The Washington Post Company — Q3 2010 Form 10-Q
Reporting period: The unaudited 13 and 39 weeks ended October 3, 2010, compared with periods ended September 27, 2009. The filing is under The Washington Post Company, the registrant identified in the source text; the supplied company metadata says Graham Holdings Co.
Business context and results
The company operated education business Kaplan, cable television, newspaper publishing, television broadcasting and other businesses. It completed the sale of Newsweek on September 30, 2010; magazine results are presented as discontinued operations for all periods shown.
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Revenue | $1,189.7m | $1,108.8m | $3,533.6m | $3,200.3m |
| Operating income | $130.6m | $74.6m | $397.2m | $103.1m |
| Continuing income attributable to common shareholders | $81.2m | $25.9m | $227.0m | $45.6m |
| Net income available to common shareholders | $60.9m | $17.1m | $198.2m | $10.1m |
| Diluted EPS from continuing operations | $9.12 | $2.76 | $24.91 | $4.85 |
| Diluted net EPS | $6.84 | $1.81 | $21.75 | $1.08 |
Revenue grew 7% in Q3 and 10% year to date. Operating margin, calculated from reported revenue and operating income, was approximately 11.0% in Q3 2010 versus 6.7% in Q3 2009, and 11.2% year to date versus 3.2%. Net income includes after-tax discontinued-operation losses of $20.3m in Q3 2010 and $28.8m year to date; 2010 includes an $11.5m after-tax Newsweek sale loss.
Cash flow, liquidity and debt
- Operating cash flow was $543.5m for the first 39 weeks, up from $503.6m. Investing used $130.4m, including $159.2m of capital expenditures; financing used $314.7m, including $277.1m of share repurchases and $62.9m of dividends.
- Cash and cash equivalents were $577.9m at October 3, 2010, versus $477.7m at January 3, 2010. Working capital was $351.7m, down from $398.5m.
- Total borrowings were $399.5m: $396.5m of 7.25% unsecured notes due February 2019 and $3.0m of other debt. The company reported $21.3m of net interest expense for the first nine months.
- A $500m revolving credit facility, which supports commercial paper and general corporate needs, was scheduled to expire in August 2011. No commercial paper was issued in the first nine months of 2010.
Material changes and segment performance
- Education: Revenue rose 9% in Q3 and 14% year to date; operating income increased to $99.1m and $266.0m, respectively. Higher Education growth was a principal contributor. Test Preparation revenue fell 6% in both periods, while Kaplan Ventures reported larger operating losses.
- Television broadcasting: Q3 revenue increased 29% and operating income 68%; year-to-date revenue rose 24% and operating income 83%, reflecting stronger advertising, including political advertising and Winter Olympics-related revenue.
- Newspaper publishing: Q3 revenue rose 5%, but the division remained loss-making, with a $1.7m operating loss. Year-to-date revenue rose 1% and the operating loss narrowed to $29.8m from $166.7m. Results included a $20.4m estimated charge for withdrawal from a multiemployer pension plan; prior-year comparisons included substantial retirement and accelerated-depreciation charges.
- Cable television: Q3 revenue was slightly lower; year-to-date revenue rose 2% and operating income rose 4%. Growth in high-speed data and telephony partly offset declines in basic and digital subscribers.
- Other businesses: A $27.5m impairment charge was recorded for online lead-generation business Avenue100. Management said further impairment could result if projected cash flows or growth fall, or the discount rate rises.
Outlook, risks and unusual items
- Management estimated 2010 capital expenditures of $220m–$245m and said cash balances and internally generated funds should provide ample liquidity for 2010 needs. No earnings guidance is provided in the filing text.
- Kaplan’s new “Kaplan Commitment” offers a risk-free enrollment period and could affect enrollment, retention, tuition revenue, operating income and cash flow. Management estimated that, had it applied from January 1, 2010, KHE revenue would have been about $100m lower in the first nine months; actual effects could differ.
- Federal rulemaking on postsecondary education, including proposed “gainful employment” standards, congressional scrutiny, and Department of Education reviews could constrain Title IV eligibility or otherwise materially affect Kaplan. The filing says the impact and outcomes were uncertain.
- Kaplan planned to reduce leased test-preparation centers over 18 months, with estimated costs of approximately $20m, mainly lease termination and asset write-down costs.
- Other notable items include the $27.5m lead-generation impairment and $11.9m Q3 unrealized foreign-exchange gain. S&P changed its outlook to negative while affirming its A long-term rating; Moody’s lowered its long-term rating from A1 to A2 and also set a negative outlook.
- The filing disclosed a securities class action concerning Kaplan Higher Education, a Florida Attorney General investigation, pending federal education reviews and an accreditor inquiry. The company said it intended to defend the lawsuit and was cooperating with relevant inquiries; outcomes were uncertain.
Most important facts for investors to verify
- Whether Kaplan’s final regulatory requirements and investigations affect Title IV funding, program eligibility, enrollment or operating performance.
- The actual revenue, retention and cash-flow effects of the Kaplan Commitment relative to management’s illustrative $100m estimate.
- Progress and total costs of the planned test-preparation center reductions and the newspaper pension-plan withdrawal liability; the latter remained an estimate pending plan notification.
- Whether Avenue100 or other assets require additional impairment, and how much of reported earnings reflects unusual gains, charges and discontinued operations.
- Liquidity and refinancing plans ahead of the revolving credit facility’s August 2011 expiration, as well as the effects of the negative credit outlooks.