Graham Holdings Company Reports Third Quarter Earnings

ARLINGTON, Va.–(BUSINESS WIRE)–Graham Holdings Company (NYSE: GHC) today reported net income attributable to common shares of $43.1 million ($8.05 per share) for the third quarter of 2019, compared to $125.1 million ($23.28 per share) for the third quarter of 2018.

The results for the third 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 $42.5 million ($7.94 per share) for the third quarter of 2019, compared to $70.9 million ($13.19 per share) for the third 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 third quarter of 2019:

  • a $20.4 million provision recorded at Kaplan International related to a Value Added Tax (VAT) receivable at UK Pathways (after-tax impact of $16.5 million, or $3.09 per share);
  • a $1.1 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 $0.9 million, or $0.16 per share);
  • $17.4 million in net gains on marketable equity securities (after-tax impact of $13.1 million, or $2.44 per share);
  • non-operating gain of $3.7 million from write-ups of cost method investments (after-tax impact of $2.8 million or $0.51 per share); and
  • $0.7 million in non-operating foreign currency gains (after-tax impact of $0.5 million, or $0.09 per share).

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

  • a $7.9 million intangible asset impairment charge at the healthcare business (after-tax impact of $5.8 million, or $1.08 per share);
  • a $1.0 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 $0.8 million, or $0.14 per share);
  • $45.0 million in net gains on marketable equity securities (after-tax impact of $33.6 million, or $6.26 per share);
  • non-operating gain, net, of $10.1 million from sales, write-ups and impairments of cost method and equity method investments, and related to sales of businesses (after-tax impact of $8.0 million, or $1.48 per share);
  • $0.1 million in non-operating foreign currency losses (after-tax impact of $0.1 million, or $0.02 per share); and
  • a nonrecurring discrete $17.8 million deferred state tax benefit related to the release of valuation allowances ($3.31 per share).

Revenue for the third quarter of 2019 was $738.8 million, up 9% from $674.8 million in the third quarter of 2018, largely due to the acquisition of two automotive dealerships in January 2019 and the acquisition of Clyde’s Restaurant Group (CRG) in July 2019. Revenues grew at healthcare and SocialCode, partially offset by declines at the television broadcasting and manufacturing businesses. The Company reported operating income of $16.3 million for the third quarter of 2019, compared to $60.7 million for the third quarter of 2018. The operating income decline is driven by lower earnings in education, television broadcasting, SocialCode and other businesses, partially offset by improvements in manufacturing and healthcare results.

For the first nine months of 2019, the Company reported net income attributable to common shares of $182.0 million ($33.96 per share), compared to $214.5 million ($39.54 per share) for the first nine months of 2018. The results for the first nine months 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 $127.4 million ($23.76 per share) for the first nine months of 2019, compared to $179.5 million ($33.09 per share) for the first nine months 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 nine months of 2019:

  • a $17.1 million provision recorded at Kaplan International related to a VAT receivable at UK Pathways (after-tax impact of $13.9 million, or $2.59 per share);
  • a $10.7 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 $8.3 million, or $1.55 per share);
  • $6.6 million in expenses related to a second quarter non-operating Separation Incentive Program (SIP) at the education division (after-tax impact of $5.1 million, or $0.95 per share);
  • $49.3 million in net gains on marketable equity securities (after-tax impact of $36.9 million, or $6.90 per share);
  • non-operating gain of $5.1 million from write-ups of cost method investments (after-tax impact of $3.9 million or $0.73 per share);
  • $29.0 million gain from the sale of Gimlet Media (after-tax impact of $21.7 million, or $4.06 per share);
  • $1.3 million in non-operating foreign currency gains (after-tax impact of $1.0 million, or $0.18 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 nine months of 2018:

