Graham Holdings Co. (The Washington Post Company) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing is under the name The Washington Post Company. Unless otherwise stated, financial amounts below are in millions of dollars.
Business context and results
The company operated education businesses through Kaplan, along with cable television, newspaper publishing, television broadcasting, and other businesses. It sold The Herald in March 2013; its results are reported as discontinued operations. Prior-period results were reclassified for discontinued operations.
- Revenue was $959.1, up 0.4% from $955.5. Education revenue declined 3% to $527.8; advertising revenue fell 3% to $163.1; circulation and subscriber revenue rose 4% to $221.7; other revenue increased to $46.4 from $27.6.
- Operating income was $23.1, versus $21.3. Operating margin was approximately 2.4%, compared with 2.2% in Q1 2012.
- Income from continuing operations attributable to common shareholders was $6.1, or $0.82 per diluted share, down from $13.5, or $1.72 per diluted share.
- Net income attributable to common shareholders was $4.7, or $0.64 per diluted share, versus $31.0, or $4.07. This comparison includes discontinued operations: a $1.4 loss in 2013 versus $17.6 income in 2012, which included substantial tax benefits related to business sales.
- Operating cash flow was $74.0, down from $84.0. Capital expenditures were $36.5, implying operating cash flow less capital expenditures of approximately $37.6. Cash and cash equivalents fell to $300.7 from $512.4 at year-end.
- Total debt was $456.9, down from $696.7 at December 31, 2012, mainly reflecting repayment of U.S. revolving borrowings. Debt included $397.6 of 7.25% notes due 2019 and $52.1 of Australian-dollar revolving borrowings. Working capital was $405.9, up from $327.5.
- Other comprehensive income was $24.0 after tax, largely reflecting unrealized gains on available-for-sale securities; total comprehensive income was $29.2.
Material changes and segment performance
- Kaplan revenue declined 3% to $527.8, while its operating loss narrowed to $4.1 from $11.9. Higher education revenue fell 12%, reflecting lower average enrollment and campuses being closed; test preparation and international revenues increased.
- Cable revenue rose 5% to $200.1 and operating income rose 12% to $36.6. Rate increases helped offset fewer basic-video subscribers; total primary service units declined 3% year over year.
- Newspaper publishing revenue fell 4% to $127.3, and its operating loss widened to $34.5 from $20.6. Print advertising and circulation declined; online publishing revenue increased 8%. Higher early-retirement and pension costs contributed to the larger loss.
- Television broadcasting revenue rose 5% to $85.3 and operating income rose 14% to $35.4, supported by advertising demand and retransmission revenue, partly offset by lower political advertising.
- The effective tax rate on continuing operations was 52.3%, versus 45.6%; management attributed the elevated rates primarily to Australian losses for which no tax benefit was recorded.
Outlook, risks and unusual items
- Management estimated 2013 capital expenditures of $225–$250 and said it expected to fund needs primarily with existing cash and internally generated funds, with additional support from its revolving credit facility as needed. Management stated it expected ample liquidity through 2013.
- Kaplan expected approximately $15 of additional restructuring costs for the remainder of 2013, with potential for further charges as it continued reviewing costs. Kaplan reported $9.5 of restructuring costs in Q1; companywide early-retirement, severance and restructuring charges were $25.3, with a reported after-tax impact of $16.2, or $2.23 per share.
- Kaplan faced regulatory risk under the federal 90/10 rule. Management estimated that, absent corrective measures and if trends continued, at least 17 campus OPEID units—about 19% of KHE’s 2012 revenue—could exceed the 90% threshold in 2013. The company cautioned that its steps might not prevent future breaches. Several Department of Education program reviews remained pending; their outcomes and operational effects were uncertain.
- Q1 2013 other non-operating expense was $4.1, including $4.6 of unrealized foreign-currency losses. Q1 2012 included $5.8 of gains on a cost-method investment and $2.7 of unrealized currency gains.
- The Post announced retirement and separation programs; $12.0 of the estimated $20.4 voluntary retirement expense was recorded in Q1, with the remainder expected in Q2. The filing also reports $2.3 of special separation benefits.
- Management said ordinary-course legal proceedings were not expected to have a material effect. The securities class-action case described in the filing was dismissed in March 2013.
Most important facts for investors to verify
- Whether Kaplan enrollment and revenue stabilize, and whether its restructuring plans improve operating performance.
- Developments in the 90/10 calculations and Department of Education reviews, including any effects on Title IV eligibility or operations.
- Whether newspaper advertising and circulation declines continue, and the effect of retirement and pension costs on results.
- Cash generation, planned capital spending, debt repayment, and access to the revolving facility.
- The composition and valuation sensitivity of the company’s marketable equity securities, which contributed substantially to Q1 other comprehensive income.