Business Context and Reporting Period
Company: The Washington Post Company (Note: Metadata referenced "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 31, 2006.
Business Overview: A diversified media and education company. The Education division (Kaplan) is the largest segment, accounting for 43% of consolidated revenues. Media operations include newspaper publishing (The Washington Post), television broadcasting (6 stations), magazine publishing (Newsweek), and cable television (Cable One).
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $3,904.9 million | $3,553.9 million |
| Income from Operations | $459.8 million | $514.9 million |
| Net Income | $324.5 million | $314.3 million |
| Diluted EPS | $33.68 | $32.59 |
| Cash and Cash Equivalents | $348.1 million | $215.9 million |
| Long-Term Debt | $401.6 million | $403.6 million |
| Working Capital | $131.6 million | $123.6 million |
| Capital Expenditures | $284.0 million | $238.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 10% to $3.9 billion, driven primarily by a 19% increase in Education revenue and growth in Cable and Television segments. Newspaper revenue grew 1%, while Magazine revenue declined 4%.
- Operating Income Decline: Operating income decreased 11% to $460 million. This decline was largely due to one-time charges, including $50.9 million for early retirement buyouts, $13.0 million for a Kaplan lawsuit settlement, and $9.9 million in goodwill impairment at PostNewsweek Tech Media.
- Net Income Increase: Despite lower operating income, Net Income rose 3% to $324.5 million. This was bolstered by significant non-operating gains, including a $43.2 million gain on the sale of the company's 49% interest in BrassRing and $33.8 million in gains from the sale of marketable securities.
- Segment Performance:
- Education: Revenue up 19%; Operating income down 18% due to increased stock compensation and acquisition transition costs.
- Television: Revenue up 9% and Operating income up 13%, driven by political and Olympics-related advertising.
- Cable: Revenue up 11% and Operating income up 56%, aided by high-speed data growth and Hurricane Katrina insurance recoveries.
- Newspaper: Operating income fell 49% primarily due to early retirement charges and a 4% decline in print advertising.
Guidance, Outlook, and Risks
- Outlook: Management expects 2007 capital expenditures to range between $260 million and $285 million. The company anticipates challenging revenue comparisons in 2007 for the Television division due to the absence of significant political and Olympics advertising seen in 2006.
- Dividends: The annual dividend rate was increased to $8.20 per share for 2007 (from $7.80 in 2006).
- Key Risks:
- Regulatory (Title IV): Kaplan's Higher Education division relies heavily on federal student financial aid (Title IV). Changes in regulations or funding could materially impact results. Some schools face accreditation challenges.
- Competition: Intense competition in media advertising from internet-based services and in cable from satellite providers (DBS) and telephone companies.
- Acquisition Integration: Kaplan completed 11 acquisitions in 2006; risks include integration difficulties and failure to meet financial projections.
- Raw Materials: Volatility in newsprint prices and availability affects newspaper margins.
Investor Verification Checklist
- Recurring vs. Non-Recurring Items: Verify the sustainability of 2006 Net Income by excluding the $43.2 million BrassRing sale gain and $33.8 million securities gains, as these are non-operating and unlikely to recur annually.
- Kaplan Title IV Compliance: Monitor the status of the four Kaplan schools that received notice of non-renewal of accreditation in December 2006 and the unresolved "show cause" order against another school.
- Early Retirement Charges: Assess the impact of the $50.9 million early retirement charge on future operating costs and whether similar charges are expected in 2007.
- Television Revenue Normalization: Evaluate the Television division's 2007 guidance, noting the significant drop in political and Olympics advertising revenue compared to 2006.
- Goodwill Impairment: Review the $9.9 million impairment charge at PostNewsweek Tech Media and the subsequent sale of the division to understand the remaining exposure in the Magazine segment.