Graham Holdings Company Reports Second Quarter Earnings

ARLINGTON, Va.–(BUSINESS WIRE)–Graham Holdings Company (NYSE: GHC) today reported net income attributable to common shares of $18.9 million ($3.60 per share) for the second quarter of 2020, compared to $57.1 million ($10.65 per share) for the second quarter of 2019.

The novel coronavirus (COVID-19) pandemic and measures taken to prevent its spread, such as travel restrictions, shelter in place orders and mandatory closures, significantly impacted the Company’s results for the first six months of 2020, largely from reduced demand for the Company’s products and services. This significant adverse impact is expected to continue in the second half of 2020. The Company’s management is taking a variety of measures to reduce costs and capital expenditures. The Company cannot predict the severity or duration of the pandemic, the extent to which demand for the Company’s products and services will be adversely affected or the degree to which financial and operating results will be negatively impacted.

The results for the second quarter of 2020 and 2019 were also affected by a number of items as described in the following paragraphs. Including these items, income before income taxes was $60.8 million for the second quarter of 2020, compared to $73.9 million for the second quarter of 2019. Excluding these items, income before income taxes was $40.0 million for the second quarter of 2020, compared to $64.8 million for the second quarter of 2019. (Refer to the Non-GAAP Financial Information schedule at the end of this release for additional details.)

Items included in the Company’s income before income taxes for the second quarter of 2020:

  • $9.3 million in long-lived asset impairment charges;
  • $10.2 million in restructuring charges at the education division;
  • $2.8 million in accelerated depreciation at other businesses;
  • a $1.1 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
  • $4.6 million in expenses related to non-operating Separation Incentive Programs at the education division and SocialCode;
  • $39.9 million in net gains on marketable equity securities;
  • non-operating gains of $7.8 million from write-ups and sales of cost and equity method investments; and
  • $1.1 million in non-operating foreign currency losses.

Items included in the Company’s income before income taxes for the second quarter of 2019:

  • a $7.8 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
  • $6.6 million in expenses related to a non-operating Separation Incentive Program at the education division;
  • $7.8 million in net gains on marketable equity securities; and
  • $0.1 million in non-operating foreign currency gains.

Revenue for the second quarter of 2020 was $652.9 million, down 11% from $737.6 million in the second quarter of 2019, largely due to the impact of COVID-19. Revenues declined at education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an increase at healthcare. The Company reported operating income of $5.9 million for the second quarter of 2020, compared to $58.0 million for the second quarter of 2019. The operating income decline is driven by lower earnings in education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an improvement at healthcare.

For the first six months of 2020, the Company reported a net loss attributable to common shares of $14.4 million ($2.77 per share) compared to net income attributable to common shares of $138.8 million ($25.91 per share) for the first six months of 2019. The results for the first six months of 2020 and 2019 were affected by a number of items as described in the following paragraphs. Including these items, loss before income taxes was $18.5 million for the first six months of 2020, compared to income before income taxes of $183.2 million for the first six months of 2019. Excluding these items, income before income taxes was $79.1 million for the first six months of 2020, compared to $117.3 million for the first six months of 2019. (Refer to the Non-GAAP Financial Information schedule at the end of this release for additional details.)

Items included in the Company’s loss before income taxes for the six months of 2020:

  • $25.7 million in goodwill and other long-lived asset impairment charges;
  • $10.2 million in restructuring charges at the education division;
  • $2.8 million in accelerated depreciation at other businesses;
  • a $1.4 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
  • $4.6 million in expenses related to non-operating Separation Incentive Programs at the education division and SocialCode;
  • $60.5 million in net losses on marketable equity securities;
  • non-operating gain, net, of $1.6 million from write-ups, sales and impairments of cost and equity method investments; and
  • $3.2 million in non-operating foreign currency gains.

Items included in the Company’s income before income taxes for the six months of 2019:

  • a $9.6 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
  • $6.6 million in expenses related to a non-operating Separation Incentive Program at the education division;
  • $31.9 million in net gains on marketable equity securities;
  • $29.0 million gain from the sale of Gimlet Media;
  • non-operating gain of $1.4 million from the write-up of cost method investments; and
  • $0.6 million in non-operating foreign currency gains.

Revenue for the first six months of 2020 was $1,385.1 million, down 3% from $1,429.8 million in the first six months of 2019, largely due to the impact of COVID-19. Revenues declined at education, television broadcasting, manufacturing and SocialCode, partially offset by increases at healthcare and other businesses. The Company reported operating income of $14.0 million for the first six months of 2020, compared to $98.0 million for the first six months of 2019. Operating results declined in education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an improvement at healthcare.

