Washington Post shares off, Kaplan faces scrutiny

Proposed federal rules that could hurt The Washington Post Co.'s biggest revenue and profit driver, the Kaplan education business, overshadowed a nearly eight-fold surge in the company's quarterly earnings reported Friday. The company's shares plunged.

The Post Co. said that proposed changes in federal education policy may have a "material effect" on Kaplan's future results.

Lawmakers have been raising concerns that for-profit colleges of the kind run by Kaplan are loading students up with debt and not preparing them to find jobs.

Those worries were underscored this week as the U.S. Senate heard testimony on a Government Accountability Office investigation that found questionable recruiting tactics, high loan-default rates and low graduation and job placement at for-profit colleges. Kaplan and 14 other institutions were singled out for criticism.

Video shot by undercover investigators showed what amounted to "misrepresentation" by Kaplan admissions representatives who were meeting with students, Post Co. Chairman and CEO Donald Graham conceded in a statement Wednesday.

He called the video "sickening," and added, "We will do everything in our power to eliminate such conduct from Kaplan's education institutions."

Proposed regulatory changes would require for-profit colleges to show better results among graduates or risk being shut out of a government-sponsored student-loan program. That could hurt enrollment by leaving tuition costs out of reach for more students.

The Post Co. said it doesn't have enough information about the proposed changes to know how they would affect Kaplan.

But any change that hurts Kaplan's results would be a blow to the Post Co., a reality that was reflected in an 8.5 percent drop in the company's share price Friday. Shares fell $31.05, or 7.6 percent, to close at $377.56 Friday. Earlier in the session, the stock hit an annual low of $363.50.

Acquired by the Post Co. in 1984, Kaplan has grown from a small test-prep company to a sprawling education-services business with annual revenue of more than $2.6 billion. It has campuses across the country and more than 100,000 students enrolled in its degree programs.

It now accounts for roughly two-thirds of the Post Co.'s revenue and operating income, and it has helped offset weaknesses in the company's traditional publishing business, which has suffered advertising declines.

The company finally had to put a money-losing Newsweek magazine on the block in May. It said this week that Sidney Harman, the 91-year-old founder of audio equipment maker Harman International Industries Inc., will take it over.

Second-quarter results reaffirmed Kaplan as the company's main engine. The unit booked a 15 percent increase in revenue to $747.3 million and an 88 percent jump in operating profit to $109 million.

Kaplan's results helped the Post Co. record a nearly eight-fold jump in net income to $91.9 million, or $10 per share, for the three months ended July 4. That's up from $12.2 million, or $1.30 per share, a year ago, when the company absorbed $56.8 million in expenses tied to an early-retirement program at the namesake newspaper.

Revenue climbed 11 percent to $1.2 billion from $1.08 billion a year ago.

Along with growth at Kaplan, the Post Co. also benefited from a rebound in spending on television advertising.

Revenue at the Post Co.'s six broadcast stations climbed 24 percent to $82.6 million as demand for commercial time picked up. The unit's operating profit more than doubled to $29.8 million.

The uptick in spending on television ads - an industrywide trend - has not extended to print media, though newspaper advertising declines have eased since the bottom of the recession.

The Post Co.'s newspaper division saw a modest 2 percent lift in revenue despite a 6 percent decline in print ad sales at its flagship daily. That and lower retirement expenses helped the newspaper division narrow its losses to $14.3 million from $89.3 million.

The company did not break out Newsweek's revenue or ad sales, but said the magazine contributed a $2.3 million loss for the quarter.

Revenue rose 2 percent to $190.6 million at the company's cable TV division, which houses Cable One, while operating profit climbed 10 percent to $43.8 million.