Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended March 30, 2008, for The Washington Post Company (Graham Holdings Co). The Company operates through five primary segments: Education (Kaplan), Newspaper Publishing, Television Broadcasting, Magazine Publishing, and Cable Television. The filing reflects a diversified media and education portfolio with significant international operations.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Operating Revenues | $1,063.1 million | $985.6 million |
| Operating Income | $66.9 million | $92.0 million |
| Net Income | $39.3 million | $64.4 million |
| Diluted EPS | $4.08 | $6.70 |
| Operating Cash Flow | $123.5 million | $146.7 million |
| Total Debt Outstanding | $467.1 million | $490.1 million (Dec 2007) |
| Cash and Equivalents | $228.1 million | $321.5 million (Dec 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8% year-over-year, driven by 14% growth in the Education division and 17% growth in Cable Television. Conversely, Newspaper Publishing, Magazine Publishing, and Television Broadcasting all reported revenue declines.
- Profitability Decline: Operating income fell 27% to $66.9 million. Net income dropped 39% to $39.3 million.
- One-Time Charges: Q1 2008 results included a $24.6 million pre-tax charge for early retirement programs at Newsweek and The Washington Post newspaper. Q1 2007 included a $8.9 million gain from the sale of land by an affiliate (Bowater Mersey), which is not present in the current period.
- Segment Performance:
- Education: Operating income rose 36% to $46.7 million, aided by a $6.7 million stock compensation credit (vs. $10.3 million expense in 2007) and enrollment growth in higher education.
- Magazine Publishing: Recorded an operating loss of $32.3 million, primarily due to the $24.6 million retirement charge and a 15% drop in advertising revenue at Newsweek.
- Newspaper Publishing: Operating income collapsed to $1.2 million from $14.9 million due to an 11% decline in print advertising and circulation drops.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company estimates 2008 capital expenditures will range between $325 million and $350 million.
- Liquidity and Debt: The Company holds $399.8 million in unsecured notes maturing February 15, 2009, now classified as current liabilities. Management states it has sufficient cash and marketable securities to repay this debt or refinance it via commercial paper or capital markets.
- Student Loan Risk: The Education division notes that approximately 9% of domestic revenues rely on non-Title IV private student loans. Tightening credit markets could impact student financing, though the division has not been significantly impacted to date.
- Restructuring: Newsweek and The Washington Post newspaper are implementing voluntary retirement programs. Additionally, the Post plans to close its College Park, MD printing plant in early 2010.
- Legal Contingency: A class-action lawsuit against Kaplan regarding bar review courses was dismissed in April 2008.
Investor Verification Checklist
- Verify the sustainability of the $6.7 million stock compensation credit in the Education segment, as this is a non-cash item dependent on market valuations of peer companies.
- Monitor the impact of tightening credit markets on the 9% of Education revenue derived from non-Title IV private student loans.
- Assess the trajectory of print advertising revenue at The Washington Post, which declined 11% year-over-year.
- Confirm the Company's ability to refinance or repay the $399.8 million debt maturing in February 2009.
- Review the progress of the restructuring at Score! (Test Prep) and the integration of recent acquisitions in the Professional division.