Graham Holdings Co. (then The Washington Post Company) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. The filing identifies the registrant as The Washington Post Company, before its subsequent name change. Dollar amounts below are in millions unless otherwise noted.
Financial results
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Revenue | $1,021.9 | $989.1 | $1,981.0 | $1,944.6 |
| Operating income | $93.1 | $63.0 | $116.1 | $84.3 |
| Operating margin | 9.1% | 6.4% | 5.9% | 4.3% |
| Continuing income attributable to common stockholders | $44.7 | $36.1 | $50.8 | $49.5 |
| Net income attributable to common stockholders | $44.7 | $51.8 | $49.4 | $82.9 |
| Diluted EPS from continuing operations | $6.02 | $4.76 | $6.84 | $6.48 |
Revenue rose 3% in Q2 and 2% in H1. Operating income improved in both periods, while common-stockholder net income fell year over year because 2012 included discontinued-operation income of $15.8 million in Q2 and $33.3 million in H1. Q2 2013 continuing results included $9.8 million after tax of early-retirement, severance and restructuring charges and $8.1 million after tax of unrealized foreign-currency losses. H1 charges were $26.0 million after tax; unrealized currency losses were $11.0 million after tax.
Cash flow, balance sheet and liquidity
- H1 operating cash flow was $197.5 million, versus $169.7 million a year earlier. Investing used $94.3 million; financing used $224.7 million. Cash and cash equivalents decreased $125.9 million to $386.6 million.
- At June 30, cash and cash equivalents were $386.6 million; working capital was $502.4 million. Marketable equity securities had a fair value of $457.0 million, including $263.9 million in net unrealized gains.
- Total debt was $450.0 million, down from $696.7 million at year-end 2012, principally following repayment of $240.1 million of short-term borrowing. Debt included $397.7 million of 7.25% notes due in 2019 and $45.7 million of Australian-dollar revolving-credit borrowing. The credit facility expires June 17, 2015.
- Capital expenditures were $87.7 million in H1; management estimated full-year 2013 capital expenditures of $215–$240 million. Management said it expected sufficient liquidity for 2013 needs, primarily from cash and internally generated funds.
Business trends and material changes
- Education: Revenue declined 1% in Q2 and 2% in H1, while operating income improved to $23.7 million in Q2 and $19.7 million in H1, from $3.7 million and an $8.2 million loss, respectively. Higher-education revenue declined amid weaker demand and campus closures; test preparation and international revenue grew. Kaplan expected about $10 million in additional restructuring costs during the rest of 2013.
- Cable television: Revenue increased 5% in Q2 and H1; operating income rose 16% and 14%, respectively. Rate increases, commercial sales and lower labor and bad-debt costs helped, while basic video subscribers declined.
- Newspaper publishing: Revenue declined 1% in Q2 and 2% in H1. The division recorded operating losses of $14.8 million and $49.3 million, respectively, including increased pension and early-retirement costs. Print advertising and circulation weakened; online publishing revenue grew 15% in Q2 and 12% in H1.
- Television broadcasting: Revenue increased 4% in both periods; operating income grew 9% in Q2 and 11% in H1. Advertising demand and retransmission revenue gains were partly offset by lower political advertising.
- H1 share-weighted average diluted shares fell about 4% year over year. The company reported H1 marketable-securities unrealized gains of $47.8 million after tax in other comprehensive income; these gains were not equivalent to operating cash flow.
Outlook, subsequent events and risks
- On August 5, 2013, the company entered a binding letter agreement to sell most of its publishing businesses, including The Washington Post, for $250 million in cash, subject to customary adjustments and closing conditions. The buyer would also assume specified active-employee pension obligations and receive related pension assets, including an additional $50 million above the relevant projected benefit obligation. The company planned to change its corporate name after closing. The filing describes an agreement, not a completed sale.
- On August 1, 2013, the company completed its acquisition of Forney Corporation; its results were to be included in other businesses.
- Kaplan faced six open or pending Department of Education program reviews and an HLC focused evaluation planned for fall 2013. Management did not expect final DOE reports to have a material impact, but outcomes and operational effects remained uncertain.
- Management estimated that, absent corrective measures and if trends continued, at least 10 Kaplan Higher Education campus OPEID units—representing about 11% of KHE’s 2012 revenue—could exceed the 90/10 threshold in 2013. The filing cautions that actions to reduce Title IV dependence may not prevent future violations.
- Management stated that existing litigation was not expected to have a material effect. Other identified market risks included equity-price, interest-rate and foreign-exchange exposure. The effective tax rate on continuing operations was 42.1% for H1, primarily reflecting Australian losses for which no tax benefit was recorded.
Important facts for investors to verify
- Whether and when the publishing-business sale closed, its final consideration and adjustments, and the assets, liabilities and pension obligations transferred.
- Kaplan enrollment, restructuring progress, 90/10 compliance, DOE review outcomes and the HLC evaluation results.
- Whether cable subscriber trends and newspaper advertising and circulation declines continued, and whether digital and broadcast growth offset them.
- Cash generation, capital spending, debt repayment and liquidity relative to management’s 2013 outlook.
- The extent to which reported earnings depended on restructuring charges, foreign-exchange movements, discontinued operations and unrealized investment gains.