. Victoria Gatsiopoulos et al. v. ICM School of Business & Medical Careers et al. (unsealed September 2, 2008); and United States of America ex rel. Charles Jajdelski v. Kaplan Higher Education Corp. et al. (unsealed January 6, 2009).
On August 17, 2011, the U.S. District Court for the Southern District of Florida issued a series of rulings in the Diaz case, which included three separate complaints: Diaz, Wilcox and Gillespie. The court dismissed the Wilcox complaint in its entirety; dismissed all False Claims Act allegations in the Diaz case, leaving only an individual employment claim; and dismissed in part the Gillespie case, thereby limiting the scope and time frame of its False Claims Act allegations regarding compliance with the U.S. Federal Rehabilitation Act. The case (now consisting of the individual employment claim in Diaz and the remaining False Claim Act allegations in Gillespie) is expected to proceed to the discovery and dispositive motion phases.
On August 23, 2011, the U.S. District Court for the Southern District of Florida dismissed the Torres case in its entirety and entered a final judgment in favor of Kaplan. That case has been appealed in the U.S. Court of Appeals for the 11th Judicial Circuit.
On August 9, 2011, the U.S. District Court for the Southern District of Florida granted in part Kaplan’s motion to dismiss the Gatsiopoulos case, which limited the allegations in that case to alleged violations of federal incentive compensation regulations and so-called “70 percent rules” and an individual employment claim, and limited the time frame applicable to these claims. Thereafter, the court recommended that the case be transferred back to its original jurisdiction, the U.S. District Court for the Western District of Pennsylvania, and the case was assigned to a judge in that venue in December 2011. The case is expected to proceed to the discovery and dispositive motion phases in that venue.
On July 7, 2011, the U.S. District Court for the District of Nevada dismissed the Jajdelski case in its entirety and entered a final judgment in favor of Kaplan. That case is currently on appeal in the U.S. Circuit Court of Appeals for the Ninth Judicial Circuit.
On October 21, 2010, Kaplan Higher Education Corporation received a subpoena from the office of the Florida Attorney General. The subpoena sought information pertaining to the online and on-campus schools operated by KHE in and outside of Florida. KHE has cooperated with the Florida Attorney General and provided the information requested in the subpoena. KHE also may receive further requests for information from the Florida Attorney General. The Company cannot predict the outcome of this inquiry.
On December 21, 2010, the U.S. Equal Employment Opportunities Commission filed suit against Kaplan Higher Education Corporation in the U.S. District Court for the Northern District of Ohio, alleging racial bias by Kaplan in requesting credit scores of job applicants seeking financial positions. The Company believes that the complaint lacks merit. In March 2011, the court granted in part the Company’s motion to dismiss the complaint. Since that time, the case is proceeding with the discovery phase.
On February 7, 2011, Kaplan Higher Education Corporation received a Civil Investigative Demand from the Office of the Attorney General of the State of Illinois. The demand primarily sought information pertaining to Kaplan University online
students who are residents of Illinois. KHE has cooperated with the Illinois Attorney General and provided the requested
information. KHE also may receive further requests for information from the Illinois Attorney General. The Company cannot predict the outcome of this inquiry.
On April 30, 2011, Kaplan Higher Education Corporation received a Civil Investigative Demand from the Office of the Attorney General of the State of Massachusetts. The demand primarily sought information pertaining to KHE Campuses’ students who are residents of Massachusetts. KHE has cooperated with the Massachusetts Attorney General and provided the requested information. KHE also may receive further requests for information from the Massachusetts Attorney General. The Company cannot predict the outcome of this inquiry.
On July 20, 2011, Kaplan Higher Education Corporation received a subpoena from the Office of the Attorney General of the State of Delaware. The demand primarily sought information pertaining to Kaplan University’s online and KHE Campuses’ students who are residents of Delaware. KHE has cooperated with the Delaware Attorney General and provided the information requested in the subpoena. KHE also may receive further requests for information from the Delaware Attorney General. The Company cannot predict the outcome of this inquiry.
