November 2, 2016 Last Updated 8:28 am

Graham Holdings reports that Kaplan revenue falls 20% in Q3

But thanks to the Summer Olympics and heavy political advertising, the company’s broadcast division saw revenue increase 14 percent

ARLINGTON, Va. – November 2, 2016 — Graham Holdings Company today reported income from continuing operations attributable to common shares of $33.1 million ($5.87 per share) for the third quarter of 2016, compared to a loss of $231.2 million ($40.32 per share) for the third quarter of 2015. Net loss attributable to common shares was $230.8 million ($40.25 per share) for the third quarter of 2015, including $0.4 million ($0.07 per share) in income from discontinued operations. (Refer to “Discontinued Operations” discussion below.)

The results for the third quarter of 2016 and 2015 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 $36.9 million ($6.53 per share) for the third quarter of 2016, compared to $35.6 million ($6.05 per share) for the third quarter of 2015. (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 third quarter of 2016:

  • a $15.0 million non-operating expense from the write-down of a cost method investment (after-tax impact of $9.6 million, or $1.70 per share);
  • $3.8 million in non-operating foreign currency losses (after-tax impact of $2.4 million, or $0.43 per share); and
  • a net nonrecurring $8.3 million deferred tax benefit related to Kaplan’s international operations ($1.47 per share).

Items included in the Company’s loss from continuing operations for the third quarter of 2015:

  • $248.6 million goodwill impairment charge related to the Kaplan Higher Education (KHE) business (after-tax impact of $217.1 million, or $37.85 per share);
  • $9.5 million in restructuring charges at the education division (after-tax impact of $5.8 million, or $1.00 per share);
  • $18.8 million in expense related to the modification of stock options awards related to the cable spin-off (after-tax impact of $11.6 million, or $1.99 per share);
  • $26.3 million in net non-operating losses arising from the sales of two businesses (after tax impact of $24.3 million, or $4.16 share); and
  • $13.0 million in non-operating foreign currency losses (after-tax impact of $8.0 million, or $1.37 per share).

Revenue for the third quarter of 2016 was $621.6 million, down 3% from $641.4 million in the third quarter of 2015. Revenues declined at the education division, offset by an increase at the television broadcasting division and in other businesses. The Company reported operating income of $68.0 million for the third quarter of 2016, compared to an operating loss of $213.7 million for the third quarter of 2015. Operating results improved at the education and television broadcasting divisions, offset by a decline in other businesses.

For the first nine months of 2016, the Company reported income from continuing operations attributable to common shares of $131.7 million ($23.21 per share), compared to a loss of $194.6 million ($34.18 per share) for the first nine months of 2015. Net loss attributable to common shares was $152.5 million ($26.19 per share) for the first nine months of 2015, including income of $42.2 million ($7.99 per share) in income from discontinued operations. (Refer to “Discontinued Operations” discussion below.)

The results for the first nine months of 2016 and 2015 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 $110.1 million ($19.41 per share) for the first nine months of 2016, compared to $87.6 million ($14.95 per share) for the first nine months of 2015. (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 nine months of 2016:

  • a $40.3 million non-operating gain from the sales of land and marketable equity securities (after-tax impact of $25.0 million, or $4.42 per share);
  • a $22.2 million non-operating gain arising from the sale of a business and the formation of a joint venture (after-tax impact of $13.6 million, or $2.37 per share);
  • a $15.0 million non-operating expense from the write-down of a cost method investment (after-tax impact of $9.6 million, or $1.70 per share);
  • $33.3 million in non-operating foreign currency losses (after-tax impact of $21.3 million, or $3.76 per share);
  • a net nonrecurring $8.3 million deferred tax benefit related to Kaplan’s international operations ($1.47 per share); and
  • a favorable $5.6 million out of period deferred tax adjustment related to the KHE goodwill impairment recorded in the third quarter of 2015 ($1.00 per share).

Items included in the Company’s income from continuing operations for the first nine months of 2015:

  • $255.5 million goodwill and long-lived asset impairment charges related to the KHE business (after-tax impact of $221.5 million, or $38.57 per share);
  • $36.8 million in restructuring charges and accelerated depreciation at the education division (after-tax impact of $23.3 million, or $4.01 per share);
  • $18.8 million in expense related to the modification of stock options awards related to the cable spin-off (after-tax impact of $11.6 million, or $2.00 per share);
  • $12.5 million in non-operating losses arising from the sales of five businesses and an investment, and on the formation of a joint venture (after tax impact of $15.7 million, or $2.82 per share); and
  • $16.2 million in non-operating foreign currency losses (after-tax impact of $10.1 million, or $1.73 per share).

Revenue for the first nine months of 2016 was $1,852.3 million, down 6% from $1,969.7 million in the first nine months of 2015. Revenues declined at the education division, offset by an increase at the television broadcasting division and in other businesses. The Company reported operating income of $194.0 million for the first nine months of 2016, compared to an operating loss of $148.6 million for the first nine months of 2015. Operating results improved at the education and television broadcasting divisions, offset by a decline in other businesses.

