Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company for the thirteen and thirty-nine weeks ended September 26, 2004. The company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan, Inc.). The filing notes that advertising revenues are seasonal, typically lower in the first and third quarters.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 26, 2004 | 39 Weeks Ended Sep 26, 2004 |
|---|---|---|
| Operating Revenues | $820,032 | $2,397,392 |
| Income from Operations | $140,298 | $391,215 |
| Net Income | $82,472 | $226,802 |
| Diluted EPS | $8.57 | $23.54 |
| Operating Cash Flow (YTD) | $405,949 | |
| Total Debt Outstanding | $499.2 million | |
| Cash and Equivalents | $74.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 16% in Q3 2004 and 17% for the first nine months compared to 2003. Growth was driven by the Education and Television Broadcasting divisions.
- Profitability Surge: Net income for Q3 2004 was $82.5 million, a significant increase from $19.9 million in Q3 2003. Year-to-date net income rose to $226.8 million from $153.6 million.
- Stock Compensation Impact: A primary driver of the profit increase was a reduction in stock-based compensation expense at the Kaplan Education division. Q3 2004 expense was $5.1 million versus $74.6 million in Q3 2003. YTD 2004 expense was $22.9 million versus $104.6 million in 2003.
- One-Time Gains in 2003: The prior year (2003) included 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, which is not present in 2004 results.
- Segment Performance:
- Education: Revenue up 31% (Q3) and 39% (YTD); turned from an operating loss in 2003 to $38.0 million profit in Q3 2004.
- Television: Revenue up 22% (Q3) due to political advertising and Olympics coverage, partially offset by hurricane impacts in Florida.
- Newspaper: Revenue up 6% (Q3); online advertising revenue grew 55%.
Outlook, Risks, and Commentary
- Capital Expenditures: The company estimates 2004 capital expenditures will range between $190 million and $215 million. YTD spending was $137.8 million.
- Liquidity: The company maintains a working capital deficit of $120.0 million but asserts it has ample liquidity to meet cash needs through operating cash flows and commercial paper borrowings. Total borrowings decreased by $131.9 million during the first nine months of 2004.
- Pension Assumptions: The company reduced its discount rate assumption from 6.75% to 6.25% in late 2003, resulting in an expected decrease in net pension credits for 2004 compared to 2003.
- Acquisitions: Kaplan continued M&A activity, acquiring businesses in professional and higher education divisions totaling approximately $58 million in the first nine months of 2004.
- Risks: Forward-looking statements are subject to risks including seasonal advertising fluctuations, hurricane impacts on Florida operations, and changes in pension assumptions.
Investor Verification Checklist
- Stock Compensation Normalization: Verify the sustainability of earnings by analyzing results excluding the one-time $74.6 million stock compensation charge in Q3 2003 versus the $5.1 million in Q3 2004.
- Education Segment Growth: Confirm the organic growth rate of the Kaplan Education division by excluding revenue from recent acquisitions (FTC and others).
- Debt Structure: Review the maturity profile of the $499.2 million debt, specifically the $66.2 million in commercial paper maturing in October 2004.
- Online Revenue Quality: Assess the margin profile of the rapidly growing online advertising revenue (up 55% in Q3) compared to traditional print.
- Pension Liability: Monitor the impact of the reduced discount rate assumption on future pension expense and cash contributions.