Graham Holdings owns the Kaplan test preparation business. Image: Kaplan
For decades, the Graham family's biggest claim to fame was its ownership of the flagship newspaper Washington Post. Yet with the decline of the newspaper industry, Donald Graham decided to sell off the Post in a landmark transaction, and his company renamed itself Graham Holdings (GHC +0.01%). Coming into its second-quarter financial report Wednesday morning, Graham investors have watched the company make other moves to divest noncore assets and focus its attention on making the most of its remaining lines of business. In its report, Graham reported far lower income from continuing operations, due largely to transactions in the interim that further refined the company's future direction. Let's take a closer look at Graham Holdings and what's ahead for the company.
How Graham Holdings fared this quarter
At first glance, Graham's second-quarter numbers looked troubling, as net income plunged more than 90% to $57.8 million, or $9.87 per share. Yet huge year-ago gains from sales and exchanges of assets distorted comparisons from 2014's second quarter, and after considering a long list of extraordinary items, adjusted income from continuing operations jumped by more than 25% to $73.7 million, or $12.59 per share. Operating revenues climbed 1% to $879.6 million.
Looking at Graham's businesses individually gives some color on the conglomerate's overall makeup. The Kaplan education division saw revenue slide by 4% to $523.6 million, and operating income dropped by a tenth to $15.8 million. Sales declines in the higher education and international units were roughly equal, but the two areas were more profitable than last year, and the test-preparation unit reversed a year-ago loss with an operating profit. Larger losses at Kaplan Corporate and impairment charges held back the education business overall.
Meanwhile, the cable division saw a narrower 1% decline in revenue to $198.7 million, and operating income fell by nearly a fifth. With the spinoff of Cable ONE having been completed at the beginning of July, this was the last quarter that cable will be included in continuing operations. Television broadcasting segment revenue gained 3% to $90.8 million, but operating income inched downward by about 5% due to increased spending on digital initiatives.
What's ahead for Graham Holdings?
Looking forward, the long-term reorganization of Graham looks to remain on pace. The company entered into a purchase and sale agreement to sell its Kaplan Higher Education campus-based business, which includes 38 ground campuses and related assets, earlier this year, and Graham expects that transaction to close during the third quarter of 2015. In exchange, Graham will take a preferred equity ownership interest in the purchasing company. Combined with the Cable ONE spinoff, Graham's sale of its physical campuses should conclude a process that began three years ago with the shrinking of the company's for-profit education exposure through some campus closings.
As a result of these moves, Graham will look much different than it has in the past. Kaplan will continue to operate its online Kaplan University, along with several professional schools under its corporate umbrella. Under the education division, Graham will continue to get revenue from test preparation programs as well as English-language learning and international educational programming. Meanwhile, the television broadcasting business should give Graham a consistent stream of reliable profit, and other business prospects include social-media advertising-services specialist SocialCode as well as a number of other unrelated businesses from a wide variety of industries.
Graham Holdings isn't a heavily traded stock, and its shares didn't immediately respond to the company's report, remaining unchanged not only in the premarket trading session after the announcement but also into the regular trading session. Graham has attracted a host of long-term investors among its shareholder ranks, and so the bigger question in their minds is whether Graham's overall strategic moves will continue to maximize shareholder value and reward them for their patience. For now, it looks like Graham is starting to emerge from its big run of restructuring moves with a solid vision of its future in place.
