Graham Holdings Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Graham Holdings is a diversified education and media company, including Kaplan, cable and television broadcasting operations. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $840.6 million | $820.6 million |
| Operating income | $79.5 million | $47.1 million |
| Operating margin | 9.5% | 5.7% |
| Continuing income attributable to common stockholders | $131.0 million | $21.7 million |
| Net income attributable to common stockholders | $132.1 million | $4.7 million |
| Diluted EPS | $17.79 | $0.64 |
| Cash from operating activities | $77.1 million | $74.0 million |
| Capital expenditures | $36.6 million | $36.5 million |
Revenue rose 2%. Education revenue was essentially flat at $526.2 million; cable revenue increased 2% to $203.9 million; television broadcasting revenue increased 24% to $85.7 million; and other revenue was $24.9 million. Reported earnings were materially boosted by a $127.7 million pretax gain on the headquarters building sale. The company also recorded $5.0 million in non-operating foreign-currency gains. These items make headline earnings and the year-over-year increase less representative of recurring performance.
Operating results improved in education, cable and television broadcasting. Kaplan reported $2.5 million of operating income, versus a $4.1 million loss a year earlier, when results included $9.4 million of restructuring costs. Cable operating income rose 12% to $41.2 million; television broadcasting operating income rose 52% to $44.4 million, helped by political and Olympics-related advertising and higher retransmission revenue.
Financial position and liquidity
At March 31, cash and cash equivalents were $642.8 million, restricted cash was $52.0 million, and total debt was $452.5 million, including $398.0 million of 7.25% unsecured notes due in 2019. Working capital was $849.4 million, compared with $768.3 million at year-end 2013. Cash and cash equivalents increased from $569.7 million at year-end. Operating cash flow was $77.1 million; investing activities provided $13.9 million, including proceeds from asset sales; financing activities used $19.0 million, primarily for dividends.
Management said it expected to fund capital needs mainly with existing cash and internally generated funds, and believed liquidity would be sufficient through 2014. The company forecast 2014 capital expenditures of $225 million to $250 million. Its revolving credit facility included U.S. dollar and Australian dollar commitments and was scheduled to expire June 17, 2015, unless extended. Moody’s placed the company’s senior unsecured and commercial paper ratings on review for downgrade in March; ratings were Baa1 and Prime-2, respectively. S&P ratings were BBB and A-2.
Material changes, outlook and risks
- Asset sales and discontinued operations: The headquarters building sold on March 27 for approximately $158 million, producing the $127.7 million pretax gain. On April 11, after the quarter, Graham announced an agreement for Berkshire Hathaway to acquire a subsidiary including Miami station WPLG, in exchange for approximately 1.6 million Graham Class B shares plus cash and Berkshire shares held by Graham. Closing was expected in Q2 or Q3 2014, subject to FCC approval, customary conditions and specified termination rights. WPLG results were presented as discontinued operations. The company also recorded a $3.0 million after-tax adjustment to reduce the previously reported gain on its 2013 newspaper-business sale.
- Education business: Kaplan Higher Education revenue fell 7%, reflecting lower average enrollment, tuition and campus closures; new student enrollments increased 7%. Management described continuing campus consolidation and announced two further campus closures, planned by the end of 2015. Kaplan International revenue increased 10%.
- Regulatory exposure: Management said proposed federal gainful-employment rules could limit program enrollment or Title IV funding and could materially adversely affect Kaplan revenue, operating income and cash flow; final requirements and effects remained uncertain. Management estimated three KHE campus OPEID units, representing about 1.7% of 2013 KHE revenue, could exceed the 90/10 threshold in 2014 if trends continued, while describing measures to address compliance. Three Department of Education program reviews were open; management did not expect a material impact but said outcomes were uncertain.
- Other items and risks: A $4.5 million corporate early-retirement expense reduced Q1 2014 earnings. On April 1, the company received approximately $95 million from Classified Ventures’ Apartments.com sale and expected to record an approximately $92 million pretax gain in Q2. Market risks include equity-price, interest-rate and foreign-exchange exposure. Management cautioned that quarterly results may not indicate future results.
Investor verification priorities
- Separate recurring earnings from the headquarters-sale gain, foreign-currency gain and pension-related items; assess the underlying operating trend.
- Track the WPLG/Berkshire transaction’s final terms, required approvals, closing and effect on shares and cash.
- Monitor Kaplan enrollment, campus closures, gainful-employment rulemaking and 90/10 compliance.
- Confirm the Apartments.com distribution and expected Q2 gain, and review liquidity, debt ratings and the 2015 revolving-facility expiration.