Student Financial Aid. The Company’s education division derives the majority of its revenues from U.S. Federal financial aid received by its students under Title IV programs administered by the DOE pursuant to the U.S. Federal Higher Education Act of 1965 (HEA), as amended. To maintain eligibility to participate in Title IV programs, a school must comply with extensive statutory and regulatory requirements relating to its financial aid management, educational programs, financial strength, administrative capability, compensation practices, facilities, recruiting practices and various other matters. In addition, the school must be licensed or otherwise legally authorized to offer postsecondary educational programs by the appropriate governmental body in the state or states in which it is physically located or has students, be accredited by an accrediting agency recognized by the DOE and be certified to participate in the Title IV programs by the DOE. Schools are required periodically to apply for renewal of their authorization, accreditation or certification with the applicable state governmental bodies, accrediting agencies and the DOE. In accordance with DOE regulations, some KHE schools operate individually or are combined into groups of two or more schools for the purpose of determining compliance with certain Title IV requirements, and each school or school group is assigned its own identification number, known as an OPEID number. As a result, the schools in KHE have a total of 32 OPEID numbers. Failure to comply with the requirements of HEA or related regulations could result in the restriction or loss of the ability to participate in Title IV programs and subject the Company to financial penalties and refunds. No assurance can be given that the Kaplan schools, or individual programs within schools, will maintain their Title IV eligibility, accreditation and state authorization in the future or that the DOE might not successfully assert that one or more of such schools have previously failed to comply with Title IV requirements.
DOE regulations require schools participating in Title IV programs to calculate correctly and return on a timely basis unearned Title IV funds disbursed to students who withdraw from a program of study prior to completion. These funds must be returned in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn. Under DOE regulations, failure to make timely returns of Title IV program funds for 5% or more of students sampled in a school’s annual compliance audit in either of its two most recently completed fiscal years could result in a requirement that the school post a letter of credit in an amount equal to 25% of its prior-year returns of Title IV program funds. If unearned funds are not properly calculated and returned in a timely manner, an institution is also subject to monetary liabilities, fines or other sanctions.
Financial aid and assistance programs are subject to political and governmental budgetary considerations. There is no assurance that such funding will be maintained at current levels. Extensive and complex regulations in the U.S. govern all of the government financial assistance programs in which students participate.
For the years ended December 31, 2011, January 2, 2011 and January 3, 2010, approximately $1,110 million, $1,460 million and $1,283 million, respectively, of the Company’s education division revenue was derived from financial aid received by students under Title IV programs. Management believes that the Company’s education division schools that participate in Title IV programs are in material compliance with standards set forth in the HEA and related regulations.
DOE Program Reviews. The DOE has undertaken program reviews at various KHE campus locations and at Kaplan University. Six program reviews were finalized in 2011 with no significant findings. Currently, there are two pending program reviews, including Kaplan University. In addition, the Company is awaiting the DOE’s final report on the program review at KHE’s Broomall, PA, location. The results of these open reviews and their impact on Kaplan’s operations are uncertain.
Other. On December 15, 2011, the United Kingdom Border Agency (UKBA) conducted a compliance review at Kaplan UK’ s Borough High Street Center in London, England. The review focused on Kaplan UK’s compliance with regulations
regarding Tier 4 students, who are adult students seeking to study in the U.K. Kaplan UK is fully cooperating with this inquiry and is in the process of responding to requests for additional information. In cases of noncompliance, the UKBA has the authority to take a range of actions to limit, suspend or revoke an institution’s ability to sponsor foreign students. At this time, Kaplan cannot predict what determinations the UKBA will make or the ultimate impact of this review on Kaplan UK.
Additionally, UKBA issued revised immigration rules that became operational on April 21, 2011. Students from outside the European Economic Area (EEA) and Switzerland who were issued a Confirmation of Acceptance for Studies (CAS) after July 4, 2011 will be given permission to work part-time during their studies only if they attend an institution which qualifies as a Higher Education Institution (HEI). Many of the Kaplan UK international students currently work part-time. Kaplan UK is not in receipt of public funding for the courses upon which international students study and, therefore, does not qualify as an HEI. Also, certain Kaplan UK schools have gained, applied for or are in the process of applying for Highly Trusted Sponsor status (HTS). Without HTS, these schools cannot issue a CAS to potential incoming international students starting in April 2012. These new rules have the potential to adversely impact the number of international students studying at Kaplan UK.
17. FAIR VALUE MEASUREMENTS
Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
(in thousands)
Level 1
Level 2
Total
At December 31, 2011
Assets:
Money market investments(1)
$
-
$
180,136
$
180,136
Marketable equity securities(2)
303,201
-
303,201
Other current investments(3)
15,223
20,250
35,473
Interest rate swap(4)
-
Total financial assets
$
318,424
$
200,400
$
518,824
Liabilities:
Deferred compensation plan liabilities(5)
$
-
$
63,403
$
63,403
7.25% unsecured notes(6)
-
460,500
460,500
AUD 50M borrowing(6)
-
51,012
51,012
Total financial liabilities
$
-
$
574,915
$
574,915
At January 2, 2011
Assets:
Money market investments(1)
$
-
$
308,927
$
308,927
Marketable equity securities(2)
340,910
-
340,910
Other current investments(3)
11,835
21,005
32,840
Total financial assets
$
352,745
$
329,932
$
682,677
Liabilities:
Deferred compensation plan liabilities(5)
$
-
$
69,226
$
69,226
7.25% unsecured notes(6)
-
457,200
457,200
Total financial liabilities
$
-
$
526,426
$
526,426
____________
(1) The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2) The Company’s investments in marketable equity securities are classified as available-for-sale.
