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WPO > SEC Filings for WPO > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for WASHINGTON POST CO


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition

This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.

Results of Operations

The Company reported net income attributable to common shares of $4.7 million ($0.64 per share) for the first quarter ended March 31, 2013, compared to $31.0 million ($4.07 per share) for the first quarter of last year. Net income includes $1.4 million in losses ($0.18 per share) and $17.6 million in income ($2.35 per share) from discontinued operations for the first quarter of 2013 and 2012, respectively. Income from continuing operations attributable to common shares was $6.1 million ($0.82 per share) for the first quarter of 2013, compared to $13.5 million ($1.72 per share) for the first quarter of 2012. As a result of the Company's share repurchases, there were 5% fewer diluted average shares outstanding in the first quarter of 2013.

Items included in the Company's income from continuing operations for the first quarter of 2013:

$25.3 million in early retirement, severance and restructuring charges at the newspaper publishing and education divisions (after-tax impact of $16.2 million, or $2.23 per share); and

$4.6 million in non-operating unrealized foreign currency losses (after-tax impact of $3.0 million, or $0.41 per share).

Items included in the Company's income from continuing operations for the first quarter of 2012:

$1.9 million in severance and early retirement charges at the newspaper publishing division (after-tax impact of $1.2 million, or $0.16 per share);

a $5.8 million gain on the sale of a cost method investment (after-tax impact of $3.7 million, or $0.48 per share); and

$2.7 million in non-operating unrealized foreign currency gains (after-tax impact of $1.7 million, or $0.22 per share).

Revenue for the first quarter of 2013 was $959.1 million, up slightly compared to $955.5 million in the first quarter of 2012. The Company reported operating income of $23.1 million in the first quarter of 2013, compared to operating income of $21.3 million in the first quarter of 2012. Revenues increased at the television broadcasting and cable television divisions, offset by declines at the education and newspaper publishing divisions. Operating results improved at the education, television broadcasting and cable television divisions, offset by a decline at the newspaper publishing division.

Division Results

Education

Education division revenue totaled $527.8 million for the first quarter of 2013, a 3% decline from revenue of $546.7 million for the first quarter of 2012. Kaplan reported a first quarter 2013 operating loss of $4.1 million, compared to an $11.9 million operating loss in the first quarter of 2012.

In response to student demand levels, Kaplan has formulated and implemented restructuring plans at its various businesses, with the objective of establishing lower cost levels in future periods. Across all businesses, restructuring costs totaled $9.5 million in the first quarter of 2013. Kaplan currently expects to incur approximately $15 million in additional restructuring costs for the remainder of 2013 at KHE and Kaplan International in conjunction with completing these restructuring plans. Kaplan may also incur additional restructuring charges in 2013 as Kaplan continues to evaluate its cost structure.


A summary of Kaplan's first quarter 2013 operating results compared to 2012 is as follows:

                                   Three Months Ended
                                        March 31,
(in thousands)                    2013           2012        % Change
Revenue
  Higher education             $   271,860    $   308,384       (12)
  Test preparation                  68,943         62,829         10
  Kaplan international             184,813        173,563          6
  Kaplan corporate                   2,604          3,384       (23)
  Intersegment elimination           (405)        (1,475)          ?
                               $   527,815    $   546,685        (3)
Operating Income (Loss)
  Higher education             $     5,101    $     8,959       (43)
  Test preparation                 (4,345)       (10,219)         57
  Kaplan international               6,397          4,140         55
  Kaplan corporate and other      (11,340)       (14,989)         24
  Intersegment elimination             131            194          ?
                               $   (4,056)    $  (11,915)         66

Kaplan Higher Education (KHE) includes Kaplan's domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the domestic professional training and other continuing education businesses.

In September 2012, KHE announced a plan to consolidate its market presence at certain of its fixed-facility campuses. Under this plan, KHE ceased new enrollments at nine ground campuses as it considered alternatives for these locations, and is in the process of consolidating operations of four other campuses into existing, nearby locations. Revenues at these campuses represented approximately 4% of KHE's total revenues in 2012. In the fourth quarter of 2012, KHE also began implementing plans to consolidate facilities and reduce its workforce. In connection with these and other plans, KHE incurred $9.1 million in total restructuring costs in the first quarter of 2013, including accelerated depreciation ($3.6 million), severance ($0.9 million), lease obligation losses ($3.7 million) and other items ($0.9 million). In the first quarter of 2013, five of the KHE campuses were closed.

