Graham Holdings Company Reports First Quarter Earnings

ARLINGTON, Va.–(BUSINESS WIRE)–Graham Holdings Company (NYSE: GHC) today reported net income
attributable to common shares of $81.7 million ($15.26 per share) for
the first quarter of 2019, compared to $42.9 million ($7.78 per share)
for the first quarter of 2018.

The results for the first quarter of 2019 and 2018 were affected by a
number of items as described in the following paragraphs. Excluding
these items, net income attributable to common shares was $38.5 million
($7.18 per share) for the first quarter of 2019, compared to $46.0
million ($8.35 per share) for the first quarter of 2018. (Refer to the
Non-GAAP Financial Information schedule at the end of this release for
additional details.)

Items included in the Company’s net income for the first quarter of 2019:

  • a $1.8 million reduction to operating expenses from property, plant
    and equipment gains in connection with the spectrum repacking mandate
    of the FCC (after-tax impact of $1.4 million, or $0.26 per share);
  • $24.1 million in net gains on marketable equity securities (after-tax
    impact of $18.0 million, or $3.37 per share);
  • $29.0 million gain from the sale of Gimlet Media (after-tax impact of
    $21.7 million, or $4.06 per share);
  • $0.5 million in non-operating foreign currency gains (after-tax impact
    of $0.4 million, or $0.07 per share); and
  • $1.7 million in income tax benefits related to stock compensation
    ($0.32 per share).

Items included in the Company’s net income for the first quarter of 2018:

  • a $0.3 million reduction to operating expenses from property, plant
    and equipment gains in connection with the spectrum repacking mandate
    of the FCC (after-tax impact of $0.2 million, or $0.04 per share);
  • $14.1 million in net losses on marketable equity securities (after-tax
    impact of $10.7 million, or $1.94 per share);
  • non-operating gain, net, of $4.4 million from sales of a cost method
    investment and a business (after-tax impact of $3.6 million, or $0.65
    per share);
  • a $4.3 million gain on the Kaplan University Transaction (after-tax
    impact of $1.8 million, or $0.33 per share);
  • $0.2 million in non-operating foreign currency gains (after-tax impact
    of $0.1 million, or $0.02 per share); and
  • $1.8 million in income tax benefits related to stock compensation
    ($0.33 per share).

Revenue for the first quarter of 2019 was $692.2 million, up 5% from
$659.4 million in the first quarter of 2018. Revenues grew at other
businesses, partially offset by declines at the education, television
broadcasting, and manufacturing divisions. The Company reported
operating income of $40.0 million for the first quarter of 2019,
compared to $44.2 million for the first quarter of 2018. The operating
income decline is driven by lower earnings in the television
broadcasting and manufacturing divisions, partially offset by
improvements in education and healthcare division results.

Division Results

Education

Education division revenue totaled $372.5 million for the first quarter
of 2019, down 1% from $375.5 million for the same period of 2018. Kaplan
reported operating income of $25.6 million for the first quarter of
2019, up 13% from $22.7 million for the first quarter of 2018.

A summary of Kaplan’s operating results is as follows:

         
Three Months Ended
March 31
(in thousands)       2019     2018     % Change
Revenue    
Kaplan international $ 185,756 $ 183,582 1
Higher education 82,780 99,830 (17 )
Test preparation 61,150 59,151 3
Professional (U.S.) 41,214 33,356 24
Kaplan corporate and other 2,302 285
Intersegment elimination (748 )     (705 )
$ 372,454       $ 375,499   (1 )
Operating Income (Loss)
Kaplan international $ 24,285 $ 20,404 19
Higher education 1,915 1,355 41
Test preparation (454 ) 521
Professional (U.S.) 11,259 9,315 21
Kaplan corporate and other (7,837 ) (7,746 ) (1 )
Amortization of intangible assets (3,567 ) (1,149 )
Intersegment elimination (6 )      
$ 25,595       $ 22,700   13
 

Kaplan International includes English-language programs, and
postsecondary education and professional training businesses largely
outside the United States. Kaplan International revenue increased 1% for
the first quarter of 2019. On a constant currency basis, revenue
increased 7% for the first quarter of 2019. Operating income increased
to $24.3 million in the first quarter of 2019, compared to $20.4 million
in the first quarter of 2018. Revenue and operating income increased due
to improved results at Pathways and UK Professional, offset by declines
in Singapore.

