SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
Quarterly Report Pursuant to Section 13 ORor 15(d) OFTHE SECURITIES EXCHANGE ACT OF
of the Securities Exchange Act of 1934
For the Quarterly Period Ended JuneMarch 30, 20022003
Commission File Number 1-6714
THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 53-0182885 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1150 15th Street, N.W. Washington, D.C. | 20071 | ||
(Address of principal executive | |||
|
(202) 334-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X x. No¨.
Shares outstanding at May 8, 2003:
Class A Common Stock | 1,722,250 Shares | |
Class B Common Stock | 7,804,370 Shares |
THE WASHINGTON POST COMPANY
Index to Form 10-Q
PART I. FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
| ||||
a. | 3 | |||
b. | 4 | |||
c. | 5 | |||
d. | 6 | |||
e. | Notes to Condensed Consolidated Financial Statements (Unaudited) | |||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition | 12 | ||
Item 4. | 17 | |||
PART II. OTHER INFORMATION | ||||
Item 6. | ||||
18 | ||||
19 | ||||
20 |
2.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||
June 30, | July 1, | June 30, | July 1, | ||||||
(In thousands, except per share amounts) | 2002 | 2001 | 2002 | 2001 | |||||
Operating revenues | |||||||||
| Advertising | $316,102 | $312,881 | $ 589,671 | $610,856 | ||||
| Circulation and subscriber | 168,614 | 161,260 | 329,755 | 309,276 | ||||
| Education | 149,695 | 119,442 | 296,776 | 240,783 | ||||
| Other | 13,292 | 10,326 | 31,823 | 29,393 | ||||
647,703 | 603,909 | 1,248,025 | 1,190,308 | ||||||
Operating costs and expenses | |||||||||
| Operating | 335,443 | 340,114 | 668,683 | 683,530 | ||||
| Selling, general and administrative | 160,387 | 151,409 | 337,252 | 299,323 | ||||
| Depreciation of property, plant and equipment | 41,286 | 35,867 | 82,459 | 70,499 | ||||
| Amortization of goodwill and other intangibles | 159 | 19,926 | 311 | 37,118 | ||||
537,275 | 547,316 | 1,088,705 | 1,090,470 | ||||||
Income from operations | 110,428 | 56,593 | 159,320 | 99,838 | |||||
Other income (expense) | |||||||||
| Equity in losses of affiliates | (9,183 | ) | (6,641 | ) | (15,689 | ) | (19,102 | ) |
| Interest income | 59 | 1,047 | 192 | 1,371 | ||||
| Interest expense | (8,797 | ) | (13,240 | ) | (17,664 | ) | (27,864 | ) |
| Other, net | (5,963 | ) | (10,717 | ) | 491 | 298,053 | ||
Income before income taxes and cumulative | |||||||||
effect of change in accounting principle | 86,544 | 27,042 | 126,650 | 352,296 | |||||
Provision for income taxes | 35,400 | 12,550 | 51,800 | 138,750 | |||||
Income before cumulative effect of change in accounting principle | 51,144 | 14,492 | 74,850 | 213,546 | |||||
Cumulative effect of change in method of accounting for goodwill and | |||||||||
other intangible assets, net of taxes | - | - | (12,100 | ) | - | ||||
Net income | 51,144 | 14,492 | 62,750 | 213,546 | |||||
Redeemable preferred stock dividends | (259 | ) | (263 | ) | (784 | ) | (789 | ) | |
Net income available for common shares | $ 50,885 | $ 14,229 | $ 61,966 | $212,757 | |||||
Basic earnings per share: | |||||||||
| Before cumulative effect of change in accounting principle | $ 5.38 | $ 1.53 | $ 7.87 | $22.52 | ||||
| Cumulative effect of change in accounting principle | – | – | (1.27 | ) | – | |||
| Redeemable preferred stock dividends | (0.03 | ) | (0.03 | ) | (0.08 | ) | (0.08 | ) |
| Net income available for common stock | $ 5.35 | $ 1.50 | $ 6.52 | $22.44 |
Diluted earnings per share: | |||||||||
| Before cumulative effect of change in accounting principle | $ 5.37 | $ 1.53 | $ 7.86 | $ 22.47 | ||||
| Cumulative effect of change in accounting principle | – | – | (1.27 | ) | – | |||
| Redeemable preferred stock dividends | (0.03 | ) | (0.03 | ) | (0.08 | ) | (0.08 | ) |
| Net income available for common stock | $ 5.34 | $ 1.50 | $ 6.51 | $ 22.39 | ||||
Dividends declared per common share | $ 1.40 | $ 1.40 | $ 4.20 | $ 4.20 | |||||
Basic average number of common shares outstanding | 9,503 | 9,485 | 9,501 | 9,482 | |||||
Diluted average number of common shares outstanding | 9,521 | 9,502 | 9,516 | 9,500 |
(In thousands, except per share amounts) | March 30, 2003 | March 31, 2002 | ||||||
Operating revenues | ||||||||
Advertising | $ | 279,796 |
| $ | 273,564 |
| ||
Circulation and subscriber |
| 172,036 |
|
| 161,298 |
| ||
Education |
| 177,778 |
|
| 146,929 |
| ||
Other |
| 10,830 |
|
| 18,531 |
| ||
| 640,440 |
|
| 600,322 |
| |||
Operating costs and expenses | ||||||||
Operating |
| 348,634 |
|
| 333,239 |
| ||
Selling, general and administrative |
| 169,170 |
|
| 176,866 |
| ||
Depreciation of property, plant and equipment |
| 43,395 |
|
| 41,173 |
| ||
Amortization of intangible assets |
| 149 |
|
| 152 |
| ||
| 561,348 |
|
| 551,430 |
| |||
Income from operations |
| 79,092 |
|
| 48,892 |
| ||
Other income (expense) | ||||||||
Equity in losses of affiliates |
| (2,642 | ) |
| (6,506 | ) | ||
Interest income |
| 114 |
|
| 133 |
| ||
Interest expense |
| (7,237 | ) |
| (8,867 | ) | ||
Other, net |
| 48,135 |
|
| 6,454 |
| ||
Income before income taxes and cumulative effect of change in accounting principle |
| 117,462 |
|
| 40,106 |
| ||
Provision for income taxes |
| 44,400 |
|
| 16,400 |
| ||
Income before cumulative effect of change in accounting principle |
| 73,062 |
|
| 23,706 |
| ||
Cumulative effect of change in method of accounting for goodwill and other intangible assets, net of taxes |
| — |
|
| (12,100 | ) | ||
Net income |
| 73,062 |
|
| 11,606 |
| ||
Redeemable preferred stock dividends |
| (517 | ) |
| (525 | ) | ||
Net income available for common shares | $ | 72,545 |
| $ | 11,081 |
| ||
Basic earnings per common share: | ||||||||
Before cumulative effect of change in accounting principle | $ | 7.62 |
| $ | 2.44 |
| ||
Cumulative effect of change in accounting principle |
| — |
|
| (1.27 | ) | ||
Net income available for common stock | $ | 7.62 |
| $ | 1.17 |
| ||
Diluted earnings per share: | ||||||||
Before cumulative effect of change in accounting principle | $ | 7.59 |
| $ | 2.43 |
| ||
Cumulative effect of change in accounting principle |
| — |
|
| (1.27 | ) | ||
Net income available for common stock. | $ | 7.59 |
| $ | 1.16 |
| ||
Dividends declared per common share | $ | 2.90 |
| $ | 2.80 |
| ||
Basic average number of common shares outstanding |
| 9,526 |
|
| 9,498 |
| ||
Diluted average number of common shares outstanding |
| 9,553 |
|
| 9,512 |
|
3.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||
June 30, | July 1, | June 30, | July 1, | |||||
(In thousands) | 2002 | 2001 | 2002 | 2001 | ||||
Net income | $ 51,144 | $ 14,492 | $ 62,750 | $ 213,546 | ||||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | 4,318 | 893 | 4,417 | (3,376 | ) | |||
Change in unrealized gain on available-for-sale securities | (13,049 | ) | 16,767 | (15,430 | ) | 1,372 | ||
Less: reclassification adjustment for realized (gains) losses |
|
|
| ) |
| |||
(8,731 | ) | 18,054 | (22,222 | ) | 1,210 | |||
Income tax benefit (expense) related to other comprehensive income | 5,080 | (6,686 | ) | 10,345 | (1,846 | ) | ||
(3,651 | ) | 11,368 | (11,877 | ) | (636 | ) | ||
Comprehensive income | $ 47,493 | $ 25,860 | $ 50,873 | $212,910 |
(In thousands) | March 30, 2003 | March 31, 2002 | ||||||
Net income | $ | 73,062 |
| $ | 11,606 |
| ||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment |
| 3,105 |
|
| 99 |
| ||
Less: reclassification adjustment on sale of affiliate investment |
| (1,633 | ) |
| — |
| ||
Change in unrealized gain on available-for-sale securities |
| (21,718 | ) |
| (2,381 | ) | ||
Less: reclassification adjustment for realized losses (gains) included in net income |
| 214 |
|
| (11,209 | ) | ||
| (20,032 | ) |
| (13,491 | ) | |||
Income tax benefit related to other comprehensive income |
| 8,387 |
|
| 5,265 |
| ||
| (11,645 | ) |
| (8,226 | ) | |||
Comprehensive income | $ | 61,417 |
| $ | 3,380 |
| ||
4.
