Graham Holdings Co - Quarter Report: 2001 April (Form 10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended April 1, 2001

Commission File Number 1-6714 

THE WASHINGTON POST COMPANY
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   X    .   No         .

THE WASHINGTON POST COMPANY
Form 10-Q

 INDEX

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

The Washington Post Company
Notes to Condensed Consolidated Financial Statements (Unaudited)

Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues.  All adjustments reflected in the interim financial statements are of a normal recurring nature.

Note 1: Acquisitions, Exchanges and Dispositions.

In the first quarter of 2001, the company spent approximately $95.0 million on business acquisitions and exchanges, which principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and amounts paid as part of a cable system exchange which AT&T Broadband.

Southern Maryland Newspapers publishes the Maryland Independent in Charles County, Maryland; the Lexington Park Enterprise in St. Mary’s County, Maryland; and the Recorder in Calvert County, Maryland.  The acquired newspapers have a combined total paid circulation of approximately 50,000.

The cable system exchange with AT&T Broadband was completed on March 1, 2001 and consisted of the exchange by the company of its cable systems in Modesto and Santa Rosa, California, and approximately $42.0 million to AT&T Broadband for cable systems serving approximately 155,000 subscribers principally located in Idaho.  In a related transaction on January 12, 2001, the Company completed the sale of a cable system serving about 15,000 subscribers in Greenwood, Indiana for $61.9 million.

The company also acquired a provider of CFA examination preparation services in the first quarter of 2001.

The gain resulting from the cable system sale and exchange transactions, which is included in “Other income, net” in the Condensed Consolidated Statements of Income, increased net income by $196.5 million, or $20.70 per share.  For income tax purposes, the cable system sale and exchange transactions qualify substantially as like-kind exchanges and therefore do not result in a significant current tax liability.

There were no significant acquisitions, dispositions or exchanges during the first quarter of 2000.

Note 2:  Investments.

Investments in marketable equity securities at April 1, 2001 and December 31, 2000 consist of the following (in thousands):

There were no purchases or sales of marketable equity securities during the first quarter of 2001 or 2000.

At April 1, 2001 and December 31, 2000, the carrying value of the Company’s cost method investments was $39.8 and $48.6 million, respectively.  There were no investments in companies constituting cost method investments during the first quarter of 2001; during the first quarter of 2000, the company invested $18.2 million in such companies.  The company recorded charges of $11.8 million and $7.4 million during the first quarter of 2001 and 2000, respectively, to write-down certain of its cost method investments to estimated fair value.

Note 3: Borrowings.

At April 1, 2001, the Company had $976.6 million in total debt outstanding, which was comprised of $578.7 million of commercial paper borrowings and $397.9 million of 5.5 percent unsecured notes due February 15, 2009.  At April 1, 2001, the Company has classified $528.7 million of its commercial paper borrowings as long-term debt in the Condensed Consolidated Balance Sheet as the Company has the ability and intent to finance such borrowings on a long term basis.

During the first quarter of 2001 and 2000, the Company had average borrowings outstanding of approximately $949.1 million and $830.0 million, respectively, at average annual interest rates of approximately 5.8 percent.  During the first quarter of 2001 and 2000, the Company incurred interest expense on borrowings of $13.8 million and $12.1 million, respectively.

Note 4: Business Segments.

The following table summarizes financial information related to each of the company’s business segments.  The 2001 and 2000 results of operations information is for the thirteen weeks ended April 1, 2001 and April 2, 2000, respectively.  The 2001 and 2000 asset information is as of April 1, 2001 and December 31, 2000, respectively.

Newspaper publishing includes the publication of newspapers in the Washington, D.C. area (The Washington Post and the Gazette community newspapers, and effective March 1, 2001 Southern Maryland newspapers) and Everett, Washington (The Everett Herald).  This business division also includes newsprint warehousing, recycling operations and the company’s electronic media publishing business (primarily washingtonpost.com).

Television broadcasting operations are conducted through six VHF, network-affiliated television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets.

The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer’s Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community.

Cable television operations consist of cable systems offering basic cable and pay television services to approximately 769,000 subscribers in  midwestern, western, and southern states.