Prior to the KU Transaction closing on March 22, 2018, Higher Education
included Kaplan’s domestic postsecondary education businesses, made up
of fixed-facility colleges and online postsecondary and career programs.
Following the KU Transaction closing, the Higher Education division
includes the results as a service provider to higher education
institutions. In the first quarter of 2019, Higher Education revenue was
down 17% due to the KU Transaction. In the first quarter of 2019, the
Company recorded a portion of the service fee with Purdue Global based
on an assessment of its collectability under the TOSA. The Company will
continue to assess the collectability of the service fee with Purdue
Global on a quarterly basis to make a determination as to whether to
record all or part of the service fee in the future and whether to make
adjustments to service fee amounts recognized in earlier periods.

Kaplan Test Preparation (KTP) includes Kaplan’s standardized test
preparation programs. In September 2018, KTP acquired the test
preparation and study guide assets of Barron’s Educational Series, a New
York-based education publishing company. KTP revenue increased 3% for
the first quarter of 2019 due to the Barron’s acquisition. Excluding
revenue from the Barron’s acquisition, revenues were down 5% for the
first quarter of 2019, due to declines in demand for classroom-based
offerings, offset in part by growth in online-based programs. KTP
operating results declined in the first quarter of 2019, due partly to
increased losses from the new economy skills training programs.
Operating losses for the new economy skills training programs were $1.1
million and $0.5 million for the first quarter of 2019 and 2018,
respectively. Excluding losses from the new economy skills training
programs, KTP operating results were down in the first quarter of 2019,
due primarily to revenue declines for classroom-based offerings.

Kaplan Professional (U.S.) includes the domestic professional and other
continuing education businesses. In the first quarter of 2019, Kaplan
Professional (U.S.) revenue was up 24% due mostly to the May 2018
acquisition of Professional Publications, Inc. (PPI), an independent
publisher of professional licensing exam review materials that provides
engineering, surveying, architecture, and interior design licensure exam
review products, and the July 2018 acquisition of College for Financial
Planning (CFFP), a provider of financial education and training to
individuals through programs of study for professionals pursuing a
career in Financial Planning. Kaplan Professional (U.S) operating
results increased 21% for the first quarter of 2019 due mostly to
earnings from PPI and CFFP.

Kaplan corporate and other represents unallocated expenses of Kaplan,
Inc.’s corporate office, other minor businesses and certain shared
activities.

Television Broadcasting

Revenue at the television broadcasting division decreased 1% to $108.2
million in the first quarter of 2019, from $108.8 million in the same
period of 2018. The revenue decline is due to $8.6 million in first
quarter 2018 incremental winter Olympics-related advertising revenue at
the Company’s NBC affiliates and a $1.6 million decrease in political
advertising revenue, offset by $9.7 million in higher retransmission
revenues. Operating income for the first quarter of 2019 declined 12% to
$35.5 million, from $40.5 million in the same period of 2018, due to
lower revenues and increased network fees.

In the first quarter of 2019 and 2018, the television broadcasting
division recorded $1.8 million and $0.3 million, respectively, in
reductions to operating expenses related to non-cash property, plant and
equipment gains due to new equipment received at no cost in connection
with the spectrum repacking mandate of the FCC.

Manufacturing

Manufacturing includes four businesses: Hoover, a supplier of pressure
impregnated kiln-dried lumber and plywood products for fire retardant
and preservative applications; Dekko, a manufacturer of electrical
workspace solutions, architectural lighting and electrical components
and assemblies; Joyce/Dayton, a 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. In July 2018, Dekko acquired
Furnlite, Inc., a Fallston, NC-based manufacturer of power and data
solutions for the hospitality and residential furniture industry.

Manufacturing revenues declined 2% in the first quarter of 2019 due to a
decline at Hoover from lower wood prices. Manufacturing operating income
declined in the first quarter of 2019 due largely to increased labor and
other operating costs at Hoover and Dekko, along with gains on inventory
sales at Hoover in the first quarter of 2018.

Healthcare

The Graham Healthcare Group (GHG) provides home health and hospice
services in three states. Healthcare revenues were flat in the first
quarter of 2019. The improvement in GHG operating results in 2019 is due
to the absence of integration costs and other overall cost reduction in
the first quarter of 2019.

