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 January 1, 2006 (52 weeks).
Business Overview: A diversified media and education company operating in four primary media segments: newspaper publishing (The Washington Post, community papers), television broadcasting (six VHF stations), magazine publishing (Newsweek, Budget Travel), and cable television (Cable One). The Education division (Kaplan, Inc.) is the largest operating division by revenue and operating income, providing test preparation, professional training, and higher education services.
Key Financial Metrics
| Metric | 2005 (in millions) | 2004 (in millions) |
|---|---|---|
| Operating Revenues | $3,553.9 | $3,300.1 |
| Income from Operations | $514.9 | $563.0 |
| Net Income | $314.3 | $332.7 |
| Diluted EPS | $32.59 | $34.59 |
| Operating Cash Flow | $522.8 | $561.7 |
| Total Assets | $4,584.8 | $4,308.8 |
| Total Debt Outstanding | $428.4 | $484.1 |
| Working Capital | $123.6 | $62.3 |
| Cash and Cash Equivalents | $215.9 | $119.4 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8% to $3,553.9 million, driven primarily by a 24% increase in Education revenue ($1,412.4 million) and growth in Cable and Newspaper segments. This offset declines in Television Broadcasting (down 8%) and Magazine Publishing (down 6%).
- Operating Income Decline: Operating income decreased 9% to $514.9 million. The decline was driven by soft advertising demand, the absence of political/Olympics advertising in TV, and the impact of Hurricane Katrina.
- Hurricane Katrina Impact: The storm caused an estimated $27.5 million adverse impact on operating income (after-tax impact of $17.3 million). The Cable division suffered the most, with $23.7 million in losses due to property damage, cleanup costs, and subscriber losses on the Gulf Coast of Mississippi.
- Non-Operating Gains: The company recorded $17.8 million in pre-tax gains from the sale of non-operating land and marketable securities, partially offsetting operating declines.
- Stock Compensation: Kaplan stock compensation expense dropped significantly to $3.0 million in 2005 from $32.5 million in 2004, improving Education division operating income.
Guidance, Outlook, and Risks
- Outlook: Management expects a large increase in Television Broadcasting operating income in 2006 due to anticipated political and Olympics-related advertising. The Cable division plans to introduce VoIP telephone service in 2006.
- Capital Expenditures: Estimated to be between $275 million and $300 million in 2006.
- Dividends: The annual dividend rate was increased to $7.80 per share for 2006 (from $7.40 in 2005).
- Key Risks:
- Regulatory: Changes in FCC regulations regarding cable rates, retransmission consent, and digital television transition.
- Education: Reliance on Title IV federal student financial aid programs (approx. $500 million in 2005 revenue); risk of losing eligibility due to compliance issues or legislative changes.
- Competition: Intense competition from internet-based classifieds, satellite TV (DBS), and telephone companies entering the video market.
- Raw Materials: Sensitivity to newsprint prices and supply disruptions.
- Legal Contingencies: Kaplan is a defendant in a putative class action antitrust lawsuit regarding bar review courses; management does not believe the outcome will be material.
Investor Verification Checklist
- Kaplan Title IV Compliance: Verify the status of the four reporting units with unresolved "show cause" orders from accrediting agencies and the impact of the 90% revenue rule on federal aid eligibility.
- Hurricane Katrina Recovery: Monitor the final insurance recovery amounts (estimated at $5.0 million recorded to date) and ongoing restoration costs for the Cable division in Mississippi.
- Advertising Trends: Assess the sustainability of the 29% revenue growth in online publishing (washingtonpost.com and Slate) versus the continued decline in print circulation and advertising inches.
- Accounting Changes: Review the impact of the upcoming adoption of SFAS 123R in Q1 2006, which is expected to result in a $5.0 million after-tax cumulative effect charge related to Kaplan equity awards.
- Debt Structure: Confirm the status of the $400 million 5.5% unsecured notes due in 2009 and the utilization of the $600 million in revolving credit facilities.