The Washington Post Company
Condensed Consolidated Balance Sheets
(In thousands) | June 30,2002 | December 30, | |||||
(unaudited) | 2001 | ||||||
Assets | |||||||
Current assets | |||||||
| Cash and cash equivalents | $ 22,717 | $ 31,480 | ||||
| Investments in marketable equity securities | 2,329 | 16,366 | ||||
| Accounts receivable, net | 272,845 | 279,328 | ||||
| Federal and state income taxes receivable | – | 10,253 | ||||
| Inventories | 29,288 | 19,042 | ||||
| Other current assets | 34,579 | 40,388 | ||||
361,758 | 396,857 | ||||||
Property, plant and equipment | |||||||
| Buildings | 269,205 | 267,658 | ||||
| Machinery, equipment and fixtures | 1,518,447 | 1,422,228 | ||||
| Leasehold improvements | 81,246 | 79,108 | ||||
1,868,898 | 1,768,994 | ||||||
| Less accumulated depreciation | (879,066 | ) | (794,596 | ) | ||
989,832 | 974,398 | ||||||
| Land | 34,733 | 34,733 | ||||
| Construction in progress | 83,002 | 89,080 | ||||
1,107,567 | 1,098,211 | ||||||
Investments in marketable equity securities | 197,945 | 219,039 | |||||
Investments in affiliates | 77,284 | 80,936 | |||||
Goodwill, net | 771,391 | 754,554 | |||||
Indefinite-lived intangible assets, net | 453,306 | 450,759 | |||||
Other intangible assets, net | 2,267 | 1,448 | |||||
Prepaid pension cost | 466,683 | 447,688 | |||||
Deferred charges and other assets | 78,228 | 109,606 | |||||
$3,516,429 | $3,559,098 | ||||||
Liabilities and Shareholders' Equity | |||||||
Current liabilities | |||||||
| Accounts payable and accrued liabilities | $ 303,928 | $ 253,346 | ||||
| Deferred revenue | 142,420 | 130,744 | ||||
| Dividends declared | 13,550 | – | ||||
| Federal and state income taxes payable | 3,267 | – | ||||
| Short-term borrowings | 400,457 | 50,000 | ||||
863,622 | 434,090 | ||||||
Postretirement benefits other than pensions | 133,580 | 130,824 | |||||
Other liabilities | 192,093 | 192,540 | |||||
Deferred income taxes | 211,458 | 221,949 | |||||
Long-term debt | 405,779 | 883,078 | |||||
1,806,532 | 1,862,481 | ||||||
Redeemable preferred stock | 12,916 | 13,132 | |||||
Preferred stock | — | — | |||||
Common shareholders' equity | |||||||
| Common stock | 20,000 | 20,000 | ||||
| Capital in excess of par value | 145,124 | 142,814 | ||||
| Retained earnings | 3,051,672 | 3,029,595 | ||||
| Accumulated other comprehensive income (loss) | ||||||
| Cumulative foreign currency translation adjustment | (5,260 | ) | (9,678 | ) | ||
| Unrealized gain on available-for-sale securities | 7,986 | 24,281 | ||||
| Cost of Class B common stock held in treasury | (1,522,541 | ) | (1,523,527 | ) | ||
1,696,981 | 1,683,485 | ||||||
$3,516,429 | $3,559,098 |
March 30, 2003 | December 29, 2002 | |||||||
(In thousands) | (unaudited) | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 36,311 |
| $ | 28,771 |
| ||
Investments in marketable equity securities |
| 1,431 |
|
| 1,753 |
| ||
Accounts receivable, net |
| 278,511 |
|
| 285,374 |
| ||
Inventories |
| 29,972 |
|
| 27,629 |
| ||
Other current assets |
| 41,771 |
|
| 39,428 |
| ||
| 387,996 |
|
| 382,955 |
| |||
Property, plant and equipment | ||||||||
Buildings |
| 283,318 |
|
| 283,233 |
| ||
Machinery, equipment and fixtures |
| 1,596,044 |
|
| 1,551,931 |
| ||
Leasehold improvements |
| 92,597 |
|
| 85,720 |
| ||
| 1,971,959 |
|
| 1,920,884 |
| |||
Less accumulated depreciation |
| (973,288 | ) |
| (926,385 | ) | ||
| 998,671 |
|
| 994,499 |
| |||
Land |
| 34,530 |
|
| 34,530 |
| ||
Construction in progress |
| 47,779 |
|
| 65,371 |
| ||
| 1,080,980 |
|
| 1,094,400 |
| |||
Investments in marketable equity securities |
| 193,384 |
|
| 214,780 |
| ||
Investments in affiliates |
| 63,142 |
|
| 70,703 |
| ||
Goodwill, net |
| 856,274 |
|
| 770,861 |
| ||
Indefinite-lived intangible assets, net |
| 482,419 |
|
| 482,419 |
| ||
Amortized intangible assets, net |
| 2,004 |
|
| 2,153 |
| ||
Prepaid pension cost |
| 507,126 |
|
| 493,786 |
| ||
Deferred charges and other assets |
| 79,843 |
|
| 71,837 |
| ||
$ | 3,653,168 |
| $ | 3,583,894 |
| |||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 315,411 |
| $ | 336,582 |
| ||
Deferred revenue |
| 156,417 |
|
| 135,419 |
| ||
Dividends declared |
| 13,912 |
|
| — |
| ||
Federal and state income taxes payable |
| 32,769 |
|
| 4,853 |
| ||
Short-term borrowings |
| 217,436 |
|
| 259,258 |
| ||
| 735,945 |
|
| 736,112 |
| |||
Postretirement benefits other than pensions |
| 137,440 |
|
| 136,393 |
| ||
Other liabilities |
| 197,466 |
|
| 194,480 |
| ||
Deferred income taxes |
| 256,347 |
|
| 261,153 |
| ||
Long-term debt |
| 431,029 |
|
| 405,547 |
| ||
| 1,758,227 |
|
| 1,733,685 |
| |||
Redeemable preferred stock |
| 12,916 |
|
| 12,916 |
| ||
Preferred stock |
| — |
|
| — |
| ||
Common shareholders’ equity | ||||||||
Common stock |
| 20,000 |
|
| 20,000 |
| ||
Capital in excess of par value |
| 157,976 |
|
| 149,090 |
| ||
Retained earnings |
| 3,224,798 |
|
| 3,179,607 |
| ||
Accumulated other comprehensive income(loss) | ||||||||
Cumulative foreign currency translation adjustment |
| (6,039 | ) |
| (7,511 | ) | ||
Unrealized gain on available-for-sale securities |
| 4,796 |
|
| 17,913 |
| ||
Cost of Class B common stock held in treasury |
| (1,519,506 | ) |
| (1,521,806 | ) | ||
| 1,882,025 |
|
| 1,837,293 |
| |||
$ | 3,653,168 |
| $ | 3,583,894 |
| |||
5.
The Washington Post Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
Twenty-six Weeks Ended | |||||||
June 30, | July 1, | ||||||
(In thousands) | 2002 | 2001 | |||||
Cash flows from operating activities: | |||||||
| Net income | $ 62,750 | $213,546 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Cumulative effect of change in method of accounting for goodwill and other intangibles |
|
| ||||
| Depreciation of property, plant and equipment | 82,459 | 70,499 | ||||
| Amortization of goodwill and other intangibles | 311 | 37,118 | ||||
| Net pension benefit | (32,164 | ) | (39,800 | ) | ||
| Early retirement program expense | 12,986 | - | ||||
| Gain from disposition of businesses | – | (321,091 | ) | |||
| (Gain) loss on sale of marketable securities | (13,209 | ) | 344 | |||
| Cost method and other investment write-downs | 16,694 | 17,300 | ||||
| Equity in losses of affiliates, net of distributions | 15,689 | 19,102 | ||||
| Provision for deferred income taxes | 6,755 | 76,965 | ||||
| Change in assets and liabilities: | ||||||
| Decrease in accounts receivable, net | 10,011 | 3,429 | ||||
| Increase in inventories | (10,246 | ) | (8,637 | ) | ||
| Increase in accounts payable and accrued liabilities | 42,668 | 8,809 | ||||
| Decrease in income taxes receivable | 10,253 | 12,370 | ||||
| Increase in income taxes payable | 3,267 | 6,248 | ||||
| Decrease in other assets and other liabilities, net | 23,164 | 35,127 | ||||
| Other | (404 | ) | (894 | ) | ||
| Net cash provided by operating activities | 243,084 | 130,435 | ||||
Cash flows from investing activities: | |||||||
| Purchases of property, plant and equipment | (79,559 | ) | (119,922 | ) | ||
| Investments in certain businesses | (26,673 | ) | (104,356 | ) | ||
| Proceeds from the sale of business | – | 61,921 | ||||
| Proceeds from sale of marketable securities | 19,701 | 124 | ||||
| Other investments | (7,610 | ) | (19,839 | ) | ||
| Other | (189 | ) | 311 | |||
| Net cash used in investing activities | (94,330 | ) | (181,761 | ) | ||
Cash flows from financing activities: | |||||||
| Net (repayment) issuance of commercial paper | (133,192 | ) | 106,114 | |||
| Dividends paid | (27,123 | ) | (27,070 | ) | ||
| Common shares repurchased | (334 | ) | (445 | ) | ||
| Proceeds from exercise of stock options | 3,132 | 2,990 | ||||
| Net cash (used in) provided by financing activities | (157,517 | ) | 81,589 | |||
Net (decrease) increase in cash and cash equivalents | (8,763 | ) | 30,263 | ||||
Beginning cash and cash equivalents | 31,480 | 20,345 | |||||
Ending cash and cash equivalents | $ 22,717 | $ 50,608 |
Thirteen Weeks Ended | ||||||||
(In thousands) | March 30, 2003 | March 31, 2002 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 73,062 |
| $ | 11,606 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Cumulative effect of change in accounting principle |
| — |
|
| 12,100 |
| ||
Depreciation of property, plant and equipment |
| 43,395 |
|
| 41,173 |
| ||
Amortization of intangible assets |
| 149 |
|
| 152 |
| ||
Net pension credit |
| (13,425 | ) |
| (16,082 | ) | ||
Early retirement program expense |
| — |
|
| 10,313 |
| ||
Gain from sale of affiliate |
| (49,762 | ) |
| — |
| ||
Gain on sale of marketable securities |
| — |
|
| (13,209 | ) | ||
Cost method and other investment write-downs |
| 1,112 |
|
| 10,050 |
| ||
Equity in losses of affiliates, net of distributions |
| 2,642 |
|
| 6,506 |
| ||
Provision for deferred income taxes |
| 3,827 |
|
| 2,986 |
| ||
Change in assets and liabilities: | ||||||||
Decrease in accounts receivable, net |
| 16,991 |
|
| 33,342 |
| ||
Increase in inventories |
| (2,342 | ) |
| (2,064 | ) | ||
(Decrease) increase in accounts payable and accrued liabilities |
| (28,588 | ) |
| 15,766 |
| ||
Increase (decrease) in deferred revenue |
| 11,880 |
|
| (1,876 | ) | ||
Decrease in income taxes receivable |
| — |
|
| 10,253 |
| ||
Increase in income taxes payable |
| 27,916 |
|
| 578 |
| ||
Increase (decrease) in other assets and other liabilities, net |
| 3,356 |
|
| (5,561 | ) | ||
Other |
| (37 | ) |
| 136 |
| ||
Net cash provided by operating activities |
| 90,176 |
|
| 116,169 |
| ||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment |
| (28,086 | ) |
| (37,310 | ) | ||
Investments in certain businesses |
| (57,537 | ) |
| (16,907 | ) | ||
Proceeds from the sale of affiliate |
| 65,000 |
|
| — |
| ||
Proceeds from sale of marketable securities |
| — |
|
| 19,701 |
| ||
Investment in affiliates |
| (5,977 | ) |
| (7,610 | ) | ||
Other |
| 378 |
|
| 249 |
| ||
Net cash used in investing activities |
| (26,222 | ) |
| (41,877 | ) | ||
Cash flows from financing activities: | ||||||||
Net repayment of commercial paper |
| (41,882 | ) |
| (69,084 | ) | ||
Dividends paid |
| (13,959 | ) |
| (13,559 | ) | ||
Proceeds from exercise of stock options |
| 380 |
|
| 2,394 |
| ||
Other |
| (953 | ) |
| — |
| ||
Net cash used in financing activities |
| (56,414 | ) |
| (80,249 | ) | ||
Net increase (decrease) in cash and cash equivalents |
| 7,540 |
|
| (5,957 | ) | ||
Beginning cash and cash equivalents |
| 28,771 |
|
| 31,480 |
| ||
Ending cash and cash equivalents | $ | 36,311 |
| $ | 25,523 |
| ||
6.
