Graham Holdings Company — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. Graham Holdings is a diversified education and media company, with Kaplan as its largest business. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $878.6 | $870.5 | $1,719.2 | $1,691.1 |
| Operating income | $94.5 | $96.3 | $174.0 | $143.4 |
| Operating margin | 10.8% | 11.1% | 10.1% | 8.5% |
| Continuing income attributable to common stockholders | $369.7 | $46.6 | $500.7 | $68.3 |
| Net income attributable to common stockholders | $750.1 | $44.7 | $882.2 | $49.4 |
| Diluted EPS from continuing operations | $49.52 | $6.28 | $67.13 | $9.21 |
| Diluted net EPS | $100.48 | $6.02 | $118.26 | $6.66 |
Reported earnings rose sharply primarily because of transaction gains, rather than a comparable increase in operating performance. Q2 continuing income included a $266.7 million Berkshire-share exchange gain and $90.9 million from Classified Ventures’ sale of Apartments.com. The six-month period also included a $127.7 million gain on the headquarters sale. Discontinued operations included a $375.0 million gain from the WPLG exchange.
Cash flow: Six-month cash from operations was $188.5 million, versus $197.5 million a year earlier. Investing activities used $73.4 million; financing activities used $361.8 million, including $327.7 million of share repurchases associated with the Berkshire transaction and $38.1 million of dividends. Capital expenditures were $92.6 million.
Liquidity and debt: At June 30, cash and cash equivalents were $325.0 million; cash, restricted cash and investments in marketable securities and other investments totaled $610.1 million. Working capital was $219.8 million, compared with $768.3 million at year-end 2013. Total debt was $451.9 million, including $398.1 million of 7.25% unsecured notes due in 2019 and $47.1 million of Australian-dollar revolving borrowings. Management said available liquidity should be sufficient for cash needs through 2014.
Balance sheet: Total assets were $5,289.7 million and total equity was $2,832.2 million at June 30, 2014.
Material changes and segment trends
- Six-month revenue increased 2% and operating income increased to $174.0 million from $143.4 million. Q2 operating income, however, declined to $94.5 million from $96.3 million.
- Education: Revenue was essentially flat for both Q2 and the first half, while operating income declined to $10.6 million in Q2 and $13.1 million for six months. Kaplan Higher Education revenue fell 8% in Q2 amid weaker demand, lower average tuition and campus closures. Test Preparation revenue fell 5%; Kaplan International revenue rose 13%.
- Cable: Q2 revenue fell 2%, while operating income rose 5% to $46.8 million, helped by lower programming costs. Video subscribers were down 15% year over year; high-speed data subscribers were up 4%.
- Television broadcasting: Continuing-operations revenue rose 10% in Q2 and 17% for six months; operating income rose 12% and 29%, respectively. Political, Olympics-related and retransmission revenue contributed to the increases. WPLG is excluded from continuing operations following its disposition.
- Other businesses: Revenue increased, but the segment reported operating losses of $7.0 million in Q2 and $17.7 million for six months.
Outlook, risks and unusual items
- Management estimated 2014 capital expenditures of $225 million to $250 million and expected to fund capital needs mainly from existing cash and internally generated funds.
- In July, the cable division sold wireless spectrum licenses for approximately $99 million; the company estimated a $75 million pre-tax gain for Q3.
- On August 4, the company and partners agreed to sell Classified Ventures to Gannett, valuing the business at $2.5 billion. Graham Holdings owns 16.5%; closing was expected before year-end 2014, subject to regulatory review.
- Kaplan faces regulatory uncertainty. The company said three KHE campus OPEID units, representing about 1.7% of KHE’s 2013 revenue, could exceed the 90/10 Title IV funding threshold in 2014 if trends continue. Proposed gainful-employment rules could restrict Title IV eligibility and materially affect KHE revenue, operating income and cash flow.
- Three Department of Education program reviews remained open; management did not expect a material impact, but outcomes were uncertain. Kaplan also announced additional campus closures and workforce reductions; further restructuring costs were possible.
- Moody’s downgraded the company’s long-term rating to Baa3 and short-term rating to Prime-3 in June 2014, with a stable outlook. The revolving credit facility was due to expire in June 2015 unless extended.
- Other notable items included a $7.8 million noncash Kaplan China intangible-asset impairment tied to regulatory changes, and a $10.5 million Q2 charge for education restructuring and software write-offs. Management reported no existing legal proceedings expected to have a material effect.
Important facts for investors to verify
- Separate recurring operating performance from the Berkshire, WPLG, Apartments.com and headquarters-sale gains when assessing earnings and EPS.
- Track Kaplan enrollment, restructuring results, the 90/10 ratios and the final scope and effect of gainful-employment regulations.
- Monitor cable customer and video subscriber losses, programming-cost savings, and continued growth in high-speed data and business services.
- Confirm the status and proceeds of the Classified Ventures sale, the spectrum-license gain, and the Residential Healthcare acquisition.
- Assess liquidity after the major transaction-related cash flows, the 2015 credit-facility expiration, and any effect of credit-rating changes on funding costs.