Education and career services are provided through the company’s wholly-owned subsidiary Kaplan, Inc.  Kaplan’s five major lines of businesses include Test Preparation and Admissions, providing test preparation services for college and graduate school entrance exams; Quest Education Corporation, a provider of post-secondary education offering Bachelor’s degrees, Associate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; Kaplan Professional, providing education and career services to business people and other professionals; SCORE!, offering multi-media learning and private tutoring to children and educational resources to parents; and The Kaplan Colleges, Kaplan’s distance learning business, including kaplancollege.com.

Corporate office includes the expenses of the company’s corporate office.

Item 2.  Management’s Discussion and Analysis of Results of

Operations and Financial Condition

This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.

Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume. 

Results of Operations

Net income for the first quarter of 2001 was $199.1 million ($20.90 per share).  Excluding one-time transactions from the quarter, principally gains from the sale and exchange of certain cable systems, net income for the first quarter totaled $9.5 million ($0.95 per share), a decrease of $14.6 million from net income of $24.1 million ($2.49 per share) in the first quarter of 2000.

Revenue for the first quarter of 2001 was $587.0 million, up 7 percent from $546.8 million in 2000.  Advertising revenue declined 7 percent compared to last year.  Circulation and subscriber revenue and education revenue increased 1 percent and 70 percent, respectively; other operating revenue increased 116 percent versus the prior year.

The decline in advertising revenue is the result of continued softness in the advertising markets of the Company’s largest advertising-based businesses, where the climate remains soft.  Approximately 60 percent of the decline in total advertising revenue is attributable to a $12.2 million (or 26 percent) decline in classified recruitment advertising at The Washington Post.

The 1 percent improvement in circulation and subscriber revenue is attributable to growth in subscriber revenues at Cable One, due to rate increases established to offset the rising cost of programming, as well as growth in basic subscribers as a result of acquisitions and cable system exchanges.

Approximately 75 percent of the increase in education revenue is attributable to the acquisition of Quest Educational Centers (Quest) in August, 2000.  The remaining improvement in education revenue is due mostly to revenue growth at Kaplan’s traditional test preparation, professional training and Score! businesses.

The 116 percent increase in other operating revenue is principally due to the timing of a technology trade show conducted in March 2001 by the Company’s trade periodicals unit, Post-Newsweek Tech Media Group.  This trade show was conducted during the second quarter of 2000.

Costs and expenses for the first quarter of 2001 increased 15 percent to $543.7 million, from $474.6 million in 2000.  Approximately one-half of the increase in costs and expenses is attributable to operating expenses of Quest (acquired in August 2000), with the remaining increase due to higher depreciation expense, a 10 percent increase in newsprint expense, and higher stock-based compensation expense at the education division.  These factors were partially offset by an increase in the pension credit. 

The increase in depreciation expense occurred mainly at the cable division, where capital improvements are enabling the division to offer digital cable services to its subscribers.

The Company’s expenses for the first quarter of 2001 were reduced by $20.4 million of pension credits, compared to $15.0 million in the first quarter of 2000.  Management expects the 2001 annual pension credit will approximate $82.0 million, compared to $61.7 million in 2000.

Operating income for the quarter decreased 40 percent to $43.2 million, from $72.2 million in 2000.

Newspaper Publishing Division.  Newspaper publishing division revenue totaled $218.2 million for the first quarter of 2001, a 3 percent decline from revenue of $224.7 million in the first quarter of 2000.  Division operating income decreased 28 percent to $26.3 million, from $36.3 million in 2000.  The decline in division operating income is primarily attributable to a decline in recruitment advertising at The Washington Post newspaper and a 10 percent increase in newsprint expense, offset in part by higher online advertising revenue.

Print advertising revenue at The Washington Post newspaper decreased 6 percent to $152.6 million, from $162.9 million in 2000, due to a $12.2 million or 26 percent decline in classified recruitment advertising that was partially offset by higher revenue from other advertising categories, principally general advertising.  First quarter 2001 advertising volume and circulation statistics for The Washington Post newspaper were as follows (inches in thousands, preprints in thousands of pieces:

The decrease in first quarter classified advertising volume was due to a 30 percent decline in recruitment classified advertising.

