Graham Holdings reports lower revenue and income in Q1 earnings statement
The company that was created following the sale of The Washington Post to Amazon CEO Jeff Bezos, Graham Holdings Company, today reported its Q1 earnings.
What is left of the old Washington Post Company is mostly the for-profit education unit, Kaplan, as well as cable and broadcast holdings, as well as The Slate Group and Foreign Policy Group. But Kaplan accounts for around 60 percent of the revenue brought in, so when its education unit suffers so will the company as a whole.
Also, when looking at Graham Holdings the other key thing to look for is discontinued operations, as the company has sold off a number of properties which, while providing a cash infusion up front, leads to lower revenue later on.
Now that The Washington Post is privately owned, we don’t get to peek at its earnings – which is probably good for the staff and ownership, of course.
Here is the earnings statement (with some portions omitted for brevity):
ARLINGTON, Va. – May 1, 2015 — Graham Holdings Company today reported income from continuing operations attributable to common shares of $21.4 million ($3.62 per share) for the first quarter of 2015, compared to $130.4 million ($17.56 per share) for the first quarter of 2014. Net income attributable to common shares was $20.6 million ($3.48 per share) for the first quarter ended March 31, 2015, compared to $132.1 million ($17.79 per share) for the first quarter of last year. Net income includes $0.8 million ($0.14 per share) in losses and $1.7 million ($0.23 per share) in income from discontinued operations for the first quarter of 2015 and 2014, respectively. (Refer to “Discontinued Operations” discussion below.)
In connection with the Berkshire exchange transaction that closed on June 30, 2014, the Company acquired 1,620,190 shares of its Class B common stock, resulting in 21% fewer diluted shares outstanding in the first quarter of 2015, versus the same period in 2014.
The results for the first quarter of 2015 and 2014 were affected by a number of items as described in the following paragraphs. Excluding these items, income from continuing operations attributable to common shares was $29.0 million ($5.04 per share) for the first quarter of 2015, compared to $48.2 million ($6.38 per share) for the first quarter of 2014. (Refer to the Non-GAAP Financial Information schedule at the end of this release for additional details.)
Items included in the Company’s income from continuing operations for the first quarter of 2015:
- $10.7 million in restructuring charges and accelerated depreciation at the education division (after-tax impact of $6.8 million, or $1.17 per share);
- $6.0 million gain on the formation of a joint venture (after-tax impact of $3.6 million, or $0.50 per share); and
- $6.8 million in non-operating unrealized foreign currency losses (after-tax impact of $4.4 million, or $0.75 per share).
Items included in the Company’s income from continuing operations for the first quarter of 2014:
- $4.5 million in early retirement program expense at the corporate office (after-tax impact of $2.9 million, or $0.39 per share);
- $127.7 million gain on the sale of the corporate headquarters building (after-tax impact of $81.8 million, or $11.13 per share); and
- $5.0 million in non-operating unrealized foreign currency gains (after-tax impact of $3.2 million, or $0.44 per share).
Revenue for the first quarter of 2015 was $846.1 million, up 1% from $836.5 million in the first quarter of 2014. Revenues increased in other businesses, while revenues were down at the education, cable and television broadcasting divisions. The Company reported operating income of $46.6 million for the first quarter of 2015, compared to $78.9 million for the first quarter of 2014. Operating results were down at the education, television broadcasting and cable divisions, offset by improvement in other businesses.
In November 2014, the Company announced that its Board of Directors authorized management to proceed with plans for the complete legal and structural separation of Cable ONE, Inc., a Graham Holdings subsidiary, from Graham Holdings. Following the proposed transaction, Cable ONE will be an independent, publicly traded company. The Company intends to complete the proposed transaction later in 2015. The proposed transaction will be structured as a tax-free spin-off of Cable ONE to the stockholders of the Company. The transaction is contingent on the satisfaction of a number of conditions, including completion of the review process by the Securities and Exchange Commission of required filings under applicable securities regulations, other applicable regulatory approvals and the final approval of transaction terms by the Company’s Board of Directors.
