Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, and the nine-month period ended on that date for The Washington Post Company. The company operates in newspaper publishing, television broadcasting, magazine publishing, cable television, and education services. The reporting period was significantly impacted by the September 11 terrorist attacks, which caused a temporary worsening of the advertising environment, and by major strategic transactions including the sale and exchange of cable systems.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | YTD 2001 | YTD 2000 |
|---|---|---|---|---|
| Operating Revenues | $595.5 million | $602.5 million | $1,787.0 million | $1,740.8 million |
| Operating Income | $47.0 million | $84.6 million | $146.8 million | $249.9 million |
| Net Income | $1.6 million | $33.5 million | $215.1 million | $98.8 million |
| Diluted EPS | $0.14 | $3.51 | $22.53 | $10.33 |
| Cash from Operations (YTD) | N/A | $234.1 million | $255.5 million | |
| Total Debt Outstanding | N/A | $971.1 million | N/A | |
| Cash and Equivalents | N/A | $23.8 million | N/A |
Note: YTD figures represent the thirty-nine weeks ended September 30, 2001.
Material Changes vs. Prior Period
- Revenue Mix Shift: While total revenue was relatively flat in Q3 (-1%), the composition shifted dramatically. Advertising revenue fell 18% due to a soft market and the post-9/11 environment. Conversely, Circulation/Subscriber revenue rose 18% (driven by Newsweek newsstand spikes) and Education revenue rose 28% (driven by the Quest Education acquisition).
- Operating Income Decline: Operating income dropped 44% in Q3 and 41% YTD. This was driven by lower advertising revenues, higher depreciation/amortization (particularly in the cable division due to digital rollout), and increased stock-based compensation in the education division.
- Non-Operating Volatility:
- Q3 2001: Net income was depressed by approximately $26 million in investment write-downs.
- YTD 2001: Net income was significantly inflated by a $272.7 million non-operating gain, primarily from the sale and exchange of cable systems (including a $61.9 million sale in Indiana and an exchange with AT&T Broadband).
- Segment Performance:
- Newspaper Publishing: Operating income fell 67% in Q3 due to a 48% volume decline in classified recruitment advertising.
- Television Broadcasting: Operating income fell 47% in Q3, impacted by commercial-free coverage following 9/11 and difficult comparisons to 2000 political/Olympics advertising.
- Cable Television: Operating income fell 50% in Q3 due to higher depreciation and programming costs, despite a 9% revenue increase.
- Education: Operating loss improved significantly (from a loss of $6.7M to a profit of $0.8M in Q3) due to Quest Education contributions and growth in test prep.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates spending approximately $233 million on property and equipment for the full year 2001. Two-thirds of this is allocated to the cable division for digital and cable modem service rollouts. Management noted they may slow spending if customer acceptance is slower than anticipated.
- Liquidity: Management states the company has ample liquidity to meet cash needs, funded primarily by internally generated funds and commercial paper. Total debt increased by $47.8 million YTD.
- Accounting Changes: The company will adopt SFAS No. 142 in fiscal 2002, which will cease the amortization of goodwill and indefinite-lived intangibles, replacing it with an annual impairment test. This is expected to reduce periodic charges.
- Risks: Key risks include the soft advertising market, the impact of the September 11 events on future ad volumes, competitive actions, and the success of the digital cable rollout. The company also faces risks related to the valuation of its investments in affiliates (e.g., BrassRing, Inc.).
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of YTD net income ($215.1M) by excluding the one-time $272.7M gain from cable transactions. Adjusted YTD net income is approximately $43.9 million.
- Advertising Trends: Monitor the recovery of classified recruitment advertising at The Washington Post, which saw a 45% revenue decline in Q3.
- Cable Digital Rollout: Assess the return on investment for the $233M capital expenditure plan, specifically the penetration rate of digital cable services (currently 23% in offered markets) and the associated free-year promotion impact on future margins.
- Investment Valuation: Review the $26 million write-down of investments in Q3 and the ongoing equity losses from affiliates (BrassRing, International Herald Tribune) to gauge potential future impairments.
- Debt Structure: Note that $523 million of commercial paper is classified as long-term debt based on management's intent to refinance; verify the company's ability to maintain this classification in a volatile credit market.