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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.
Net income in 1997 was $281.6 million, an increase of 28 percent over net income of $220.8 million in 1996. Basic and diluted earnings per share rose 31 and 30 percent to $26.23 and $26.15, respectively, in 1997. The company's 1997 net income includes $28.5 million from the sale of the company's investment in Bear Island Paper Company, L.P., and Bear Island Timberlands Company, L.P., as well as $16.0 million relating to the sale of the assets of its PASS Sports subsidiary. Excluding these non-recurring gains, net income increased 7 percent in 1997 and basic and diluted earnings per share each increased 10 percent. Revenues for 1997 totaled $1.956 billion, an increase of 6 percent from $1.853 billion in 1996. Advertising revenues increased 5 percent in 1997, and circulation and subscriber revenues increased 6 percent. Other revenues increased 5 percent. Substantially all of the increase in advertising revenues was generated by the newspaper and magazine divisions. The increase in circulation and subscriber revenues is due to growth at the cable division and the increase in other revenues is attributable to higher tuition revenues at Kaplan partially offset by reduced fees for engineering services at MLJ. Costs and expenses for the year increased 4 percent to $1.575 billion, from $1.516 billion in 1996. In addition to the normal growth in the costs of operations, the cost and expense increase is attributable to companies acquired in 1997, expansion of Kaplan's business offerings, increased spending for new media activities offset partially by decreased newsprint and magazine paper costs, and other favorable cost experience at Newsweek. Operating income increased 13 percent to $381.4 million in 1997. Newspaper Division. Newspaper division revenues increased 6 percent to $812.9 million, from $763.9 million in 1996. Advertising revenues at the newspaper division rose 8 percent over the previous year. At The Washington Post, advertising revenues increased 8 percent as a result of strong volume increases and, to a lesser extent, higher rates. Classified revenues at The Washington Post increased 12 percent due to higher recruitment volume and associated rates. The Washington Post's retail revenues rose 4 percent due to higher rates and a 1 percent increase in volume. Other advertising revenues (including general and preprint) at The Washington Post increased 8 percent. General advertising and preprint volume each increased 8 percent over 1996. Circulation revenues for the newspaper division increased 1 percent in 1997 resulting mostly from rate increases enacted in the beginning of 1997 at The Washington Post. Average daily circulation at The Washington Post fell 1.5 percent, while Sunday circulation declined 1.3 percent. Newspaper division operating margin in 1997 increased to 20 percent from 15 percent in 1996. The increase in 1997 operating margin is primarily attributable to increased advertising revenues and lower newsprint expense (down 9 percent). Average newsprint prices paid by the newspaper division in 1997 declined about 14 percent from 1996, the positive effects of which were partially offset by a 4 percent increase in newsprint consumed. Broadcast Division. Revenues at the broadcast division rose 1 percent to $338.4 million over last year. An increase in advertising from a number of industry categories, including restaurants, utilities, banks and finance, as well as an overall revenue share increase, allowed the broadcast division to offset the approximate $30.0 million in non-recurring advertising revenues generated in 1996 from political and Olympics-related advertising. Network revenues were down slightly from 1996. Competitive market position remained strong for the television stations. Four stations were ranked number one in the latest ratings period, sign-on to sign-off, in their markets; one station was ranked a strong number two; one station was ranked number three. The operating margin at the broadcast division increased to 47 percent, from 46 percent in 1996. Excluding amortization of goodwill and intangibles, operating margins for 1997 and 1996 were 51 percent and 50 percent, respectively. The improvement in the 1997 operating margin is due to increased advertising revenues and benefits derived from 1997 expense control initiatives which, in total, outpaced higher expenses associated with the new station, WCPX (renamed WKMG). Magazine Division. Magazine division revenues, which beginning in 1997 also included the company's business information unit, rose 3 percent to $389.9 million due primarily to increased advertising revenues at the Newsweek domestic edition. The Newsweek domestic advertising revenue increase over the prior year resulted from a 6 percent increase in domestic advertising pages sold in 1997 versus 1996. Total circulation revenues for the magazine division increased 1 percent in 1997. Operating margin of the magazine division increased to 10 percent in 1997, from 6 percent in 1996. The increase in operating margin is primarily attributable to the operating results of Newsweek, including the higher sales of domestic advertising pages, reduced magazine paper costs, realized savings from prior year outsourcing initiatives, and other favorable cost experience. Cable Division. Revenues