GHC

Business Context and Reporting Period

The Washington Post Company (Graham Holdings Co.) filed its Form 10-Q for the thirteen-week period ended March 29, 2009. The Company operates as a diversified education and media enterprise, with major segments including Education (Kaplan), Cable Television, Newspaper Publishing (The Washington Post), Television Broadcasting, and Magazine Publishing (Newsweek).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 1% year-over-year, driven by significant declines in Newspaper Publishing (-22%), Television Broadcasting (-21%), and Magazine Publishing (-14%). These were partially offset by growth in Education (+9%) and Cable Television (+5%).
• Operating Loss: The Company swung from an operating profit of $66.9 million in Q1 2008 to an operating loss of $19.6 million in Q1 2009. The Newspaper Publishing division reported an operating loss of $53.8 million, compared to a profit of $1.2 million in the prior year.
• Segment Performance:
  • Education: Revenue grew 9% due to strong enrollment in Higher Education (+26%), but operating income fell 76% to $11.2 million due to restructuring charges and increased marketing costs.
  • Cable: Operating income increased 23% to $42.0 million, supported by growth in high-speed data and telephony subscribers.
  • Magazine: Operating loss narrowed to $20.3 million from $32.3 million, primarily due to a reduction in early retirement program expenses compared to the prior year.
• Debt Refinancing: In January 2009, the Company issued $400 million in 7.25% unsecured notes due 2019 to repay $400 million of 5.5% notes maturing in February 2009. Total borrowings decreased by $154.7 million from the prior quarter.

Guidance, Outlook, and Risks

• Restructuring and Charges: Q1 2009 results included $13.4 million in accelerated depreciation at The Washington Post, $16.9 million in restructuring charges for Kaplan's Score and Professional (U.S.) operations, and $6.6 million in early retirement expenses at Newsweek.
  • Future Costs: The Company expects to record an additional $18.5 million in accelerated depreciation for The Post in the remainder of 2009. Approximately $19.2 million in additional operating losses are expected for the wind-down of 64 Score centers, and $3.0 million in additional restructuring expenses for Kaplan Professional (U.S.).
• Capital Expenditures: Estimated to be between $290 million and $315 million for the full year 2009.
• Liquidity and Credit: The Company maintains $258.4 million in cash and a $500 million commercial paper program. However, on May 1, 2009, Standard & Poor's placed the Company's credit ratings on CreditWatch with negative implications. The outlook was previously changed from stable to negative in October 2008.
• Market Risks: The Company faces risks related to equity price fluctuations, interest rate changes, and foreign exchange rates. The education division noted a potential diminishment of private student loan funding, expecting a shift toward Title IV federal funds.

Investor Verification Checklist

• Verify the impact of the $13.4 million accelerated depreciation charge at The Washington Post and the projected $18.5 million additional charge for the remainder of 2009.
• Confirm the timeline and cost estimates for the closure of 64 Score tutoring centers and the associated $19.2 million in expected operating losses.
• Monitor the status of the Company's credit ratings following the May 1, 2009 CreditWatch negative placement by Standard & Poor's.
• Assess the sustainability of the 26% revenue growth in Kaplan Higher Education against the backdrop of rising marketing costs and potential shifts in student loan funding sources.
• Review the effectiveness of cost-cutting measures in the Newspaper and Magazine divisions given the continued decline in advertising revenues.