Business context and reporting period
The Washington Post Company, now identified in the request as Graham Holdings Co., filed this unaudited Form 10-Q for the quarter ended September 30, 2012, and the nine months then ended. The diversified company operated education (Kaplan), cable television, newspaper publishing, television broadcasting, and other businesses. Comparative 2011 quarter ended October 2; the company had changed its fiscal-quarter convention, so periods are not exactly calendar-aligned.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,011.3m | $1,012.5m | $2,967.6m | $3,090.7m |
| Operating income | $75.9m | $70.2m | $159.0m | $216.6m |
| Income from continuing operations | $44.9m | $12.8m | $94.4m | $84.2m |
| Net income attributable to common stockholders | $93.8m | $(6.2)m | $176.7m | $54.5m |
| Basic and diluted EPS | $12.64 | $(0.82) | $23.39 | $6.81 |
- Operating margin was approximately 7.5% in Q3 versus 6.9%; for the nine months, approximately 5.4% versus 7.0%.
- Q3 net income included $49.1m from discontinued operations, versus an $18.8m loss a year earlier. Nine-month discontinued operations contributed $83.2m versus a $28.8m loss.
- Nine-month operating cash flow was $295.5m, compared with $263.6m. Capital expenditures were $152.4m, implying operating cash flow less capital expenditures of about $143.1m, versus about $117.9m in 2011.
- At September 30, cash and cash equivalents were $305.7m; marketable equity securities were $379.9m. Total debt was $456.5m, including $397.4m of 7.25% notes due February 2019. Working capital was $373.1m. Long-term debt fair value was above carrying value: $485.2m versus $397.4m for the notes.
Material changes versus the prior comparable period
- Q3 revenue was essentially flat; operating income rose about 8%. Nine-month revenue fell about 4% and operating income fell about 27%.
- Education revenue declined 8% in Q3 and 9% for the nine months; education operating income fell 29% and 90%, respectively. Higher Education revenue was down 17% in Q3 and 19% year to date, mainly reflecting lower average enrollments.
- Cable revenue increased 6% in Q3 and 3% year to date; nine-month operating income fell 3%, primarily due to higher programming costs.
- Newspaper publishing revenue declined 4% in Q3 and 7% year to date; the division reported operating losses of $21.8m and $56.3m, respectively. Print advertising and circulation continued to weaken.
- Television broadcasting revenue increased 44% in Q3 and 23% year to date; nine-month operating income rose 69%, helped by political and Olympics-related advertising and higher retransmission revenue.
- Cash decreased $75.4m from year-end 2011, while total debt decreased $108.7m. The company repurchased 284,550 Class B shares for $97.5m in the first nine months.
Outlook, management commentary, risks and unusual items
- Management estimated 2012 capital expenditures of $225m–$250m. It expected ample liquidity through 2012, funded primarily by cash and internally generated funds, with revolver borrowings available as needed; no earnings guidance was provided.
- Kaplan expected significant additional restructuring costs in Q4 2012 and 2013, including costs associated with campus consolidation and international operations. The fixed-campus plan included ceasing new enrollment at nine campuses and consolidating four others; expected costs were approximately $18m, of which $2.1m was recorded in Q3.
- Q3 and nine-month results included $12.2m and $22.4m of early-retirement, severance and restructuring charges, respectively. The Q3 discontinued-operations result was materially affected by a $44.5m tax benefit related to Avenue100, which the company determined had no value. Other 2012 disposals included Kidum, EduNeering and Kaplan Learning Technologies.
- Kaplan University and one Kaplan Higher Education location had open Department of Education program reviews. Three campuses received accreditor “show cause” notices; potential loss of accreditation could affect Title IV eligibility. Management estimated that, absent corrective actions and if trends continued, at least 16 Kaplan campus reporting units could exceed the 90/10 threshold in 2013, representing about 16% of 2011 KHE revenue.
- The court overturned most federal gainful-employment regulations in June 2012; the DOE was evaluating next steps, leaving the rules’ outcome and operational impact uncertain. Management also disclosed possible goodwill impairment sensitivity at Kaplan and planned its annual impairment test for Q4.
- Credit ratings were downgraded during 2012; at filing, S&P rated the company BBB with a negative outlook and Moody’s rated it Baa1 with a negative outlook. The company also disclosed equity-price, interest-rate and foreign-exchange risks.
- After quarter-end, the company closed its acquisition of a controlling interest in Celtic Healthcare on November 5, 2012. It also changed pension benefits to a cash-balance plan for most current participants, effective August 1, and reduced the company’s 401(k) matching contribution.
Most important facts for investors to verify
- How much reported earnings growth depends on discontinued operations and the Avenue100 tax benefit, versus continuing operating performance.
- Whether Kaplan’s enrollment, revenue and operating-income trends stabilize, and the total timing and cost of restructuring.
- The outcomes of Department of Education reviews, campus accreditation actions and future 90/10 compliance.
- Whether newspaper revenue and circulation declines continue, and whether television’s political and Olympics-related gains persist beyond 2012.
- Cash generation after capital spending, debt and credit-rating developments, and the realized results of the Celtic acquisition and other disposals.