Division Results

Education

Education division revenue totaled $386.9 million for the third quarter of 2016, down 20% from revenue of $481.7 million for the same period of 2015. Kaplan reported operating income of $16.3 million for the third quarter of 2016, compared to an operating loss of $242.8 million for the third quarter of 2015. Operating results for the third quarter of 2015 included a $248.6 million goodwill impairment charge related to KHE. Operating results for the third quarter of 2015 also included restructuring costs of $9.5 million.

For the first nine months of 2016, education division revenue totaled $1,207.2 million, down 20% from revenue of $1,506.0 million for the same period of 2015. Kaplan reported operating income of $63.7 million for the first nine months of 2016, compared to an operating loss of $249.8 million for the first nine months of 2015. Operating results for the first nine months of 2015 included $255.5 million in goodwill and other long-lived asset impairment charges related to KHE. Restructuring costs totaled $36.8 million for the first nine months of 2015.

A summary of Kaplan’s operating results for the third quarter and first nine months of 2016 compared to 2015 is as follows:

ghc-q3-1-580

KHE includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the domestic professional and other continuing education businesses.

Since 2012, KHE has closed campuses, consolidated facilities and reduced its workforce. On September 3, 2015, Kaplan completed the sale of substantially all of the remaining assets of its KHE Campuses business. In connection with these and other plans, KHE incurred $3.8 million and $9.2 million in restructuring costs in the third quarter and first nine months of 2015, respectively.

As a result of continued declines in student enrollments at KHE and the challenging industry operating environment, Kaplan completed an interim impairment review of KHE’s remaining long-lived assets in the third quarter of 2015 that resulted in a $248.6 million goodwill impairment charge. This goodwill impairment charge followed a $6.9 million long-lived asset impairment charge that was recorded in the second quarter of 2015 in connection with the KHE Campuses business.

Television Broadcasting

Revenue at the television broadcasting division increased 25% to $112.4 million in the third quarter of 2016, from $89.7 million in the same period of 2015; operating income for the third quarter of 2016 increased 46% to $59.2 million, from $40.5 million in the same period of 2015. The revenue increase is due to $13.1 million in incremental summer Olympics-related advertising revenue at the Company’s NBC affiliates, a $7.2 million increase in political advertising revenue and $4.4 million more in retransmission revenues. The increase in operating income is due to the revenue increase, offset by higher spending on digital initiatives and increased network fees.

Revenue at the television broadcasting division increased 14% to $300.9 million in the first nine months of 2016, from $264.0 million in the same period of 2015; operating income for the first nine months of 2016 increased 19% to $144.6 million, from $121.1 million in the same period of 2015. The revenue increase is due to $13.1 million in incremental summer Olympics-related advertising revenue at the Company’s NBC affiliates, $14.5 million more in retransmission revenues and a $9.9 million increase in political advertising revenue. The increase in operating income is due to the revenue increase, offset by higher spending on digital initiatives and increased network fees.

In May 2016, the Company announced that it had reached an agreement with Nexstar Broadcasting Group, Inc. and Media General, Inc. to acquire WCWJ, a CW affiliate television station in Jacksonville, FL and WSLS, an NBC affiliate television station in Roanoke, VA for $60 million in cash and the assumption of certain pension obligations. The Company will continue to operate both stations under their current network affiliations. The acquisition is subject to approval by the FCC, other regulatory approvals, and the satisfaction of closing conditions.

Other Businesses

Manufacturing includes three businesses: Dekko, a manufacturer of electrical workspace solutions, architectural lighting, and electrical components and assemblies acquired in November 2015; Joyce/Dayton Corp., a Dayton, OH, based manufacturer of screw jacks and other linear motion systems; and Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications.

Manufacturing revenues and operating income increased in the first nine months of 2016 due primarily to the Dekko acquisition. In September 2016, Dekko acquired Electri-Cable Assemblies (ECA), a Shelton, CT based manufacturer of power, data and electrical solutions for the office furniture industry.

The Graham Healthcare Group (GHG) provides home health and hospice services in six states. In June 2016, the Company acquired the outstanding 20% redeemable noncontrolling interest in Residential Healthcare (Residential). Also in June 2016, Celtic Healthcare (Celtic) and Residential combined their business operations and the Company now owns 90% of the combined entity, known as GHG. The Company incurred approximately $2.0 million in expenses in conjunction with these transactions in the second quarter of 2016. Healthcare revenues increased 12% in the first nine months of 2016 due primarily to patient growth for both home health and hospice. Operating results were down for the first nine months of 2016, largely due to the expenses incurred related to the transactions in the second quarter of 2016 and an increase in information systems costs.

In June 2016, Residential and a Michigan hospital formed a joint venture to provide home health services to West Michigan patients. Residential manages the operations of the joint venture 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 pre-tax gain of $3.2 million in the second quarter of 2016 that is included in other non-operating income.

In January 2015, Celtic 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.