The Washington Post Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. All adjustments reflected in the interim financial statements are of a normal recurring nature. Certain 2001 amounts have been reclassified to conform with current year presentation.
The Company generally reports on a 13 week fiscal quarter ending on the Sunday nearest the calendar quarter-end. With the exception of the newspaper publishing operations, subsidiaries of the Company report on a calendar-quarter basis.
Note 1: Acquisitions Exchanges and Dispositions.
In March 2003, Kaplan completed its acquisition of the stock of FTC Holdings Limited (FTC), for £55.3 million ($87.4 million). Headquartered in London, FTC is a leader in test preparation services for accountants and financial services professionals, with 18 training centers in the United Kingdom and a growing presence in Asia, including operations in Hong Kong and Singapore. The acquisition was financed through cash and debt with $26.5 million remaining to be paid, primarily to employees of the business (included in long-term debt at March 30, 2003). Most of the purchase price has been allocated to goodwill, on a preliminary basis.
On January 1, 2003, the Company sold its 50 percent interest in the International Herald Tribune for $65 million and the Company recorded an after-tax non-operating gain of $32.3 million in the first quarter of 2003.
In the first six monthsquarter of 2002, Kaplan acquired several businesses in their higher education and test preparation divisions, totaling $37.9 million, with most of the aggregate purchase price allocated to goodwill. About $9.5 million remains to be paid on these acquisitions, of which $2.1 million has been classified in current liabilities and $7.4 million as long-term debt at June 30, 2002. $23.2 million.
During the first six months of 2001, the Company spent approximately $104.4 million on business acquisitions and exchanges, which principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and amounts paid as part of a cable system exchange with AT&T Broadband. Kaplan also acquired two businesses that are part of their professional division.
The gain resulting from the cable system sale and exchange transactions, which is included in "Other income, net" in the Condensed Consolidated Statements of Income, increased net income for the first six months of 2001 by $196.5 million, or $20.69 per share. For income tax purposes, the cable system sale and exchange transactions qualified as like-kind exchanges, and therefore, a large portion of these transactions did not result in a current tax liability.
Note 2: Investments.
Investments in marketable equity securities at JuneMarch 30, 20022003 and December 30, 200129, 2002 consist of the following (in thousands):
June 30, | December 30, | ||
2002 | 2001 | ||
Total cost | $187,169 | $195,661 | |
Gross unrealized gains | 13,105 | 39,744 | |
Total fair value | $200,274 | $235,405 |
March 30, 2003 | December 29, 2002 | |||||
Total cost | $ | 186,955 | $ | 187,169 | ||
Gross unrealized gains |
| 7,860 |
| 29,364 | ||
Total fair value | $ | 194,815 | $ | 216,533 | ||
There were no sales of marketable equity securities in the first quarter of 2003. During the first quarter of 2002, the Company sold its shares of Ticketmaster, resulting in a pre-tax gain of $13.2 million. There were no sales of marketable equity securities in the second quarter of 2002. During the first six months of 2001, proceeds from sales of marketable equity securities were $0.1 million. Gross realized losses on such sales were $0.3 million.
At JuneMarch 30, 20022003 and December 30, 2001,29, 2002, the carrying value of the Company’s cost method investments was $14.9$8.6 million and $29.6$9.5 million, respectively. There were no investments in companies constituting cost method investments during the first sixthree months of 2003 or 2002. During the second quarter and the first six months of 2001, the Company invested $7.7 million in companies constituting cost method investments.
The Company recorded charges of $6.6$1.1 million and $16.7$10.1 million during the secondfirst quarter of 2003 and first six months of 2002, respectively, to write-down certain of its investments to estimated fair value; for the same periods of 2001, the Company recorded charges of $5.5 million and $17.3 million, respectively.value.
7.
Note 3: Borrowings.
At JuneMarch 30, 2002,2003, the Company had $806.2$648.5 million in total debt outstanding, which was comprised of $400.0$217.4 million of commercial paper borrowings, $398.2$398.5 million of 5.5 percent unsecured notes due February 15, 2009, and $8.0$32.6 million in other debt. The Company’s five-year $500 million revolving credit facility, which expires in March 2003, and one-year $250 million revolving credit facility, which expires in September 2002, support the issuance of the Company’s short-term commercial paper. The Company intends to replace the revolving credit facility agreements prior to their expiration.
During the secondfirst quarter of 20022003 and 20012002 the Company had average borrowings outstanding of approximately $830.6$601.6 million and $949.1$888.3 million, respectively, at average annual interest rates of approximately 3.74.2 percent and 5.83.5 percent, respectively. During the secondfirst quarter of 20022003 and 2001,2002, the Company incurred net interest expense on borrowings of $7.1 million and $8.7 million, and $12.2 million, respectively.
During the first six months of 2002 and 2001 the Company had average borrowings outstanding of approximately $859.5 million and $968.6 million, respectively, at average annual interest rates of approximately 3.6 percent and 5.4 percent, respectively. During the first six months of 2002 and 2001, the Company incurred net interest expense on borrowings of $17.5 million and $26.5 million, respectively.
Note 4: Business Segments.
The following table summarizes financial information related to each of the Company’s business segments. The 20022003 and 20012002 asset information is as of JuneMarch 30, 20022003 and December 30, 2001,29, 2002, respectively.
8.
SecondFirst Quarter Period
(in thousands)thousands)
Newspaper | Television | Magazine | Cable | Corporate | ||||||||||||||
Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||
2002 | ||||||||||||||||||
Operating revenues | $ | 215,067 | $ | 86,092 | $ | 88,886 | $ | 107,963 | $ | 149,695 | $ | – | $ | 647,703 | ||||
Income (loss) from | ||||||||||||||||||
operations | $ | 37,811 | $ | 43,459 | $ | 13,272 | $ | 21,766 | $ | 624 | $ | (6,504 | ) | $ | 110,428 | |||
Equity in losses of | ||||||||||||||||||
affiliates | (9,183 | ) | ||||||||||||||||
Interest expense, net | (8,738 | ) | ||||||||||||||||
Other expense, net | (5,963 | ) | ||||||||||||||||
Income before income | ||||||||||||||||||
taxes | $ | 86,544 | ||||||||||||||||
Depreciation expense |
| 10,744 | $ | 2,784 | $ | 1,022 | $ | 20,738 | $ | 5,998 | $ | – | $ | 41,286 | ||||
Amortization expense | $ | 4 | – | – | $ | 39 | $ | 116 | $ | – | $ | 159 | ||||||
Net pension credit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| ||||||||||||||||||
Identifiable assets | $ | 698,538 | $ | 415,080 | $ | 458,883 | $ | 1,117,157 | $ | 537,397 | $ | 11,276 | $ | 3,238,331 | ||||
Investments in | ||||||||||||||||||
marketable equity | ||||||||||||||||||
securities | 200,274 | |||||||||||||||||
Investments in | ||||||||||||||||||
affiliates | 77,824 | |||||||||||||||||
Total assets | $ | 3,516,429 |
Newspaper | Television |
| Magazine | Cable | Corporate | |||||||||||||
Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||
2001 | ||||||||||||||||||
Operating revenues | $ | 212,824 | $ | 83,653 | $ | 91,543 | $ | 96,452 | $ | 119,437 | $ | – | $ | 603,909 | ||||
Income (loss) from | ||||||||||||||||||
operations | $ | 23,130 | $ | 37,811 | $ | 8,540 | $ | 5,325 | $ | (11,507 | ) | $ | (6,706 | ) | $ | 56,593 | ||
Pro forma income (loss) | $ | 23,816 | $ | 41,344 | $ | 10,207 | $ | 15,524 | $ | (7,814 | ) | $ | (6,706 | ) | $ | 76,371 | ||
Equity in losses of | ||||||||||||||||||
affiliates | (6,641 | ) | ||||||||||||||||
Interest expense, net | (12,193 | ) | ||||||||||||||||
Other expense, net | (10,717 | ) | ||||||||||||||||
Income before | ||||||||||||||||||
income taxes | $ | 27,042 | ||||||||||||||||
Depreciation expense | $ | 10,026 | $ | 2,931 | $ | 1,217 | $ | 16,886 | $ | 4,807 | $ | – | $ | 35,867 | ||||
Amortization expense | $ | 686 | $ | 3,534 | $ | 1,667 | $ | 10,238 | $ | 3,801 | $ | – | $ | 19,926 | ||||
Net pension credit (expense) | $ | 7,123 | $ | 1,663 | $ | 11,416 | $ | (153 | ) | $ | (171 | ) | $ | – | $ | 19,878 | ||
Identifiable assets | $ | 703,947 | $ | 419,246 | $ | 486,804 | $ | 1,117,426 | $ | 472,988 | $ | 42,346 | $ | 3,242,757 | ||||
Investments in | ||||||||||||||||||
marketable equity | ||||||||||||||||||
securities | 235,405 | |||||||||||||||||
Investments in | ||||||||||||||||||
affiliates | 80,936 | |||||||||||||||||
Total assets | $ | 3,559,098 |
|
Six Month Period (in thousands)
Newspaper | Television | Magazine | Cable | Corporate | |||||||||||||||
Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | |||||||||||||
2002 | |||||||||||||||||||
Operating revenues | $ | 415,839 | $ | 161,510 | $ | 163,904 | $ | 209,996 | $ | 296,776 | – | $ | 1,248,025 | ||||||
Income (loss) from | |||||||||||||||||||
operations | $ | 55,354 | $ | 77,010 | $ | 1,694 | $ | 37,808 | $ | 74 | $ | (12,620 | ) | $ | 159,320 | ||||
Equity in losses of | |||||||||||||||||||
affiliates | (15,689 | ) | |||||||||||||||||
Interest expense, net | (17,472 | ) | |||||||||||||||||
Other expense, net | 491 | ||||||||||||||||||
Income before income | |||||||||||||||||||
taxes | $ | 126,650 | |||||||||||||||||
