Graham Holdings Company — Q1 2015 Form 10-Q
Business context and period. Diversified education and media company, with additional home health, hospice, manufacturing and other businesses. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $846.1 million | $836.5 million |
| Operating income | $46.6 million | $78.9 million |
| Operating margin | 5.5% | 9.4% |
| Continuing income attributable to common stockholders | $21.4 million | $130.4 million |
| Net income attributable to common stockholders | $20.6 million | $132.1 million |
| Diluted EPS, continuing operations | $3.62 | $17.56 |
| Diluted EPS, total | $3.48 | $17.79 |
| Cash from operating activities | $(45.9) million | $99.6 million |
| Capital expenditures paid in cash | $47.6 million | $59.1 million |
Revenue rose about 1%, but operating income fell about 41%. The sharp earnings decline partly reflects the prior-year $127.7 million pretax gain on sale of the headquarters building; Q1 2015 also included $10.7 million of education restructuring and accelerated-depreciation charges, a $6.0 million gain on formation of a health-care joint venture, and $6.8 million of unrealized foreign-currency losses. The 2015 effective tax rate was 39.1%, versus 37.2%.
Segment highlights: Education revenue declined 4% to $500.6 million and reported a $22.8 million operating loss, versus $1.9 million of income. Cable revenue fell 3% to $198.7 million and operating income fell 5% to $39.1 million. Television revenue declined 2% to $83.6 million and operating income declined 13% to $38.6 million. Other businesses’ revenue increased to $63.3 million from $24.9 million, primarily reflecting acquisitions and improved results at SocialCode and Slate; the segment’s operating loss narrowed to $5.2 million from $10.7 million.
Financial position and liquidity
At March 31, 2015, cash and cash equivalents were $619.4 million; total cash, restricted cash, marketable equity securities and other investments were $865.9 million, down from $1,024.4 million at year-end. Working capital was $637.9 million. Total borrowings were $404.8 million, including $398.4 million of 7.25% unsecured notes due 2019; debt declined $41.1 million after repayment of the AUD 50 million revolving-credit borrowing. Net interest expense was $8.0 million. Operating cash use reflected, among other items, substantial income-tax payments. The company reported total assets of $5.53 billion and total liabilities of $2.37 billion.
Management expected to fund capital needs from cash and internally generated funds and said liquidity should be sufficient through 2015. Estimated 2015 capital expenditures were $225–$250 million. The existing revolving-credit facility was due to expire in June 2015, and the company expected to replace it.
Material changes, outlook and risks
- Education: KHE revenue and enrollment pressure reflected weaker demand, lower tuition and campus closures. New higher-education enrollments fell 11% year over year; total students were down 8%. Kaplan expected about $21 million of additional restructuring costs in 2015, including estimated second-quarter charges for accelerated depreciation and lease obligations.
- Planned transactions: Kaplan agreed to sell substantially all assets of its KHE Campuses business—38 campuses—in exchange for preferred equity in Education Corporation of America. Closing was expected in Q3 2015, subject to regulatory and accrediting approvals; management expected a pretax loss that would not be material overall. The company also planned a tax-free Cable ONE spin-off later in 2015, subject to regulatory review and other conditions. Management expected a dividend of about $450 million around the spin-off’s effective date.
- Education regulation: Gainful-employment rules effective July 1, 2015 could put programs on warning or make them ineligible for Title IV funding if debt-to-earnings tests are not met. The company said impacts remained uncertain and that mitigation efforts might not prevent adverse effects. Pending Department of Education program reviews and 90/10 compliance also remained areas to monitor; management estimated continuing KHE campuses would comply with the 90/10 rule in 2015.
- Other operating pressures: Cable customers and primary service units declined, while programming costs and changing video economics remained relevant. Television results were affected by lower political and prior-year Olympics advertising, partly offset by Super Bowl and retransmission revenue.
- Other matters: The company disclosed Kaplan-related litigation, including a claim remanded for further proceedings, and noted that a summary-judgment ruling in another case could be appealed. Management did not expect existing legal matters or open program reviews to have a material effect based on currently available information.
The 2014 comparative cash-flow statement was revised to correct the treatment of noncash capital expenditures: operating cash flow increased by $22.6 million and investing cash flow decreased by the same amount. The company said the correction was not material and did not affect cash balances, the balance sheet or statement of operations.
Investor verification points
- Track KHE enrollment, operating losses, restructuring charges and the eventual effect of gainful-employment and Title IV rules.
- Confirm whether the KHE Campuses sale and Cable ONE spin-off close on the anticipated terms and timing, including the expected spin-off dividend.
- Monitor operating cash generation, tax payments, capital spending, liquidity and replacement of the revolving-credit facility.
- Assess whether cable customer losses and television advertising trends continue to pressure segment margins.
- Reconcile reported earnings with unusual items, including the 2014 headquarters gain, 2015 restructuring costs, joint-venture gain and currency losses.