SocialCode is a provider of marketing solutions on social, mobile and video platforms. SocialCode revenues increased 39% and 31% in the third quarter and first nine months of 2016, due to continued growth in digital advertising service revenues. SocialCode reported operating losses of $10.8 million and $15.3 million for the third quarter and first nine months of 2016, respectively; these results include incentive accruals of $11.3 million and $12.0 million related to phantom equity appreciation plans, for the relevant periods. The expense amounts related to these plans for the comparable periods of 2015 were insignificant.

Other businesses also include Slate and Foreign Policy, which publish online and print magazines and websites; and two investment stage businesses, Panoply and CyberVista. Losses from each of these businesses in the third quarter and first nine months of 2016 adversely affected operating results.

Corporate Office

Corporate office includes the expenses of the Company’s corporate office, the pension credit for the Company’s traditional defined benefit plan and certain continuing obligations related to prior business dispositions. In the third quarter of 2015, the Company recorded $18.8 million in incremental stock option expense, due to stock option modifications that resulted from the Cable ONE spin-off. The total pension credit for the Company’s traditional defined benefit plan was $48.1 million and $58.7 million in the first nine months of 2016 and 2015, respectively.

Without the pension credit, corporate office expenses declined in the first nine months of 2016 due primarily to lower compensation costs.

Equity in Earnings (Losses) of Affiliates

At September 30, 2016, the Company held interests in a number of home health and hospice joint ventures, and interests in several other affiliates. The Company recorded equity in losses of affiliates of $1.0 million for the third quarter of 2016, compared to earnings of $0.1 million for the third quarter of 2015. The Company recorded equity in losses of affiliates of $0.9 million for the first nine months of 2016, compared to $0.7 million for the first nine months of 2015.

Other Non-Operating Income (Expense)

The Company recorded total other non-operating expense, net, of $18.2 million for the third quarter of 2016, compared to $40.5 million for the third quarter of 2015. The 2016 amounts included a $15.0 million write-down of a cost method investment and $3.8 million in foreign currency losses, partially offset by other items. The 2015 amounts included $26.3 million in losses from the sales of businesses, $13.0 million in foreign currency losses and other items.

The Company recorded total other non-operating income, net, of $15.9 million for the first nine months of 2016, compared to $29.9 million in non-operating expense, net for the first nine months of 2015. The 2016 amounts included a $34.1 million gain on the sale of land; an $18.9 million gain on the sale of a business; a $6.3 million gain on the sale of marketable equity securities; a $3.2 million gain on the Residential joint venture transaction and other items, partially offset by $33.3 million in foreign currency losses and $15.2 million in cost method investment write-downs. The 2015 amounts included $23.3 million in losses from the sales of businesses, $16.2 million in foreign currency losses and other items, offset by a $6.0 million gain on the Celtic joint venture transaction and a $4.8 million increase to the Classified Ventures gain.

Net Interest Expense and Related Balances

The Company incurred net interest expense of $7.9 million and $22.5 million for the third quarter and first nine months of 2016, respectively, compared to $7.3 million and $23.3 million for the third quarter and first nine months of 2015. At September 30, 2016, the Company had $497.4 million in borrowings outstanding at an average interest rate of 6.2% and cash, marketable equity securities and other investments of $1,029.9 million.

In July 2016, a Kaplan UK company entered into a 4-year loan agreement for a £75 million borrowing. The overall effective interest rate is 2.01%, taking into account an interest rate swap agreement the Company entered into on the same date as the borrowing.

Provision for Income Taxes

The Company’s effective tax rate for the first nine months of 2016 was 28.9%. In the third quarter of 2016, a net nonrecurring $8.3 million deferred tax benefit related to Kaplan’s international operations was recorded. In the second quarter of 2016, the Company benefited from a favorable $5.6 million out of period deferred tax adjustment related to the KHE goodwill impairment recorded in the third quarter of 2015. Excluding these adjustments, the Company’s effective tax rate for the first nine months of 2016 was 36.4%.

The Company’s effective tax rate on the loss for continuing operations for the first nine months of 2015 was 4.9%, as a large portion of the goodwill impairment charge and the goodwill included in the loss on the KHE Campuses sale are permanent differences. Excluding the effect of these permanent differences, the effective tax rate for continuing operations for the first nine months of 2015 was 38.0%.

Discontinued Operations

In 2015, the Company completed the spin-off of Cable ONE as an independent, publicly traded company and the sale of a school in China that was previously part of Kaplan International.

As a result of these transactions, income from continuing operations excludes the operating results and related loss, if any, on dispositions of these businesses, which have been reclassified to discontinued operations, net of tax, in 2015.

Earnings Per Share

The calculation of diluted earnings per share for the third quarter and first nine months of 2016 was based on 5,573,982 and 5,599,898 weighted average shares outstanding, respectively, compared to 5,837,107 and 5,810,672 for the third quarter and first nine months of 2015. At September 30, 2016, there were 5,617,576 shares outstanding. On May 14, 2015, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock; the Company has remaining authorization for 264,859 shares as of September 30, 2016.

Forward-Looking Statements

This press release contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K.

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