Depreciation expense | $ | 21,623 | $ | 5,549 | $ | 2,072 | $ | 41,217 | $ | 11,998 | – | $ | 82,459 | ||||||
Amortization expense | $ | 8 | – | – | $ | 78 | $ | 225 | – | $ | 311 | ||||||||
Net pension credit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newspaper Publishing | Television Broadcasting | Magazine Publishing | Cable Television | Education | Corporate Office | Consolidated | |||||||||||||||||||
2003 | |||||||||||||||||||||||||
Operating revenues | $ | 204,040 | $ | 70,752 | $ | 77,502 | $ | 110,368 |
| $ | 177,778 |
| $ | — |
| $ | 640,440 |
| |||||||
Income (loss) from operations | $ | 21,358 | $ | 26,347 | $ | 837 | $ | 20,762 |
| $ | 15,927 |
| $ | (6,139 | ) | $ | 79,092 |
| |||||||
Equity in losses of affiliates |
| (2,642 | ) | ||||||||||||||||||||||
Interest expense, net |
| (7,123 | ) | ||||||||||||||||||||||
Other, net |
| 48,135 |
| ||||||||||||||||||||||
Income before income taxes | $ | 117,462 |
| ||||||||||||||||||||||
Depreciation expense | $ | 11,297 | $ | 2,746 | $ | 952 | $ | 22,713 |
| $ | 5,687 |
| $ | — |
| $ | 43,395 |
| |||||||
Amortization expense | $ | 4 | $ | — | $ | — | $ | 38 |
| $ | 107 |
| $ | — |
| $ | 149 |
| |||||||
Net pension credit (expense) | $ | 3,957 | $ | 1,065 | $ | 8,998 | $ | (243 | ) | $ | (352 | ) | $ | — |
| $ | 13,425 |
| |||||||
Identifiable assets | $ | 706,539 | $ | 407,619 | $ | 488,573 | $ | 1,136,798 |
| $ | 647,244 |
| $ | 8,438 |
| $ | 3,395,211 |
| |||||||
Investments in marketable equity securities |
| 194,815 |
| ||||||||||||||||||||||
Investments in affiliates |
| 63,142 |
| ||||||||||||||||||||||
Total assets | $ | 3,653,168 |
| ||||||||||||||||||||||
Newspaper | Television | Magazine | Cable | Corporate | |||||||||||||||
Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | |||||||||||||
2001 | |||||||||||||||||||
Operating revenues | $ | 431,018 | $ | 157,854 | $ | 174,862 | $ | 185,629 | $ | 240,945 | $ | – | $ | 1,190,308 | |||||
Income (loss) from | |||||||||||||||||||
operations | $ | 49,406 | $ | 66,359 | $ | 6,020 | $ | 13,081 | $ | (21,754 | ) | $ | (13,274 | ) | $ | 99,838 | |||
Pro forma income (loss) | |||||||||||||||||||
from operations | $ | 50,600 | $ | 73,426 | $ | 9,354 | $ | 30,942 | $ | (14,389 | ) | $ | (13,274 | ) | $ | 136,659 | |||
Equity in losses of | |||||||||||||||||||
affiliates | (19,102 | ) | |||||||||||||||||
Interest expense, net | (26,493 | ) | |||||||||||||||||
Other expense, net | 298,053 | ||||||||||||||||||
Income before income | |||||||||||||||||||
taxes | $ | 352,296 | |||||||||||||||||
Depreciation expense | $ | 19,527 | $ | 5,858 | $ | 2,437 | $ | 33,145 | $ | 9,532 | $ | – | $ | 70,499 | |||||
Amortization expense | $ | 1,195 | 7,067 | 3,334 | $ | 17,939 | $ | 7,583 | $ | – | $ | 37,118 | |||||||
Net pension credit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newspaper Publishing | Television Broadcasting | Magazine Publishing | Cable Television | Education | Corporate Office | Consolidated | ||||||||||||||||||||
2002 | ||||||||||||||||||||||||||
Operating revenues | $ | 200,772 | $ | 75,418 | $ | 75,018 |
| $ | 102,033 |
| $ | 147,081 |
| $ | — |
| $ | 600,322 |
| |||||||
Income (loss) from operations | $ | 17,543 | $ | 33,551 | $ | (11,578 | ) | $ | 16,042 |
| $ | (550 | ) | $ | (6,116 | ) | $ | 48,892 |
| |||||||
Equity in losses of affiliates |
| (6,506 | ) | |||||||||||||||||||||||
Interest expense, net |
| (8,734 | ) | |||||||||||||||||||||||
Other, net |
| 6,454 |
| |||||||||||||||||||||||
Income before income taxes | $ | 40,106 |
| |||||||||||||||||||||||
Depreciation expense | $ | 10,879 | $ | 2,765 | $ | 1,050 |
| $ | 20,479 |
| $ | 6,000 |
| $ | — |
| $ | 41,173 |
| |||||||
Amortization expense | $ | 4 | $ | — | $ | — |
| $ | 39 |
| $ | 109 |
| $ | — |
| $ | 152 |
| |||||||
Net pension credit (expense) | $ | 5,491 | $ | 1,220 | $ | 9,895 |
| $ | (226 | ) | $ | (298 | ) | $ | — |
| $ | 16,082 |
| |||||||
Identifiable assets | $ | 690,197 | $ | 413,663 | $ | 488,562 |
| $ | 1,142,995 |
| $ | 542,251 |
| $ | 18,990 |
| $ | 3,296,658 |
| |||||||
Investments in marketable equity securities |
| 216,533 |
| |||||||||||||||||||||||
Investments in affiliates |
| 70,703 |
| |||||||||||||||||||||||
Total assets | $ | 3,583,894 |
| |||||||||||||||||||||||
9.
Newspaper publishing includes the publication of newspapers in the Washington, D.C. area (The Washington Post, the Gazettecommunity newspapers, and Southern Maryland newspapers) and Everett, Washington (The Everett Herald). This business division also includes newsprint warehousing, recycling operations and the Company’s electronic media publishing business (primarily washingtonpost.com).
Television broadcasting operations are conducted through six VHF, television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. Each of theAll stations isare network-affiliated except(except for Jacksonville, which became an independent station on July 15, 2002, when its network affiliation agreement with CBS expired.WJXT in Jacksonville).
The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer’s Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community.
Cable television operations consist of cable systems offering basic cable, digital cable, pay television, cable modem and other services to approximately 736,100719,000 subscribers in midwestern,mid-western, western, and southern states.
Education products and career services are provided through the Company’s wholly-owned subsidiary Kaplan, Inc. Kaplan’s businesses include supplemental education services, which is made up of test preparation and admissions, providing test preparation services for college and graduate school entrance exams; Kaplan Professional, providing education and career services to business people and other professionals; and Score!, offering multi-mediamultimedia learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include higher education services, which includes all of Kaplan’s post-secondary education businesses, including the fixed facility colleges that were formerly part of Quest Education, which offers bachelor’s degrees, associate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; and online post-secondary and care ercareer programs (various distance-learning businesses, including kaplancollege.com).
Corporate office includes the expenses of the Company’s corporate office.
Note 5: New Accounting Pronouncement.Goodwill and Other Intangible Assets.
The Company adopted
In accordance with Statement of Financial Accounting Standards No. 142 (SFAS142(SFAS 142), “Goodwill and Other Intangible Assets” effective onAssets,” the Company has reviewed its goodwill and other intangible assets and classified them in three categories (goodwill, indefinite-lived intangible assets, and amortized intangible assets). The Company’s intangible assets with an indefinite life are from franchise agreements at its cable division. Amortized intangible assets are primarily non-compete agreements, with amortization periods up to five years. The Company’s amortized intangible assets decreased in the first dayquarter of its 2002 fiscal year. As2003 as a result of the adoption$149,000 of SFAS 142, the Company ceased most of the periodic charges previously recorded from the amortization ofexpense.
The Company’s goodwill and other intangibles.intangible assets as of March 30, 2003 and December 29, 2002 were as follows (in thousands):
10.
Gross | Accumulated Amortization | Net | |||||||
2003 | |||||||||
Goodwill | $ | 1,154,676 | $ | 298,402 | $ | 856,274 | |||
Indefinite-lived intangible assets |
| 646,225 |
| 163,806 |
| 482,419 | |||
Amortized intangible assets |
| 3,525 |
| 1,521 |
| 2,004 | |||
$ | 1,804,426 | $ | 463,729 | $ | 1,340,697 | ||||
2002 | |||||||||
Goodwill | $ | 1,069,263 | $ | 298,402 | $ | 770,861 | |||
Indefinite-lived intangible assets |
| 646,225 |
| 163,806 |
| 482,419 | |||
Amortized intangible assets |
| 3,525 |
| 1,372 |
| 2,153 | |||
$ | 1,719,013 | $ | 463,580 | $ | 1,255,433 | ||||
Activity related to the Company’s goodwill during the quarter ended March 30, 2003 was as follows (in thousands):
Newspaper Publishing | Television Broadcasting | Magazine Publishing | Cable Television | Education | Total | |||||||||||||||
Goodwill, net | ||||||||||||||||||||
Beginning of year | $ | 72,738 |
| $ | 203,165 | $ | 69,556 | $ | 85,666 | $ | 339,736 | $ | 770,861 |
| ||||||
Acquisitions |
| 86,874 |
| 86,874 |
| |||||||||||||||
Disposition |
| (1,461 | ) |
| — |
| — |
| — |
| — |
| (1,461 | ) | ||||||
End of Quarter | $ | 71,277 |
| $ | 203,165 | $ | 69,556 | $ | 85,666 | $ | 426,610 | $ | 856,274 |
| ||||||
There was no activity related to the Company’s indefinite-lived intangible assets during the first quarter of 2003.
As required under SFAS 142, in the first quarter of 2002, the Company completed its transitional impairment review of indefinite-lived intangible assets and no impairment charge was warranted. The Company completed its SFAS 142 transitional goodwill impairment test during the second quarter ofin 2002. The expected future cash flows for onePostNewsweek Tech Media (part of the business units in the Company’s magazine segment,publishing segment), on a discounted basis, did not support the net carrying value of the related goodwill. Accordingly, an after-tax goodwill impairment loss of $12.1 million, or $1.27 per share was recorded. As required under SFAS 142, the transitional goodwill impairmentThe loss is recognizedincluded in the Company’s 2002 first quarter results as a cumulative effect of change in accounting principle and is reported on a retroactive basis in the first quarter of 2002. Therefore, the loss is included in the Company’s year-to-date results for the six months ended June 30, 2002.principle.
