Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company (Graham Holdings Co) for the thirteen and thirty-nine weeks ended October 1, 2006. The Company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan, Inc.). The reporting period reflects seasonal advertising fluctuations and significant one-time items including goodwill impairments, early retirement charges, and accounting changes.
Key Financial Metrics
| Metric (in millions) | 13 Weeks Ended Oct 1, 2006 | 39 Weeks Ended Oct 1, 2006 | 13 Weeks Ended Oct 2, 2005 | 39 Weeks Ended Oct 2, 2005 |
|---|---|---|---|---|
| Operating Revenues | $946.9 | $2,864.2 | $873.7 | $2,605.2 |
| Operating Income | $108.6 | $343.6 | $112.4 | $358.1 |
| Net Income | $73.3 | $228.9 | $66.6 | $211.9 |
| Diluted EPS | $7.60 | $23.71 | $6.89 | $21.93 |
| Cash and Equivalents | $321.5 | $321.5 | $215.9 | $170.3 |
| Total Debt | $407.2 | $407.2 | $428.4 | $428.4 |
| Operating Cash Flow (YTD) | N/A | $410.6 | N/A | $387.5 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 8% in the third quarter and 10% year-to-date (YTD), driven primarily by the Education and Cable Television segments. Newspaper and Magazine revenues declined.
- Operating Income Decline: Despite revenue growth, operating income fell 3% in the quarter and 4% YTD. This was due to a $9.9 million goodwill impairment charge, a $15.7 million increase in Kaplan stock compensation expense, and $50.9 million in early retirement charges YTD.
- Net Income Increase: Net income rose 10% in the quarter and 8% YTD, aided by a lower effective tax rate (32.9% vs 40.2% in Q3) and significant non-operating gains from the sale of marketable securities ($33.6 million YTD).
- Segment Performance:
- Education: Revenue up 16% (Q3) and 20% (YTD). Operating income dropped 21% in Q3 due to stock compensation changes but rose 8% YTD.
- Cable: Revenue up 16% (Q3) and 11% (YTD). Operating income surged due to recovery from Hurricane Katrina impacts in 2005 and insurance recoveries of $10.4 million in 2006.
- Newspaper: Operating income fell 38% in Q3 and 61% YTD, driven by a 11% drop in print advertising and $47.1 million in early retirement charges YTD.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company estimates 2006 capital expenditures will range between $260 million and $285 million. YTD spending was $199.3 million.
- Liquidity: The Company maintains strong liquidity with $321.5 million in cash and a new $500 million five-year revolving credit facility entered into in August 2006. Management expects ample liquidity to meet cash needs.
- Accounting Changes: Adoption of SFAS 123R resulted in a $5.1 million after-tax charge in Q1 2006 for the cumulative effect of changing Kaplan equity award accounting to fair-value based. Future pension accounting changes (FAS 158) are expected to increase prepaid pension assets significantly in Q4 2006.
- Risks and Contingencies:
- Goodwill Impairment: A $9.9 million charge was recorded for PostNewsweek Tech Media due to the advertising environment.
- Early Retirement: $49.0 million in pre-tax charges were recorded YTD for voluntary early retirement programs.
- Legal: Kaplan is defending a class action antitrust lawsuit in California; management does not expect a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of Education segment growth excluding the impact of recent acquisitions (Aspect Education, PMBR, Tribeca).
- Confirm the trajectory of print advertising revenue recovery at The Washington Post following the 11% Q3 decline.
- Monitor the impact of the new SFAS 123R accounting standard on future Kaplan stock compensation expenses.
- Assess the long-term subscriber retention in the Gulf Coast region following Hurricane Katrina recovery.
- Review the status of the pending sale of BrassRing LLC, expected to close in Q4 2006.