(3) Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
(4) Included in deferred charges and other assets. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
(5) Includes The Washington Post Company Deferred Compensation Plan and supplemental savings plan benefits under The Washington Post Company Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.
(6) See Note 10 for carrying amount of these notes and borrowing.
For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.
18. BUSINESS SEGMENTS
Basis of Presentation. The Company’s organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customers, the nature of products and services and use of resources. The business segments disclosed in the Consolidated Financial Statements are based on this organizational structure and information reviewed by the Company's management to evaluate the business segment results. The Company has eight reportable segments: KHE, KTP, Kaplan International, Kaplan Ventures, cable television, newspaper publishing, television broadcasting and other businesses.
The Company evaluates segment performance based on operating income before amortization of intangible assets. The accounting policies at the segments are the same as described in Note 2. In computing income from operations by segment, the effects of equity in earnings (losses) of affiliates, interest income, interest expense, other non-operating income and expense items and income taxes are not included. Intersegment sales are not material.
Identifiable assets by segment are those assets used in the Company's operations in each business segment. Investments in marketable equity securities are discussed in Note 4.
Education. Education products and services are provided by Kaplan, Inc. KHE includes Kaplan's postsecondary education businesses, made up of fixed-facility colleges as well as online postsecondary and career programs. KTP includes Kaplan's standardized test preparation and tutoring offerings, as well as the professional domestic training business, and other businesses. Kaplan International includes professional training and postsecondary education businesses outside the United States, as well as English-language programs. Kaplan Ventures is made up of a number of businesses in various states of development that are managed separately from the other education businesses.
In the first quarter of 2011, Kaplan made several changes to its operating and reporting structure. Kaplan’s domestic professional training business was moved from KTP to KHE and Kaplan Continuing Education moved from Kaplan Ventures to KHE. These businesses were integrated with Kaplan University to become part of the Kaplan University School of Professional and Continuing Education. Also, Kaplan sold KCS in October 2011, KVE in July 2011, and Education Connection in April 2010; therefore the education division’s operating results exclude these businesses. Segment operating results of the education division for fiscal years ended 2011, 2010 and 2009 have been restated to reflect these changes. Kaplan Ventures sold one small business in February 2012 and is exploring other alternatives with respect to the remaining Kaplan Ventures businesses, including possible sales.
In light of recent revenue declines and other business challenges, Kaplan has formulated and implemented restructuring plans at its various businesses that have resulted in significant costs in the past three years, with the objective of establishing lower cost levels in future periods. Across all Kaplan businesses, severance and restructuring costs of $29.2 million, $27.5 million and $33.2 million were recorded in 2011, 2010 and 2009, respectively.
Restructuring and severance related expenses of $13.2 million and $9.3 million were recorded in 2011 and 2010, respectively, at KHE associated with workforce reductions.
In the first quarter of 2010, the Company discontinued certain offerings of the K12 business; $7.8 million in severance and other closure costs were recorded in the first half of 2010 in connection with this plan. In the fourth quarter of 2010, KTP began implementing a plan to reorganize its business consistent with the migration of students to Kaplan’s online and hybrid test preparation offerings, reducing the number of leased test preparation centers; $10.4 million in costs were incurred, mostly comprised of charges related to early lease termination and property, plant and equipment write-downs. In 2011, implementation of the plan was completed and $12.5 million in additional restructuring and severance costs were incurred.
In March 2009, the Company approved a plan to close its Score tutoring centers. The Company recorded charges of $24.9 million in asset write-downs, lease terminations, severance and accelerated depreciation of fixed assets in the first half of 2009. In addition, restructuring-related expenses of $8.3 million were recorded in 2009 at Kaplan's professional domestic training business (part of KHE).
Cable Television. Cable television operations consist of cable systems offering video, Internet, phone and other services to subscribers in midwestern, western and southern states. The principal source of revenue is monthly subscription fees charged for services.
Newspaper Publishing. Newspaper publishing includes the publication of newspapers in the Washington, DC, area and Everett, WA; newsprint warehousing; and the Company’s digital media publishing businesses (primarily washingtonpost.com and Slate). Revenues from newspaper publishing operations are derived from advertising and, to a lesser extent, from circulation.
Television Broadcasting. Television broadcasting operations are conducted through six VHF television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville), with revenues derived primarily from sales of advertising time.