SocialCode

SocialCode is a provider of marketing solutions on social, mobile and
video platforms. In the third quarter of 2018, SocialCode acquired
Marketplace Strategy, a Cleveland-based Amazon sales acceleration
agency. SocialCode’s revenue increased 1% in the first quarter of 2019.
SocialCode reported operating losses of $4.0 million in the first
quarter of 2019, compared to $3.8 million in the first quarter of 2018.

Other Businesses

On January 31, 2019, the Company acquired two automotive dealerships,
Lexus of Rockville and Honda of Tysons Corner, from Sonic Automotive.
The Company also announced it had entered into an agreement
with Christopher J. Ourisman, a member of the Ourisman Automotive Group
family of dealerships. Mr. Ourisman and his team of industry
professionals will operate and manage the dealerships. Graham Holdings
Company holds a 90% stake. Revenues from other businesses increased due
mostly to the automotive dealership acquisition.

Other businesses also includes Slate and Foreign Policy, which publish
online and print magazines and websites; and three investment stage
businesses, Megaphone, Pinna and CyberVista. Megaphone, Slate and
CyberVista reported revenue increases in the first quarter of 2019.
Losses from each of these five businesses in the first three months of
2019 adversely affected operating results.

Corporate Office

Corporate office includes the expenses of the Company’s corporate office
and certain continuing obligations related to prior business
dispositions.

Equity in Earnings of Affiliates

At March 31, 2019, the Company held an 11% interest in Intersection
Holdings, LLC, a company that provides digital marketing and advertising
services and products for cities, transit systems, airports, and other
public and private spaces. The Company also holds interests in a number
of home health and hospice joint ventures, and several other affiliates.
The Company recorded equity in earnings of affiliates of $1.7 million
for the first quarter of 2019, compared to $2.6 million for the first
quarter of 2018.

Net Interest Expense and Related Balances

In connection with the auto dealership acquisition that closed on
January 31, 2019, a subsidiary of the Company borrowed $30 million to
finance a portion of the acquisition and entered into an interest rate
swap to fix the interest rate on the debt at 4.7% per annum. The
subsidiary is required to repay the loan over a 10-year period by making
monthly installment payments.

On May 30, 2018, the Company issued 5.75% unsecured eight-year
fixed-rate notes due June 1, 2026. Interest is payable semi-annually on
June 1 and December 1. On June 29, 2018, the Company used the net
proceeds from the sale of the notes and other cash to repay $400 million
of 7.25% notes that were due February 1, 2019.

The Company incurred net interest expense of $5.7 million for the first
quarter of 2019, compared to $6.7 million for the first quarter of 2018.

At March 31, 2019, the Company had $509.8 million in borrowings
outstanding at an average interest rate of 5.1% and cash, marketable
equity securities and other investments of $719.1 million.

Non-operating Pension and Postretirement
Benefit Income, net

The Company recorded net non-operating pension and postretirement
benefit income of $19.9 million for the first quarter of 2019, compared
to $21.4 million for the first quarter of 2018.

Gain (Loss) on Marketable Equity Securities, net

Overall, the Company recognized $24.1 million in net gains on marketable
equity securities in first quarter of 2019, compared to $14.1 million in
net losses on marketable equity securities in the first quarter of 2018.

Other Non-Operating Income

The Company recorded total other non-operating income, net, of $29.4
million for the first quarter of 2019, compared to $9.2 million for the
first quarter of 2018. The 2019 amounts included a $29.0 million gain on
the sale of the Company’s interest in Gimlet Media and $0.5 million in
foreign currency gains, offset by other items. The 2018 amounts included
a $5.9 million gain on sales of businesses; a $2.8 million gain on the
sale of a cost method investment; $0.2 million in foreign currency
gains; and other items.

Provision for Income Taxes

The Company’s effective tax rate for the first three months of 2019 and
2018 was 25.3% and 24.0%, respectively. In the first quarter of 2019 and
2018, the Company recorded income tax benefits related to stock
compensation of $1.7 million and $1.8 million, respectively.

Earnings Per Share

The calculation of diluted earnings per share for the first quarter of
2019 was based on 5,326,448 weighted average shares outstanding,
compared to 5,472,643 for the first quarter of 2018. At March 31, 2019,
there were 5,314,930 shares outstanding. On November 9, 2017, 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
273,655 shares as of March 31, 2019.

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.