Division Results

Education

The COVID-19 pandemic adversely impacted Kaplan’s operating results in the second quarter and first six months of 2020. The impact began in February and continued through the first half of 2020.

Kaplan serves a significant number of students who travel to other countries to study a second language, prepare for licensure, or pursue a higher education degree. Government-imposed travel restrictions and school closures arising from COVID-19 had a negative impact on the ability of international students to travel and attend Kaplan’s programs, particularly Kaplan International’s Language programs. In addition, most licensing bodies and administrators of standardized exams postponed or canceled scheduled examinations due to COVID-19, resulting in a significant number of students deciding to defer their studies. In these instances, Kaplan extended the life of its courses to be responsive to the changes in study needs of its students. These program modifications resulted in longer revenue recognition periods, adversely affecting the timing of revenue recognition at Kaplan’s Test Preparation and Professional education divisions. Overall, this is expected to continue to adversely impact Kaplan’s revenues and operating results for the remainder of 2020, particularly at Kaplan International Languages.

Most of Kaplan Higher Education’s (KHE) services are delivered online by staff who have historically worked both virtually and in office locations. In response to COVID-19 necessitated “stay-at-home” protocols, KHE transitioned its entire staff to virtual work arrangements. KHE did not experience any disruption in its service delivery and Purdue Global has experienced an increase in program demand in the first half of 2020.

To help mitigate the negative revenue impact arising from the COVID-19 disruption, and to re-align its program offerings to better pursue opportunities arising from the disruption, Kaplan management developed and implemented a number of initiatives across its businesses, including: employee salary and work-hour reductions; temporary furlough and other employee reductions; reduced discretionary spending; facility restructuring; reduced capital expenditures; and accelerated development and promotion of various online programs and solutions. The facility restructuring plan undertaken by Kaplan was developed to align classroom and office space at International Languages and Higher Education with future business requirements, and was premised on the decision at Kaplan Test Prep and Kaplan Professional (U.S.) to substantially reduce location-based in person course offerings in step with shifting consumer preferences for online programs. In the second quarter and first six months of 2020, Kaplan recorded $10.5 million and $12.5 million in lease restructuring costs, respectively; and $1.2 million in second quarter 2020 severance restructuring costs. The lease restructuring costs included $3.4 million in accelerated depreciation expense in the second quarter and first six months of 2020. Kaplan also recorded a $10.0 million lease impairment charge in connection with these restructuring plans in the second quarter of 2020; this impairment charge included $2.0 million in property, plant and equipment write-downs. Also in the second quarter of 2020, the Company approved a Separation Incentive Program (SIP) that reduced the number of employees at Kaplan International, Higher Education, Kaplan Professional (U.S.) and Kaplan corporate, resulting in $5.0 million in non-operating pension expense in the second quarter of 2020. Additional restructuring and cost reduction plans are under development at Kaplan to be implemented in the second half of 2020.

In June 2020, Kaplan announced a plan to combine its three primary divisions based in the United States (Kaplan Test Prep, Kaplan Professional, and Kaplan Higher Education) into one business known as Kaplan North America (KNA). The plan for this combination is under development and is designed to create and reinforce Kaplan’s competitiveness in each market and new markets into which Kaplan extends.

Education division revenue totaled $333.2 million for the second quarter of 2020, down 9% from $367.8 million for the same period of 2019. Kaplan reported operating income of $12.3 million for the second quarter of 2020, a 53% decline from $26.3 million for the second quarter of 2019.

For the first six months of 2020, education division revenue totaled $689.6 million, down 7% from revenue of $740.2 million for the same period of 2019. Kaplan reported operating income of $16.9 million for the first six months of 2020, a 67% decline from $51.9 million for the first six months of 2019.

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

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

June 30

 

 

 

June 30

 

 

(in thousands)

2020

 

2019

 

% Change

 

2020

2019

 

% Change

Revenue

 

 

 

 

 

 

 

 

 

 

 

Kaplan international

$

164,713

 

 

$

188,580

 

 

(13

)

 

$

364,328

 

 

$

374,336

 

 

(3

)

Higher education

86,453

 

 

76,288

 

 

13

 

 

159,990

 

 

159,068

 

 

1

 

Test preparation

51,111

 

 

65,673

 

 

(22

)

 

93,950

 

 

126,823

 

 

(26

)

Professional (U.S.)

