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 thirteen-week period ended March 30, 2003. The company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan, Inc.).
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Operating Revenues | $640.4 million | $600.3 million |
| Operating Income | $79.1 million | $48.9 million |
| Net Income | $73.1 million | $11.6 million |
| Diluted EPS | $7.59 | $1.16 |
| Operating Cash Flow | $90.2 million | $116.2 million |
| Total Debt Outstanding | $648.5 million | $888.3 million (Avg) |
| Cash and Equivalents | $36.3 million | $28.8 million (Prior Period End) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7% year-over-year, driven primarily by the Education and Cable Television divisions.
- Profitability Surge: Net income increased significantly, largely due to a one-time after-tax non-operating gain of $32.3 million from the sale of the company's 50% interest in the International Herald Tribune.
- Segment Performance:
- Education: Revenue up 21% and operating income turned from a loss of $0.6 million to a profit of $15.9 million.
- Cable: Revenue up 8% and operating income up 29% due to growth in digital and broadband services.
- Magazine: Operating income improved from a loss of $11.6 million to a profit of $0.8 million, excluding a $10.3 million early retirement charge in 2002.
- Broadcasting: Revenue and operating income declined 6% and 21% respectively, impacted by the war in Iraq and the absence of Olympic-related advertising seen in 2002.
- Accounting Changes: The 2002 prior period included a $12.1 million after-tax goodwill impairment charge related to PostNewsweek Tech Media, which is not present in 2003.
Outlook, Risks, and Management Commentary
- Acquisitions: Kaplan acquired FTC Holdings Limited for $87.4 million in March 2003. An agreement to acquire Heritage College was announced in May 2003, pending regulatory approval.
- Capital Expenditures: Q1 2003 CapEx was $28.1 million. Management anticipates spending $170–$180 million on property and equipment for the full year 2003.
- Liquidity: The company maintains ample liquidity, funded primarily by internally generated funds and commercial paper. Total debt decreased by $16.3 million during the quarter.
- Risks and Contingencies:
- Geopolitical Impact: Advertising demand was negatively affected late in the quarter by the war in Iraq. Travel-related advertising was also impacted by the SARS epidemic.
- Pension Assumptions: A reduction in the discount rate assumption (from 7.0% to 6.75%) is expected to reduce the net pension credit by approximately $10 million in 2003 compared to 2002.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $32.3 million gain from the International Herald Tribune sale.
- Segment Mix: Confirm the continued growth trajectory of the Education (Kaplan) and Cable segments, which are driving the majority of revenue increases.
- Advertising Sensitivity: Monitor the impact of geopolitical events (Iraq war) and health crises (SARS) on advertising revenue in the Newspaper, Magazine, and Broadcast divisions.
- Debt Structure: Review the composition of the $648.5 million debt, specifically the $217.4 million in commercial paper and the $398.5 million in 5.5% notes due 2009.
- Goodwill Valuation: Note the increase in goodwill to $856.3 million following the FTC acquisition and monitor future impairment testing requirements under SFAS 142.