Image: Graham Holdings' Kaplan.
Conglomerate Graham Holdings (GHC -1.53%) has changed its identity, getting itself out of the newspaper business through the sale of The Washington Post and refocusing on its other businesses. Coming into its third-quarter financial report on Wednesday, Graham Holdings investors had seen the stock fall substantially in recent months, with the company's Kaplan education unit having gone through some of the same challenges that have crushed Apollo Education Group (APOL) and other for-profit colleges. Graham's results did indeed include a huge charge related to the Kaplan business, but insiders are optimistic the company can work past its challenges and find avenues for long-term success. Let's look more closely at how Graham Holdings did this quarter and whether the future looks brighter.
Graham Holdings learns a lesson
Graham's third-quarter numbers looked dismal. Revenue fell 9% to $641.4 million, falling well short of the 3% growth that many investors were looking to see from the company. The company posted a huge loss of $231.2 million, or $40.32 per share, due to immense impairments of goodwill and other one-time items. When you take out those things, adjusted income from continuing operations climbed nearly 40% and adjusted earnings climbed to $6.05 per share.
The list of extraordinary items for Graham was extraordinarily long. The company took a $248.6 million hit from preliminary goodwill impairment charges related to the Kaplan Higher Education business, using preliminary assumptions that it said could change in the future. Restructuring costs, option-award adjustments, foreign-currency losses, and losses on the sales of businesses all contributed to pull down net income.
Looking more closely at Graham's businesses, you can see different influences on various segments. Education-division revenue fell 11%, as the higher-education division in particular took a large 19% hit. Losses in test preparation and the Kaplan International business were much smaller. On the bottom line, test-preparation operating profits nearly doubled from year-earlier figures, but drops in the higher education and international units more than offset those gains. The higher-education division has worked hard to retrench, selling off the remaining assets in its KHE Campuses business in response to the tough environment in the space.
Meanwhile, television broadcasting saw a modest 3% rise in sales to $89.7 million. Graham said that general advertising revenue and retransmission fee income helped boost the top line, but a drop in political ads from the 2014 midterm period weighed on growth. Still, operating income fell 10%, with higher spending on digital initiatives and higher network fees hitting the segment's bottom line.
Can Graham Holdings bounce back?
The big-ticket item that Graham Holdings had to deal with this quarter was the higher-education impairment, and that reflects tough conditions in the industry. Graham's Kaplan unit has worked for three years to close down campuses, consolidate its remaining operations, and cut back on staffing, and restructuring costs have multiplied over that timeframe. Severance, lease obligations, accelerated depreciation, and other items have all combined to cost Graham millions of dollars.
Moreover, the future still doesn't look bright. Continued declines in student enrollment at Kaplan Higher Education motivated the impairment charge, and similar trends have hit Kaplan's peers. At Apollo, new enrollment at its key University of Phoenix fell by a third during its most recent quarter, and total enrollment has fallen nearly 20% in just the past year. With regulatory bars preventing Apollo from actively recruiting U.S. military members as students, some believe the entire for-profit education industry is at risk. Both Apollo and Graham's Kaplan unit will have to come up with answers to those challenges.
Graham Holdings investors largely shrugged off the news, sending the stock modestly lower the day after the report before rebounding. All in all, Graham needs to refocus its attention on the higher-potential aspects of its education business in order to return to a healthy growth trajectory and put all these massive one-time charges behind it for good.
