Graham Holdings Company — Q2 2017 Form 10-Q
Business context and reporting period. Graham Holdings is a diversified education and media company, with additional manufacturing, healthcare and other businesses. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Unless stated otherwise, dollar figures below are in millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $676.1 | $628.9 | $1,258.8 | $1,230.7 |
| Operating income | $68.4 | $74.1 | $97.4 | $126.0 |
| Operating margin | 10.1% | 11.8% | 7.7% | 10.2% |
| Net income attributable to common stockholders | $42.0 | $60.8 | $63.1 | $98.5 |
| Diluted EPS | $7.46 | $10.76 | $11.21 | $17.33 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $131.6 | $146.6 |
Q2 revenue increased 7%, while operating income declined 8%; first-half revenue increased 2%, while operating income fell 23%. Education revenue declined 8% in Q2 and 7% in the first half. Television broadcasting revenue rose 10% and 5%, respectively, including the contribution of two acquired stations, but operating income fell 11% and 24%. Other businesses revenue increased 62% in Q2 and 36% in the first half, but the segment reported operating losses of $8.9 million and $19.5 million.
At June 30, cash and cash equivalents were $432.1 million, restricted cash was $23.0 million, and marketable equity securities and other investments totaled $470.0 million. Management reported total cash, restricted cash and investments of $925.1 million, down from $1,119.1 million at year-end 2016. Total debt was $496.2 million, including $6.5 million current; working capital was $842.2 million. The company generated $131.6 million of operating cash flow in the first half and used $335.1 million in investing activities, including $299.9 million for business investments. Cash, cash equivalents and restricted cash decreased $215.7 million.
Material changes and unusual items
- Education revenue weakness reflected lower Kaplan University enrollment. Total Kaplan University students were 29,193 at June 30, down 13% year over year; new enrollments declined 5% in Q2.
- Broadcasting revenue benefited from the January acquisition of WCWJ and WSLS and higher retransmission revenue. Higher NBC network fees weighed on broadcasting operating income.
- Other businesses included the April acquisition of Hoover Treated Wood Products for $206.8 million, net of cash acquired. The company reported six 2017 acquisitions for $318.7 million in cash and contingent consideration, plus assumed pension and postretirement obligations.
- A $9.2 million Forney goodwill and long-lived-asset impairment was recorded in Q2, attributed to a challenging environment and lower-than-expected energy-product demand.
- Q2 2017 included $3.5 million of non-operating foreign-currency gains. Q2 2016 included $38.6 million of gains on land and securities sales, a $3.2 million joint-venture gain, $24.1 million of foreign-currency losses and a favorable $5.6 million deferred-tax adjustment. These items materially affect year-over-year earnings comparisons.
- First-half 2017 included a $5.9 million tax benefit from stock-based compensation; excluding it, the company reported a 36.3% effective tax rate, versus 35.6% for first-half 2016 excluding that period’s tax adjustment.
Outlook, risks and contingencies
- Management estimated 2017 capital expenditures of $75–$85 million; $27.9 million had been incurred in the first half. Management said it expected to have sufficient liquidity for cash needs over the next 12 months, primarily from cash balances and internally generated funds.
- The planned transfer of Kaplan University to a new nonprofit affiliated with Purdue University remained subject to regulatory and accreditation approvals, which might not be received until Q1 2018. Either party may terminate if the transaction has not closed by April 30, 2018. Under the related 30-year support agreement, Kaplan may need to advance funds if the new university cannot meet specified priority payments.
- Kaplan announced in July that Dev Bootcamp, which represents most of Kaplan Test Preparation’s new-economy skills training programs, would close by year-end 2017. Those programs recorded first-half operating losses of $7.2 million.
- Management said existing legal and regulatory proceedings were not expected to have a material impact based on available information, but estimated reasonably possible future losses above accruals could reach approximately $20 million. Kaplan’s university operations also remained subject to open Department of Education program reviews; Kaplan University was on provisional certification through September 30, 2018.
- Moody’s affirmed the company’s ratings but changed its outlook from Stable to Negative in May 2017. Ratings were Ba1 from Moody’s and BB+ from S&P. The company reported compliance with Kaplan credit-facility financial covenants.
Important facts for investors to verify
- Progress, approvals, economics and potential funding obligations related to the Kaplan University–Purdue transaction.
- Enrollment trends and revenue performance across Kaplan’s higher-education, test-preparation and international businesses, including the impact of Dev Bootcamp’s closure.
- Whether Forney’s operating challenges or other acquired-business performance lead to further impairments or losses.
- Cash conversion, acquisition spending, liquidity and debt levels, alongside the Negative Moody’s outlook.
- Outcomes of Kaplan’s Department of Education reviews and remaining legal proceedings, including any losses above recorded accruals.