GHC

Business Context and Reporting Period

This Form 10-Q covers The Washington Post Company (WP) for the thirteen and thirty-nine weeks ended September 30, 2007. The Company operates through five primary segments: Education (Kaplan), Newspaper Publishing (The Washington Post), Television Broadcasting, Magazine Publishing (Newsweek), and Cable Television. The reporting period reflects seasonal fluctuations, with advertising revenues typically lower in the third quarter compared to the second and fourth quarters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 8% in the third quarter and 7% year-to-date (YTD) compared to 2006. This was driven by significant growth in the Education (22% Q3, 21% YTD) and Cable Television (11% Q3, 10% YTD) divisions.
• Segment Declines: Newspaper Publishing revenue fell 7% in Q3 and 8% YTD due to declines in print advertising (down 13% Q3, 14% YTD). Magazine Publishing revenue dropped 18% in Q3 and 16% YTD, partly due to the sale of PostNewsweek Tech Media in late 2006.
• Operating Income: Q3 operating income rose 2% to $110.5 million, aided by a $9.5 million gain on the sale of a Miami television station facility. YTD operating income decreased 5% to $327.7 million, impacted by advertising weakness and a $24.1 million increase in Kaplan stock compensation expense.
• Net Income: Q3 net income was flat at $72.5 million. YTD net income declined 10% to $205.7 million, influenced by a $12.9 million tax charge related to the Bowater Mersey affiliate and higher stock compensation costs.

Outlook, Risks, and Unusual Items

• Unusual Items:
  • 2007: Included a $9.5 million pre-tax gain on the sale of the Miami TV station facility. Also included a $12.9 million non-cash tax expense adjustment for the Bowater Mersey affiliate and a $6.3 million tax benefit from state law changes.
  • 2006 Comparison: Included a $9.9 million goodwill impairment charge for PostNewsweek Tech Media, $50.9 million in early retirement plan charges, and $10.4 million in Hurricane Katrina insurance recoveries.
• Restructuring: Kaplan announced a restructuring of its SCORE! business, closing 75 centers. The Company expects to incur approximately $16 million in expenses in Q4 2007 related to lease obligations, severance, and accelerated depreciation.
• Acquisitions: In Q3 2007, Kaplan acquired three businesses totaling $43.3 million. In October 2007 (subsequent event), the Company acquired CourseAdvisor Inc.
• Liquidity: The Company reported a working capital deficit of $11.7 million at September 30, 2007, compared to a surplus of $131.6 million at year-end 2006. Management states this is consistent with business requirements and expects ample liquidity from operations and cash balances.
• Capital Expenditures: Estimated full-year 2007 capital expenditures are projected between $275 million and $300 million.

Investor Verification Checklist

• Working Capital Deficit: Verify the sustainability of the $11.7 million working capital deficit and the Company's reliance on operating cash flow to meet obligations.
• SCORE! Restructuring Costs: Monitor the $16 million in expected Q4 2007 expenses related to the closure of 75 SCORE! centers and the impact on future profitability.
• Advertising Trends: Assess the continued decline in print advertising revenue at The Washington Post and the ability of online advertising growth to offset these losses.
• Tax Rate Volatility: Review the impact of the Bowater Mersey tax adjustment on the effective tax rate (39.9% YTD 2007 vs. 36.5% YTD 2006) and future tax provisions.
• Stock Compensation: Evaluate the impact of the $24.1 million YTD increase in Kaplan stock compensation expense on future operating margins.