Graham Holdings Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Figures below are in U.S. dollars; financial amounts are rounded to millions unless otherwise noted. Graham Holdings operated education, cable, television broadcasting, and other businesses. On July 1, 2015, it completed the tax-intended spin-off of Cable ONE; Cable ONE’s debt and future results are no longer Graham’s obligations or consolidated results, and its pre-spin results will be presented as discontinued operations beginning in Q3.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $879.6m | $874.4m | $1,725.7m | $1,711.0m |
| Operating income | $88.9m | $101.6m | $135.5m | $180.4m |
| Operating margin | 10.1% | 11.6% | 7.9% | 10.5% |
| Continuing operations income attributable to common stockholders | $57.8m | $374.9m | $79.2m | $505.3m |
| Diluted EPS from continuing operations | $9.87 | $50.22 | $13.53 | $67.74 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $77.3m | $208.0m |
Revenue rose about 1% year over year in both the quarter and first half, but operating income fell. First-half net income attributable to common stockholders was $78.4m, versus $882.2m in 2014; the 2014 comparison included substantial discontinued-operation gains. The 2015 first-half cash-flow comparison uses the company’s revised 2014 cash-flow statement; the filing says the revision had no effect on previously reported total cash, balance sheets, or statements of operations.
Segments and material changes
- Education: Q2 revenue declined 4% to $523.6m and operating income decreased to $15.8m from $17.6m. First-half revenue declined 4% to $1,024.2m; the segment reported a $7.0m operating loss versus $19.5m income. KHE enrollment was down 10% year over year at June 30; new enrollments fell 9% in Q2. Kaplan cited weaker demand and campus closures.
- Cable: Q2 revenue fell 1% to $198.7m and operating income fell 18% to $38.4m. First-half revenue declined 2% and operating income declined 12%. At June 30, customers were down 4% and primary service units down 8% year over year.
- Television broadcasting: Q2 revenue increased 3% to $90.8m, while operating income declined 5% to $42.0m. Higher retransmission revenue was partly offset by lower political advertising and increased digital spending.
- Other businesses: Q2 revenue increased to $66.5m from $42.4m, and operating loss narrowed to $2.2m from $7.0m. Management attributed improvement in part to businesses acquired in 2014 and stronger SocialCode and Celtic results.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $1,219.3m; total cash, restricted cash, marketable securities, and other investments were $1,446.0m, versus $1,024.4m at year-end 2014. Working capital was $1,209.3m, up from $639.9m.
- Six-month operating cash flow was $77.3m; cash purchases of property and equipment were $100.2m. Investing activities used $114.1m, while financing activities provided $486.0m, including $550m of borrowings. Cash increased $445.3m to $1,219.3m.
- Reported borrowings at June 30 were $954.8m, including $450m Cable ONE notes and a $100m Cable ONE term loan issued in June. These Cable ONE borrowings ceased to be Graham obligations upon the July 1 spin-off. Graham had a new $200m five-year revolving facility, with covenants requiring leverage no greater than 3.5:1 and interest coverage of at least 3.5:1.
- Management said it expected to fund needs primarily with cash and internally generated funds and believed liquidity would be sufficient through 2015. Moody’s ratings were Ba1 long-term and Not Prime short-term; S&P lowered ratings to BB+ and B on July 1 after the spin-off.
Outlook, unusual items, and risks
- Management estimated 2015 capital expenditures of $120m–$130m, excluding future Cable division capital expenditures. It expected an estimated net pension credit of $40m in the second half, following the spin-off-related pension remeasurement.
- Graham expected its regular quarterly dividend to decrease to $1.15 per share in Q4 2015 and intended to retire its Series A redeemable preferred stock in October 2015.
- Q2 2015 results included $16.6m of education restructuring charges and accelerated depreciation, a $6.9m education long-lived-asset impairment, $9.5m of Cable spin-off costs, and $7.7m of non-operating gains from business and investment sales. The impairment included a $4.7m out-of-period adjustment; management stated the adjustment was not material.
- The sharp year-over-year earnings decline also reflects exceptional 2014 gains: $266.7m from the Berkshire share exchange, $90.9m from the Classified Ventures apartments.com sale, and $127.7m from the headquarters sale in the first half. The 2014 Berkshire gain was not subject to income tax, contributing to a lower 2014 effective tax rate.
- Kaplan agreed to sell substantially all assets of its 38-campus KHE Campuses business to Education Corporation of America for a preferred equity interest, subject to regulatory and accrediting approvals; the transaction was expected to close in Q3. The business reported first-half revenue of $124.1m and an operating loss of $7.3m.
- Education-related risks include federal Title IV eligibility, gainful-employment rules, the 90/10 rule, and pending Department of Education program reviews. Management estimated continuing KHE campuses would comply with the 90/10 rule in 2015, but noted outcomes and regulatory effects remain uncertain. Kaplan continued cost-saving efforts and anticipated further restructuring costs in 2015.
- The Cable ONE spin-off’s intended tax-free treatment is not assured; an adverse tax determination could create material tax for the company and/or shareholders. In July 2015, KHE resolved a Massachusetts investigation under an Assurance of Discontinuance, agreeing to pay $1.375m without an admission or finding of wrongdoing.
Most important facts for investors to verify
- Post-spin financial statements: Cable ONE’s removal, debt and cash transferred, and the resulting continuing-business liquidity and leverage.
- Progress and final approvals for the KHE Campuses sale, plus enrollment trends, restructuring costs, and impairment or closure effects.
- Kaplan’s ongoing compliance with Title IV, 90/10, and gainful-employment requirements, and outcomes of open program reviews and litigation appeals.
- Actual second-half pension effects, capital spending, the announced Q4 dividend, and preferred-stock retirement.
- Whether one-time gains, restructuring charges, and other unusual items materially affect comparisons with reported earnings.