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-Q (Quarterly Report).
Reporting Period: Thirteen and twenty-six weeks ended July 1, 2007.
Business Overview: The Company operates through five primary segments: Education (Kaplan), Newspaper Publishing (The Washington Post), Television Broadcasting, Magazine Publishing (Newsweek), and Cable Television. The Education division is the largest revenue generator.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 1, 2007 |
13 Weeks Ended July 2, 2006 |
26 Weeks Ended July 1, 2007 |
26 Weeks Ended July 2, 2006 |
|---|---|---|---|---|
| Operating Revenues | $1,046,773 | $969,041 | $2,032,381 | $1,917,321 |
| Income from Operations | $125,260 | $97,205 | $217,255 | $234,964 |
| Net Income | $68,816 | $78,744 | $133,246 | $155,618 |
| Diluted EPS | $7.19 | $8.17 | $13.89 | $16.12 |
| Cash & Equivalents | $236,124 | $264,890 (End Q2 2006) | $236,124 | $264,890 (End Q2 2006) |
| Long-Term Debt | $400,907 | $401,571 (Dec 31, 2006) | $400,907 | $401,571 (Dec 31, 2006) |
| Operating Cash Flow (26 wks) | $225,106 | $244,258 | $225,106 | $244,258 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 8% in Q2 2007 and 6% for the first six months of 2007 compared to the prior year. This was driven primarily by the Education division (up 23% in Q2) and Cable Television (up 9% in Q2).
- Segment Performance:
- Education: Revenue grew significantly due to acquisitions (EduNeering, Sagemont Virtual) and organic growth in higher education and test preparation. Operating income rose 11% in Q2 but fell 17% YTD due to increased stock-based compensation ($23.2M YTD 2007 vs. $5.3M YTD 2006).
- Newspaper Publishing: Revenue declined 7% in Q2 and 9% YTD due to drops in print advertising (real estate and classifieds). However, operating income improved significantly compared to 2006, which included a $46.8M pre-tax charge for early retirement buyouts.
- Magazine Publishing: Revenue declined 13% in Q2 and 15% YTD, partly due to the sale of PostNewsweek Tech Media in late 2006 and lower ad rates.
- Cable Television: Revenue increased due to growth in high-speed data and digital subscribers. Operating income declined compared to 2006, which included $10.4M in insurance recoveries from Hurricane Katrina.
- Non-Operating Items: Q2 2006 included a $31.6M gain on the sale of marketable securities, which was absent in 2007. Q2 2007 included a $15.5M non-cash tax expense related to the Bowater Mersey affiliate.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company estimates 2007 capital expenditures will range between $275 million and $300 million. YTD 2007 capex was $137.9 million.
- Liquidity: Management expects to fund capital needs through existing cash balances and internally generated funds. Working capital decreased to $18.1 million at July 1, 2007, from $131.6 million at year-end 2006, though management deems liquidity ample.
- Acquisitions: Completed four acquisitions in Q2 2007 totaling $29.1M. Announced an agreement in April 2007 to acquire the education division of the Financial Services Institute of Australia for $36M AUD, expected to close in Q3 2007.
- Tax Rate Volatility: The effective tax rate for Q2 2007 was 45.4% (vs. 38.0% in 2006) due to a change in tax assumptions for the Bowater Mersey affiliate. Excluding this and a state tax benefit, the rate was 38.0%.
- Seasonality: Advertising revenues in Q2 and Q4 are typically higher than in Q1 and Q3.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the sustainability of the Education division's margins given the sharp increase in Kaplan stock-based compensation ($13.0M in Q2 2007 vs. $3.4M in Q2 2006).
- Print Advertising Trends: Monitor the continued decline in print advertising revenue at The Washington Post, specifically in real estate and classifieds, against the growth in online advertising.
- Tax Provision Normalization: Confirm the effective tax rate stabilizes at ~38% in future quarters, excluding the one-time Bowater Mersey adjustment.
- Acquisition Integration: Assess the integration and revenue contribution of recent Education division acquisitions (EduNeering, Sagemont Virtual) to ensure they offset organic declines in other segments.
- Debt Maturity: Note that $399.6 million of 5.5% unsecured notes are due in February 2009; verify refinancing plans or cash availability for this maturity.