Graham Holdings Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Graham Holdings is a diversified education and media company, with additional manufacturing, automotive, healthcare and other businesses. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $692.2 | $659.4 |
| Operating income | $40.0 | $44.2 |
| Operating margin | 5.8% | 6.7% |
| Income before income taxes | $109.3 | $56.6 |
| Net income attributable to common stockholders | $81.7 | $42.9 |
| Diluted earnings per share | $15.26 | $7.78 |
| Net cash from (used in) operating activities | $(37.9) | $19.0 |
Revenue rose 5%, but operating income fell about 10% and operating margin declined. Reported earnings more than doubled, substantially aided by investment gains and the sale of an affiliate; they should not be read as a comparable increase in recurring operating performance. Q1 2019 included $24.1 million of net gains on marketable equity securities and a $29.0 million gain on the sale of Gimlet Media. Q1 2018 included $14.1 million of net marketable-equity-securities losses.
Business trends and material changes
- Education: Revenue decreased 1% to $372.5 million; operating income increased 13% to $25.6 million. Kaplan International revenue grew 1% (7% on a constant-currency basis) and operating income rose to $24.3 million. Higher Education revenue fell 17%, primarily reflecting the 2018 Kaplan University transaction. Professional (U.S.) revenue increased 24%, mainly reflecting acquisitions. Test Preparation revenue increased 3% including Barron’s, but declined 5% excluding that acquisition; classroom-based demand weakened and new-economy skills training losses increased.
- Television broadcasting: Revenue declined 1% to $108.2 million and operating income declined 12% to $35.5 million. Lower Olympics-related and political advertising and higher network fees were partly offset by higher retransmission revenue.
- Healthcare: Revenue was essentially flat at $37.7 million; operating results improved, with the filing citing the absence of prior-year integration costs and cost reductions.
- Other businesses: Revenue rose 26% to $173.8 million, principally reflecting the January 2019 acquisition of two automotive dealerships. The segment’s operating loss widened to $9.2 million; manufacturing income declined amid higher costs and lower wood prices.
Cash, debt and liquidity
- Cash and cash equivalents were $170.9 million at March 31, 2019; restricted cash was $20.2 million. Cash, marketable securities and other investments totaled $719.1 million, down from $778.7 million at year-end 2018.
- Borrowings totaled $509.8 million, up from $477.1 million at December 31, 2018. The company reported an average borrowing rate of 5.1% for the quarter. It had $500.2 million of long-term debt and $9.6 million current debt; a $300 million revolving credit facility was available, with no outstanding revolver borrowing specified in the filing text.
- Working capital was $647.8 million, versus $720.2 million at year-end. Management said it expected sufficient liquidity for cash needs over the next 12 months and anticipated funding capital needs primarily through cash and internally generated funds. About $92 million of cash and cash equivalents was held outside the U.S.; approximately $8 million was not available for immediate operational use or distribution, and some foreign balances support local needs.
- Operating cash flow turned negative, which management attributed to working-capital changes, payroll timing and increased incentive-compensation payments. Investing cash outflow was $73.9 million, including $83.7 million for business investments; financing cash inflow was $37.0 million.
- The company adopted lease accounting on January 1, 2019, recognizing $369.3 million of right-of-use assets and $418.3 million of lease liabilities at adoption. At quarter-end, reported lease liabilities were $420.1 million.
Outlook, risks and unusual items
- Management estimated 2019 capital expenditures of $95 million to $105 million, including a Kaplan Pathways facility in Liverpool and FCC-mandated spectrum-repacking work, which is expected to be largely reimbursed.
- Management cautioned that quarterly results may not indicate future performance. The company is exposed to equity-price, interest-rate and foreign-exchange risks. The new $30 million automotive acquisition loan is effectively fixed at 4.7% through an interest-rate swap; the vehicle floor-plan facility is variable-rate.
- Management believed potential future losses from existing and threatened legal, regulatory and other proceedings in excess of recorded amounts could reach approximately $45 million. Kaplan’s U.K. Pathways business has a £16.1 million VAT matter; if unsuccessful, the company said it would record a pre-tax operating expense charge for that amount. The company also remains exposed to lease-guarantee obligations tied to the former KHE Campuses transaction; $17.5 million of estimated losses was recorded in 2018, with no significant estimate change in Q1 2019.
- Kaplan continues to assess collectability of service fees under its Purdue Global agreement. The filing also identifies uncertainty around Department of Education program reviews. The company reported compliance with its financial covenants and effective disclosure controls.
Key facts for investors to verify
- How much of the earnings increase reflects recurring operations versus the $24.1 million securities gain and $29.0 million Gimlet Media gain?
- Whether operating cash flow improves after the working-capital, payroll-timing and incentive-payment effects described by management.
- Progress against the $95 million–$105 million capital-expenditure estimate and the expected FCC reimbursements.
- Developments in the £16.1 million VAT dispute, potential legal exposures and KHE lease-guarantee obligations.
- Kaplan’s Purdue Global service-fee collectability and performance in classroom-based test preparation and new-economy skills training.