On a pro forma basis, the Company’s operating income would have been $76.4 million in the second quarter of 2001, if SFAS 142 had been adopted at the beginning of fiscal 2001, compared to $110.4 for the second quarter of 2002. On a pro forma basis, the Company’s operating income would have been $136.7 million in the first six months of 2001, if SFAS 142 had been adopted at the beginning of fiscal 2001, compared to $159.3 for the first six months of 2002.
Other pro forma results for the second quarter of 2002, compared to 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001, are as follows:
Second Quarter | ||
2002 | 2001 | |
Net income available for common stock as reported | $50,885 | $14,229 |
Amortization of goodwill and other intangibles, net of tax | – | 13,863 |
Pro forma net income available for common stock | $ 50,885 | $ 28,092 |
Basic earnings per share | $ 5.35 | $ 2.96 |
Diluted earnings per share | $ 5.34 | $ 2.96 |
Other pro forma results for the first six months of 2002, compared to 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001, are as follows:
Year-to-Date | ||||
2002 | 2001 | |||
Income before cumulative effect of change | $ 74,850 | $213,546 | ||
Amortization of goodwill and other intangibles, net of tax | – | 26,087 | ||
Pro forma income before cumulative | 74,850 | 239,633 | ||
Cumulative effect of change in method of accounting for | (12,100 | ) | ||
Redeemable preferred stock dividends | (784 | ) | (789 | ) |
Pro forma net income available for common stock | $ 61,966 | $238,844 | ||
Basic earnings per share: | ||||
Before cumulative effect of change in accounting | $ 7.87 | $ 25.27 | ||
Cumulative effect of change in accounting principle | (1.27 | ) | – | |
Redeemable preferred stock dividends | (0.08 | ) | (0.08 | ) |
Net income available for common stock | $ 6.52 | $ 25.19 | ||
Diluted earnings per share: | ||||
Before cumulative effect of change in accounting | $ 7.86 | $ 25.22 | ||
Cumulative effect of change in accounting principle | (1.27 | ) | – | |
Redeemable preferred stock dividends | (0.08 | ) | (0.08 | ) |
Net income available for common stock | $ 6.51 | $ 25.14 |
In accordance with SFAS 142, the Company has reviewed its goodwill and other intangible assets and reported them on the consolidated balance sheet in three categories (goodwill, indefinite-lived intangible assets, and other intangible assets). The Company’s intangible assets with an indefinite life are from franchise agreements at its cable division. Other intangible assets are primarily non-compete agreements, with amortization periods up to five years. At June 30, 2002, goodwill, indefinite lived intangible assets and other intangible assets were net of accumulated amortization of $298.4 million, $163.8 million and $1.0 million, respectively. At December 30, 2001, goodwill, indefinite lived intangible assets and other intangible assets were net of accumulated amortization of $279.4 million, $163.8 million and $0.7 million, respectively.
Note 6: Change in Accounting Method – Stock Options
Effective the first day of the Company’s 2002 fiscal year, the Company has adopted the fair-value-based method of accounting for companyCompany stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method will bewas applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 will continue to beare accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
No stock optionsThe following table presents what the Company’s results would have been awardedhad the fair values of options granted after 1995, but prior to 2002, been recognized as compensation expense in fiscal yearthe first quarter of 2003 and 2002 through the end of the second quarter; therefore, this change in accounting method has had no impact on the Company’s reported results of operations in 2002. The impact on the Company’s overall 2002 operating results is not expected to be material. (in thousands except per share amounts).
2003 | 2002 | |||||
Company stock-based compensation expense included in net income (pre-tax) | $ | 142 | $ | — | ||
Net income available for common shares, as reported | $ | 72,545 | $ | 11,081 | ||
Stock-based compensation expense not included in net income (after-tax) |
| 790 |
| 904 | ||
Pro forma net income available for common shares | $ | 71,755 | $ | 10,177 | ||
Basic earnings per share, as reported | $ | 7.62 | $ | 1.17 | ||
Pro forma basic earnings per share | $ | 7.53 | $ | 1.07 | ||
Diluted earnings per share, as reported | $ | 7.59 | $ | 1.16 | ||
Pro forma diluted earnings per share | $ | 7.51 | $ | 1.07 |
11.
Item 2. 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.
Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume.
As discussed above, the Company adopted SFAS 142 effective on the first day of its 2002 fiscal year. All operating income comparisons presented below are on a pro forma basis as if SFAS 142 had been adopted at the beginning of 2001. Therefore, 2001 pro forma operating results exclude amortization charges of goodwill and certain other intangible assets that are no longer amortized under SFAS 142.
Second Quarter ComparisonsResults of Operations
Net income for the secondfirst quarter of 20022003 was $51.1$73.1 million ($5.347.59 per share), up from net income of $14.5$11.6 million ($1.501.16 per share) in the secondfirst quarter of last year.
Results for the secondfirst quarter of 20022003 include net losses onan after-tax non-operating gain from the write-downsale of certain investments ($3.3the Company’s 50 percent interest in the International Herald Tribune (after-tax impact of $32.3 million, or $0.34 per share) and an early retirement program charge at Newsweek ($1.6 million, or $0.17$3.38 per share). Results for the second quarter of 2001 include losses on the write-down of a non-operating parcel of land and certain investments to their estimated fair value (totaling $4.7 million, or $0.50 per share) and a charge of $13.9 million, or $1.45 per share, for amortization of goodwill and certain other intangible assets that are no longer amortized under SFAS 142. Excluding these items, net income for the secondfirst quarter of 2002 totaled $56.0included a transitional goodwill impairment loss (after-tax impact of $12.1 million, or $5.85$1.27 per share, compared to net income of $33.1 million, or $3.45 per share, for the second quarter of 2001. Second quarter 2002 earnings benefited from improved results at all five of the Company’s divisions, with significant increases at The Washing ton Post newspaper and at the Company’s education and cable divisions. These factors were offset in part by increased depreciation expense,share), a reduced net pension credit, an early retirement program charge at Newsweek and higher stock-based compensation expense accruals at the education division.
Revenue for the second quarter of 2002 was $647.7 million, up 7 percent from $603.9 million in 2001. Advertising revenue increased 1 percent compared to last year. Circulation and subscriber revenue and education revenue increased 5 percent and 25 percent, respectively.
The 1 percent increase in advertising revenue is the result of modest growth at the television broadcasting division, relatively flat print advertising revenue at The Post, and a decline in Newsweek advertising revenue. The advertising climate at the newspaper and magazine publishing divisions continues to be soft.
The 5 percent improvement in circulation and subscriber revenue is attributable to growth in subscriber revenues at Cable One, from rapid growth in cable modem and digital service revenues.
The 25 percent increase in education revenue is due to revenue growth in all of Kaplan’s lines of business, particularly the traditional test preparation business and the fixed-facility colleges that were formerly part of Quest Education.
Costs and expenses for the second quarter of 2002, excluding amortization of goodwill and other intangibles, increased 2 percent to $537.1 million, from $527.4 million in 2001. The increase is due to a $2.7 million pre-tax chargearising from an early retirement program at Newsweek higher stock-based compensation expense accruals(after-tax impact of $6.1 million, or $0.64 per share), and a net non-operating gain primarily from the sale of marketable securities (after-tax impact of $3.8 million, or $0.40 per share).
Revenue for the first quarter of 2003 was $640.4 million, up 7 percent from $600.3 million in 2002. The increase in revenue is due mostly to significant revenue growth at the education and cable divisions. Although advertising revenues have suffered due to the war in Iraq, the magazine and newspaper divisions showed modest revenue growth; revenues were down at the broadcast division.
Operating income for the quarter increased 62 percent to $79.1 million, from $48.9 million in 2002. Operating results for 2002 included a $10.3 million pre-tax charge from the Newsweek early retirement program. The Company’s results benefited from significantly improved operating results at the education, cable and newspaper divisions. These factors were offset by a reduction in advertising demand late in the quarter and certain incremental costs due to the war in Iraq, a reduction in operating income at the broadcast division, increased depreciation expense, and a reduced net pension credit. These factors were partially offset by a 30 percent decrease in newsprint expense and general cost control measures employed throughout the Company.
The increase in depreciation expense occurred mainly at the cable division, where capital spending in 2001 and 2000 has enabled the cable division to offer digital and broadband cable services to its subscribers.
The Company’s expensesoperating income for the secondfirst quarter of 2002 were reduced by $16.12003 includes $13.4 million of net pension credits, compared to $19.9$16.1 million in the secondfirst quarter of 2001.2002. At December 30, 2001, the Company modified certain assumptions surrounding the Company’s pension plans. Specifically,29, 2002, the Company reduced its assumptionsassumption on discount rate from 7.57.0 percent to 7.0 percent and expected return on plan assets from 9.0 percent6.75 percent. Due to 7.5 percent. These assumption changes result in athe reduction of approximately $5.5 million in the Company’sdiscount rate and lower than expected investment returns in 2002, the net pension credit each quarter. Management expects the 2002 annual net pension creditfor 2003 is expected to approximate $65be down by about $10 million compared to $76.9 million in 2001,2002, excluding charges related to early retirement programs.
Operating income for the quarter increased 45 percent to $110.4 million, from $76.4 million in 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001.
Newspaper Publishing Division. Newspaper publishing division revenue totaled $215.1$204.0 million for the secondfirst quarter of 2002, an2003, a 2 percent increase of 1 percent from revenue of $212.8$200.8 million in the secondfirst quarter of 2001.2002. Division operating income for the second quarter increased 5922 percent to $37.8$21.4 million, from pro forma operating income of $23.8$17.5 million in the second quarter of 2001.2002. The increase in division operating income for the second quarter is dueprimarily attributable to an increaseincreases in print and online advertising cost control initiatives employed throughout the division, and a 30revenue, combined with an 11 percent decrease in newsprint expense offset by a reduced pension credit.at The Post.
Print advertising revenue at The Washington Post newspaper increased slightly to $132.5 million, from $131.5 million in 2002, due to increases in preprint and zone advertising revenue, which more than offset a decrease in classified advertising revenue from volume declines. Recruitment advertising revenue was down $2.3 million due to a 17 percent volume decline. Advertising demand was down late in the second quarter increaseddue to $143.7 million, from $142.0 millionthe war in 2001. The relatively flat print advertising revenues forIraq.
For the secondfirst quarter of 2002 were2003, Post daily and Sunday circulation declined 1.9 percent and 1.1 percent, respectively, compared to the resultfirst quarter of higher revenue from several advertising categories, including preprints, general2002. For
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the three months ended March 30, 2003, average daily circulation at The Post totaled 757,000 and other classified advertising, offset by a continued decline in recruitment advertising revenue, with volume decreases of 29 percent in the second quarter. average Sunday circulation totaled 1,052,000.