  • a $7.9 million intangible asset impairment charge at the healthcare business (after-tax impact of $5.8 million, or $1.08 per share);
  • a $2.1 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 $1.6 million, or $0.29 per share);
  • $6.2 million in interest expense related to the settlement of a mandatorily redeemable noncontrolling interest ($1.14 per share);
  • $11.4 million in debt extinguishment costs (after-tax impact of $8.6 million, or $1.60 per share);
  • $28.3 million in net losses on marketable equity securities (after-tax impact of $20.9 million, or $3.86 per share);
  • non-operating gain, net, of $17.0 million from sales, write-ups and impairments of cost method and equity method investments, and related to sales of land and businesses (after-tax impact of $13.4 million, or $2.46 per share);
  • a $4.3 million gain on the Kaplan University Transaction (after-tax impact of $1.8 million, or $0.33 per share);
  • $2.2 million in non-operating foreign currency losses (after-tax impact of $1.7 million, or $0.31 per share);
  • a nonrecurring discrete $17.8 million deferred state tax benefit related to the release of valuation allowances ($3.31 per share); and
  • $1.8 million in income tax benefits related to stock compensation ($0.33 per share).

Revenue for the first nine months of 2019 was $2,168.6 million, up 8% from $2,006.9 million in the first nine months of 2018, largely due to the acquisition of two automotive dealerships in January 2019 and the acquisition of CRG in July 2019. Revenues grew at healthcare and SocialCode, partially offset by declines at the education, television broadcasting and manufacturing businesses. The Company reported operating income of $114.2 million for the first nine months of 2019, compared to $170.6 million for the first nine months of 2018. Operating results declined at the education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by improvements at healthcare.

Division Results

Education

Education division revenue totaled $357.3 million for the third quarter of 2019, down slightly from $358.6 million for the same period of 2018. Kaplan reported an operating loss of $7.2 million for the third quarter of 2019, compared to operating income of $22.3 million for the third quarter of 2018.

For the first nine months of 2019, education division revenue totaled $1,097.5 million, down 1% from revenue of $1,104.1 million for the same period of 2018. Kaplan reported operating income of $44.7 million for the first nine months of 2019, a 46% decline from $82.5 million for the first nine months of 2018.

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

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30

 

 

 

September 30

 

 

(in thousands)

 

2019

 

2018

 

% Change

 

2019

 

2018

 

% Change

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Kaplan international

 

$

178,169

 

 

$

167,668

 

 

6

 

 

$

552,505

 

 

$

535,553

 

 

3

 

Higher education

 

78,712

 

 

89,269

 

 

(12

)

 

237,780

 

 

275,080

 

 

(14

)

Test preparation

 

64,710

 

 

67,749

 

 

(4

)

 

191,533

 

 

195,504

 

 

(2

)

Professional (U.S.)

 

33,820

 

 

34,302

 

 

(1

)

 

110,181

 

 

98,715

 

 

12

 

Kaplan corporate and other

 

2,450

 

 

143

 

 

 

7,121

 

 

870

 

 

Intersegment elimination

 

(542

)

 

(530

)

 

 

(1,584

)

 

(1,617

)

 

 

 

$

357,319

 

 

$

358,601

 

 

0

 

 

$

1,097,536

 

 

$

1,104,105

 

 

(1

)

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Kaplan international

 

$

(14,226

)

 

$

8,375

 

 

 

$

35,596

 

 

$

52,966

 

 

(33

)

Higher education

 

5,177

 

 

6,042

 

 

(14

)

 

9,813

 

 

18,616

 

 

(47

)

Test preparation

 

4,959

 

 

10,572

 

 

(53

)

 

8,794

 

 

17,213

 

 

(49

)

Professional (U.S.)

 

4,939

 

 

6,768

 

 

(27

)

 

20,943

 

 

20,863

 

 

0

 

Kaplan corporate and other

 

(4,067

)

 

(6,770

)

 

40

 

 

(18,824

)

 

(21,616

)

 

13

 

Amortization of intangible assets

 

(3,944

)

 

(2,682

)

 

(47

)

 

(10,888

)

 

(5,494

)

 

(98

)

Impairment of long-lived assets

 

 

 

 

(693

)

 

 

Intersegment elimination

 

1

 

 

(43

)

 

 

(2

)

 

(32

)

 

 

 

$

(7,161

)

 

$

22,262

 

 

 

$

44,739

 

 

$

82,516

 

 

(46

)

