Graham Holdings Company — Q1 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2016, compared with Q1 2015. Graham Holdings is a diversified education and media company, with home health and hospice and manufacturing businesses as well. The 2015 comparison reflects Cable One and certain Kaplan schools as discontinued operations; Cable One was spun off in July 2015.
Financial performance
Amounts are in millions of dollars except per-share data.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $601.7 | $647.4 |
| Operating income | $51.9 | $8.9 |
| Operating margin | 8.6% | 1.4% |
| Continuing-operations income (loss) attributable to common stockholders | $37.8 | $(2.7) |
| Net income attributable to common stockholders | $37.8 | $20.6 |
| Diluted EPS from continuing operations | $6.59 | $(0.58) |
| Cash provided by (used in) operating activities | $47.0 | $(45.9) |
Revenue declined 7%, principally because of lower education revenue, partly offset by growth in television broadcasting and other businesses. The improved operating result reflected higher education and television broadcasting results. Q1 2016 continuing-operations income included an $18.9 million gain on the Colloquy sale and a $1.8 million gain on marketable securities, partly offset by $5.4 million of unrealized foreign-currency losses. Q1 2015 continuing results included $10.7 million of education restructuring charges and accelerated depreciation, a $6.0 million joint-venture gain, and $6.8 million of unrealized foreign-currency losses. Q1 2015 total net income also included $23.3 million from discontinued operations.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $530.6 million at March 31, down from $754.2 million at year-end. Management reported $949.4 million of cash, restricted cash, marketable securities and other investments, versus $1,154.4 million at year-end.
- Debt was $399.9 million, primarily 7.25% unsecured notes due 2019. The company also had a $200 million revolving credit facility expiring in 2020, and reported compliance with its financial covenants. Credit ratings were Ba1 from Moody’s and BB+ from S&P.
- Working capital was $869.7 million, down from $1,135.6 million at December 31, 2015. Total assets were $4.31 billion and total equity was $2.44 billion.
- Operating cash flow was $47.0 million. Investing cash outflow was $196.9 million, including $198.2 million invested in businesses; financing cash outflow was $74.9 million, including $81.3 million of share repurchases. Cash and cash equivalents decreased by $223.6 million during the quarter.
- Capital expenditures were $9.3 million in Q1; management estimated full-year 2016 spending of $75–$85 million. Management said liquidity should be sufficient for cash needs throughout 2016.
Business developments, outlook and risks
- Education: Revenue fell 20% to $401.1 million, while the division moved from a $22.8 million operating loss to $14.5 million of operating income. Higher Education revenue fell 30%; Kaplan University reported 37,398 students, down 18% year over year, and new student enrollments fell 34%. Kaplan Test Preparation revenue declined 4%, and Kaplan International revenue declined 12%, including a 4% currency impact.
- Television broadcasting: Revenue rose 10% to $92.0 million and operating income rose 7% to $41.2 million, supported by higher retransmission and political advertising revenue.
- Acquisitions and dispositions: Kaplan acquired Mander Portman Woodward and Osborne Books for a combined $208.3 million. Kaplan also sold Colloquy, recording the gain noted above. Goodwill increased by $163.4 million from year-end, primarily reflecting acquisitions.
- Education regulatory exposure: Kaplan University remained on provisional certification with the Department of Education through September 30, 2018, amid an open program review. The company said it could not predict the review’s outcome. Proposed borrower-defense rules could increase loan discharges and institutional reimbursement obligations; final rules were expected by November 2016.
- Contingencies: Kaplan may be required to provide up to approximately $45 million of credit support related to the sale of KHE Campuses, potentially drawable if the buyer defaults on obligations to students. The filing also describes continuing litigation, including a remanded False Claims Act claim against Kaplan and a warranty dispute concerning the sale of Franklyn Scholar. Management did not expect existing legal matters to have a material effect, based on information then available.
- Other risks and commentary: The company identified exposure to marketable-equity price changes, interest rates and foreign exchange. It provided a 2016 capital expenditure estimate and liquidity assessment, but no consolidated revenue or earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether Kaplan University enrollment and demand trends stabilize, and what the Department of Education review and borrower-defense rules ultimately mean for Kaplan.
- How much of reported earnings improvement is recurring versus attributable to the Colloquy and securities gains, prior-year restructuring charges, and the 2015 discontinued-operations comparison.
- Cash and investment levels after the acquisitions and share repurchases, and progress against the $75–$85 million 2016 capital expenditure estimate.
- Final purchase accounting for the 2016 acquisitions and any resulting changes to goodwill, intangible assets or reported earnings.
- Any developments in the potential KHE Campuses credit support obligation and the disclosed legal matters.