Revenue
Revenues generated by the Company’s online publishing activities, primarily washingtonpost.com, totaled $8.7increased 27 percent to $9.5 million for the secondfirst quarter of 2002,2003, versus $8.2$7.5 million for 2001.2002. Local and national online advertising revenues grew 5678 percent forin 2003, while revenue at the second quarter, however, revenues at WashingtonJobs.com were flat in the second quarter due to the weak employment market.Jobs section of washingtonpost.com increased 17 percent.
Television Broadcasting Division. Revenue for the television broadcastingbroadcast division increased 3decreased 6 percent in the secondfirst quarter of 20022003 to $86.1$70.8 million, from $83.7$75.4 million in 2001, primarily2002, due to an increasesignificant Olympics related advertising at the Company’s NBC affiliates in political advertising, offset by a reduction2002 and several days of commercial-free coverage in network compensation due to a new network affiliation agreementconnection with NBC, which goes through 2011.the war in Iraq. Operating income for the secondfirst quarter increased 5of 2003 decreased 21 percent to $43.5$26.3 million, from pro forma operating income of $41.3$33.6 million for the second quarter of 2001. Operating income growth for the second quarter of 2002 is due to modest revenue growth and tight cost controls, partially offset by a reduced pension credit. in 2002.
In AprilJuly 2002, the Company announced thatWJXT in Jacksonville, Florida began operations as an independent station when its network affiliation with CBS at WJXT in Jacksonville, Florida, would end. On July 15, 2002, WJXT began operations as an independent station. ended.
Magazine Publishing Division. Revenue for the magazine publishing division totaled $88.9$77.5 million for the secondfirst quarter of 2002,2003, a 3 percent decreaseincrease from $91.5$75.0 million for the secondfirst quarter of 2001,2002. This increase was primarily due to loweran 18 percent increase in advertising revenue at Newsweek. Operating income totaled $13.3 million forNewsweek, as a result of increased ad pages at both the seconddomestic and international editions, as well as an additional issue of the magazine in the first quarter of 2002,2003 versus the first quarter of 2002. This revenue increase was partially offset by reduced advertising demand late in the quarter due to the Iraq war, and a 30 percent increase from pro forma operating income of $10.2 milliondecline in revenue at PostNewsweek Tech Media, whose primary trade show is in the second quarter of 2001. Excluding2003, versus the $2.7first quarter in 2002.
Magazine division operating income totaled $0.8 million, pre-taxcompared to a loss of $11.6 million for the first quarter of 2002. The improvement in operating results is primarily attributable to a $10.3 million charge in connection with an early retirement program at Newsweek operating income increased 56 percent to $15.9 million due to a decline in overall operating expenses, includingthe first quarter of 2002.
During the second quarter of 2003, Newsweek has experienced a reduction in magazine paper ratesadvertising demand and subscriptionincreased costs offset by lower revenues anddue to the Iraq war, along with a reduced pension credit. reduction in travel-related advertising demand at Newsweek International due to the SARS epidemic.
Cable Television Division. Cable division revenue of $108.0$110.4 million for the secondfirst quarter of 20022003 represents a 12an 8 percent increase over 2001 second2002 first quarter revenue of $96.5$102.0 million. The 20022003 revenue increase is principally due to rapidcontinued growth in the division’s cable modem and digital service revenues, offset by lower pay revenues.
Cable division cash flow (operating income excluding depreciation and amortization expense) totaled $42.5 million for the second quarter of 2002, an increase of 31 percent from $32.4 million for the second quarter of 2001.
Cable division operating income forincreased 29 percent to $20.8 million in the second quarter increased 40 percent from pro forma operating income of $15.5 million for the secondfirst quarter of 2001.2003, versus $16.0 million in the first quarter of 2002. The increase in operating income is due mostly to the division’s significant revenue growth, offset by higher depreciation expense and increased programming expense.
The increase in depreciation expense is due to significant capital spending primarily in 2001 and 2000, whichrecent years that has enabled the cable division to offer digital and broadband cable services to its subscribers. The cable division began its rollout plan for these services in the third quarter of 2000. At June 30, 2002,March 31, 2003, the cable division had approximately 232,800210,500 digital cable subscribers, representing a 3330 percent penetration of the subscriber base in the markets where digital services are offered. Digital services are currently offered in markets serving 9799 percent of the cable division’s subscriber base. The initial rollout plan for the new digital cable services included an offer for the cable division’s customers to obtain these services free for one year. At June 30, 2002,the end of March 2003, the cable division had about 94,000205,300 paying digital subscribers, including 15,600 paying digital subscribers in Idaho systems that it had ass umed from the cable exchange transactions completed in the first quarter of 2001 and who were not offered one-year free digital service by the prior owner. The benefits from these services began to show in the first quarter of 2002 and are expected to continue throughout the year, with the remaining portion of free one-year periods generally ending later in 2002.subscribers.
At June 30, 2002,March 31, 2003, the cable division had 736,100719,300 basic subscribers, compared to 758,000lower than 751,700 basic subscribers at the end of June 2001, withMarch 2002 but up slightly from 718,000 basic subscribers at the decrease due primarily to the difficult economic environment over the past year; basic customer disconnects for non-paymentend of bills have increased significantly.December 2002. At June 30, 2002,March 31, 2003, the cable division had 60,60095,800 CableONE.net service subscribers, compared to 32,80053,100 at the end
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of June 2001,March 2002, due to a large increase in the Company’s cable modem deployment (offered to 9197 percent of homes passed at the end of June 2002)March 2003) and subscriber penetrationtake-up rates. Of these subscribers, 56,000
At March 31, 2003, Revenue Generating Units (RGUs), representing the sum of basic, digital and 19,000 werehigh-speed data customers, as defined by the NCTA Standard Reporting Categories, totaled 1,020,500, compared to 870,000 as of March 31, 2002. The increase is due to increased paying digital cable modem subscribers atand high-speed data customers.
Below are details of Cable division capital expenditures for the end of the secondfirst quarter of 2003 and 2002, and 2001, respectively, withas defined by the remainder being dial-up subscribers.NCTA Standard Reporting Categories (in millions):
2003 | 2002 | |||||
Customer Premise Equipment | $ | 2.6 | $ | 14.5 | ||
Commercial |
| 0.1 |
| 0.1 | ||
Scaleable Infrastructure |
| 1.2 |
| 0.7 | ||
Line Extensions |
| 3.1 |
| 1.8 | ||
Upgrade/Rebuild |
| 8.1 |
| 4.9 | ||
Support Capital |
| 1.8 |
| 2.1 | ||
Total | $ | 16.9 | $ | 24.1 | ||
Education Division. Education division revenue totaled $149.7$177.8 million for the secondfirst quarter of 2002,2003, a 2521 percent increase over revenue of $119.4$147.1 million for the same period of 2001. Including the charges for stock options held by Kaplan management,2002. Kaplan reported operating income for the secondfirst quarter of 2003 of $15.9 million, compared to an operating loss of $0.6 million compared to a pro forma operating loss of $7.8 million forin the secondfirst quarter of 2001. Excluding these charges,2002. Approximately 20 percent of the increase in Kaplan operating earnings were $10.6 million forrevenue is from acquired businesses, primarily in the second quarter of 2002, compared to operating losses of $0.6 million for the second quarter of 2001.higher education division. A summary of secondfirst quarter operating results excluding goodwill amortization in 2001, is as follows:
Second Quarter | ||||||||
(In thousands) | 2002 | 2001 | % Change | |||||
Revenue | ||||||||
Supplemental education | $ | 92,623 | $ | 81,826 | +13 | |||
Higher education | 57,072 | 37,611 | +52 | |||||
$ | 149,695 | $ | 119,437 | +25 | ||||
Operating income (loss) | ||||||||
Supplemental education | $ | 10,989 | $ | 5,513 | +99 | |||
Higher education | 5,065 | (825 | ) | --- | ||||
Kaplan corporate overhead | (5,314 | ) | (5,185 | ) | (2 | ) | ||
Other* | (10,116 | ) | (7,317 | ) | (38 | ) | ||
$ | 624 | $ | (7,814 | ) | --- | |||
*Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles. |
First Quarter | |||||||||||
(in thousands) | 2003 | 2002 | % Change | ||||||||
Revenue | |||||||||||
Supplemental education | $ | 98,182 |
| $ | 90,750 |
| 8 |
| |||
Higher education |
| 79,596 |
|
| 56,331 |
| 41 |
| |||
$ | 177,778 |
| $ | 147,081 |
| 21 |
| ||||
Operating income (loss) | |||||||||||
Supplemental education | $ | 18,552 |
| $ | 13,204 |
| 41 |
| |||
Higher education |
| 14,922 |
|
| 8,886 |
| 68 |
| |||
Kaplan corporate overhead |
| (7,440 | ) |
| (5,902 | ) | (26 | ) | |||
Other* |
| (10,107 | ) |
| (16,738 | ) | 40 |
| |||
$ | 15,927 |
| $ | (550 | ) | — |
| ||||
* | Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles. |
Supplemental education includes Kaplan’s test preparation, professional training, and Score! businesses. The improvement in supplemental education results for the secondfirst quarter of 2003 is due mostly to higher enrollments and to a lesser extent higher pricesincreased enrollment at Kaplan’s traditional test preparation business, (particularly the LSAT, MCAT and GRE prep courses), as well as higher revenues and profits from Kaplan’s CFA anda significant increase in the professional real estate exam preparation services.courses. Score! also contributed to the improved results, with increased enrollment from existing sites and two new learning centers opened later in 2001 (148 centers at the end of June 2002, versus 145 centers at the end of June 2001), higher prices and strongcompared to last year, combined with tight cost controls.
Higher education includes all of Kaplan’s post-secondary education businesses, including the fixed-facility colleges that were formerly part of Quest Education, as well as online post-secondary and career programs (various distance learningdistance-learning businesses). Higher education results are showing significant growth due to student enrollment increases, high student retention rates, and as a result of several acquisitions.
Corporate overhead represents unallocated expenses of Kaplan, Inc.’s corporate office, including expenses associated with the design and development of educational software that, if successfully completed, will benefit all of Kaplan’s business units.
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Other expense is comprised of accrued charges for stock-based incentive compensation arising from a stock option plan established for certain members of Kaplan’s management and amortization of certain intangibles. Under the stock-based incentive plan, the amount of compensation expense varies directly with the estimated fair value of Kaplan’s common stock and the number of options outstanding. For the first quarter of 2003 and 2002, the Company recorded expense of $10.0 million and $16.6 million, respectively, related to this plan. The increaseCompany prepares estimates of the Kaplan stock option expense and related accrual balance on a quarterly basis. The trend in otherKaplan stock option expense in 2002 ($10.0 million, $6.7 million and $1.2 million for the second, third and fourth quarters of 2002, respectively) is attributablenot indicative of the expected expense to be recorded for the remainder of 2003.