On February 12, 2015, Kaplan entered into a Purchase and Sale Agreement with Education Corporation of America (ECA) to sell substantially all of the assets of its KHE Campuses business, consisting of thirty-eight nationally accredited ground campuses, and certain related assets, in exchange for a preferred equity interest in ECA. The transaction is contingent upon certain regulatory and accrediting agency approvals and is expected to close in the third quarter of 2015.
Education division revenue totaled $500.6 million for the first quarter of 2015, compared with revenue of $522.2 million for the same period of 2014. Kaplan reported an operating loss of $22.8 million for the first quarter of 2015, compared to operating income of $1.9 million for the first quarter of 2014. Operating results for the first quarter of 2015 include restructuring costs of $10.7 million.
Cable division revenue declined 3% in the first quarter of 2015 to $198.7 million, from $203.9 million for the first quarter of 2014, due to 5% fewer customers and 9% fewer Primary Service Units (PSUs). Operating expenses in the first quarter declined 2%, from $162.8 million to $159.6 million, due to fewer customers and reduced programming costs, offset by an increase in depreciation expense. Cable division operating income declined 5% in the first quarter of 2015 to $39.1 million, from $41.2 million in the first quarter of 2014.
The cable division continues its focus on higher margin businesses, namely high-speed data and business sales. Residential high-speed data revenue increased 5% in the first quarter of 2015 on a 2% customer gain and business sales increased 17% on a 16% increase in business customers. Overall, business sales comprised 10% of total revenue for the first quarter of 2015, compared with 9% of total revenue for the first quarter of 2014. Due to rapidly rising programming costs and shrinking margins, video sales now have less value and emphasis (video PSUs were down 20% over the first quarter of last year) and programming costs have been reduced significantly.
The cable division also continues its focus on higher lifetime value customers who are less attracted by discounting, require less support and churn less. Operating income margins are down slightly to 19.7% in the first quarter of 2015 from 20.2% in the first quarter of 2014.
Revenue at the television broadcasting division decreased 2% to $83.6 million in the first quarter of 2015, from $85.7 million in the same period of 2014; operating income for the first quarter of 2015 was down 13% to $38.6 million, from $44.4 million in the same period of 2014. The decrease in revenue is due to a $1.7 million decrease in political advertising revenue compared to the first quarter of 2014 and $9.5 million in incremental winter Olympics-related advertising revenue at the Company’s NBC affiliates booked in the prior year, offset by revenues from the Super Bowl at the Company’s NBC affiliates in February 2015 and a $2.3 million in increased retransmission revenues. The decline in operating income is due to the revenue decline and an increase in spending on digital initiatives.
Other businesses includes the operating results of The Slate Group and Foreign Policy Group, which publish online and print magazines and websites; SocialCode, a marketing solutions provider helping companies with marketing on social-media platforms; Celtic Healthcare, a provider of home health and hospice services; Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications; and Trove, a digital innovation team that builds products and technologies in the news space. Other businesses also includes a number of businesses acquired during 2014. These businesses include:
– VNA-TIP Healthcare of Bridgeton, MO, operating home health and hospice service in Missouri and Illinois;
– Joyce/Dayton Corp., a Dayton, OH-based manufacturer of screw jacks and other linear motion systems; and
– Residential Healthcare Group, Inc. (Residential), a leading provider of skilled home health care and hospice services in Michigan and Illinois.
In January 2015, Celtic Healthcare and Allegheny Health Network formed a joint venture to combine each other’s home health and hospice assets in the western Pennsylvania region. Celtic manages the operations of the joint venture for a fee and holds a 40% interest. The pro rata operating results of the joint venture are included in the Company’s equity in earnings of affiliates. In connection with this transaction, the Company recorded a noncash pre-tax gain of $6.0 million in the first quarter of 2015 that is included in Other Non-Operating Income.
The increase in revenues and operating results for the first quarter of 2015 is primarily due to newly acquired businesses in 2014, and increased revenues and improved results at SocialCode and Slate.
In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously part of Kaplan International. An additional school was sold by Kaplan in January 2015.
In the second quarter of 2014, the Company closed on the Berkshire exchange transaction, which included the disposition of WPLG, the Company’s Miami-based television station.
As a result of these transactions, income from continuing operations excludes the operating results and related loss on dispositions of these businesses, which have been reclassified to discontinued operations, net of tax, for all periods presented.