28,674

 

 

35,147

 

 

(18

)

 

67,123

 

 

76,361

 

 

(12

)

Kaplan corporate and other

3,039

 

 

2,369

 

 

28

 

 

6,244

 

 

4,671

 

 

34

 

Intersegment elimination

(815

)

 

(294

)

 

 

 

(2,082

)

 

(1,042

)

 

 

 

$

333,175

 

 

$

367,763

 

 

(9

)

 

$

689,553

 

 

$

740,217

 

 

(7

)

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

Kaplan international

$

16,035

 

 

$

25,537

 

 

(37

)

 

$

35,015

 

 

$

49,822

 

 

(30

)

Higher education

17,050

 

 

2,721

 

 

 

 

15,030

 

 

4,636

 

 

 

Test preparation

(1,048

)

 

4,289

 

 

 

 

(13,724

)

 

3,835

 

 

 

Professional (U.S.)

1,378

 

 

4,745

 

 

(71

)

 

7,504

 

 

16,004

 

 

(53

)

Kaplan corporate and other

(6,870

)

 

(6,920

)

 

1

 

 

(8,392

)

 

(14,757

)

 

43

 

Amortization of intangible assets

(4,271

)

 

(3,377

)

 

(26

)

 

(8,472

)

 

(6,944

)

 

(22

)

Impairment of long-lived assets

(10,020

)

 

(693

)

 

 

 

(10,020

)

 

(693

)

 

 

Intersegment elimination

 

 

3

 

 

 

 

5

 

 

(3

)

 

 

 

$

12,254

 

 

$

26,305

 

 

(53

)

 

$

16,946

 

 

$

51,900

 

 

(67

)

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 decreased 13% and 3% for the second quarter and first six months of 2020, respectively. Excluding acquisitions, Kaplan International revenue decreased 13% and 4% in the second quarter and first six months of 2020, respectively. On a constant currency basis, revenue decreased 9% and remained flat for the second quarter and first six months of 2020, respectively. The revenue decreases were due to declines at Languages, Singapore, and UK Professional, partially offset by growth at UK Pathways and Australia and the Heverald acquisition. Kaplan International reported operating income of $16.0 million in the second quarter of 2020, compared to $25.5 million in the second quarter of 2019. Operating income decreased to $35.0 million in the first six months of 2020, compared to $49.8 million in the first six months of 2019. The decline in operating results in the second quarter and first six months of 2020 is due to declines at Languages, UK Professional and Singapore, partially offset by improved results in UK Pathways and Australia. Kaplan International Languages 2020 results were negatively impacted by COVID-19 travel restrictions and UK Professional results were negatively impacted by postponements of standardized exam dates. In addition, Kaplan International recorded $3.9 million of lease restructuring costs and $1.2 million of severance restructuring costs at Languages in the second quarter of 2020; the lease restructuring costs included $1.5 million in accelerated depreciation expense. Due to travel restrictions imposed as a result of COVID-19, management expects significant challenges in Languages’ operating environment for at least the remainder of 2020. In June 2020, UK Visas and Immigration announced that a mixed mode of online and face to face teaching would be permitted to continue for the duration of the entire academic year from July 1, 2020 to June 30, 2021; this will provide flexibility and confidence for students enrolling in UK Pathways programs.

The Higher Education division primarily includes the results of Kaplan as a service provider to higher education institutions. In the second quarter and first six months of 2020, Higher Education revenue was up 13% and 1%, respectively, due primarily to an increase in the Purdue University Global fee, offset by a reduction in expenses incurred by Kaplan Higher Education as service provider to Purdue Global. In the first quarter of 2020, the Company did not record an additional fee with Purdue Global based on an assessment of its collectability under the TOSA. In the second quarter of 2020, the Company recorded a portion of the fee with Purdue Global based on an assessment of its collectability under the TOSA. Purdue Global experienced increased enrollments and higher retention rates in the first half of 2020, which resulted in improved Higher Education results for the second quarter and first six months of 2020. The Company will continue to assess the collectability of the fee with Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the fee in the future. For the second quarter and first six months of 2020, Kaplan Higher Education recorded $1.5 million and $3.5 million, respectively, in lease restructuring costs, of which $0.1 million was accelerated depreciation expense.

Kaplan Test Preparation includes Kaplan’s standardized test preparation programs. KTP revenue decreased 22% and 26% for the second quarter and first six months of 2020, respectively, due to reduced demand for KTP’s retail comprehensive test preparation programs and product-life extensions related to the postponement of various standardized test dates due to the COVID-19 pandemic. Overall, product-life extensions have resulted in lower revenue being recognized in the first half of 2020; however, substantially all of this will be recognized over the remainder of 2020. KTP operating results declined in the second quarter and first six months of 2020 due to these revenue declines and $4.5 million of lease restructuring costs, of which $1.8 million was accelerated depreciation expense.

Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. Kaplan Professional (U.S.) revenue in the second quarter and first six months of 2020 declined 18% and 12%, respectively, due to declines in CFA, real estate and accountancy programs, partly due to the postponement of certification exams. Kaplan Professional (U.S.) operating results declined in the second quarter and first six months of 2020, primarily due to the revenue declines and $0.6 million in lease restructuring costs.

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 the first six months of 2020 due to lower compensation costs.

In the second quarter of 2020, the Company approved a Separation Incentive Program (SIP) that reduced the number of employees at Kaplan International, Higher Education, Kaplan Professional (U.S.) and Kaplan corporate, resulting in $5.0 million in non-operating pension expense in the second quarter of 2020. In the second quarter of 2019, the Company approved a SIP that reduced the number of employees at KTP and Higher Education, resulting in $6.6 million in non-operating pension expense in the second quarter of 2019.

Television Broadcasting

Revenue at the television broadcasting division decreased 14% to $100.8 million in the second quarter of 2020, from $116.6 million in the same period of 2019. The revenue decline is due to reduced advertising demand related to the COVID-19 pandemic, partially offset by a $3.7 million increase in political advertising revenue and a $3.5 million increase in retransmission revenues. In the second quarter of 2020 and 2019, the television broadcasting division recorded $1.1 million and $7.8 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 second quarter of 2020 decreased 47% to $23.6 million, from $44.5 million in the same period of 2019, due to revenue declines, higher network fees and a reduction in property, plant and equipment gains. While revenue and operating results were adversely impacted by the COVID-19 pandemic in the second quarter of 2020, both revenue and operating results improved steadily throughout the quarter.

Revenue at the television broadcasting division decreased 4% to $216.2 million in the first six months of 2020, from $224.9 million in the same period of 2019. The revenue decline is due to reduced advertising demand related to the COVID-19 pandemic, partially offset by a $13.5 million increase in political advertising revenue and $4.1 million in higher retransmission revenues. In the first six months of 2020 and 2019, the television broadcasting division recorded $1.4 million and $9.6 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 first six months of 2020 decreased 26% to $59.4 million, from $80.0 million in the same period of 2019, due to revenue declines, higher network fees and a reduction in property, plant and equipment gains.

The postponement of the 2020 summer Olympics, the reduction and uncertainty surrounding broadcast sporting events, and overall reduced advertising demand related to the COVID-19 pandemic are expected to negatively impact advertising revenue and the operating results at the television broadcasting division for the remainder of 2020.

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.

Manufacturing revenues declined 28% and 14% in the second quarter and first six months of 2020, respectively. The revenue declines are due primarily to a significant reduction in product demand at Dekko, particularly in the hospitality, household appliance and transportation sectors, as well as lower product demand at Hoover, partially offset by higher wood prices at Hoover in the second quarter of 2020. Manufacturing operating results declined in the second quarter and first six months of 2020, due to a significant decline in Dekko results for the second quarter of 2020 from lower revenues, partially offset by improved results at Hoover from reduced operating costs and gains on inventory sales.

Starting in the second half of March 2020, certain of Dekko, Joyce/Dayton and Hoover’s manufacturing plants began operating at reduced levels due to lower product demand and other jurisdictional factors related to the COVID-19 pandemic. The manufacturing businesses are tightly managing expenses and continuing with cost reduction plans to mitigate the impact of lower product demand. Overall, this is expected to continue to adversely impact manufacturing revenues and operating results for the remainder of 2020.

Healthcare

The Graham Healthcare Group (GHG) provides home health and hospice services in three states. In December 2019, GHG acquired a 75% interest in CSI Pharmacy Holding Company, LLC (CSI), a Wake Village, TX-based company, which coordinates the prescriptions and nursing care for patients receiving in-home infusion treatments. Healthcare revenues increased 21% for the second quarter and first six months of 2020, due to the CSI acquisition, offset by revenue declines from home health services due to lower patient volumes.

In the second quarter of 2020, GHG received $7.4 million from the Federal CARES Act Provider Relief Fund. GHG did not apply for these funds; they were disbursed to GHG as a Medicare provider under the CARES Act. Under the Department of Health and Human Services guidelines, these funds may be used to offset revenue reductions and expenses incurred in connection with the COVID-19 pandemic. Of this amount, GHG recorded $5.5 million in revenue in the second quarter to partially offset the impact of revenue reductions due to the COVID-19 pandemic from the curtailment of elective procedures by health systems and other factors.

Contacts

Wallace R. Cooney

(703) 345-6470

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