Business context and reporting period
Graham Holdings Company’s Form 10-K covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. The diversified company operated education businesses through Kaplan, cable systems through Cable ONE, five television stations, and other media, health-care and manufacturing businesses. Education generated approximately 61% of consolidated revenue.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $3.535 billion | $3.408 billion |
| Operating income | $407.9 million | $319.2 million |
| Operating margin | 11.5% | 9.4% |
| Income from continuing operations attributable to common stockholders | $920.7 million | $172.0 million |
| Net income attributable to common stockholders | $1.293 billion | $236.0 million |
| Diluted EPS | $195.03 | $32.05 |
| Cash provided by operating activities | $372.4 million | $310.2 million |
The sharp rise in earnings primarily reflects large transaction gains, not a comparable increase in recurring operations. 2014 included a $396.6 million gain on the sale of Classified Ventures, a $266.7 million gain on the Berkshire exchange, a $127.7 million gain on the headquarters sale, a $75.2 million gain on wireless-license sales, and a $90.9 million gain related to Classified Ventures’ sale of Apartments.com. Discontinued operations contributed $372.2 million, including the $375.0 million WPLG exchange gain. The effective tax rate on continuing operations was 30.6%, substantially affected by the tax-free Berkshire exchange.
At December 31, cash and cash equivalents were $772.8 million, restricted cash was $24.9 million, working capital was $639.9 million, and borrowings totaled $445.9 million. Debt was primarily $400 million of 7.25% unsecured notes due in 2019 and Australian-dollar revolving-credit borrowings. Net interest expense was $34.5 million. Cash-flow statement purchases of property and equipment were $237.3 million. Management estimated 2015 capital expenditures of $225–$250 million, including Cable ONE for the full year.
Material changes versus the prior period
- Revenue grew 3.7% and operating income rose 27.8%; reported earnings increased much faster because of the nonrecurring gains noted above.
- Kaplan revenue was nearly flat at $2.160 billion, while operating income increased to $65.5 million from $51.0 million. Higher Education revenue fell 7%, Test Preparation rose 4%, and Kaplan International rose 7%. Higher Education enrollment fell 6% year over year.
- Cable revenue declined 1% to $798.1 million, but operating income increased 5% to $178.7 million as expenses and programming costs fell. Total primary service units declined 8%; high-speed data revenue increased 5.3%.
- Television-broadcasting revenue rose 18% to $363.8 million and operating income rose 29% to $187.8 million, helped by political and Olympics-related advertising and higher retransmission revenue.
- Other-business revenue increased, largely from acquisitions. The company acquired businesses including Joyce/Dayton and Residential Healthcare; total 2014 acquisitions were approximately $210.2 million.
- Cash from operations increased to $372.4 million. Cash and cash equivalents rose from $569.7 million to $772.8 million, while borrowings declined modestly.
Outlook, commentary, risks and unusual items
- Management said it expected ample liquidity for 2015 and planned to fund needs mainly from cash and internally generated funds. It intended to repay the AUD 50 million facility borrowing in March 2015, replace the revolving facility expiring in June 2015, and retire Series A redeemable preferred stock in October 2015.
- The company expected a roughly $450 million dividend from Cable ONE around the effective date of its proposed tax-free spin-off, targeted for later in 2015. Completion remained conditional on regulatory, SEC and board approvals; no assurance was given that it would proceed on the expected terms or timing.
- In February 2015, 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 business had 2014 revenue of about $275 million and an operating loss of $12.5 million; closing was expected in the second or third quarter of 2015.
- Kaplan remained exposed to extensive student-aid regulation. Title IV funds represented about $806 million, or 37% of Kaplan revenue, and approximately 80% of KHE revenue. New gainful-employment rules were scheduled to take effect July 1, 2015. Management estimated that three KHE campus OPEID units, representing about 2.6% of KHE’s 2014 revenue, could exceed the 90/10 threshold in 2015 if trends continued.
- Other material risks included student enrollment and loan-default trends; pending and future Department of Education reviews; state authorization and accreditation requirements; international immigration rules; cable and broadcast competition and regulation; health-care reimbursement and regulation; foreign exchange; and execution of acquisitions and the planned spin-off.
- Kaplan anticipated further cost-saving measures and possible restructuring costs in 2015. 2014 also included $17.3 million of continuing-operations impairment charges, education and corporate restructuring/retirement costs, and an $11.1 million unrealized foreign-currency loss.
- The filing disclosed ongoing legal and regulatory matters, including pending Kaplan program-review reports and lawsuits. Management stated it did not expect existing claims to have a material adverse effect, while noting that outcomes of certain matters were uncertain.
Important facts for investors to verify
- Separate recurring operating performance and cash generation from the substantial 2014 disposal and exchange gains; confirm the effect of discontinued operations on comparisons.
- Track Kaplan enrollment, KHE campus sale completion, Title IV eligibility, gainful-employment outcomes and 90/10 compliance.
- Verify Cable ONE spin-off terms, timing, approvals, expected dividend and the resulting capital and liquidity position of both companies.
- Review debt maturities, revolving-credit renewal, credit-rating developments, preferred-stock redemption and the $450 million expected Cable ONE dividend.
- Assess whether cable subscriber losses, broadcast advertising volatility, acquisition integration and Medicare-dependent health-care operations affect future margins and cash flow.
- Note that the company revised previously reported 2013 and 2012 cash-flow classifications for noncash capital expenditures; management said the correction did not affect total cash, balance sheets or statements of operations.