Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company (Note: Metadata referenced "Graham Holdings Co," but the filing text identifies the registrant as The Washington Post Company) for the quarterly period ended June 29, 2003. The company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan, Inc.). The reporting period reflects the second quarter of fiscal 2003 and the first six months of the fiscal year.
Key Financial Metrics
| Metric | Q2 2003 (13 Weeks) | Q2 2002 (13 Weeks) | YTD 2003 (26 Weeks) | YTD 2002 (26 Weeks) |
|---|---|---|---|---|
| Operating Revenues | $706.9 million | $647.7 million | $1,347.4 million | $1,248.0 million |
| Operating Income | $106.9 million | $110.4 million | $186.0 million | $159.3 million |
| Net Income | $60.6 million | $51.1 million | $133.7 million | $62.8 million |
| Diluted EPS | $6.32 | $5.34 | $13.91 | $6.51 |
| Cash from Operations (YTD) | N/A | $178.4 million | $243.1 million | |
| Total Debt Outstanding | N/A | $622.9 million | $664.8 million (Dec 2002) | |
| Cash & Equivalents | N/A | $30.8 million | $28.8 million (Dec 2002) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 9% in Q2 and 8% YTD, driven primarily by the Education division (Kaplan), which saw a 31% revenue increase in Q2 and 26% YTD. Cable, Newspaper, and Magazine divisions also reported revenue growth.
- Operating Income: Q2 operating income declined 3% to $106.9 million due to incremental costs from the Iraq war, increased depreciation, and reduced net pension credits. However, YTD operating income rose 17% to $186.0 million.
- Net Income Surge: YTD net income more than doubled to $133.7 million compared to $62.8 million in 2002. This was significantly boosted by a one-time after-tax non-operating gain of $32.3 million from the sale of the company's 50% interest in the International Herald Tribune (IHT).
- Segment Performance:
- Education: Strong growth in supplemental and higher education segments, aided by the acquisition of Financial Training Corporation (FTC).
- Television: Revenue and operating income declined 5% and 10% respectively in Q2, attributed to lower advertising volume and commercial-free coverage during the Iraq war.
- Newspaper: Print advertising revenue grew 3% in Q2, offset by a 20% volume decline in classified recruitment advertising. Online revenue grew 27%.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates spending approximately $160 million to $170 million on property and equipment for the full year 2003.
- Liquidity: Management expects to fund capital needs through internally generated funds and commercial paper. Despite a working capital deficit of $319.3 million, the company maintains ample liquidity and the ability to refinance obligations.
- Pension Assumptions: A reduction in the discount rate assumption from 7.0% to 6.75% is expected to reduce the net pension credit by approximately $10 million in 2003 compared to 2002.
- Stock-Based Compensation: The company adopted fair-value accounting for stock options (SFAS 123). Volatility in the valuation of education companies could lead to significant fluctuations in stock-based compensation expenses for the Education division.
- Forward-Looking Risks: Results are subject to seasonal advertising fluctuations, economic conditions, and the impact of the Iraq war on advertising and operations.
Investor Verification Checklist
- One-Time Gains: Verify the impact of the $32.3 million after-tax gain from the IHT sale on YTD net income and EPS.
- Education Segment Volatility: Review the "Other" expense line in the Education segment, which includes significant accruals for stock-based compensation ($20.0 million in Q2) that vary with market valuations.
- Debt Structure: Confirm the maturity profile of the $188.5 million in commercial paper and the $398.5 million in 5.5% notes due 2009.
- Pension Liability: Assess the long-term impact of the reduced discount rate on future pension credits and cash flow requirements.
- Acquisition Integration: Monitor the integration and performance of the Financial Training Corporation (FTC) acquisition, which contributed significantly to Education revenue growth.