On March 31, 2003, Kaplan completed its acquisition of the stock of FTC Holdings Limited (FTC) for £55.3 million ($87.4 million), financed through cash and debt. Headquartered in London, FTC is a leader in test preparation services for accountants and financial services professionals, with 18 training centers in the United Kingdom and a growing presence in Asia, including operations in Hong Kong and Singapore.
In May 2003, Kaplan announced it had entered into an increaseagreement for its higher education division to acquire Heritage College, a career-oriented postsecondary school providing training in stock-based incentive compensation, whichthe fields of allied health, paralegal, travel and information technology. The acquisition is due to an increase in Kaplan’s estimated value.contingent upon regulatory approvals.
Equity in Losses of Affiliates. The Company’s equity in losses of affiliates for the secondfirst quarter of 20022003 was $9.2$2.6 million, compared to losses of $6.6$6.5 million for the secondfirst quarter of 2001.2002. The Company’s affiliate investments consist of a 49 percent interest in BrassRing LLC a 50 percent interest in the International Herald Tribune, and a 49 percent interest in Bowater Mersey Paper Company Limited. BrassRing accountedThe reduction in first quarter 2003 affiliate losses is primarily attributable to improved operating results at BrassRing.
On January 1, 2003, the Company sold its 50 percent interest in the International Herald Tribune for approximately $6.5$65 million and the Company recorded an after-tax non-operating gain of the 2002 second quarter equity in losses of affiliates compared to $8.3$32.3 million in equity losses for the same periodfirst quarter of 2001. 2003.
Non-Operating Items. The Company recorded other non-operating expense,income, net, of $6.0$48.1 million for the secondfirst quarter of 2002,2003, compared to $10.7non-operating income, net, of $6.5 million for the first quarter of 2002. The 2003 non-operating expense, net,income is comprised mostly of a $49.8 million pre-tax gain from the sale of the Company’s 50 percent interest in the second quarter of 2001.International Herald Tribune. The 2002 non-operating expense includes charges forincome is comprised mostly of a gain from the write-downsale of marketable securities, offset by write-downs recorded on certain investments; the 2001 non-operating expense includes charges for the write-down of certain investments and a parcel of non-operating land to their estimated fair value.investments.
Net Interest Expense. The Company incurred net interest expense of $8.7$7.1 million for the secondfirst quarter of 2002,2003, compared to $12.2$8.7 million for the same period of 2001.the prior year. The reduction is due to both lower average borrowings and lower interest rates.in the first quarter of 2003 versus the same period of the prior year. At JuneMarch 30, 2002,2003, the Company had $806.2$648.5 million in borrowings outstanding at an average interest rate of 3.74.0 percent.
Provision for Income Taxes. The effective tax rate for the secondfirst quarter of 20022003 was 40.937.8 percent, compared to 46.440.9 percent for the same period of 2001.2002. The 2003 rate benefited from a lower effective tax rate applicable to the one-time gain arising from the sale of the Company’s interest in the International Herald Tribune. Excluding the effect of the International Herald Tribune gain, the Company’s effective tax rate approximated 39.8 percent for the first quarter of 2003. The effective tax rate for 20022003 has declined becausedue to an increase in operating earnings.
Cumulative Effect of Change in Accounting Principle.In 2002, the Company no longer has any permanent difference from goodwill amortization not deductible for tax purposes as a result of the adoption of SFAS 142.
Earnings Per Share. The calculation of diluted earnings per share for the second quarter of 2002 was based on 9,521,000 weighted average shares outstanding compared to 9,502,000 for the second quarter of 2001. The Company made no significant repurchases of its stock during the second quarter of 2002.
Six Month Comparisons
The Company completed its SFAS 142 transitional goodwill impairment test during the second quarterrequired under Statement of 2002,Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), resulting in an after-tax impairment loss related to its magazine division of $12.1 million, or $1.27 per share. As required under SFAS 142, the transitional goodwill impairmentshare, related to PostNewsweek Tech Media (part of magazine publishing segment). This loss is recognizedincluded in the Company’s 2002 results as a cumulative effect of change in accounting principle and is reported on a retroactive basis in the first quarter of 2002. Therefore, the loss is included in the Company’s year-to-date results for the six months ended June 30, 2002.
For the first six months of 2002, net income totaled $62.8 million ($6.51 per share), compared with net income of $213.5 million ($22.39 per share) for the same period of 2001. Results for the first six months of 2002 include the transitional goodwill impairment loss discussed above ($12.1 million, or $1.27 per share), charges from early retirement programs at Newsweek ($7.7 million, or $0.81 per share), and a net non-operating gain from the sale of marketable securities ($0.6 million, or $0.06 per share). Results for the first six months of 2001 include net non-operating gains, principally from the sale and exchange of certain cable systems ($184.7 million, or $19.44 per share), and a charge of $26.1 million, or $2.75 per share, for amortization of goodwill and other intangible assets that are no longer amortized under SFAS 142. Excluding these items, net income for the first six months of 2002 totaled $82.0 million, or $8.53 per share, compared to net income of $54.9 million, or $5.70 per share, for the first six months of 2001. Consistent with the Company’s results for the second quarter of 2002, the Company’s year-to-date results benefited from improved operating results at the education and cable divisions, along with improved earnings at The Washington Post newspaper in the second quarter. These factors were offset in part by increased depreciation expense, a reduced net pension credit, and higher stock-based compensation expense accruals at the education division.
Revenue for the first half of 2002 was $1,248.0 million, up 5 percent over revenue of $1,190.3 million for the first six months of 2001. Advertising revenue decreased 3 percent compared to last year. Circulation and subscriber revenue and education revenue increased 7 percent and 23 percent, respectively. The decline in advertising revenue is primarily attributable to a $22.1 million (or 37 percent) decline in classified recruitment advertising revenue at The Washington Post. The 7 percent improvement in circulation and subscriber revenue is attributable to growth in subscriber revenues at Cable One, from rapid growth in cable modem and digital service revenues. The 23 percent increase in education revenue is due to revenue growth in all of Kaplan’s lines of business, particularly the traditional test preparation business and the fixed-facility colleges that were formerly part of Quest Education.
Costs and expenses for the first six months of 2002, excluding amortization of goodwill and other intangibles, increased 3 percent to $1,088.4 million, from $1,053.4 million in 2001. The increase is due to $13.0 million in pre-tax charges from early retirement programs at Newsweek, higher stock-based compensation expense accruals at the education division, increased depreciation expense, and a reduced net pension credit. These factors were partially offset by a 25 percent decrease in newsprint expense and general cost control measures employed throughout the Company.
The Company’s expenses were reduced for the first six months of 2002 by $32.2 million of net pension credits, compared to $39.8 million during the first six months of 2001.
Operating income increased 17 percent to $159.3 million, from $136.7 million in 2001. Excluding the $13.0 million pre-tax charges from Newsweek’s early retirement programs, operating income for the first six months of 2002 was $172.3 million, an increase of 26 percent.
Newspaper Publishing Division. Newspaper publishing division revenue decreased 4 percent to $415.8 million for the first six months of 2002, from $431.0 million for the first six months of 2001. Division operating income increased 9 percent to $55.4 million for the first six months of 2002, compared to pro forma operating income of $50.6 million for the first six months of 2001. The increase in operating income for the first six months of 2002 is due to increased circulation revenues, a 25 percent decrease in newsprint expense, and cost control initiatives employed throughout the division, offset by a decrease in print advertising revenues and a reduced pension credit.principle.
Print advertising at The Washington Post newspaper decreased 7 percent to $275.3 million for the first six months of 2002, from $294.6 million for the first six months of 2002. The decrease in print advertising revenues for the first six months of 2002 is primarily due to a $22.1 million decline in recruitment advertising revenue, resulting from a 40 percent volume decline, and a continued decline in retail advertising sales and volume. These declines are partially offset by higher revenues from several advertising categories, including preprints and other classified advertising.
For the first six months of 2002, Post daily and Sunday circulation declined 0.1 percent and 0.8 percent, respectively, compared to the same period of the prior year. For the six months ended June 30, 2002, average daily circulation at The Post totaled 759,900 and average Sunday circulation totaled 1,059,700.15.
Revenue generated by the Company’s online publishing activities totaled $16.2 million for the first six months of 2002, versus $15.4 million for 2001. Local and national online advertising revenues grew 47 percent for the first six months of 2002. However, revenues at WashingtonJobs.com were down 13 percent for the first six months of 2002 due to the weak employment market.
Television Broadcasting Division. Revenue for the television broadcasting division for the first six months of 2002 increased 2 percent to $161.5 million, from $157.9 million in 2001, due to an increase in national advertising, including political, and Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2002, partially offset by reduced network compensation revenues due to a new network affiliation agreement with NBC, which goes through 2011. Operating income for the first six months of 2002 increased to $77.0 million, from pro forma operating income of $73.4 million for the first six months of 2001. Operating income growth for the first six months of 2002 is due to modest revenue growth and tight cost controls, partially offset by a reduced pension credit.
Magazine Publishing Division. Revenue for the magazine publishing division totaled $163.9 million for the first six months of 2002, a 6 percent decline from $174.9 million for the first six months of 2001, due primarily to lower advertising revenue at Newsweek. Operating income totaled $1.7 million for the first six months of 2002, down from pro forma operating income of $9.4 million for the first six months of 2001. Excluding the $13.0 million in pre-tax charges in connection with early retirement programs at Newsweek, operating income increased 57 percent to $14.7 million, due to a decline in overall operating expenses, including a reduction in magazine paper rates, print and distribution costs and lower subscription costs, offset by lower revenues and a reduced pension credit.
In the third quarter of 2002, the Company will record an estimated $3.1 million additional charge in connection with an early retirement program recently offered to certain employees in Newsweek’s international operations.
Cable Television Division. Cable division revenue for the first six months of 2002 increased 13 percent to $210.0 million, from $185.6 million in 2001, due to rapid growth in the division's cable modem and digital service revenues.
Cable division cash flow (operating income excluding depreciation and amortization expense) for the first six months of 2002 increased 23 percent to $79.1 million, from $64.2 million in 2001. Cable division operating income for the first six months of 2002 increased 22 percent to $37.8 million from pro forma operating income of $30.9 million for the first six months of 2001. The increase in operating income is due mostly to the division’s significant revenue growth, offset by higher depreciation expense and increased programming expense.