Other Businesses. Other businesses include the operating results of Avenue100 Media Solutions and other small businesses.
Corporate Office. Corporate office includes the expenses of the Company’s corporate office and the pension credit previously reported in the magazine publishing division. Newsweek employees were participants in The Washington Post Company Retirement Plan, and the Company had historically been allocated a net pension credit for segment reporting purposes. Since the associated pension assets and liabilities were retained by the Company, the associated credit has been excluded from the reclassification of Newsweek results to discontinued operations. Pension cost arising from early retirement programs at Newsweek, however, is included in discontinued operations.
Geographical Information. The Company's non-U.S. revenues in 2011, 2010 and 2009 totaled approximately $628 million, $540 million and $505 million, respectively, from Kaplan's operations outside the U.S. The Company's long-lived assets in non-U.S. countries (excluding goodwill and other intangible assets), totaled approximately $74 million at December 31, 2011, and $57 million at January 2, 2011.
Company information broken down by operating segment and education division:
Fiscal Year Ended
(in thousands)
Operating Revenues
Education
$
2,465,048
$
2,862,279
$
2,576,162
Cable television
760,221
759,884
750,409
Newspaper publishing
648,039
680,373
679,282
Television broadcasting
319,206
342,164
272,651
Other businesses
26,135
46,395
53,921
Corporate office
-
-
-
Intersegment elimination
(3,816)
(7,054)
(6,385)
$
4,214,833
$
4,684,041
$
4,326,040
Income (loss) from operations
Education
$
89,434
$
346,733
$
227,281
Cable television
156,844
163,945
169,051
Newspaper publishing
(18,200)
(9,826)
(163,549)
Television broadcasting
117,089
121,348
70,506
Other businesses
(34,787)
(34,966)
(61)
Corporate office
(14,422)
(24,572)
(12,829)
$
295,958
$
562,662
$
290,399
Equity in earnings (losses) of affiliates, net
5,949
(4,133)
(29,421)
Interest expense, net
(29,079)
(27,927)
(28,968)
Other (expense) income, net
(55,200)
7,515
13,197
Income from continuing operations before income taxes
$
217,628
$
538,117
$
245,207
Depreciation of property, plant and equipment
Education
$
87,718
$
77,306
$
80,403
Cable television
126,302
124,834
124,207
Newspaper publishing
26,336
30,341
72,870
Television broadcasting
12,448
12,720
12,299
Other businesses
Corporate office
1,159
$
253,373
$
246,630
$
290,609
Amortization of intangible assets
Education
$
21,167
$
21,406
$
21,191
Cable television
Newspaper publishing
1,051
1,223
1,010
Television broadcasting
-
-
-
Other businesses
5,874
3,786
3,099
Corporate office
-
-
-
$
28,359
$
26,742
$
25,610
Impairment of goodwill and other intangible assets
Education
$
-
$
-
$
8,492
Cable television
-
-
-
Newspaper publishing
-
-
-
Television broadcasting
-
-
-
Other businesses
11,923
27,477
-
Corporate office
-
-
-
$
11,923
$
27,477
$
8,492
Net pension credit (expense)
Education
$
(6,345)
$
(5,707)
$
(5,414)
Cable television
(1,924)
(1,919)
(1,851)
Newspaper publishing(1)
(25,300)
(42,287)
(75,925)
Television broadcasting
(1,669)
(1,113)
(418)
Other businesses
(68)
(65)
(82)
Corporate office
36,983
34,599
33,836
$
1,677
$
(16,492)
$
(49,854)
Capital expenditures
Education
$
54,633
$
113,780
$
104,282
Cable television
143,225
109,579
84,027
Newspaper publishing
11,405
10,590
18,856
Television broadcasting
6,415
6,675
13,559
Other businesses
Corporate office
-
-
-
$
215,841
$
241,087
$
221,650
Identifiable assets
Education
$
2,176,240
$
2,197,277
$
2,188,328
Cable television
1,145,596
1,141,427
1,164,209
Newspaper publishing
118,253
206,305
207,234
Television broadcasting
421,764
436,289
433,705
Other businesses
11,190
30,038
54,418
Corporate office
823,641
774,484
729,706
$
4,696,684
$
4,785,820
$
4,777,600
Investments in marketable equity securities
303,201
340,910
353,884
Investments in affiliates
17,101
31,637
54,722
Total Assets
$
5,016,986
$
5,158,367
$
5,186,206
(1) Includes a $2.4 million and $20.4 million charge in 2011 and 2010, respectively, related to the withdrawal from a multiemployer pension plan.