 
GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
         
Three Months Ended
March 31 %
(in thousands, except per share amounts)       2019     2018     Change
Operating revenues $ 692,199     $ 659,436 5
Operating expenses 625,613 590,196 6
Depreciation of property, plant and equipment 13,523 14,642 (8 )
Amortization of intangible assets 13,060       10,384   26
Operating income 40,003 44,214 (10 )
Equity in earnings of affiliates, net 1,679 2,579 (35 )
Interest income 1,700 1,372 24
Interest expense (7,425 ) (8,071 ) (8 )
Non-operating pension and postretirement benefit income, net 19,928 21,386 (7 )
Gain (loss) on marketable equity securities, net 24,066 (14,102 )
Other income, net 29,351       9,187  
Income before income taxes 109,302 56,565 93
Provision for income taxes 27,600       13,600  
Net income 81,702 42,965 90
Net loss (income) attributable to noncontrolling interests 46       (74 )
Net Income Attributable to Graham Holdings Company Common
Stockholders
$ 81,748       $ 42,891   91
Per Share Information Attributable to Graham Holdings Company
Common Stockholders
Basic net income per common share $ 15.38 $ 7.84 96
Basic average number of common shares outstanding 5,284 5,436
Diluted net income per common share $ 15.26 $ 7.78 96
Diluted average number of common shares outstanding 5,326 5,473
 
 
GRAHAM HOLDINGS COMPANY
BUSINESS DIVISION INFORMATION
(Unaudited)
 
      Three Months Ended    
March 31 %
(in thousands)       2019     2018     Change
Operating Revenues    
Education $ 372,454 $ 375,499 (1 )
Television broadcasting 108,223 108,802 (1 )
Manufacturing 115,157 117,406 (2 )
Healthcare 37,728 37,621 0
SocialCode 13,447 13,299 1
Other businesses 45,230 6,833
Corporate office
Intersegment elimination (40 )     (24 )
$ 692,199       $ 659,436   5
Operating Expenses
Education $ 346,859 $ 352,799 (2 )
Television broadcasting 72,683 68,260 6
Manufacturing 111,883 108,778 3
Healthcare 35,399 39,012 (9 )
SocialCode 17,465 17,080 2
Other businesses 53,723 15,375
Corporate office 14,224 13,942 2
Intersegment elimination (40 )     (24 )
$ 652,196       $ 615,222   6
Operating Income (Loss)
Education $ 25,595 $ 22,700 13
Television broadcasting 35,540 40,542 (12 )
Manufacturing 3,274 8,628 (62 )
Healthcare 2,329 (1,391 )
SocialCode (4,018 ) (3,781 ) (6 )
Other businesses (8,493 ) (8,542 ) 1
Corporate office (14,224 )     (13,942 ) (2 )
$ 40,003       $ 44,214   (10 )
Depreciation
Education $ 6,201 $ 7,606 (18 )
Television broadcasting 3,239 3,071 5
Manufacturing 2,433 2,451 (1 )
Healthcare 610 653 (7 )
SocialCode 152 233 (35 )
Other businesses 648 375 73
Corporate office 240       253   (5 )
$ 13,523       $ 14,642   (8 )
Amortization of Intangible Assets
Education $ 3,567 $ 1,149
Television broadcasting 1,408 1,408
Manufacturing 6,530 5,936 10
Healthcare 1,398 1,808 (23 )
SocialCode 157 83 89
Other businesses
Corporate office        
$ 13,060       $ 10,384   26
Pension Expense
Education $ 2,664 $ 2,664
Television broadcasting 731 493 48
Manufacturing 25 17 47
Healthcare 183 122 50
SocialCode 248 156 59
Other businesses 201 116 73
Corporate office 1,169       1,372   (15 )
$ 5,221       $ 4,940   6
 
 
GRAHAM HOLDINGS COMPANY
EDUCATION DIVISION INFORMATION
(Unaudited)
         
