Graham Holdings Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report; it includes fourth-quarter results but is not a standalone Q4 filing. Graham Holdings is a diversified education and media company. Its largest business is Kaplan; other operations include five television stations, digital media, home health and hospice, and manufacturing. Cable One was spun off on July 1, 2015, and is reported as discontinued operations.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.586 billion | $2.737 billion |
| Operating income (loss) | $(80.8) million | $232.7 million |
| Net income (loss) attributable to common stockholders | $(101.3) million | $1.293 billion |
| Diluted EPS | $(17.87) | $195.03 |
| Cash from operating activities | $74.8 million | $372.4 million |
| Cash and cash equivalents at year-end | $754.2 million | $772.8 million |
| Long-term debt at year-end | $399.9 million | $399.5 million |
| Working capital at year-end | $1.136 billion | $639.9 million |
Consolidated operating margin was approximately negative 3.1%, versus positive 8.5% in 2014. The 2015 operating loss included $259.7 million of goodwill and long-lived asset impairments. Revenue declined 6%; operating expenses rose 6%. The 2014 earnings comparison benefited substantially from large transaction gains, including the Classified Ventures sale, Berkshire exchange and headquarters sale. The 2015 loss also included $45.8 million in restructuring charges, stock-award modification expense and foreign-currency losses; a $21.4 million land-sale gain partly offset these items.
Segments and material changes
- Education/Kaplan: Revenue fell 11% to $1.928 billion; operating loss was $223.5 million, versus $65.5 million operating income in 2014. The result included $256.8 million of impairment charges. Higher Education revenue fell 16%, reflecting campus disposals and closures and weaker Kaplan University enrollment. New Kaplan University higher-education enrollments declined 14%; year-end total enrollment fell 6%.
- Kaplan Test Preparation: Revenue declined 1%; operating income improved to $16.8 million from a $4.7 million loss, aided by lower costs and no repeat of a $7.7 million software write-off recorded in 2014. Enrollments excluding new economy skills training fell 12%.
- Kaplan International: Revenue declined 8% in reported dollars and was flat at constant currency. Foreign exchange and weaker English-language programs weighed on results; growth in Australia professional training and Singapore higher education partly offset declines. Operating income fell 22% to $53.7 million.
- Television broadcasting: Revenue decreased 1% to $359.2 million and operating income fell 12% to $164.9 million. The 2014 comparison included more political and Olympics advertising; higher retransmission revenue partly offset the decline. Operating margin was 46%, versus 52%.
- Other businesses: Revenue rose to $299.5 million, primarily reflecting acquired businesses; operating loss narrowed to $13.7 million from $21.1 million. Group Dekko was acquired in November 2015.
The KHE Campuses business, comprising 38 ground campuses, was sold in September 2015 for a preferred equity interest in Education Corporation of America. Kaplan may have to provide up to approximately $45 million of credit support if required by the Department of Education in connection with its post-closing review. Graham completed the Cable One spin-off in July; 2015 continuing results exclude Cable One.
Cash, debt and capital allocation
- Operating cash flow dropped to $74.8 million, which management attributed largely to significant income-tax payments and the absence of Cable One operating results in the second half. Investing activities used $425.6 million; financing activities provided $342.2 million.
- Year-end debt was principally $400 million of 7.25% unsecured notes due February 2019. The company had a new $200 million revolving credit facility, no borrowings under it at year-end, and reported compliance with its financial covenants. Moody’s rated the company Ba1 and S&P BB+ after downgrades associated with the Cable One spin-off.
- Management said it expected ample liquidity to meet 2016 needs, primarily from cash and internally generated funds. Estimated 2016 capital expenditures were $75 million to $85 million. The company reported $131.3 million of 2015 capital expenditures, including Cable One for the first half.
- The annual common dividend rate for 2016 was $4.84 per share, following the reduction associated with the spin-off; 2015 dividends were $9.10 per share. The company repurchased 46,226 Class B shares for approximately $23.0 million in 2015.
Outlook, risks and unusual items
- Management provided no consolidated revenue or earnings guidance. It anticipated a 2016 pension credit of approximately $48.3 million and capital expenditures of $75 million to $85 million.
- Kaplan University was placed on provisional Title IV certification through September 30, 2018, in connection with an open Department of Education review. The filing reported no negative findings at that point, but the review outcome was uncertain. Kaplan must obtain prior approval for significant changes during provisional status.
- Kaplan’s business is exposed to Title IV eligibility, gainful-employment rules, state authorization, accreditation, student loan default rates and other regulatory requirements. Title IV funding represented approximately $628 million, or 74%, of KHE revenue in 2015. The filing also describes an ED data-reporting issue Kaplan said it had corrected, while noting the ED might identify further issues or take action.
- The company recorded a $248.6 million KHE goodwill impairment after enrollment declines and a challenging operating environment. Management warned that further changes in business conditions could cause future impairments.
- Other risks include television advertising and retransmission-consent changes, foreign-exchange movements, healthcare reimbursement and regulation, cybersecurity, acquisition integration, and potential tax consequences if the Cable One spin-off does not qualify for intended tax treatment.
- Management stated that ordinary-course litigation was not expected to have a material effect, but several Kaplan-related matters remained pending, including regulatory reviews and claims involving Title IV compliance and incentive compensation. Kaplan settled a Massachusetts matter for $1.375 million without admitting wrongdoing.
Most important facts for investors to verify
- Whether Kaplan University’s ED program review, provisional certification and 2016 accreditation review result in restrictions, repayment obligations, fines or other material consequences.
- Whether enrollment trends and gainful-employment requirements continue to impair Kaplan revenue, cash generation or goodwill value.
- Whether underlying operating performance and cash flow improve after excluding impairments, restructuring, transaction gains and discontinued operations.
- Whether the $45 million potential ED credit-support obligation related to the KHE Campuses sale is required, and the value and terms of Kaplan’s preferred equity interest in ECA.
- Whether liquidity, the revolving-credit covenants and the 2019 note maturity remain manageable following the Cable One spin-off and credit-rating downgrades.
- Whether the Cable One spin-off retains its intended tax treatment and whether any material litigation or regulatory contingencies change.