The Company’s education division comprises the following operating segments:
Fiscal Year Ended
(in thousands)
Operating Revenues
Higher education
$
1,399,582
$
1,905,038
$
1,653,276
Test preparation(1)
303,093
314,879
336,788
Kaplan international
690,225
585,924
537,238
Kaplan ventures
74,946
59,296
57,210
Kaplan corporate and other
4,585
5,537
2,436
Intersegment elimination
(7,383)
(8,395)
(10,786)
$
2,465,048
$
2,862,279
$
2,576,162
Income (loss) from operations
Higher education
$
148,915
$
406,880
$
284,357
Test preparation(1)
(28,498)
(32,583)
(18,029)
Kaplan international
46,498
56,152
53,772
Kaplan ventures
(10,093)
(17,490)
(9,286)
Kaplan corporate and other
(66,268)
(65,992)
(83,843)
Intersegment elimination
(1,120)
(234)
$
89,434
$
346,733
$
227,281
Depreciation of property, plant and equipment
Higher education
$
48,379
$
42,412
$
42,813
Test preparation
15,489
14,095
17,941
Kaplan international
16,747
12,839
11,438
Kaplan ventures
4,189
4,109
3,911
Kaplan corporate and other
2,914
3,851
4,300
$
87,718
$
77,306
$
80,403
Amortization of intangible assets
$
21,167
$
21,406
$
21,191
Impairment of goodwill and other long-lived assets
$
-
$
-
$
8,492
Kaplan stock-based incentive compensation (credit) expense
$
(1,290)
$
(1,179)
$
Capital Expenditures
Higher education
$
19,735
$
58,660
$
69,131
Test preparation
17,266
32,798
15,900
Kaplan international
16,304
14,163
13,900
Kaplan ventures
2,762
3,050
3,710
Kaplan corporate and other
(1,434)
5,109
1,641
$
54,633
$
113,780
$
104,282
Identifiable assets
Higher education
$
936,029
$
1,043,503
$
1,018,256
Test preparation
334,343
290,368
285,673
Kaplan international
809,267
675,127
671,250
Kaplan ventures
89,043
93,359
58,421
Kaplan corporate and other
7,558
94,920
154,728
$
2,176,240
$
2,197,277
$
2,188,328
_____________
(1) Test Preparation amounts include revenues of $8.6 million and operating losses of $36.8 million from Score for the fiscal year ended 2009.
19. SUMMARY OF QUARTERLY OPERATING RESULTS AND COMPREHENSIVE INCOME (UNAUDITED)
Quarterly results of operations and comprehensive income for the year ended December 31, 2011 is as follows:
(in thousands, except per share amounts)
First
Quarter
Second Quarter
Third
Quarter
Fourth
Quarter
2011 Quarterly Operating Results
Operating Revenues
Education
$
626,631
$
624,844
$
615,884
$
597,689
Advertising
177,384
193,352
170,553
213,255
Circulation and subscriber
214,523
216,607
212,144
213,183
Other
31,076
34,337
34,059
39,312
1,049,614
1,069,140
1,032,640
1,063,439
Operating Costs and Expenses
Operating
481,313
506,049
504,001
481,805
Selling, general and administrative
443,876
411,610
393,508
403,058
Depreciation of property, plant and equipment
63,021
63,690
62,644
64,018
Amortization of intangible assets
6,164
6,779
8,603
6,813
Impairment of goodwill
-
-
11,923
-
994,374
988,128
980,679
955,694
Income from Operations
55,240
81,012
51,961
107,745
Equity in earnings (losses) of affiliates, net
3,737
3,138
(1,494)
Interest income
1,174
Interest expense
(7,961)
(7,960)
(8,667)
(8,638)
Other (expense) income, net
(24,032)
(2,591)
(29,650)
1,073
Income from Continuing Operations Before Income Taxes
27,966
74,596
13,144
101,922
Provision for Income Taxes
10,400
27,500
16,600
41,800
Income (Loss) from Continuing Operations
17,566
47,096
(3,456)
60,122
(Loss) Income from Discontinued Operations, Net of Tax
(1,937)
(1,333)
(2,510)
1,609
Net Income (Loss)
15,629
45,763
(5,966)
61,731
Net (Income) Loss Attributable to Noncontrolling Interests
(14)
(16)
(17)
Net Income (Loss) Attributable to The Washington Post
Company
15,615
45,803
(5,982)
61,714
Redeemable Preferred Stock Dividends
(461)
(230)
(226)
-
Net Income (Loss) Attributable to The Washington Post
Company Common Stockholders
$
15,154
$
45,573
$
(6,208)
$
61,714
Amounts Attributable to The Washington Post Company
Common Stockholders
Income (loss) from continuing operations
$
17,091
$
46,906
$
(3,698)
$
60,105
(Loss) income from discontinued operations, net of tax
(1,937)
(1,333)
(2,510)
1,609
Net income attributable to The Washington Post Company
common stockholders
$
15,154
$
45,573
$
(6,208)
$
61,714
Per Share Information Attributable to The Washington Post
Company Common Stockholders
Basic income (loss) per common share from continuing operations
$
2.11
$
5.91
$
(0.50)
$
7.82
Basic (loss) income per common share from discontinued
operations
(0.24)
(0.17)
(0.32)
0.21
Basic net income (loss) per common share
$
1.87
$
5.74
$
(0.82)
$
8.03
Diluted income (loss) per common share from continuing
operations
$
2.11
$
5.91
$
(0.50)
$
7.82
Diluted (loss) income per common share from discontinued
operations
(0.24)
(0.17)
(0.32)
0.21
Diluted net income (loss) per common share
$
1.87
$
5.74
$
(0.82)
$
8.03
Basic average number of common shares outstanding
8,046
7,852
7,802
7,601
Diluted average number of common shares outstanding
8,119
7,933
7,802
7,682
2011 quarterly comprehensive income (loss)
$
40,894
$
37,040
$
(41,225)
$
63,512
The sum of the four quarters may not necessarily be equal to the annual amounts reported in the Consolidated Statements of Operations due to rounding.
