Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company (Note: Metadata listed "Graham Holdings Co," but the filing text identifies the registrant as The Washington Post Company) for the quarterly period ended June 27, 2004, and the twenty-six weeks ended on that date. The company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan, Inc.).
Key Financial Metrics
| Metric | 13 Weeks Ended June 27, 2004 | 26 Weeks Ended June 27, 2004 |
|---|---|---|
| Operating Revenues | $818.4 million | $1,577.4 million |
| Operating Income | $146.0 million | $250.9 million |
| Net Income | $84.9 million | $144.3 million |
| Diluted EPS | $8.82 | $14.98 |
| Cash from Operations | N/A (Quarterly) | $255.5 million |
| Total Debt Outstanding | $504.9 million | $504.9 million |
| Cash and Equivalents | $44.6 million | $44.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 16% in the second quarter and 17% year-to-date compared to 2003. The Education division was the primary driver, with revenue up 41% in the quarter and 43% year-to-date.
- Profitability: Operating income rose 37% in the quarter and 35% year-to-date. Net income increased 40% in the quarter and 8% year-to-date.
- Segment Performance:
- Education: Operating income surged from $3.5 million to $29.4 million in the quarter, driven by acquisitions and organic growth in higher education and test prep.
- Magazine Publishing: Operating income increased 42% in the quarter, despite a slight revenue decline, due to cost controls and increased ad pages at Newsweek.
- Television Broadcasting: Revenue and operating income grew 10% and 12% respectively, aided by political advertising.
- Newspaper Publishing: Revenue grew 5% and operating income 2% in the quarter. Online advertising revenue grew 61%.
- Non-Operating Items: The prior year (2003) included a one-time $32.3 million after-tax gain from the sale of the International Herald Tribune, which is absent in 2004. Conversely, 2004 benefited from reduced affiliate losses ($0.4 million vs. $5.5 million in 2003).
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company spent $92.5 million in the first half of 2004 and estimates full-year capital expenditures between $200 million and $225 million.
- Liquidity: The company maintains a working capital deficit of $179.5 million, which management states is consistent with business requirements. Liquidity is supported by strong operating cash flows and access to commercial paper and credit facilities.
- Debt Management: Total borrowings decreased by $126.2 million during the first half of 2004. The average interest rate on borrowings was 4.5% for the first six months of 2004.
- Pension Costs: Net pension credits are expected to decrease by approximately $14 million in 2004 compared to 2003 due to a reduction in the discount rate assumption.
- Acquisitions: Recent acquisitions include El Tiempo Latino (May 2004) and several Kaplan businesses totaling $4.5 million in Q2 and $49.8 million in Q1.
Investor Verification Checklist
- Education Segment Sustainability: Verify the organic growth rate of the Education division excluding the impact of recent acquisitions (FTC and others).
- Pension Assumptions: Monitor the impact of the reduced discount rate (6.25%) on future pension expense and cash flow requirements.
- Debt Maturity Profile: Review the maturity schedule for the $398.8 million in 5.5% notes due 2009 and the $61.4 million in commercial paper.
- Online Revenue Mix: Assess the continued growth trajectory of online advertising (up 61% in Q2) relative to print advertising.
- Working Capital: Confirm the company's ability to maintain operations despite the reported working capital deficit, relying on operating cash flow to service short-term debt.