Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company for the quarterly period ended July 4, 1999, and the twenty-six weeks ended on that date. The company operates through five primary segments: Newspaper Publishing (The Washington Post), Television Broadcasting, Magazine Publishing (Newsweek), Cable Television, and Education and Career Services (Kaplan). The filing notes that advertising revenues are seasonal, typically higher in the second and fourth quarters.
Key Financial Metrics
Revenue and Profitability
- Operating Revenues (26 weeks): $1,077.6 million (1999) vs. $1,009.7 million (1998).
- Net Income (26 weeks): $113.1 million (1999) vs. $271.7 million (1998). The 1998 figure included a $162.8 million gain from the sale of Cowles Media.
- Diluted EPS (26 weeks): $11.08 (1999) vs. $26.74 (1998). Excluding the prior year's one-time gain, EPS increased 4% to $11.08 from $10.67.
- Operating Income (26 weeks): $184.0 million (1999) vs. $181.8 million (1998).
Cash Flow and Liquidity
- Cash and Cash Equivalents: $17.7 million as of July 4, 1999.
- Net Cash Provided by Operating Activities (26 weeks): $136.6 million (1999) vs. $53.2 million (1998).
- Net Cash Used in Investing Activities (26 weeks): $79.5 million (1999), driven by capital expenditures and business investments.
- Net Cash Used in Financing Activities (26 weeks): $54.6 million (1999), primarily due to debt repayments and dividends.
Debt and Capital Structure
- Long-term Debt: $397.5 million (July 4, 1999).
- Short-term Borrowings: $33.2 million (July 4, 1999).
- Interest Expense (26 weeks): $12.3 million (1999) vs. $4.1 million (1998).
- Dividends Declared (26 weeks): $3.90 per common share.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7% year-over-year for the six-month period. Advertising revenues were flat (+1%), while circulation/subscriber revenues rose 8% (driven by cable acquisitions) and "Other" revenues surged 37% (driven by Kaplan growth).
- Expense Increases: Operating costs rose 8% to $893.6 million. Increases were due to amortization of recent acquisitions, higher depreciation (printing facility expansion), and internet-related spending. These were partially offset by a 20% decline in newsprint costs and increased pension credits.
- Segment Performance:
- Education (Kaplan): Revenues up 60% to $118.5 million; operating losses improved 25% to $14.3 million.
- Cable: Revenues up 19% to $163.9 million; operating income (pre-amortization) up 23%.
- Newspaper: Revenues up 2%; operating income up 3%.
- Magazine: Revenues down 4%; operating income up 15%.
- Broadcast: Revenues down 2%; operating income down 3%.
- One-Time Items: The 1998 net income was significantly inflated by a $258.4 million pre-tax gain from the disposition of the company's interest in Cowles Media Company. No comparable gain occurred in 1999.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: The company anticipates spending approximately $150 million in 1999 on property and equipment, primarily for newspaper and cable projects.
- Liquidity: Management expects to fund capital needs through internally generated funds and commercial paper. On February 15, 1999, the company issued $400 million in 5.5% unsecured notes due 2009 to repay commercial paper.
- Stock Repurchases: The company repurchased 15,318 shares of Class B stock for $8.4 million in the first half of 1999. Approximately 786,000 shares remain available for repurchase.
Risks and Contingencies
- Year 2000 (Y2K) Compliance: The company estimates total Y2K compliance costs at $25 million. While most systems are compliant, critical revenue systems at The Washington Post and Newsweek required remediation. Testing is 85% complete as of July 1999. Management does not believe Y2K will have a material adverse effect, but risks remain regarding third-party vendor failures.
- Forward-Looking Statements: Risks include unanticipated failures by critical vendors, inability to execute remediation efforts, and uncertainties in third-party responses.
Investor Verification Checklist
- Verify the sustainability of the 60% revenue growth in the Education segment, noting that a significant portion is attributable to acquisitions rather than organic growth.
- Confirm the impact of the $162.8 million one-time gain in 1998 when comparing year-over-year net income and EPS figures.
- Monitor the progress of Year 2000 remediation for critical billing systems at The Washington Post, with completion expected in late Fall 1999.
- Review the company's ability to maintain liquidity given the $400 million debt issuance and ongoing capital expenditure plans of $150 million for the year.
- Assess the trend in advertising volume at The Washington Post, which declined slightly (1%) in the first half of 1999 despite rate increases.