Graham Holdings Co. (then The Washington Post Company) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The filing was signed November 5, 2013. The company was a diversified education and media business, led by Kaplan, cable television and television broadcasting. Unless otherwise stated, figures below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Revenue | $902.5 | $877.6 | $2,628.9 | $2,559.7 |
| Operating income | $81.9 | $93.2 | $240.0 | $202.1 |
| Operating margin | 9.1% | 10.6% | 9.1% | 7.9% |
| Continuing income attributable to common shareholders | $56.0 | $56.3 | $134.3 | $122.1 |
| Net income attributable to common shareholders | $30.1 | $93.8 | $79.5 | $176.7 |
| Diluted EPS | $4.05 | $12.64 | $10.70 | $23.39 |
| Operating cash flow | Not provided by quarter | $347.6 | $295.5 | |
| Capital expenditures | Not provided by quarter | $143.3 | $152.4 |
Revenue rose 3% in both the quarter and year-to-date periods. Operating income declined 12% in Q3 but increased 19% year to date. Continuing income was nearly unchanged in Q3 and increased year to date; reported net income and EPS fell sharply because discontinued operations moved from income to loss. Q3 2013 discontinued operations recorded a $25.9 million loss, versus $37.5 million income in Q3 2012; the respective nine-month figures were a $54.7 million loss and $54.5 million income.
At September 30, cash and cash equivalents were $441.7 million, marketable equity securities were $458.0 million, and total debt was $451.1 million, including $397.8 million of 7.25% notes due in 2019. Working capital was $516.7 million, up from $327.5 million at year-end 2012. Cash declined $70.8 million from year-end. The company repaid $240.1 million of short-term borrowing during the first nine months. Management said operating cash generation and available funding were sufficient for expected 2013 cash needs.
Business performance and material changes
- Education/Kaplan: Revenue declined 1% in Q3 and 2% year to date; operating income improved to $17.0 million and $36.7 million, respectively, principally on expense reductions and restructuring. Higher-education revenue fell 3% in Q3 and 7% year to date amid weaker demand and campus closures. Kaplan International revenue grew, but operating income declined.
- Cable television: Revenue increased 1% in Q3 and 4% year to date. Year-to-date operating income rose 9% to $121.0 million. Basic video subscribers continued to decline.
- Television broadcasting: Q3 revenue fell 18% and operating income fell 33%; year-to-date revenue and operating income declined 4% and 7%. Lower political advertising and the absence of 2012 Olympics-related advertising were key factors.
- Other businesses: Revenue growth reflected SocialCode and Slate, plus acquisitions including Celtic Healthcare and Forney; the segment remained loss-making.
- Publishing sale: The company completed the sale of most publishing operations, including The Washington Post, on October 1, 2013, for $250 million subject to customary closing adjustments. The sale was therefore subsequent to the quarter-end; publishing results were presented as discontinued operations. The company retained Slate, TheRoot.com, Foreign Policy, WaPo Labs, SocialCode, its Classified Ventures interest and certain real estate. It planned to change its corporate name within 60 days of closing.
Outlook, risks and unusual items
- Management estimated a preliminary $125 million pretax and $80 million after-tax gain on the publishing sale, expected to be recognized in Q4. The estimate included pension-related items and other assumptions and could change. Q3 discontinued operations included $28.4 million of sale-related expenses; the first nine months also included $22.7 million of early-retirement costs.
- Management estimated 2013 capital expenditures of $190 million to $215 million. Kaplan expected approximately $5 million of additional restructuring costs for the remainder of 2013, with possible further charges as cost structure reviews continued.
- Kaplan faced regulatory and accreditation uncertainty, including four open or pending Department of Education program reviews, a planned focused evaluation by its accreditor in early 2014, and the risk that a school unit could exceed the 90/10 rule threshold. Management did not expect any Kaplan unit to exceed 90% in 2013, but could not guarantee future compliance.
- Q3 continuing income included $7.9 million of unrealized foreign-currency gains and $4.0 million of education restructuring charges. Year-to-date continuing income included $9.4 million of unrealized foreign-currency losses and $18.3 million of education restructuring charges.
- Management said ordinary-course litigation was not expected to have a material effect. Market risks included equity-price, interest-rate and foreign-exchange exposure. S&P affirmed the BBB long-term rating with a Stable outlook and upgraded the short-term rating to A-2.
Important facts for investors to verify
- Final proceeds, closing adjustments and the recognized gain from the October 1 publishing sale, including pension curtailment, settlement and remeasurement effects.
- Post-sale results and cash generation from the continuing businesses, particularly Kaplan enrollment trends and the recovery of broadcasting advertising.
- Kaplan’s DOE review outcomes, 90/10 compliance and accreditor evaluation, and the amount of any additional restructuring charges.
- Realized performance and impairment risk in the marketable securities portfolio; the filing identified a $7.0 million unrealized loss on Strayer Education shares and concluded it was not other-than-temporary at September 30.
- Debt, liquidity and capital-spending needs after the sale, and the final 2013 capital expenditure total.