at the cable division increased 12 percent to $257.7 million in 1997. Basic and tier, pay, and advertising revenue categories showed improvement over 1996. Increased subscribers in 1997 accounted for the majority of the total increase in revenues. The number of basic subscribers increased 7 percent to 637,300. About 37,000 subscribers were added in 1997 as a result of cable system acquisitions and exchanges and the remainder by internal growth. Cable operating cash flow increased 4 percent to $101.6 million, from $97.9 million in 1996. Operating margin at the cable division was 20 percent in 1997 compared to 24 percent in 1996, reflecting the effects of increased depreciation and amortization in 1997 from recent cable system acquisitions and capital improvements. Other Businesses. In 1997, revenues from other businesses, including Kaplan, MLJ, LEGI-SLATE, Digital Ink, and PASS Sports (nine months of 1997), increased 7 percent over the prior year to $157.4 million. The majority of the increase in other businesses revenues is attributable to Kaplan, where revenues increased 21 percent. Student enrollments at Kaplan increased 3 percent in 1997. Partially offsetting the revenue increase generated by Kaplan was a decrease in engineering consulting revenues at MLJ. Other businesses recorded an operating loss in 1997 of $30.1 million, compared to a loss of $13.5 million in 1996. The 1997 operating loss generated by other businesses is directly attributable to the company's investing activities in new media, the 1997 decline in MLJ's revenues, and, to a lesser extent, the start-up costs associated with Kaplan's significant expansion of its Score elementary education business. Offsetting these losses was improved and continued profitability from Kaplan's core test preparation business. Equity in Earnings of Affiliates. The company's equity in earnings of affiliates for 1997 declined to $10.0 million, from $19.7 million in 1996, reflecting the effect of lower earnings at the company's affiliated newsprint mills for the majority of 1997 compared to 1996. The decline in earnings at the affiliated newsprint mills is due to lower average newsprint prices charged by the mills in 1997 versus 1996. Non-Operating Items. Interest income, net of interest expense, was $2.2 million, compared to $3.8 million in 1996. Increased spending in 1997 for acquisitions, capital expenditures, and stock repurchases resulted in less invested cash in 1997 versus 1996, causing a decline in interest income. Other income (expense), net in 1997 was $69.5 million, compared with an expense of $0.5 million in 1996. The increase in other income is attributable to the 1997 gains arising from the company's sale of its investment in Bear Island Paper Company, L.P., and Bear Island Timberlands Company, L.P., as well as the sale of the assets of the PASS Sports subsidiary. Income Taxes. The effective tax rate in both 1997 and 1996 was approximately 39 percent. Results of Operations--1996 compared to 1995 Net income in 1996 was $220.8 million, an increase of 16 percent over net income of $190.1 million in 1995. Basic and diluted earnings per share each rose 17 percent to $20.08 and $20.05, respectively, in 1996. The company's 1995 net income included $8.4 million ($0.75 per share basic and diluted) from the sale of the company's investment in American PCS, L.P. (APC), as well as an after-tax charge of $5.6 million ($0.51 per share basic and diluted) relating to the write-off of the company's interest in Mammoth Micro Productions. Excluding these items, net income and earnings per share (basic and diluted) increased 18 percent and 19 percent, respectively, in 1996. Revenues for 1996 totaled $1.853 billion, an increase of 8 percent from $1.719 billion in 1995. Advertising revenues increased 7 percent in 1996, and circulation and subscriber revenues increased 8 percent. Other revenues increased 11 percent. The broadcast, newspaper, and magazine divisions all contributed significantly to the improvement in advertising revenues. The increase in circulation and subscriber revenues was principally due to growth at the cable division. About two-thirds of growth in other revenues over 1995 was attributable to new businesses acquired in 1996. Costs and expenses for 1996 increased 5 percent to $1.516 billion, from $1.448 billion in 1995. Approximately one-half of the increase is attributable to businesses acquired in 1996, while the remainder of the increase reflects normal growth in the costs of operations. Operating income increased 24 percent to $337.2 million, from $271.0 million in 1995. Newspaper Division. Newspaper division revenues increased 5 percent to $763.9 million, from $729.2 million in 1995. Advertising revenues at the newspaper division rose 4 percent over 1995. At The Washington Post, advertising revenues increased 3 percent as higher rates offset a decline in volume. Retail revenues at The Washington Post declined 4 percent as a result of a 9 percent decline in inches. Classified revenues rose 13 percent in 1996 primarily as a result of higher recruitment volume and associated rates. Other advertising revenues (including general and preprint) at The Washington Post increased 2 percent. General advertising volume was essentially unchanged from 1995, though preprint volume at The Washington Post increased 2 percent. Circulation revenues for the newspaper