The Washington Post Company (now Graham Holdings Company) — 2010 Q2 Form 10-Q
Business context and reporting period. The unaudited quarter ended July 4, 2010 (13 weeks); year-to-date covers 26 weeks. The company’s businesses included Kaplan education, cable television, newspaper publishing, and television broadcasting. Newsweek was classified as discontinued operations; the company announced an agreement to sell it on August 2, after quarter-end.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $1,201.8M | $1,083.2M | $2,343.8M | $2,091.5M |
| Operating income | $163.5M | $19.5M | $266.6M | $28.4M |
| Operating margin (calculated) | 13.6% | 1.8% | 11.4% | 1.4% |
| Continuing income attributable to common shareholders | $94.2M | $21.2M | $145.8M | $19.6M |
| Net income (loss) attributable to common shareholders, including discontinued operations | $91.9M | $12.2M | $137.3M | $(6.9)M |
| Diluted EPS from continuing operations | $10.25 | $2.25 | $15.82 | $2.09 |
| Operating cash flow | Not provided separately | Not provided separately | $317.3M | $282.4M |
- Revenue rose 11% in Q2 and 12% in the first half. Education was the largest growth driver; television broadcasting and cable also grew. Advertising revenue increased, while circulation/subscriber revenue was comparatively steady.
- First-half capital expenditures were $84.8M. Operating cash flow less capital expenditures was approximately $232.5M, a simple calculated measure before other investing and financing flows.
- At July 4, cash and cash equivalents were $659.0M, marketable equity securities and other investments were $392.5M, and working capital was $540.5M (excluding discontinued-operations current assets and liabilities). Total borrowings were $399.5M, including $396.4M of 7.25% notes due February 2019 and $3.1M of other debt. The company had a $500M revolving credit facility expiring August 2011 and had issued no commercial paper in the first half.
Material changes and segment developments
- Kaplan revenue grew 15% in Q2 and 17% in the first half; operating income rose to $109.0M and $166.9M, respectively. Higher education revenue benefited from enrollment growth, improved retention, and higher margins; enrollment increased 18% year over year to 112,221.
- Cable revenue increased 2% in Q2 and 3% year to date, while operating income rose 10% and 6%. Total revenue-generating units declined 1%, as growth in data and telephone subscribers was offset by fewer basic and digital subscribers.
- Newspaper revenue increased 2% in Q2 but slipped slightly for the first half. Print advertising declined 6% in Q2 and 7% year to date; online publishing revenue grew 14% and 11%, respectively. Daily and Sunday circulation fell 10.7% and 9.5% year to date.
- Broadcasting revenue grew 24% in Q2 and 22% in the first half, reflecting stronger advertising demand, including automotive, political, and Winter Olympics-related advertising.
- Comparisons in operating income were affected by substantial prior-year charges, including a $56.8M newspaper early-retirement expense, Kaplan restructuring costs, and newspaper accelerated depreciation. Prior-year foreign-currency gains also contrast with current-year foreign-currency losses.
Outlook, risks, contingencies, and unusual items
- Management estimated 2010 capital expenditures of $240M–$265M and said cash balances and internally generated funds should provide ample liquidity for 2010 needs. No formal earnings or revenue guidance was provided.
- The company recorded a $17.7M charge for its planned withdrawal from a newspaper multiemployer pension plan, effective November 30, 2010. The actual withdrawal liability remained subject to determination by the plan.
- Newsweek generated a first-half discontinued-operations loss of $8.5M after tax, versus $26.5M a year earlier. The planned sale was expected to close in Q3, subject to conditions; the company retained pension assets and liabilities and certain pre-sale employee obligations. The sale gain or loss was not expected to be material. Further Newsweek accelerated depreciation and write-downs were expected before closing.
- Proposed U.S. Department of Education rules could restrict or remove Title IV funding eligibility for certain Kaplan programs and affect recruiting practices. The company said the impact was not reasonably predictable. Kaplan was also subject to Department of Education program reviews, a Senate industry review, and a GAO report criticizing recruiting practices at several schools, including two Kaplan campuses; the company was evaluating the findings.
- Management also cited potential effects of UK visa-rule changes on overseas student enrollment. Other exposures include market-price risk on equity investments, interest-rate risk, and foreign-exchange risk. Q2 included $3.8M of unrealized foreign-currency losses; first-half losses were $7.1M.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Key facts investors should verify
- Whether Kaplan enrollment, student retention, and operating margins remain strong, and how final Title IV rules and regulatory reviews affect program eligibility and demand.
- The final withdrawal liability for the newspaper pension plan and any additional related costs.
- Completion terms and timing of the Newsweek sale, retained obligations, and any additional pre-sale charges.
- Whether newspaper advertising and circulation trends stabilize, and whether digital revenue growth can offset print declines.
- Execution of the $240M–$265M capital-expenditure plan, cash generation, and refinancing or liquidity arrangements ahead of the 2011 revolving-facility expiry.