Three Months Ended
March 31 %
(in thousands)       2019     2018     Change
Operating Revenues    
Kaplan international $ 185,756 $ 183,582 1
Higher education 82,780 99,830 (17 )
Test preparation 61,150 59,151 3
Professional (U.S.) 41,214 33,356 24
Kaplan corporate and other 2,302 285
Intersegment elimination (748 )     (705 )
$ 372,454       $ 375,499   (1 )
Operating Expenses
Kaplan international $ 161,471 $ 163,178 (1 )
Higher education 80,865 98,475 (18 )
Test preparation 61,604 58,630 5
Professional (U.S.) 29,955 24,041 25
Kaplan corporate and other 10,139 8,031 26
Amortization of intangible assets 3,567 1,149
Intersegment elimination (742 )     (705 )
$ 346,859       $ 352,799   (2 )
Operating Income (Loss)
Kaplan international $ 24,285 $ 20,404 19
Higher education 1,915 1,355 41
Test preparation (454 ) 521
Professional (U.S.) 11,259 9,315 21
Kaplan corporate and other (7,837 ) (7,746 ) (1 )
Amortization of intangible assets (3,567 ) (1,149 )
Intersegment elimination (6 )      
$ 25,595       $ 22,700   13
Depreciation
Kaplan international $ 3,882 $ 3,974 (2 )
Higher education 597 1,858 (68 )
Test preparation 805 978 (18 )
Professional (U.S.) 865 642 35
Kaplan corporate and other 52       154   (66 )
$ 6,201       $ 7,606   (18 )
Pension Expense
Kaplan international $ 117 $ 83 41
Higher education 1,163 1,406 (17 )
Test preparation 866 729 19
Professional (U.S.) 348 290 20
Kaplan corporate and other 170       156   9
$ 2,664       $ 2,664  
 
 
NON-GAAP FINANCIAL INFORMATION
GRAHAM HOLDINGS COMPANY
(Unaudited)
 

In addition to the results reported in accordance with accounting
principles generally accepted in the United States (GAAP) included in
this press release, the Company has provided information regarding net
income, excluding certain items described below, reconciled to the most
directly comparable GAAP measures. Management believes that these
non-GAAP measures, when read in conjunction with the Company’s GAAP
financials, provide useful information to investors by offering:

  • the ability to make meaningful period-to-period comparisons of the
    Company’s ongoing results;
  • the ability to identify trends in the Company’s underlying business;
    and
  • a better understanding of how management plans and measures the
    Company’s underlying business.

Net income, excluding certain items, should not be considered
substitutes or alternatives to computations calculated in accordance
with and required by GAAP. These non-GAAP financial measures should be
read only in conjunction with financial information presented on a GAAP
basis. The following table reconciles the non-GAAP financial measures to
the most directly comparable GAAP measures:

     
Three Months Ended March 31
2019     2018
(in thousands, except per share amounts)      

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

   

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

Amounts attributable to Graham Holdings Company Common
Stockholders
                   
As reported $ 109,302 $ 27,600 $ 81,702 $ 56,565 $ 13,600 $ 42,965
Attributable to noncontrolling interests 46   (74 )
Attributable to Graham Holdings Company Stockholders 81,748 42,891
Adjustments:
Reduction to operating expenses in connection with the broadcast
spectrum repacking
(1,788 ) (411 ) (1,377 ) (307 ) (71 ) (236 )
Net (gains) losses on marketable equity securities (24,066 ) (6,016 ) (18,050 ) 14,102 3,384 10,718
Gain on sale of Gimlet Media (28,994 ) (7,248 ) (21,746 )
Non-operating gain from sales of a cost method investment and a
business
(4,437 ) (860 ) (3,577 )
Gain on Kaplan University Transaction (4,315 ) (2,472 ) (1,843 )
Foreign currency gain (514 ) (129 ) (385 ) (177 ) (42 ) (135 )
Tax benefit related to stock compensation 1,700 (1,700 ) 1,810 (1,810 )
Net Income, adjusted (non-GAAP) $ 38,490   $ 46,008  
 
Per share information attributable to Graham Holdings Company
Common Stockholders
Diluted income per common share, as reported $ 15.26   $ 7.78  
Adjustments:
Reduction to operating expenses in connection with the broadcast
spectrum repacking
(0.26 ) (0.04 )
Net (gains) losses on marketable equity securities (3.37 ) 1.94
Gain on sale of Gimlet Media (4.06 )
Non-operating gain from sales of a cost method investment and a
business
(0.65 )
Gain on Kaplan University Transaction (0.33 )
Foreign currency gain (0.07 ) (0.02 )
Tax benefit related to stock compensation (0.32 ) (0.33 )
Diluted income per common share, adjusted (non-GAAP) $ 7.18   $ 8.35  
 
The adjusted diluted per share amounts may not compute due to
rounding.
 

Contacts

Wallace R. Cooney
(703) 345-6470

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