Education Division. For the first six months of 2002, education division revenue totaled $296.8 million, a 23 percent increase over revenue of $240.9 million for the same period of 2001. Including the charges for stock options held by Kaplan management, Kaplan reported operating income of $0.1 million for the first six months of 2002, compared to a pro forma operating loss of $14.4 million for the first six months of 2001. Excluding these charges, Kaplan operating earnings were $26.7 million for the first six months of 2002, compared to operating earnings of $0.9 million for the first six months of 2001. Excluding goodwill amortization in 2001, a summary of operating results for the first six months of 2002 compared to 2001 is as follows:
YTD | ||||||
(In thousands) | 2002 | 2001 | % Change | |||
Revenue | ||||||
Supplemental education | $183,373 | $162,700 | +13 | |||
Higher education | 113,403 | 78,245 | +45 | |||
$296,776 | $240,945 | +23 | ||||
Operating income (loss) | ||||||
Supplemental education | $ 24,191 | $ 11,953 | +102 | |||
Higher education | 13,951 | 1,419 | +883 | |||
Kaplan corporate overhead | (11,216 | ) | (12,280 | ) | +9 | |
Other* | (26,852 | ) | (15,481 | ) | (73 | ) |
$ 74 | $ (14,389 | ) | --- | |||
*Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles. |
The improvement in supplemental education results for the first half of 2002 is due mostly to higher enrollments and to a lesser extent higher prices at Kaplan’s traditional test preparation business (particularly the LSAT, MCAT and GRE prep courses), as well as higher revenues and profits from Kaplan’s CFA and real estate exam preparation services. Score! also contributed to the improved results, with increased enrollment from new learning centers opened later in 2001 (148 centers at the end of June 2002, versus 145 centers at the end of June 2001), higher prices and strong cost controls.
Higher education results are showing significant growth due to student enrollment increases, high student retention rates, and as a result of several acquisitions.
The decrease in the corporate overhead expense category in 2002 is due to decreased spending for educational software design and development initiatives.
The increase in other expense for 2002 is due to higher stock-based compensation accruals due to an increase in Kaplan’s estimated value.
Equity in Losses of Affiliates. For the first six months of 2002, the Company’s equity in losses of affiliates totaled $15.7 million, compared to losses of $19.1 million for the same period of 2001. BrassRing accounted for approximately $10.7 million of the 2002 first six month equity in losses of affiliates compared to $22.4 million in equity losses for the same period of 2001.
Non-Operating Items. The Company recorded non-operating income, net, of $0.5 million for the first six months of 2002, compared to non-operating income, net, of $298.1 million for the same period of the prior year. The 2002 non-operating income, net, includes a gain on the sale of marketable securities, offset by write-downs recorded on certain investments. The 2001 non-operating income is comprised mostly of gains arising from the sale and exchange of certain cable systems completed in the first quarter of 2001, offset by write-downs recorded on certain investments and the non-operating land as previously discussed.
Net Interest Expense. The Company incurred net interest expense of $17.5 million for the first six months of 2002, versus $26.5 million in 2001.
Provision for Income Taxes. The effective tax rate was 40.9 percent versus 39.4 percent for the 2002 and 2001 six month periods, respectively. Excluding the effect of the cable gain transactions, the Company’s effective tax rate approximated 45.8 percent for the first six months of 2001. The effective tax rate for 2002 has declined because the Company no longer has any permanent difference from goodwill amortization not deductible for tax purposes as a result of the adoption of SFAS 142.
Earnings Per Share. The calculation of diluted earnings per share for the first six monthsquarter of 20022003 was based on 9,516,0009,553,000 weighted average shares outstanding, compared to 9,500,0009,512,000 for the first six monthsquarter of 2001.2002. The Company made no significant repurchases of its stock during the first six monthsquarter of 2002.2003.
Stock Options – Change in Accounting Method. Effective the first day of the Company’s 2002 fiscal year, the Company adopted the fair-value-based method of accounting for Company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method was applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 are accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
The Company recorded $142,000 in Company stock option expense for the first quarter of 2003; there was no Company stock option expense in the first quarter of 2002.
Financial Condition: Capital Resources and Liquidity
Acquisitions. InOn March 31, 2003, Kaplan completed its acquisition of the first six monthsstock of 2002, Kaplan acquired several businessesFTC Holdings Limited (FTC), for £55.3 million ($87.4 million). Headquartered in their higher education andLondon, FTC is a leader in test preparation divisions, totaling approximately $37.9 million. About $9.5services for accountants and financial services professionals, with 18 training centers in the United Kingdom and a growing presence in Asia, including operations in Hong Kong and Singapore. The acquisition was financed through cash and debt with $26.5 million remainsremaining to be paid, on these acquisitions,primarily to employees of which $2.1 million has been classifiedthe business (included in current liabilities and $7.4 million as long-term debt at JuneMarch 30, 2002. 2003).
Capital expenditures. During the first six monthsquarter of 2002,2003, the Company’s capital expenditures totaled $79.6$28.1 million. The Company anticipates it will spend approximately $165.0$170 – 180 million throughout 20022003 for property and equipment.
Liquidity. Throughout the first sixthree months of 2002,2003, the Company’s borrowings, net of repayments, decreased by $126.8$16.3 million, with the decrease primarily due to cash flows from operations.operations and proceeds from the sale of the International Herald Tribune, offset in part by borrowings for the purchase of FTC by Kaplan.
At JuneMarch 30, 2002,2003, the Company had $806.2$648.5 million in total debt outstanding, which was comprised of $400.0$217.4 million of commercial paper borrowings, $398.2$398.5 million of 5.5 percent unsecured notes due February 15, 2009, and $8.0$32.6 million in other debt. The Company’s five year $500 million revolving credit facility, which expires in March 2003, and one-year $250 million revolving credit facility, which expires in September 2002, support the issuance of the Company’s short-term commercial paper. The Company intends to replace the revolving credit facility agreements prior to their expiration, at which time the Company expects to classify a portion of its commercial paper borrowings as “Long-Term Debt” in its Consolidated Balance Sheet. In early May 2002, Moody’s downgraded the Company’s long-term debt ratings to A1 from Aa3 and affirmed the Company’s short-term debt rating at P-1.
During the first six monthsquarter of 20022003 and 20012002 the Company had average borrowings outstanding of approximately $859.5$601.6 million and $968.6$888.3 million, respectively, at average annual interest rates of approximately 3.64.2 percent and 5.43.5 percent, respectively. During the first six monthsquarter of 20022003 and 2001,2002, the Company incurred net interest expense on borrowings of $17.5$7.1 million and $26.5$8.7 million, respectively.
The Company expects to fund its estimated capital needs primarily through internally generated funds, and to a lesser extent, commercial paper borrowings. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2002.2003.
Change in Accounting Method - Stock Options
Effective the first day of the Company’s 2002 fiscal year, the Company has adopted the fair-value-based method of accounting for company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method will be applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 will continue to be accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
No stock options have been awarded in fiscal year 2002 through the end of the second quarter; therefore, this change in accounting method has had no impact on the Company’s reported results of operations in 2002. The impact on the Company’s overall 2002 operating results is not expected to be material.
The accounting treatment for the Company’s Kaplan stock option plan is not impacted by this change in accounting method, as the expense related to the Kaplan stock option plan has been and will continue to be recorded in the Company’s results of operations.
This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such 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 for the fiscal year ended December 30, 2001.29, 2002.
16.
A review and evaluation was performed by the Company’s management, at the direction of the Company’s Chief Executive Officer (the Company’s principal executive officer) and Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this quarterly report. Based on that review and evaluation, the Company’s Chief Executive Officer and Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that all material information required to be disclosed in the reports that the Company files or submits under the Exchange Act have been made known to them in a timely fashion. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of such evaluation.
17.
PART II -– OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company’s May 9, 2002 Annual Meeting of Stockholders, the stockholders elected each of the nominees named in the Company’s proxy statement dated March 28, 2002 to its Board of Directors. The voting results are set forth below:
Class A Directors | |||
|
| Votes | Broker |
Warren E. Buffett | 1,722,250 | -0- | -0- |
Barry Diller | 1,722,250 | -0- | -0- |
George J. Gillespie, III | 1,722,250 | -0- | -0- |
Donald E. Graham | 1,722,250 | -0- | -0- |
Richard D. Simmons | 1,722,250 | -0- | -0- |
George W. Wilson | 1,722,250 | -0- | -0- |
Class B Directors | |||
|
| Votes | Broker |
Daniel B. Burke | 6,512,664 | 59,270 | -0- |
John L. Dotson Jr. | 6,368,354 | 203,580 | -0- |
Ralph E. Gomory | 6,520,364 | 51,570 | -0- |
Item 6. Exhibits and Reports on Form 8-K.8-K.
(a) The following documents are filed as exhibits to this report:
(a) |
Exhibit Number | Description | |
3.1 | Certificate of Incorporation of the Company as amended through May 12, 1998, and the Certificate of Designation for the Company’s Series A Preferred Stock filed January 22, 1996 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995). | |
3.2 | By-Laws of the Company as amended through | |
| ||
4.1 | Form of the Company’s 5.50% Notes due February 15, 2009, issued under the Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999). | |
4.2 | Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999). | |
4.3 | 364-Day Credit Agreement dated as of | |
4.4 | 5-Year Credit Agreement dated as of August 14, 2002, among the Company, Citibank, N.A., Wachovia Bank, National Association, SunTrust Bank, JPMorgan Chase Bank, Bank One, N.A., The | |
11 | ||
Calculation of Earnings per Share of Common Stock. | ||
99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | No reports on Form 8-K were filed during the period covered by this report. |
18.
Pursuant to the requirements 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.
(Registrant) | ||||||||
Date: | ||||||||
| /s/ DONALD E. GRAHAM | |||||||
Donald E. Graham Chairman & Chief Executive Officer (Principal Executive Officer) |
Date: | May 12, 2003 |
| |||||||
| |||||||||
Vice President-Finance (Principal Financial Officer) |
19.
RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Graham, Chief Executive Officer (principal executive officer) of The Washington Post Company (the “Registrant”), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) | designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
(b) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
(c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
(a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and |
6. The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ DONALD E. GRAHAM | ||
Donald E. Graham Chief Executive Officer May 12, 2003 |
20.
CERTIFICATION PURSUANT TO
RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Morse, Jr., Vice President-Finance (principal financial officer) of The Washington Post Company (the “Registrant”), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) | designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
(b) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
(c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
(a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and |
6. The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ JOHN B. MORSE, JR. | |||
John B. Morse, Jr. Vice President-Finance | May 12, 2003 |
21.