Revenue generated by the company’s online publishing activities, primarily washingtonpost.com, totaled $7.2 million for the first quarter of 2001, versus $5.4 million for 2000.

Television Broadcasting Division.  Revenue for the broadcast division declined 6 percent in the first quarter of 2001 to $74.2 million, from $78.7 million in 2000.  Operating income for the first quarter of 2001 decreased 12 percent to $28.5 million from $32.3 million in 2000.  General softness in advertising accounted for the decline in first quarter operating income.

Magazine Publishing Division.  Revenue for the magazine publishing division declined 1 percent for the first quarter of 2001, compared to the same period in 2000.  Magazine division operating loss totaled $2.5 million, compared to operating income of $2.7 million for the first quarter of 2000.  The decline in operating income is primarily attributable to a 12 percent decline in advertising at Newsweek (due to softness in domestic and international edition advertising pages), offset in part by a technology trade show conducted in the first quarter of 2001, which was held in the second quarter of 2000.

Cable Television Division.  Cable division revenue of $89.2 million for the first quarter of 2001 represents a 3 percent increase over 2000 first quarter revenue of $86.7 million.  Cable division cash flow (operating income excluding depreciation and amortization expense) totaled $31.7 million for the first quarter of 2001, a 6 percent decrease from $33.8 million for the first quarter of 2000.  Cable division operating income declined 47 percent.  The decline in operating income is due mostly to increased depreciation expense, higher programming expense, and costs associated with the launch of digital cable services.

The increase in depreciation expense is due to capital spending which is enabling the cable division to offer digital cable services to its subscribers.  The cable division began its rollout plan for these services in the third quarter of 2000.  At March 31, 2001, the cable division had approximately 83,000 digital cable subscribers, representing a 14 percent penetration of the subscriber base in the markets where digital services are offered.  Digital services are offered in markets serving 77 percent of the cable division’s subscriber base.  The rollout plan for the new digital cable services includes an offer for the cable division’s customers to obtain these services free for one year.  Accordingly, management does not believe the cable division’s 2001 revenue will materially benefit from these new services; however, benefits are expected in 2002 and thereafter.

At March 31, 2001, the cable division had 769,000 basic subscribers, compared to 741,400 at the end of March 2000.  The increase in basic subscribers is largely attributable to a net gain in subscribers arising from the recently completed cable system exchange and sale transactions.

Education Division.  Education division revenue totaled $121.5 million for the first quarter of 2001, a 69 percent increase over revenue of $72.0 million for the same period of 2000.  Operating losses for the quarter were $10.2 million, compared to $9.6 million for the first quarter of 2000.  A summary of first quarter operating results is as follows (in thousands):

Test prep and professional training include the results of Kaplan's test preparation and admissions business and Kaplan professional, a provider of education services to business people and other professionals. The increase in test preparation and professional training results is due mostly to higher enrollments at Kaplan’s traditional test preparation business (particularly the GMAT and LSAT exams), and higher revenues from CFA exam preparation services.  Quest post-secondary education includes the results of Quest Education Corporation, which was acquired by Kaplan in August 2000.  New business development activities represent the results of Score!, eScore.com, and The Kaplan Colleges (various distance learning businesses).  The increase in new business development revenue is attributable mostly to new learning centers opened by Score!, which operated 141 centers at the end of the first quarter of 2001 versus 100 at the end of the same period in the prior year.

Corporate overhead represents unallocated expenses of Kaplan, Inc.’s corporate office, including expenses associated with the design and development of educational software that, if sucessfully completed, will benefit all of Kaplan's business units.

Other expense is comprised of accrued charges for stock-based incentive compensation arising from a stock option plan established for certain members of Kaplan’s management and amortization of goodwill and other intangibles.  Under the stock-based incentive plan, the amount of compensation expense varies directly with the estimated fair value of Kaplan’s common stock and the number of options outstanding.  The first quarter 2001 increase in other expense compared to the same period of 2000 is mostly attributable to an increase in stock-based incentive compensation, which was primarily due to an increase in Kaplan’s estimated value.