Quarterly results of operations and comprehensive income for the year ended January 2, 2011 is as follows:
(in thousands, except per share amount)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2010 Quarterly Operating Results
Operating Revenues
Education
$
694,078
$
739,129
$
737,131
$
691,941
Advertising
184,182
207,241
200,532
241,650
Circulation and subscriber
213,454
215,995
213,377
214,464
Other
33,013
31,253
32,495
34,106
1,124,727
1,193,618
1,183,535
1,182,161
Operating Costs and Expenses
Operating
471,542
477,248
479,526
503,260
Selling, general and administrative
478,908
480,412
471,897
457,737
Depreciation of property, plant and equipment
61,307
60,872
60,752
63,699
Amortization of intangible assets
6,403
7,492
6,409
6,438
Impairment of goodwill and other intangible assets
-
-
27,477
-
1,018,160
1,026,024
1,046,061
1,031,134
Income from Operations
106,567
167,594
137,474
151,027
Equity in (losses) earnings of affiliates, net
(8,109)
2,027
2,140
(191)
Interest income
1,051
Interest expense
(7,579)
(7,598)
(7,633)
(7,693)
Other (expense) income, net
(3,321)
(3,807)
12,486
2,157
Income from Continuing Operations Before Income Taxes
87,884
158,815
145,067
146,351
Provision for Income Taxes
33,700
56,700
59,400
68,200
Income from Continuing Operations
54,184
102,115
85,667
78,151
(Loss) Income from Discontinued Operations, Net of Tax
(8,356)
(9,988)
(24,591)
Net Income
45,828
92,127
61,076
78,989
Net Loss (Income) Attributable to Noncontrolling Interests
(2)
Net Income Attributable to The Washington Post Company
45,840
92,135
61,152
78,987
Redeemable Preferred Stock Dividends
(461)
(231)
(230)
-
Net Income Attributable to The Washington Post Company
Common Stockholders
$
45,379
$
91,904
$
60,922
$
78,987
Amounts Attributable to The Washington Post Company
Common Stockholders
Income from continuing operations
$
53,735
$
101,892
$
85,513
$
78,149
(Loss) income from discontinued operations, net of tax
(8,356)
(9,988)
(24,591)
Net income attributable to The Washington Post Company
common stockholders
$
45,379
$
91,904
$
60,922
$
78,987
Per Share Information Attributable to The Washington Post
Company Common Stockholders
Basic income per common share from continuing operations
$
5.81
$
11.08
$
9.61
$
9.32
Basic (loss) income per common share from discontinued
operations
(0.90)
(1.08)
(2.76)
0.10
Basic net income per common share
$
4.91
$
10.00
$
6.85
$
9.42
Diluted income per common share from continuing operations
$
5.81
$
11.08
$
9.60
$
9.32
Diluted (loss) income per common share from discontinued
operations
(0.90)
(1.08)
(2.76)
0.10
Diluted net income per common share
$
4.91
$
10.00
$
6.84
$
9.42
Basic average number of common shares outstanding
9,175
9,126
8,839
8,336
Diluted average number of common shares outstanding
9,241
9,193
8,904
8,385
2010 quarterly comprehensive income
$
91,370
$
33,291
$
83,421
$
147,552
The sum of the four quarters may not necessarily be equal to the annual amounts reported in the Consolidated Statements of Operations due to rounding.
