GHC

Business Context and Reporting Period

This Form 10-Q covers The Washington Post Company for the thirteen and thirty-nine weeks ended September 28, 2003. The company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan). During the quarter, the company completed an internal corporate restructuring to separate the newspaper publishing business into a wholly-owned subsidiary, though this had no accounting impact. The Education division saw significant activity, including the acquisition of Financial Training Corporation (FTC) and a major stock option buyback program.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 10% in Q3 and 9% YTD, driven primarily by the Education division (up 40% in Q3, 31% YTD) and growth in Cable and Newspaper segments. Television Broadcasting and Magazine Publishing revenues declined due to lower political advertising and fewer magazine editions, respectively.
• Profitability Decline: Q3 operating income fell 55% to $40.1 million. This was largely due to a $67.9 million increase in stock-based compensation expense at Kaplan. YTD operating income decreased 9% to $226.1 million.
• Net Income Volatility: While Q3 net income dropped significantly, YTD net income rose 39% to $153.6 million. This YTD increase was bolstered by a one-time $32.3 million after-tax gain from the sale of the company's 50% interest in the International Herald Tribune (IHT).
• Segment Performance:
  • Education: Reported an operating loss of $43.1 million in Q3 (vs. $11.5 million profit in 2002) due to stock compensation charges, despite strong revenue growth.
  • Cable: Operating income rose 35% in Q3, driven by digital and broadband service growth.
  • Newspaper: Operating income increased 33% in Q3, aided by higher advertising revenue and lower prior-year restructuring charges.

Guidance, Outlook, and Risks

• Kaplan Stock Option Payouts: The company announced an offer to purchase 55% of outstanding Kaplan stock options. It estimates a payout of approximately $117 million in Q4 2003, with the remainder paid through 2006. An additional $13 million in stock compensation expense is expected in Q4 2003.
• Capital Expenditures: The company anticipates spending $130 million to $140 million on property and equipment for the full year 2003.
• Liquidity: Despite a working capital deficit of $331.6 million, management asserts ample liquidity exists to meet cash needs, funded by operating cash flows and commercial paper. The company reduced its 364-day revolving credit facility from $350 million to $250 million.
• Pension Assumptions: A reduction in the discount rate assumption and lower investment returns are expected to reduce the net pension credit for the full year 2003 by approximately $10 million compared to 2002.
• Seasonality: Advertising revenues in Q3 are typically lower than in Q2 and Q4.

Investor Verification Checklist

• Kaplan Stock Compensation: Verify the impact of the $74.6 million Q3 and $104.6 million YTD stock compensation charges on the Education segment's true operating performance.
• One-Time Gains: Assess the sustainability of YTD earnings by excluding the $32.3 million after-tax gain from the IHT sale.
• Debt Structure: Review the maturity profile of the $590.7 million debt, specifically the $149.8 million in commercial paper maturing in early 2004.
• Segment Margins: Analyze the divergence between revenue growth and operating income in the Education segment versus the Newspaper and Cable segments.
• Future Payouts: Confirm the timing and cash impact of the remaining Kaplan stock option payouts scheduled for 2004-2006.