In the first quarter of 2013, KHE revenue declined 12% due to a decline in average enrollments, reflecting weaker market demand over the past year and the impact of campuses in the process of closing. These declines were partially offset by a revenue increase arising from changes in the trial period offered to new students in 2013. These changes had the effect, among others, of recognizing revenue of $5.6 million in the first quarter of 2013 that otherwise would have been recognized in the second quarter of 2013.

Operating income decreased 43% due primarily to lower revenue and restructuring costs noted above. Partially offsetting the declines were expense reductions associated with lower enrollments and recent restructuring efforts.

New student enrollments at KHE decreased 9% in the first quarter of 2013. New student enrollments were adversely affected by campuses planned for closure that are no longer recruiting students, but were positively impacted by the changes in the trial period offered to new students.

Total students at March 31, 2013 were down 12% compared to March 31, 2012, and increased 3% compared to December 31, 2012. Excluding campuses planned for closure, total students at March 31, 2013 were down 8% compared to March 31, 2012, and increased 4% compared to December 31, 2012. A summary of student enrollments is as follows:

                                        Students as of
                             March 31,   December 31,   March 31,
                               2013         2012          2012
Kaplan University              48,673         46,737      52,800
KHE Campuses                   18,523         18,733      23,184
                               67,196         65,470      75,984

                                        Students as of
                             March 31,   December 31,   March 31,
(excluding campuses closing)   2013         2012          2012
Kaplan University              48,673         46,737      52,800
KHE Campuses                   17,615         16,901      19,459
                               66,288         63,638      72,259


Kaplan University enrollments included 8,819, 7,991 and 9,298 campus-based students as of March 31, 2013, December 31, 2012, and March 31, 2012, respectively.

Kaplan University and KHE Campuses enrollments at March 31, 2013, and March 31, 2012, by degree and certificate programs, are as follows:

As of March 31,

                2013          2012
Certificate     23.0  %       25.2  %
Associate's     35.7  %       29.7  %
Bachelor's      29.5  %       33.6  %
Master's        11.8  %       11.5  %
               100.0  %      100.0  %

Kaplan Test Preparation (KTP) includes Kaplan's standardized test preparation and tutoring offerings and other businesses. KTP revenue increased 10% in the first quarter of 2013. Total enrollment was down slightly in the first quarter of 2013 due to declines in graduate programs, offset by continued strength in pre-college, nursing and bar review programs. KTP operating results improved in the first quarter of 2013 due largely to increased revenues.

Kaplan International includes English-language programs and postsecondary education and professional training businesses outside the United States. Kaplan International revenue increased 6% in the first quarter of 2013 due largely to enrollment growth in the pathways, English-language and Singapore higher education programs. Kaplan International operating income increased in the first quarter of 2013 due primarily to strong results in Singapore. In the first quarter of 2013, severance costs totaled $0.3 million in Australia, where Kaplan has been consolidating and restructuring its businesses to optimize operations.

Corporate represents unallocated expenses of Kaplan, Inc.'s corporate office, other minor businesses and shared activities, and Colloquy, which was moved from Kaplan International to Kaplan corporate in 2013. The comparative division results presented above reflect this change.

Cable Television

Cable television division revenue for the first quarter of 2013 increased 5% to $200.1 million, from $190.2 million for the first quarter of 2012. The revenue results reflect rate increases for many subscribers in June 2012, partially offset by a decline in basic video subscribers.

Cable television division operating income increased 12% to $36.6 million, from $32.8 million in the first quarter of 2012, due to increased revenues, partially offset by higher programming and depreciation costs.

At March 31, 2013, Primary Service Units (PSUs) were down 3% from the prior year due to a decline in basic video subscribers. PSUs include about 6,000 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by various franchise agreements. A summary of PSUs is as follows:

                         As of March 31,
                       2013          2012
Basic video            588,180       622,339
High-speed data        463,726       463,443
Telephony              185,717       186,009
                     1,237,623     1,271,791

Below are details of Cable division capital expenditures as defined by the NCTA Standard Reporting Categories:

                                Three Months Ended
                                     March 31,
(in thousands)                  2013         2012
Customer Premise Equipment    $   5,361    $  15,813
Commercial                          790          864
Scaleable Infrastructure          3,032        5,525
Line Extensions                     890        1,123
Upgrade/Rebuild                   6,001        3,228
Support Capital                  11,085        5,172
                              $  27,159    $  31,725