Quarterly impact from certain items in 2011 (after-tax and diluted EPS amounts):
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Charges of $18.1 million in connection with severance and restructuring at
Kaplan ($1.4 million, $7.3 million, $3.5 million and $6.0 million in the first, second,
third and fourth quarters, respectively)
$
(0.18)
$
(0.91)
$
(0.44)
$
(0.77)
Charge of $1.5 million recorded at the newspaper publishing division in connection
with the withdrawal from a multiemployer pension plan
$
(0.19)
Goodwill impairment charge of $11.9 million at the Company's online lead
generation business
$
(1.51)
Impairment charges of $5.7 million at one of the Company’s affiliates
$
(0.72)
Write-down of a marketable equity security of $34.6 million ($19.8 million and
$14.9 million in the first and third quarters, respectively)
$
(2.44)
$
(1.89)
Losses, net, of $2.1 million for non-operating unrealized foreign currency gains
(losses) ($1.7 million gain, $0.2 million gain, $4.2 million loss and $0.3 million
gain in the first, second, third and fourth quarters, respectively)
$
0.21
$
0.03
$
(0.54)
$
0.03
Quarterly impact from certain items in 2010 (after-tax and diluted EPS amounts):
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Charge of $12.7 million in connection with the withdrawal from a multiemployer
pension plan at The Washington Post ($11.0 million and $1.6 million in the
$
(1.19)
$
(0.18)
second and third quarters, respectively)
Goodwill and other intangible assets impairment charge of $26.3 million at the
Company’s online lead generation business, included in other businesses
$
(2.96)
Charges of $24.2 million in connection with severance and restructuring ($2.9 million,
$2.0 million and $19.3 million in the first, second, and fourth quarter, respectively)
$
(0.31)
$
(0.22)
$
(2.31)
Gains, net, of $4.2 million for non-operating unrealized foreign currency gains (losses)
($2.2 million loss, $2.3 million loss, $7.5 million gain and $1.2 million gain in the
first, second, third and fourth quarters, respectively)
$
(0.23)
$
(0.25)
$
0.84
$
0.14
THE WASHINGTON POST COMPANY
FIVE-YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
See Notes to Consolidated Financial Statements for the summary of significant accounting policies and additional information relative to the years 2009-2011 and refer to Note 3 for discussion of discontinued operations.
(in thousands, except per share amounts)
Results of Operations
Operating revenues
$
4,214,833
$
4,684,041
$
4,326,040
$
4,160,953
$
3,852,276
Income from operations
295,958
562,662
290,399
238,917
484,711
Income from continuing operations
121,328
320,117
156,207
100,751
293,660
Net income attributable to The Washington Post Company
common stockholders
116,233
277,192
91,846
64,776
287,655
Per Share Amounts
Basic earnings per common share attributable to
The Washington Post Company common stockholders
Income from continuing operations
$
15.23
$
35.77
$
16.70
$
10.59
$
30.80
Net income
14.70
31.06
9.78
6.89
30.31
Diluted earnings per common share attributable to
The Washington Post Company common stockholders
Income from continuing operations
$
15.23
$
35.75
$
16.70
$
10.57
$
30.68
Net income
14.70
31.04
9.78
6.87
30.19
Weighted average shares outstanding:
Basic
7,826
8,869
9,332
9,408
9,492
Diluted
7,905
8,931
9,392
9,430
9,528
Cash dividends per common share
$
9.40
$
9.00
$
8.60
$
8.60
$
8.20
The Washington Post Company common stockholders’ equity
per common share
$
342.76
$
343.47
$
317.21
$
305.12
$
363.72
Financial Position
Working capital
$
250,069
$
353,621
$
398,481
$
257,292
$
(18,503)
Total assets
5,016,986
5,158,367
5,186,206
5,158,434
6,004,509
Long-term debt
452,229
396,650
396,236
400,003
400,519
The Washington Post Company common stockholders’ equity
2,601,896
2,814,364
2,939,550
2,857,540
3,461,159
Impact from certain items included in income from continuing operations (after-tax and diluted EPS amounts):
• charges of $18.1 million ($2.30 per share) related to severance and restructuring at Kaplan
• charge of $1.5 million ($0.19 per share) recorded at the newspaper publishing division in connection with the withdrawal from a multiemployer pension plan
• goodwill impairment charge at the Company’s online lead generation business of $11.9 million ($1.51 per share)
• impairment charge at one of the Company’s affiliates of $5.7 million ($0.72 per share)
• write-down of a marketable equity security of $34.6 million ($4.34 per share)
• losses, net, of $2.1 million ($0.26 per share) from non-operating unrealized foreign currency losses
• charge of $12.7 million ($1.38 per share) at the Post in connection with the withdrawal from a multiemployer pension plan
• goodwill and other intangible assets impairment charge of $26.3 million ($2.96 per share) at the Company’s online lead generation business
• charges of $24.2 million ($2.83 per share) related to severance and restructuring
• gains, net, of $4.2 million ($0.47 per share) from non-operating unrealized foreign currency gains
• charges of $35.9 million ($3.82 per share) related to early retirement program expense at the newspaper publishing division