Kaplan International includes English-language programs, and postsecondary education and professional training businesses largely outside the United States. In July 2019, Kaplan acquired Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. Kaplan International revenue increased 6% and 3% for the third quarter and first nine months of 2019, respectively. On a constant currency basis, revenue increased 13% and 8% for the third quarter and first nine months of 2019, respectively. The revenue increases were due to growth at UK Pathways, UK Professional and Australia, and from the Heverald acquisition. Kaplan International reported an operating loss of $14.2 million in the third quarter of 2019, compared to operating income of $8.4 million in the third quarter of 2018. Operating income decreased to $35.6 million in the first nine months of 2019, compared to $53.0 million in the first nine months of 2018. The decline in operating results in 2019 is due to the VAT provision recorded at UK Pathways and a decline in Singapore, offset by increases at UK Professional and Australia.

In 2017, HMRC raised assessments against Kaplan UK Pathways for VAT relating to 2014 to 2017, which were paid by Kaplan. Kaplan challenged these assessments and the Company believes it has met all requirements under UK VAT law and is entitled to recover the £17.3 million receivable from assessments and subsequent payments through September 30, 2019. Due to recent developments in the case, in the third quarter of 2019, the Company recorded a full provision of £17.3 million ($21.0 million) against this receivable; of this amount, £14.1 million ($17.1 million) relates to years 2014 to 2018. The Company estimates total additional annual VAT expense at the UK Pathways business of approximately $6.0 million related to this matter for 2019. If the Company ultimately prevails in this case, the provision will be reversed and a pre-tax credit will be recorded in the Company’s Consolidated Statement of Operations. The result of the case is expected to be known by the end of 2020.

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 third quarter and first nine months of 2019, Higher Education revenue was down 12% and 14%, respectively, due to the KU Transaction. In the first nine months of 2019, the Company recorded a portion of the service fee with Purdue Global based on an assessment of its collectability under the TOSA. This resulted in a decline in Higher Education results for the first nine months of 2019, as the Company recorded the full service fee for Purdue Global for the first six months of 2018, and a portion of the service fee for the third quarter of 2018. Following the transition from KU, Purdue Global launched a planned marketing campaign to fully establish its new brand. This significant marketing spend, which the Company supports, impacts the cash generated by Purdue Global and its current ability to fully pay the KHE service fee 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 decreased 4% and 2% for the third quarter and first nine months of 2019, respectively. Excluding revenue from the Barron’s acquisition, revenues were down 11% and 9%, respectively, due to declines in KTP’s retail comprehensive test preparation programs. KTP operating results declined 53% and 49% in the third quarter and first nine months of 2019, respectively, due primarily to revenue declines for retail comprehensive test preparation programs. Operating losses for the new economy skills training programs were $3.2 million and $2.8 million for each of the first nine months of 2019 and 2018, respectively.

In the second quarter of 2019, the Company approved a SIP to reduce the number of employees at KTP and Higher Education. In connection with the SIP, the Company recorded $6.6 million in non-operating pension expense in the second quarter of 2019.

Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. Kaplan Professional (U.S.) revenue in the third quarter of 2019 declined 1% due to declines in CFA, real estate and accountancy programs. In the first nine months of 2019, Kaplan Professional (U.S.) revenue increased 12%, due 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 declined in the third quarter of 2019, primarily due to lower demand for real estate and accountancy programs and increased spending for sales and marketing. Kaplan Professional (U.S) operating results were flat for the first nine months of 2019, due to increased earnings at PPI and CFFP, offset by increased sales and marketing expenses.

Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities. Overall, Kaplan corporate and other expenses declined in 2019 due to lower incentive compensation costs.

Television Broadcasting

Revenue at the television broadcasting division declined 11% to $115.2 million in the third quarter of 2019, from $130.0 million in the same period of 2018. The revenue decrease is due to a $19.9 million decrease in political advertising revenue, slightly offset by a $3.1 million increase in retransmission revenues. In the third quarter of 2019 and 2018, the television broadcasting division recorded $1.1 million and $1.0 million, respectively, in reductions to operating expenses related to property, plant and equipment gains due to new equipment received at no cost in connection with the spectrum repacking mandate of the FCC. Operating income for the third quarter of 2019 decreased 34% to $36.8 million, from $55.5 million in the same period of 2018, due to lower revenues and higher network fees.