division rose 2 percent in 1996 due to a home delivery price increase at The Washington Post. For the 12-month period ended September 30, 1996, both daily and Sunday circulation at The Washington Post declined 1 percent. The Washington Post's share of the market was 48.5 percent penetration in its daily editions and 63.9 percent penetration in its Sunday editions. Newspaper division operating margin in 1996 remained at 15 percent, consistent with 1995. The previously mentioned increases in advertising and circulation revenues were offset by higher newsprint expense (up 4 percent) and other normal operating cost increases. Broadcast Division. Revenues at the broadcast division rose 9 percent over 1995 to $335.2 million, with both national and local advertising revenues increasing by 10 percent. The improvement for 1996 is attributable almost entirely to political and Olympics-related advertising as other categories generally remained unchanged. Network revenues rose 12 percent in 1996. Viewership remained strong for the television stations. Four stations were ranked number one in the latest ratings period, sign-on to sign-off, in their markets; one station was ranked a strong number two; one station was ranked number three. The increases in advertising and network compensation were partially offset by normal operating cost increases of about 4 percent. As a result, the operating margin at the broadcast division increased to 46 percent, from 43 percent in 1995. Excluding amortization of goodwill and intangibles, operating margins for 1996 and 1995 were 50 percent and 47 percent, respectively. Magazine Division. Newsweek revenues in 1996 increased 7 percent to $377.1 million due primarily to increased advertising revenues at the domestic edition. Advertising revenues rose 11 percent overall, 16 percent at the domestic edition. The domestic improvement was due to a 9 percent increase in page volume as well as the realization of higher advertising rates. Total circulation revenues for 1996 increased 1 percent over 1995. In 1996 the domestic and international editions published 52 weekly issues versus 51 issues in 1995. At Newsweek, the operating margin increased to 6 percent, from 4 percent in 1995. The increased cost of magazine paper, one-time costs associated with the magazine's decision to outsource its fulfillment operations, and higher general operating costs offset much of the revenue increase. Cable Division. Revenues at the cable division increased 18 percent to $229.7 million in 1996 over 1995. All revenue categories--basic, tier, pay, pay-per-view, advertising, and other--showed improvement from 1995. About two-thirds of the total increase is attributable to higher average subscriber counts, with the remainder due to higher rates and increased advertising. During 1996, the number of domestic basic subscribers rose by 15 percent to 594,000. About 66,000 subscribers were added as a result of cable system acquisitions and the remainder by internal growth. Operating margin at the cable division was 24 percent, compared to 21 percent in 1995. Cable cash flow increased 19 percent to $97.9 million, from $82.0 million in 1995. About half of the improvement in cash flow is attributable to the results of cable systems acquired in 1996. Other Businesses. In 1996, revenues from other businesses, including Kaplan, MLJ, PASS Sports, LEGI-SLATE, and Digital Ink, increased 7 percent to $147.6 million, from $137.4 million in 1995. Half of the increase related to Kaplan, where tuition revenues increased 6 percent. Most of the remainder was due to PASS Sports, which experienced revenue growth of 18 percent. Other businesses recorded an operating loss in 1996 of $13.5 million, compared with a loss of $27.1 million in 1995. The 1995 results included the write-off of Mammoth Micro Productions as previously mentioned. If all costs associated with Mammoth Micro Productions are excluded from the 1995 results, other businesses operating losses amounted to $5.3 million in 1995. The increase in the 1996 operating loss over this latter amount reflects the company's increased expenditures for digital media and electronic information services and other new business ventures. Equity in Earnings of Affiliates. The company's equity in earnings of affiliates for 1996 declined to $19.7 million, from $24.5 million in 1995. The reduction in earnings resulted from lower income at the company's affiliated newsprint mills, which were adversely affected by declining newsprint prices beginning in mid-1996. Non-Operating Items. Interest income, net of interest expense, was $3.8 million, compared with $2.4 million in 1995. The increase was a result of lower interest expense following the retirement of the company's remaining long-term debt in March 1996. Other income (expense), net in 1996 was a loss of $0.5 million, compared with income of $13.5 million in 1995. The gain from the sale of the company's investment in APC is included in the 1995 amount. Income Taxes. The effective tax rate in both 1996 and 1995 was approximately 39 percent.