• charges of $20.6 million ($2.19 per share) in connection with the restructuring of Kaplan’s Score and Test Preparation operations
• $21.0 million ($2.23 per share) in accelerated depreciation related to the closing of the Post’s College Park, MD, plant and the consolidation of operations at the Post
• goodwill impairment charge of $8.5 million ($0.90 per share) related to Kaplan Ventures
• impairment charges of $18.8 million ($2.00 per share) at two of the Company’s affiliates
• gains, net, of $10.3 million ($1.10 per share) from non-operating unrealized foreign currency gains
• goodwill, intangible assets and other impairment charges of $115.7 million ($12.35 per share) at the Company’s online lead generation business; at the Company’s community newspapers, The Herald and other operations included in the newspaper publishing segment; and at two of the Company’s equity affiliates
• charges of $50.1 million ($5.27 per share) related to early retirement program expense at the Post and the corporate office
• $13.9 million ($1.48 per share) in accelerated depreciation related to the planned closing of the Post’s College Park, MD, plant
• charges of $6.8 million ($0.72 per share) in connection with the restructuring of KHE’s professional training businesses
• gains of $28.9 million ($3.09 per share) from the sales of marketable securities
• losses, net, of $28.5 million ($3.04 per share) from non-operating unrealized foreign currency losses
• charge of $9.5 million ($1.01 per share) in income tax expense related to valuation allowances provided against certain state and local income tax benefits, net of U.S. Federal income tax benefits
• charge of additional net income tax expense of $6.6 million ($0.70 per share), as the result of a $12.9 million increase in taxes associated with Bowater Mersey, offset by a tax benefit of $6.3 million associated with changes in certain state income tax laws
• charges of $10.3 million ($1.08 per share) in connection with the restructuring of Kaplan’s Score and Test Preparation operations
• gain of $5.9 million ($0.62 per share) from the sale of property at the Company’s television station in Miami
• gains of $5.5 million ($0.58 per share) from non-operating unrealized foreign currency gains
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
Restated Certificate of Incorporation of the Company dated November 13, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003).
3.2
Certificate of Designation for the Company’s Series A Preferred Stock dated September 22, 2003 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Current Report on Form 8-K dated September 22, 2003).
3.3
By-Laws of the Company as amended and restated through November 8, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 14, 2007).
4.1
Second Supplemental Indenture dated January 30, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A., as successor to The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 30, 2009).
4.2
Four-Year Credit Agreement, dated as of June 17, 2011, among the Company, JPMorgan Chase Bank, N.A., J.P. Morgan Australia Limited, Wells Fargo Bank, N.A, The Royal Bank of Scotland PLC, HSBC Bank USA, The Bank of New York Mellon, PNC Bank, National Association, Bank of America, N.A., Citibank, N.A., and The Northern Trust Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17, 2011).
10.1
The Washington Post Company Incentive Compensation Plan as amended and restated on January 19, 2012.
10.2
The Washington Post Company Stock Option Plan as amended and restated effective May 31, 2003 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2003).*
10.3
The Washington Post Company Supplemental Executive Retirement Plan as amended and restated on September 10, 2008, and amended December 18, 2009 (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010).*
10.4
The Washington Post Company Deferred Compensation Plan as amended and restated through December 2007 and amended September 23, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2010).*
List of subsidiaries of the Company.
Consent of independent registered public accounting firm.
Power of attorney dated February 23, 2012.
31.1
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document**
XBRL Taxonomy Extension Schema Document**
XBRL Taxonomy Extension Calculation Linkbase Document**
XBRL Taxonomy Extension Definition Linkbase Document**
XBRL Taxonomy Extension Label Linkbase Document**
XBRL Taxonomy Extension Presentation Linkbase Document**
* A management contract or compensatory plan or arrangement required to be included as an exhibit hereto pursuant to Item 15(b) of Form 10-K.
** Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the fiscal years ended December 31, 2011, January 2, 2011, and January 3, 2010; (ii) Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2011, January 2, 2011, and January 3, 2010; (iii) Consolidated Balance Sheets as of December 31, 2011, and January 2, 2011; (iv) Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2011, January 2, 2011, and January 3, 2010; (v) Consolidated Statements of Changes in Common Shareholders’ Equity for the fiscal years ended December 31, 2011, January 2, 2011, and January 3, 2010; and (vi) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.