Newspaper Publishing

Newspaper publishing division revenue totaled $127.3 million for the first quarter of 2013, down 4% from revenue of $132.5 million for the first quarter of 2012. Print advertising revenue at The Washington Post ("the Post") in the first quarter of 2013 declined 8% to $48.6 million, from $52.7 million in the first quarter of 2012. The decline is largely due to reductions in general and retail advertising. Revenue generated by the Company's newspaper online publishing activities, primarily washingtonpost.com and Slate, increased 8% to $25.8 million for the first quarter of 2013, versus $23.9 million for the first quarter of 2012. Display online advertising revenue increased 16% for the first quarter of 2013. Online classified advertising revenue on washingtonpost.com declined 6% for the first quarter of 2013.

For the first quarter of 2013, daily and Sunday circulation at the Post declined 7.2% and 7.7%, respectively, compared to the first quarter of 2012. For the first quarter of 2013, average daily circulation at the Post totaled 457,100, and average Sunday circulation totaled 659,500. In January 2013, the Post implemented circulation price increases for daily home delivery and daily and Sunday single copy categories.

In February 2013, the Company announced a Voluntary Retirement Incentive Program (VRIP) which was offered to certain employees of the Post. The VRIP expense is estimated at $20.4 million, which will be funded from the assets of the Company's pension plan. Of this amount, $12.0 million was recorded in the first quarter of 2013; the remainder will be recorded in the second quarter of 2013. The Post also implemented a Separation Incentive Program in February 2013 that resulted in an additional $2.3 million in early retirement program expense, which will also be funded from the assets of the Company pension plan. In addition, voluntary severance and other early retirement expense of $1.6 million and $1.9 million was recorded at the newspaper publishing division in the first quarter of 2013 and 2012, respectively.

The newspaper publishing division reported an operating loss of $34.5 million in the first quarter of 2013, compared to an operating loss of $20.6 million in the first quarter of 2012. These operating losses include noncash pension expense of $22.9 million and $8.5 million for the first quarter of 2013 and 2012, respectively. The decline in operating results is primarily due to the $14.0 million increase in early retirement and severance expense, offset partially by a reduction in other operating expenses. Newsprint expense was down 12% for the first quarter of 2013 compared to the first quarter of 2012 due to a decline in newsprint consumption.

In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. Consequently, the newspaper division's operating results exclude The Herald.

Television Broadcasting

Revenue for the television broadcasting division increased 5% in the first quarter of 2013 to $85.3 million, from $81.5 million in 2012; operating income for the first quarter of 2013 increased 14% to $35.4 million, from $31.0 million in 2012. The increase in revenue and operating income reflects growth in advertising demand across many product categories and increased retransmission revenues, offset by a $2.8 million decline in political advertising revenue.

Other Businesses

Other businesses includes the operating results of Social Code, a marketing solutions provider helping companies with marketing on social media platforms; Celtic Healthcare, Inc., a provider of home health care and hospice services in the northeastern and mid-Atlantic regions that was acquired by the Company in November 2012; and WaPo Labs, a digital team focused on emerging technologies and new product development.

Corporate Office

Corporate office includes the expenses of the Company's corporate office as well as a net pension credit.

Equity in Earnings (Losses) of Affiliates

The Company holds a 16.5% interest in Classified Ventures, LLC, and interests in several other affiliates.


The Company's equity in earnings of affiliates, net, for the first quarter of 2013 was $3.4 million, compared to $3.9 million for the first quarter of 2012.

Other Non-Operating (Expense) Income

The Company recorded other non-operating expense, net, of $4.1 million for the first quarter of 2013, compared to other non-operating income, net, of $8.6 million for the first quarter of 2012. The first quarter 2013 non-operating expense, net, included $4.6 million in unrealized foreign currency losses and other items. The first quarter 2012 non-operating income, net, included a $5.8 million gain on the sale of a cost method investment, $2.7 million in unrealized foreign currency gains and other items.

A summary of non-operating (expense) income is as follows:

                                                                 Three Months Ended
                                                                     March 31,
(in thousands)                                                   2013         2012
Foreign currency (losses) gains, net                          $  (4,614)    $   2,660
(Losses) gains on sales or write-downs of cost method
investments                                                        (179)        5,766
Other, net                                                           710          162
   Total                                                      $  (4,083)    $   8,588

Net Interest Expense

The Company incurred net interest expense of $8.5 million for the first quarter of 2013, compared to $8.1 million for the first quarter of 2012. At March 31, 2013, the Company had $456.9 million in borrowings outstanding at an average interest rate of 7.0%.

