Graham Holdings Company — FY 2013 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2013; it is not a standalone fourth-quarter filing. Graham Holdings changed its name from The Washington Post Company after completing the sale of most newspaper-publishing businesses on October 1, 2013. Continuing operations are led by Kaplan education, Cable ONE, six television stations, and smaller businesses including Slate, Foreign Policy, SocialCode, Celtic Healthcare, and Forney. Sold publishing operations are reported as discontinued operations.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $3.488 billion | $3.456 billion |
| Operating income | $345.6 million | $179.2 million |
| Operating margin | 9.9% | 5.2% |
| Continuing-operations income attributable to common shareholders | $189.9 million; $25.78 diluted EPS | $71.1 million; $9.22 diluted EPS |
| Net income attributable to common shareholders, including discontinued operations | $236.0 million; $32.05 diluted EPS | $131.2 million; $17.39 diluted EPS |
| Cash provided by operating activities | $327.9 million | $477.2 million |
| Capital expenditures | $224.1 million | $218.0 million |
| Cash and cash equivalents at year-end | $569.7 million | $512.4 million |
| Total borrowings at year-end | $450.8 million | $696.7 million |
| Working capital | $768.3 million | $327.5 million |
Revenue increased 1%, while operating costs fell 4%. Reported improvement in operating income principally reflects the absence of 2012’s $111.6 million noncash Kaplan Test Preparation impairment, alongside better education and cable results. Operating cash flow declined mainly because of higher income-tax payments and costs associated with the newspaper sale. Restricted cash was $83.8 million at year-end and is not equivalent to unrestricted liquidity. The company reported $400 million principal amount of 7.25% unsecured notes due in 2019 and an Australian-dollar revolving borrowing; it had no USD revolving borrowing outstanding at year-end. Net interest expense was $33.8 million, versus $32.6 million.
Segments and changes versus 2012
- Education: Revenue fell 1% to $2.178 billion; operating income was $51.3 million, compared with a $105.4 million loss in 2012. Higher education revenue declined 6%, and year-end KHE enrollment fell 8% (5% excluding campuses closing or planned for closure). New KHE enrollments rose 4%. Kaplan recorded $36.4 million of restructuring charges and a $3.3 million impairment charge in 2013.
- Cable: Revenue rose 3% to $807.3 million and operating income rose 10% to $169.7 million; operating margin increased to 21% from 20%. High-speed data subscriptions grew to 472,631, while video subscriptions declined to 538,894 and total primary service units fell 4%.
- Television broadcasting: Revenue declined 6% to $374.6 million and operating income declined 11% to $171.3 million. The comparison reflects 2012 political advertising and Olympics-related revenue; higher retransmission revenue partly offset the decline.
- Other businesses: Revenue increased 77% to $128.8 million, reflecting SocialCode and Slate growth and the inclusion of Celtic Healthcare and Forney. This segment recorded an operating loss of $23.5 million.
Sale, unusual items, and outlook
The publishing businesses were sold for $250 million, subject to customary closing adjustments. The company recorded a $157.5 million pretax gain ($100.0 million after tax); discontinued operations contributed $46.1 million of 2013 income overall. Fourth-quarter common-shareholder income included $100.8 million from discontinued operations, substantially reflecting the sale-related gain and associated items. Continuing-operations results also included education restructuring charges, the Kaplan impairment, a $10.4 million marketable-security write-down, and $13.4 million of unrealized foreign-currency losses. Comparisons should account for these items and the discontinued-operations presentation.
Management expected 2014 capital expenditures of $240 million to $265 million and said it expected ample liquidity to meet 2014 cash needs, primarily using cash and internally generated funds. It anticipated a roughly $65 million pension credit in 2014, based on investment performance and actuarial assumptions; this is an estimate, not operating guidance. A sale of the Washington, D.C. headquarters property for approximately $159 million was expected to close in March 2014. Management said Kaplan might undertake further restructuring.
Risks, contingencies, and controls
- Kaplan’s dependence on federal Title IV student aid is material: KHE received approximately $819 million in Title IV funds in 2013, about 76% of KHE revenue. Eligibility, accreditation, state authorization, student-loan defaults, the 90/10 rule, and proposed gainful-employment rules could affect enrollment, funding, or operations. Management estimated that three campus OPEID units, representing about 1.7% of KHE revenue, could exceed the 90/10 threshold in 2014 if trends continued.
- Several education-related reviews and legal matters remained pending, including reviews of the Broomall and Pittsburgh campuses and a desk audit of the Houston campus. Kaplan’s University of Phoenix? No: Kaplan University’s accreditor conducted a focused visit in February 2014. The filing says outcomes of certain matters could not be predicted; management did not believe existing claims were likely to have a material effect. A separate Kaplan University review concluded with repayment of a nominal sum.
- Other principal risks include declining demand or enrollment in education, competition and changing video-consumption patterns, television advertising volatility, regulation of cable and broadcasting, foreign-exchange exposure, health-care reimbursement and regulation, and technology and cybersecurity disruption.
- The company reported $897.4 million of operating-lease commitments and $402.2 million of programming purchase commitments. The filing states there were no off-balance-sheet arrangements with special-purpose entities.
- Management and the independent auditor concluded internal control over financial reporting was effective as of year-end. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile continuing earnings and cash generation with the newspaper-sale gain and other discontinued-operation effects; review the sale proceeds, retained properties, and pension liabilities.
- Track KHE enrollment, restructuring benefits and costs, and Kaplan’s compliance with Title IV eligibility, cohort-default, and 90/10 requirements.
- Assess whether cable data growth and retransmission revenue can offset ongoing video-subscriber losses and programming-cost inflation.
- Review liquidity against the debt maturity and facility expiry, $240–$265 million capital-spending estimate, lease and programming commitments, and restricted-cash requirements.
- Monitor the proposed headquarters and Alexandria property sales, the estimated 2014 pension credit, and marketable-equity and foreign-currency exposure.