Other Non-Operating Income.  The company recorded other non-operating income, net, of $308.8 million for the first quarter of 2001, compared to non-operating expense of $6.9 million for the same period of the prior year.  The 2001 non-operating income is comprised mostly of gains arising from the sale and exchange of certain cable systems completed in January and March of 2001.  Offsetting these gains were charges of $11.8 million recorded for the write-down of certain e-commerce focused investments.

For income tax purposes, the cable system sale and exchange transactions qualify as like-kind exchanges and therefore do not result in a current tax liability. 

Net Interest Expense.  The company incurred net interest expense of $14.3 million for the first quarter of 2001, compared to $12.3 million for the same period of the prior year.  At April 1, 2001, the company had $976.6 million in borrowings outstanding.

Provision for Income Taxes.  The effective tax rate for the first quarter of 2001 was 38.8 percent, compared to 42.1 percent for the same period of 2000.  The decline in the effective tax rate is due to a lower effective rate applicable to the one-time gains arising from the sale and exchange of cable systems.  Excluding the effect of the cable gain transactions, the company’s effective tax rate approximated 43 percent for the quarter, with the increase in the rate due mostly to the decline in pretax income.

Earnings Per Share.  The calculation of diluted earnings per share for the first quarter of 2001 was based on 9,499,027 weighted average shares outstanding, compared to 9,458,109 for the first quarter of 2000.  The company made no repurchases of its stock during the first quarter of 2001.

Financial Condition: Capital Resources and Liquidity

Acquisitions, Exchanges and Disposition.  In the first quarter of 2001, the company spent approximately $95.0 million on business acquisitions and exchanges, which principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and amounts paid as part of a cable system exchange with AT&T Broadband.  The company also acquired a provider of CFA examination preparation services.

The cable system exchange with AT&T Broadband was completed on March 1, 2001 and consisted of the exchange by the company of its cable systems in Modesto and Santa Rosa, California, and approximately $42.0 million to AT&T Broadband for cable systems serving approximately 155,000 subscribers principally located in Idaho.  In a related transaction on January 12, 2001, the Company completed the sale of a cable system serving about 15,000 subscribers in Greenwood, Indiana for $61.9 million.

For income tax purposes, the cable system sale and the exchange transactions discussed above qualify substantially as like-kind exchanges and therefore do not result in a significant current tax liability.

Capital expenditures.  During the first quarter of 2001, the company’s capital expenditures totaled $49.1 million, three-quarters of which related to plant upgrades at the company’s cable subsidiary.  The company anticipates it will spend approximately $200.0 million throughout 2001 for property and equipment.  Approximately 60 percent of this spending is earmarked for the cable division in connection with its rollout of new digital and cable modem services.  If the rate of customer acceptance for these new services is slower than anticipated, then the Company will consider slowing its capital expenditures in this area to a level consistent with demand.

Liquidity.  Throughout the first quarter of 2001 the Company’s borrowings, net of repayments, increased by $53.4 million, with the net increase primarily due to amounts spent for acquisitions.

At April 1, 2001, the Company had $976.6 million in total debt outstanding, which was comprised of $578.7 million of commercial paper borrowings and $397.9 million of 5.5 percent unsecured notes due February 15, 2009.  The Company has classified $528.7 million of its commercial paper borrowings as long-term debt in it Condensed Consolidated Balance Sheets as the Company has the ability and intent to finance such borrowings on a long-term basis.

During the first quarter of 2001, the company had average borrowings outstanding of approximately $949.1 million at an average annual interest rate of 5.8 percent.

The company expects to fund its estimated capital needs primarily through internally generated funds, and to a lesser extent, commercial paper borrowings.  In management’s opinion, the company will have ample liquidity to meet its various cash needs throughout 2001.

Forward-looking Statements

All public statements made by the company and its representatives which are not statements of historical fact, including certain statements in this quarterly report, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements.  These risks and uncertainties include:  changes in prevailing economic conditions, particularly in the specific geographic and other markets served by the company; actions of competitors; changes in customer preferences; changes in communications and broadcast technologies; and the effects of changing cost or availability of raw materials, including changes in the cost or availability of newsprint and magazine body paper.  They also include other risks detailed from time to time in the company’s publicly-filed documents, including the company’s Annual Report on Form 10-K for the period ended December 31, 2000.

PART II - OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K.

   (a)   The following documents are filed as exhibits to this report: