Graham Holdings Company — Q2 2016 Form 10-Q
Business context and period. Diversified education and media company with healthcare and manufacturing operations. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Cable ONE, spun off July 1, 2015, is reported as a discontinued operation in 2015.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $628.9m | $680.9m | $1,230.7m | $1,328.3m |
| Operating income | $74.1m | $56.2m | $126.0m | $65.1m |
| Operating margin | 11.8% | 8.3% | 10.2% | 4.9% |
| Continuing income attributable to common shareholders | $60.8m | $39.3m | $98.5m | $36.6m |
| Diluted continuing EPS | $10.76 | $6.71 | $17.33 | $6.22 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $135.5m | $77.3m |
For the six months, investing cash outflow was $183.6m and financing cash outflow was $103.9m. Cash and cash equivalents were $600.3m at June 30, versus $754.2m at year-end 2015. Cash, restricted cash, marketable securities and other investments totaled $999.8m, down from $1,154.4m. Long-term debt was $400.0m, largely 7.25% unsecured notes due 2019; the company reported compliance with its financial covenants. Working capital was $883.1m, versus $1,135.6m at year-end.
Material changes and management commentary
- Revenue fell 8% in Q2 and 7% year to date, principally from education; television broadcasting and other businesses grew. Education revenue declined 20% year to date, while education operating results improved to $47.4m from a $7.0m loss, helped by reduced restructuring costs and lower expenses.
- Kaplan Higher Education revenue fell 32% year to date; new student enrollments at Kaplan University declined 31%, and total students were down 19% year over year. Kaplan International revenue declined 10% year to date, partly from currency and lower English-language and UK Pathways enrollments.
- Television broadcasting revenue rose 8% year to date, primarily from higher retransmission revenue and political advertising. Other-business revenue increased mainly because of the 2015 Dekko acquisition, but the segment recorded a $10.8m operating loss for the first half.
- Results included significant nonrecurring and volatile items. Q2 2016 included gains on land and securities sales, a joint-venture gain, $24.1m of unrealized foreign-exchange losses, and a favorable $5.6m deferred-tax adjustment. The first-half results also included an $18.9m gain on the sale of Colloquy. These items materially affect comparisons and reported earnings.
- The company acquired education businesses for $208.7m in the first half and repurchased $89.1m of Class B shares. It estimated 2016 capital expenditures of $70m–$80m. No earnings guidance was provided; management said liquidity should be sufficient for 2016 needs.
Outlook, risks and contingencies
- Kaplan University remained on provisional U.S. Department of Education certification through September 30, 2018, pending an open program review. The outcome and any resulting limitations or liability were uncertain. Proposed federal borrower-defense rules could increase loan-discharge and reimbursement exposure and potentially require letters of credit.
- Kaplan also retained potential exposure related to reviews of formerly sold campuses; a possible letter of credit or other support for the ECA transaction could be up to approximately $45m. The filing did not report that this support had been required.
- Management cited uncertainty around Brexit and international enrollment, foreign-exchange exposure, particularly to the British pound, and the possibility that changes in regulation or student mobility could affect Kaplan International. First-half unrealized foreign-exchange losses were $29.5m.
- A 10% mandatorily redeemable minority interest in Graham Healthcare Group is recorded as a liability. Redemption obligations begin in 2020 and extend through 2026, with no stated cap on the amount payable.
- After quarter-end, Kaplan borrowed £75m under a four-year facility and entered into a swap intended to fix the borrowing’s rate at 2.01% under the then-current margin. The parent guaranteed the facility. The company also agreed to lend a UK pathway-college joint venture approximately $35m over 18 months.
Important facts for investors to verify
- Whether enrollment declines at Kaplan University and Kaplan International persist, and their effect on education revenue and operating performance.
- Outcomes of the Department of Education reviews, Kaplan University’s provisional certification, and any final borrower-defense rules or credit-support requirements.
- How much reported earnings growth reflects recurring operations versus asset-sale gains, foreign-exchange movements, and the $5.6m tax adjustment.
- Cash use and obligations associated with acquisitions, buybacks, capital spending, the post-quarter £75m borrowing, and healthcare minority-interest redemptions.