Revenue at the television broadcasting division declined 4% to $340.0 million in the first nine months of 2019, from $352.9 million in the same period of 2018. The revenue decrease is due primarily to a $25.0 million decrease in political advertising revenue, an $8.6 million decrease in 2018 incremental winter Olympics-related advertising revenue at the Company’s NBC stations; partially offset by $17.5 million in higher retransmission revenues. In the first nine months of 2019 and 2018, the television broadcasting division recorded $10.7 million and $2.1 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. Operating income for the first nine months of 2019 decreased 15% to $116.8 million from $137.1 million in the same period of 2018, due to lower revenues and higher network fees, partially offset by increased property, plant and equipment gains.

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 11% and 8% in the third quarter and first nine months of 2019, respectively, due primarily to a decline at Hoover from lower wood prices, partially offset by increases due to the Furnlite acquisition. Manufacturing operating income increased in the third quarter of 2019, due partly to improved results at Hoover from losses on inventory sales in the third quarter of 2018. Operating income declined in the first nine months of 2019 due largely to increased labor and other operating costs at Hoover.

Healthcare

The Graham Healthcare Group (GHG) provides home health and hospice services in three states. Healthcare revenues increased in the first nine months of 2019, largely due to growth in home health and hospice services. The improvement in GHG operating results in 2019 is due to increased revenues and the absence of integration costs and other overall cost reduction in the first nine months of 2019. In the third quarter of 2018, GHG recorded a $7.9 million intangible asset impairment charge related to the Celtic trademark, which was phased-out in the second half of 2018.

SocialCode

SocialCode is a provider of marketing solutions managing data, creative, media and marketplaces to accelerate client growth. In the third quarter of 2018, SocialCode acquired Marketplace Strategy, a Cleveland-based Amazon sales acceleration agency. SocialCode’s revenue increased 16% and 9% in the third quarter and first nine months of 2019, respectively. SocialCode reported operating losses of $0.4 million and $5.4 million in the third quarter and first nine months of 2019, respectively, compared to operating income of $5.1 million and an operating loss of $0.4 million in the third quarter and first nine months of 2018, respectively. The 2018 results include a $7.5 million and $7.2 million credit related to SocialCode’s phantom equity plans in the third quarter and first nine months of 2018, respectively.

Other Businesses

On July 31, 2019, the Company acquired CRG. CRG owns and operates thirteen restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton, two of the top twenty highest grossing independent restaurants in the United States. CRG is managed by its existing management team as a wholly-owned subsidiary of the Company.

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 operate and manage the dealerships. Graham Holdings Company holds a 90% stake.

Revenues from other businesses increased due mostly to the automotive dealership and CRG acquisitions.

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 nine months of 2019. Losses from each of these five businesses in the first nine 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 September 30, 2019, the Company held an approximate 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 $4.7 million for the third quarter of 2019, compared to $9.5 million for the third quarter of 2018. The Company recorded equity in earnings of affiliates of $7.8 million for the first nine months of 2019, compared to $13.0 million for the first nine months of 2018. In the third quarter of 2018, the Company recorded $7.9 million in gains in equity in earnings of affiliates related to two of its investments.

Net Interest Expense, Debt Extinguishment Costs 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 $11.4 million in debt extinguishment costs related to the early termination of the 7.25% notes.

The Company incurred net interest expense of $5.3 million and $17.8 million for the third quarter and first nine months of 2019, respectively, compared to $5.5 million and $27.5 million for the third quarter and first nine months of 2018, respectively. The Company incurred $6.2 million in interest expense related to the mandatorily redeemable noncontrolling interest at the Graham Healthcare Group settled in the second quarter of 2018. The higher interest expense in 2018 is also due to both the $400 million eight-year and ten-year notes outstanding for the month of June 2018.

Contacts

Wallace R. Cooney

(703) 345-6470

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