Graham Holdings Co. (then The Washington Post Company) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparison is with the three months ended April 3, 2011. The company changed its fiscal-quarter end convention in 2011, so the periods are not identical in length or timing. The interim statements are unaudited.
Business context and results
The company operated education businesses through Kaplan, alongside cable television, newspaper publishing, television broadcasting and other businesses.
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Revenue | $972.5 million | $1,041.9 million |
| Operating income | $17.5 million | $56.6 million |
| Income from continuing operations attributable to common stockholders | $10.8 million; $1.37 per share | $17.9 million; $2.21 per share |
| Net income attributable to common stockholders, including discontinued operations | $31.0 million; $4.07 per share | $15.2 million; $1.87 per share |
| Cash provided by operating activities | $84.0 million | $49.4 million |
| Capital expenditures | $44.9 million | $39.3 million |
| Cash and cash equivalents, at period end | $295.0 million | $381.1 million at December 31, 2011 |
| Total debt, at period end | $456.4 million | $565.2 million at December 31, 2011 |
| Working capital, at period end | $261.4 million | $250.1 million at December 31, 2011 |
Revenue fell about 7%, while operating income fell about 69%; operating margin was approximately 1.8%, versus 5.4% in the prior period (calculated from reported figures). Operating cash flow improved. Total debt declined primarily after repayment of commercial paper. The company reported no separate free-cash-flow measure.
Material changes and segment performance
- Education: Revenue declined 11% to $553.4 million; Kaplan recorded an operating loss of $13.2 million, versus income of $20.0 million. Higher education revenue fell 20%, primarily reflecting lower average enrollments and weaker market demand; student enrollment at March 31 was down 18% year over year. New student enrollments at Kaplan University and KHE campuses increased 5% during the quarter. International revenue increased 16%, including acquired-business contributions.
- Newspaper publishing: Revenue declined 8% to $142.3 million and the operating loss widened to $22.6 million. Print advertising at The Washington Post fell 17%; online publishing revenue fell 7%. Daily and Sunday circulation declined 9.8% and 5.2%, respectively.
- Cable television: Revenue was essentially flat at $190.2 million, while operating income fell 13% to $32.8 million, chiefly due to higher programming and sales costs. Growth in internet and telephone services was offset by fewer basic video subscribers and increased promotional discounts.
- Television broadcasting: Revenue rose 13% to $81.5 million and operating income increased 58% to $31.0 million, reflecting improved advertising demand, political advertising and cost controls.
Outlook, risks and unusual items
- Management estimated 2012 capital expenditures of $220 million to $245 million and said it expected ample liquidity for 2012, funded mainly through cash and internally generated funds, with commercial paper to a lesser extent. These are management expectations, not guarantees.
- Reported Q1 common-stockholder net income included $20.2 million of income from discontinued operations, compared with a $2.8 million loss in the prior period. The 2012 result included $23.2 million of tax benefits associated with sales of Kaplan businesses. Kaplan Learning Technologies was sold in February, with a reported pretax loss of $3.1 million; EduNeering was sold in April, with an estimated $30 million pretax gain expected in Q2, subject to working-capital adjustments.
- Continuing-operations results included a $5.8 million gain on sales of cost-method investments and $2.7 million of unrealized foreign-currency gains. The prior period included a $30.7 million write-down of a marketable equity security. The Q1 2012 effective tax rate on continuing operations was 48.1%, mainly because no tax benefit was recorded for losses in Australia.
- Education risks include federal student-aid rules. Management did not expect gainful-employment regulations to adversely affect most current Kaplan programs, but acknowledged data and eligibility uncertainties. Management estimated that, if trends continued and planned actions were insufficient, at least 19 KHE campus reporting units—about 11% of KHE’s 2011 revenue—could exceed the 90/10 threshold in 2013.
- Three Department of Education program reviews remained pending, with a final report awaited for another review. A UK Border Agency compliance review of a Kaplan UK center was ongoing; revised UK student-visa rules could also reduce international enrollment. Outcomes and impacts were uncertain.
- The filing identifies possible KTP goodwill impairment sensitivity: estimated fair value exceeded carrying value by 10%, but lower projected cash flows or growth, or a higher discount rate, could result in an impairment charge. The company also disclosed an amended securities class action complaint; management said it intended to seek dismissal and defend the matter. Management did not consider existing legal proceedings likely to have a material effect based on information then available.
- Credit ratings had been downgraded in November 2011: S&P long-term BBB+ and Moody’s senior unsecured A3; Moody’s outlook was Negative. The company disclosed equity-price, interest-rate and foreign-exchange market risks.
Key facts for investors to verify
- Whether Kaplan’s enrollment and revenue trends stabilize, and how the Kaplan Commitment program affects retention and outcomes.
- Progress and consequences of the DOE reviews, gainful-employment requirements, 90/10 compliance and UK regulatory matters.
- Actual proceeds and final working-capital adjustments for the Kaplan business sales, and recognition of the expected EduNeering gain.
- Whether newspaper advertising and circulation declines, and cable basic-video subscriber losses, continue.
- Execution of the $220 million to $245 million capital-expenditure plan, debt and cash trends, and any change in credit ratings or liquidity.
- The assumptions supporting KTP goodwill valuation and the status of the amended securities litigation.