Provision for Income Taxes

The effective tax rate for income from continuing operations for the first quarter of 2013 was 52.3%, compared to 45.6% for the first quarter of 2012. The high effective tax rate in the first quarter of 2013 and 2012 results primarily from losses in Australia for which no tax benefit is recorded.

Discontinued Operations

In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. Kaplan sold Kidum in August 2012, EduNeering in April 2012 and Kaplan Learning Technologies (KLT) in February 2012. The Company also divested its interest in Avenue100 Media Solutions in July 2012. Consequently, the Company's income from continuing operations excludes these businesses, which have been reclassified to discontinued operations, net of tax.

The sale of The Herald resulted in a pre-tax loss of $0.1 million that was recorded in the first quarter of 2013. The sale of KLT resulted in a pre-tax loss of $3.1 million that was recorded in the first quarter of 2012. The sale of EduNeering resulted in a pre-tax gain of $29.5 million that was recorded in the second quarter of 2012. In the first quarter of 2012, in connection with each of the sales of the Company's stock in KLT and EduNeering, the Company recorded $23.2 million of income tax benefits related to the excess of the outside stock tax basis over the net book value of the net assets acquired.

Earnings (Loss) Per Share

The calculation of diluted earnings per share for the first quarter of 2013 was based on 7,266,284 weighted average shares outstanding, compared to 7,614,623 for the first quarter of 2012. At March 31, 2013, there were 7,422,732 shares outstanding and the Company had remaining authorization from the Board of Directors to purchase up to 180,993 shares of Class B common stock.


Financial Condition: Capital Resources and Liquidity

Acquisitions and Dispositions

In the first quarter of 2013, the Company acquired one small business included in other businesses; the purchase price allocation mostly comprised goodwill and other intangible assets on a preliminary basis. In the first quarter of 2012, Kaplan acquired two small businesses in its International division; the purchase price allocation mostly comprised goodwill and other intangible assets. The assets and liabilities of the companies acquired have been recorded at their estimated fair values at the date of acquisition.

In March 2013, the Company completed the sale of The Herald, a daily and Sunday newspaper headquartered in Everett, WA. The Herald was previously reported in the newspaper publishing segment. Kaplan completed the sale of Kaplan Learning Technologies in February 2012, which was part of the Kaplan Ventures division.

Capital Expenditures

During the first three months of 2013, the Company's capital expenditures totaled $36.5 million. The Company estimates that its capital expenditures will be in the range of $225 million to $250 million in 2013.

Liquidity

The Company's borrowings decreased by $239.8 million, to $456.9 million at March 31, 2013, as compared to borrowings of $696.7 million at December 31, 2012. At March 31, 2013, the Company had $300.7 million in cash and cash equivalents, compared to $512.4 million at December 31, 2012. The Company had money market investments of $190.9 million and $432.7 million that are classified as cash, cash equivalents and restricted cash in the Company's condensed consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, respectively.

The Company's total debt outstanding of $456.9 million at March 31, 2013 included $397.6 million of 7.25% unsecured notes due February 1, 2019, $52.1 million of AUD 50M borrowing and $7.2 million in other debt.

In June 2011, the Company entered into a credit agreement (the "Credit Agreement") providing for a 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 will expire on June 17, 2015, unless the Company and the banks agree to extend the term.

The Company's credit ratings were unchanged during the first quarter of 2013 and are as follows:

                         Standard
              Moody's    & Poor's
Long-term         Baa1         BBB
Short-term     Prime-2         A-3

During the first quarter of 2013 and 2012, the Company had average borrowings outstanding of approximately $516.7 million and $484.5 million, respectively, at average annual interest rates of approximately 7.0%. During the first quarter of 2013 and 2012, the Company incurred net interest expense of $8.5 million and $8.1 million, respectively.

At March 31, 2013 and December 31, 2012, the Company had working capital of $405.9 million and $327.5 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 expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds and to a lesser extent borrowings supported by our Credit Agreement. In management's opinion, the Company will have ample liquidity to meet its various cash needs throughout 2013.

There were no significant changes to the Company's contractual obligations or other commercial commitments from those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.


Forward-Looking Statements

This report contains certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. For more information about these forward-looking statements and related risks, please refer to the section titled "Forward-Looking Statements" in Part I of the Company's Annual Report on Form 10-K.

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