Financial Condition: From 1995 through 1997, the company spent approximately $1.235 billion on purchases of additional property, plant, and equipment, investments in new businesses, and the repurchase of Class B common stock. The company also retired its $50.2 million of long-term debt. During 1997, the company acquired various businesses for an aggregate purchase price of about $118.9 million. These acquisitions included, among others, cable systems serving approximately 16,000 subscribers, the publishing rights to two computer services industry trade periodicals, the rights to conduct two computer industry trade shows, and a company that produces job fairs serving the information systems and technology industry. In 1996, the company purchased cable systems serving about 66,000 subscribers in four states, for about $129 million, including $11.9 million of the company's redeemable Series A Preferred Stock. The company also acquired various other new businesses in 1996 for an aggregate purchase price of about $18.5 million. These acquisitions include, among others, Comprint, Inc., a commercial printer in the Maryland suburbs of Washington, D.C., Score Learning Corp., which provides educational services to students in grades K through 12, and TechNews, Inc., a producer of business publications for the computer services industry and the Washington-area technology community. During 1997, the company exchanged the assets of certain cable systems with Tele-Communications, Inc. resulting in an increase of about 21,000 subscribers for the company. The company also completed, in 1997, a transaction with Meredith Corporation whereby the company exchanged the assets of WFSB-TV, the CBS affiliate in Hartford, Connecticut and $60.0 million in cash for the assets of WCPX-TV (renamed WKMG), the CBS affiliate in Orlando, Florida. During 1997, the company sold its 35 percent interest in both Bear Island Paper Company, L.P., and Bear Island Timberlands Company, L.P., for approximately $92.8 million. The company also sold the assets of its PASS Sports subsidiary in 1997 for approximately $27.4 million. In 1995, the company divested substantially all of its 70 percent limited partnership in APC for a sales price of approximately $33 million. During 1997, 1996, and 1995, the company repurchased 846,290, 103,642, and 361,106 shares, respectively, of its Class B common stock at a cost of $368.6 million, $32.3 million, and $89.6 million, respectively. The annual dividend rate for 1998 was increased to $5.00 per share, from $4.80 per share in 1997, $4.60 per share in 1996, and $4.40 per share in 1995. The company estimates that in 1998 it will spend approximately $225.0 million for plant and equipment, principally for various projects at the newspaper and cable divisions. This estimate includes about $90.0 million to be expended as part of a project to provide new production facilities for The Washington Post newspaper. This project is expected to be substantially completed in late 1998. In November 1997, the management of Cowles and McClatchy Newspapers, Inc., announced that shareholders representing a majority of each of the respective companies' outstanding voting shares have agreed to vote to approve a series of transactions whereby Cowles and McClatchy will be merged into a newly created company (New McClatchy). Under the terms of the proposed merger, each share of Cowles stock will be converted into a right to receive (based on elections made by Cowles stockholders) either $90.50 in cash or shares of stock in New McClatchy, or a combination of cash and New McClatchy stock. The company owns 3,893,796 shares of Cowles stock and intends to submit an election requesting to be paid in cash for all of its shares. However, depending on the elections made by other Cowles stockholders, the company may be required to accept up to approximately 15 percent of the consideration otherwise payable to it in the form of New McClatchy stock. At December 28, 1997, the carrying value of the company's investment in Cowles approximated $91,900,000. If and when the merger described above is completed, the company will adjust the carrying value of such investment and record the corresponding gain. At December 28, 1997, the company had $21 million in cash and cash equivalents. In early 1996, the company established a five-year, $300 million revolving credit facility with a group of banks to provide for general corporate purposes and support the issuance of commercial paper. At December 28, 1997, the company had issued approximately $296.4 million in commercial paper borrowings at an average interest rate of 5.8 percent. The average short-term borrowings outstanding during 1997 were approximately $10.7 million. In February 1998, the company borrowed an additional $45.0 million under a short-term unsecured note bearing interest at 5.76 percent. The company expects to fund the majority of its estimated capital needs through internally generated funds. In management's opinion, the company will have ample liquidity to meet its various cash needs in 1998. Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The company has formed a year 2000 task force which is assessing the readiness of the company's computer systems and software. The task force has also begun seeking confirmations from key vendors stating that materials and services provided to the company will not be interrupted by year 2000 processing issues. The company plans to implement the system and programming changes necessary to address year 2000 issues, and does not believe based upon present facts that the cost of such actions will have a material effect on the company's results of operations or financial condition. |