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 28, 2008.
Business Overview: A diversified education and media company. The Education division (Kaplan) is the largest segment, accounting for 52% of consolidated revenues. Media operations include Cable ONE (cable television), newspaper publishing (The Washington Post), television broadcasting (six stations), and magazine publishing (Newsweek).
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Operating Revenues | $4,461.6 million | $4,180.4 million |
| Income from Operations | $174.2 million | $477.0 million |
| Net Income | $65.7 million | $288.6 million |
| Diluted EPS | $6.87 | $30.19 |
| Cash and Cash Equivalents | $390.5 million | $321.5 million |
| Working Capital | $257.3 million | ($18.5 million) deficit |
| Total Debt (Short & Long Term) | $553.8 million | $490.1 million |
| Capital Expenditures | $288.9 million | $290.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 7% to $4.46 billion, driven by a 15% increase in Education revenue and a 15% increase in Cable Television revenue. This offset declines in Newspaper Publishing (-10%), Magazine Publishing (-13%), and Television Broadcasting (-4%).
- Profitability Decline: Net income dropped 77% to $65.7 million. Operating income fell 64% to $174.2 million.
- Segment Performance:
- Education: Operating income rose 38% to $206.3 million, led by Higher Education growth.
- Cable: Operating income rose 31% to $162.2 million due to rate increases and growth in high-speed data/telephony.
- Newspaper Publishing: Reported an operating loss of $192.7 million (vs. $66.4 million income in 2007) due to a 17% decline in print advertising and significant one-time charges.
- Magazine Publishing: Reported an operating loss of $16.1 million (vs. $31.4 million income in 2007) due to a 14% decline in Newsweek advertising revenue.
Guidance, Outlook, Risks, and Unusual Items
Unusual and One-Time Items (2008)
Results were significantly impacted by the following non-recurring items (after-tax impact in parentheses):
- Impairment Charges: $142.3 million in goodwill and intangible asset impairments ($115.7 million after-tax), primarily affecting the online lead generation business (CourseAdvisor), community newspapers, and equity affiliates.
- Early Retirement Programs: $111.1 million in charges ($67.2 million after-tax) for voluntary retirement incentives at The Washington Post, Newsweek, and corporate offices.
- Accelerated Depreciation: $22.3 million ($13.9 million after-tax) related to the planned closure of The Washington Post's College Park, MD printing plant.
- Restructuring: $11.0 million ($6.8 million after-tax) for Kaplan Professional (U.S.) restructuring.
- Foreign Currency: $46.3 million in unrealized losses ($28.5 million after-tax) due to the strengthening of the U.S. dollar against the British pound and Australian dollar.
- Investment Gains: $47.3 million in gains ($28.9 million after-tax) from the sale of marketable equity securities.
Outlook and Management Commentary
- Education: Kaplan expects private student loan funding to diminish due to credit market strains, to be replaced by Title IV funds and internal lending. Restructuring of Kaplan Professional (U.S.) is ongoing with additional expenses expected in 2009.
- Media: The Company is integrating print and online operations for The Washington Post to reduce costs. Newsweek announced a further reduction in its domestic circulation rate base to 1.5 million by January 2010 to target a more valuable demographic.
- Liquidity: Management expects ample liquidity for 2009, funded by cash balances and internally generated funds. In January 2009, the Company issued $400 million of 7.25% notes due 2019 to refinance maturing debt.
Risks and Contingencies
- Regulatory (Title IV): Kaplan Higher Education relies heavily on federal Title IV funding (71% of segment revenue). Risks include loss of eligibility due to cohort default rates or regulatory changes. The Department of Education is conducting program reviews at several Kaplan campuses.
- Economic Downturn: Advertising demand remains sensitive to economic conditions, negatively impacting publishing and broadcasting revenues.
- Legal Proceedings: Kaplan faces class action lawsuits regarding bar review courses and wage/hour violations. Several False Claims Act actions regarding Title IV eligibility are pending.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the discounted cash flow models for the $142.3 million impairment charges, particularly regarding CourseAdvisor and community newspapers.
- Retirement Program Funding: Confirm the extent to which the $111.1 million early retirement charges are funded by pension plan assets versus cash outflows.
- Title IV Compliance: Monitor the status of Department of Education program reviews at Kaplan campuses and potential impacts on federal funding eligibility.
- Advertising Trends: Assess the sustainability of the 17% decline in print advertising at The Washington Post and the effectiveness of the shift to digital revenue.
- Debt Refinancing: Review the terms of the new 7.25% notes issued in January 2009 and the impact on future interest expense compared to the refinanced 5.5% notes.