Business Context and Reporting Period
Company: The Washington Post Company (Note: Metadata listed "Graham Holdings Co," but the filing text identifies the registrant as The Washington Post Company).
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 30, 2001.
Business Overview: A diversified media organization with principal operations in newspaper publishing (The Washington Post), television broadcasting (six network-affiliated stations), cable television systems (Cable One), magazine publishing (Newsweek), and educational services (Kaplan, Inc.).
Key Financial Metrics
| Metric | 2001 (in millions) | 2000 (in millions) |
|---|---|---|
| Operating Revenues | $2,416.7 | $2,412.2 |
| Income from Operations | $219.9 | $339.9 |
| Net Income | $229.6 | $136.5 |
| Diluted Earnings Per Share | $24.06 | $14.32 |
| Operating Cash Flow | $348.8 | $368.5 |
| Total Debt Outstanding | $933.1 | $923.3 |
| Cash and Cash Equivalents | $31.5 | $20.3 |
Debt Structure: Includes $533.9 million in commercial paper (avg. rate 2.0%) and $398.1 million in 5.5% unsecured notes due 2009. The company maintains $750 million in revolving credit facilities.
Material Changes vs. Prior Period
- Revenue: Flat year-over-year ($2,416.7M vs $2,412.2M). Advertising revenue declined 13% due to softness in newspaper, TV, and magazine sectors. This was offset by a 40% increase in Education revenue (driven by the Quest Education acquisition) and a 10% increase in circulation/subscriber revenue.
- Operating Income: Decreased 35% to $219.9M. The decline was driven by lower advertising revenues, increased depreciation/amortization, and higher stock-based compensation at Kaplan. These were partially offset by a higher pension credit ($76.9M in 2001 vs $65.3M in 2000).
- Net Income: Increased 68% to $229.6M. This surge was primarily due to a one-time after-tax gain of $196.5M from the sale and exchange of cable systems. Excluding non-operating items, core operating earnings declined.
- Segment Performance:
- Newspaper: Revenue down 8%; Operating income down 26% (classified ad volume down 41%).
- Television: Revenue down 14%; Operating income down 26%.
- Magazine: Revenue down 9%; Operating income down 48% (Newsweek ad pages down 24%).
- Cable: Revenue up 8%; Operating income down 51% due to increased depreciation from digital rollout.
- Education: Revenue up 40%; Operating loss narrowed to $28.3M from $41.8M.
Guidance, Outlook, and Risks
- Capital Expenditures: Estimated to decrease to approximately $130 million in 2002 as the rollout of digital and cable modem services nears completion.
- Pension Outlook: Management expects the 2002 pension credit to be $10M-$15M lower than 2001 due to assumption changes (discount rate reduced to 7.0%, expected return on assets to 7.5%), despite strong 2001 investment returns.
- Regulatory Risks:
- Cable/Internet: FCC classification of cable modem service as an "interstate information service" could impact profitability and local regulation.
- Education: Kaplan's reliance on Title IV federal student aid programs creates risk; loss of eligibility or funding cuts would significantly impact results.
- Legal Proceedings: An antitrust lawsuit filed in February 2001 regarding the acquisition of Southern Maryland Newspapers seeks unspecified damages and divestiture. Management believes the outcome will not have a material adverse effect.
- Market Risks: Significant exposure to equity price risk via a $235.4M investment in Berkshire Hathaway and interest rate risk on commercial paper borrowings.
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $196.5M gain from cable system sales/exchanges.
- Advertising Trends: Monitor the continued decline in classified advertising volumes, particularly in the newspaper segment.
- Kaplan Valuation: Assess the impact of the increasing stock-based compensation expense at Kaplan, which is tied to the estimated fair value of its common stock.
- Debt Maturity: Review the maturity schedule of the $533.9M commercial paper and the status of the revolving credit facilities expiring in 2002 and 2003.
- Regulatory Changes: Track FCC rulings on cable modem regulation and Title IV funding levels for the education division.