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Graham Holdings Company Reports Second Quarter Earnings

August 1, 2018

ARLINGTON, Va.--(BUSINESS WIRE)--Aug 1, 2018--Graham Holdings Company (NYSE: GHC) today reported net income attributable to common shares of $46.6 million ($8.63 per share) for the second quarter of 2018, compared to $42.0 million ($7.46 per share) for the second quarter of 2017.

The results for the second quarter of 2018 and 2017 were affected by a number of items as described in the following paragraphs. Excluding these items, net income attributable to common shares was $65.0 million ($12.05 per share) for the second quarter of 2018, compared to $45.6 million ($8.10 per share) for the second quarter of 2017. (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 second quarter of 2018:

$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); $2.6 million in net losses on marketable equity securities (after-tax impact of $1.9 million or $0.36 per share); and $2.3 million in non-operating foreign currency losses (after-tax impact of $1.7 million, or $0.32 per share).

Items included in the Company’s net income for the second quarter of 2017:

a $9.2 million goodwill and other long-lived asset impairment charge in other businesses (after-tax impact of $5.8 million, or $1.03 per share); and $3.5 million in non-operating foreign currency gains (after-tax impact of $2.2 million, or $0.39 per share).

Revenue for the second quarter of 2018 was $672.7 million, down 1% from $676.1 million in the second quarter of 2017. Revenues declined at the education division, offset by growth at the television broadcasting and manufacturing businesses. The Company reported operating income of $65.6 million for the second quarter of 2018, compared to $49.7 million for the second quarter of 2017. The operating income increase is driven by higher earnings at the education, television broadcasting and manufacturing businesses.

For the first six months of 2018, the Company reported net income attributable to common shares of $89.5 million ($16.40 per share), compared to $63.1 million ($11.21 per share) for the first six months of 2017. The results for the first six months of 2018 and 2017 were affected by a number of items as described in the following paragraphs. Excluding these items, net income attributable to common shares was $114.9 million ($21.08 per share) for the first six months of 2018, compared to $59.7 million ($10.60 per share) for the first six months of 2017. (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 six months of 2018:

$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); $16.7 million in net losses on marketable equity securities (after-tax impact of $12.7 million, or $2.30 per share); a $4.3 million gain on the Kaplan University Transaction (after-tax impact of $1.8 million, or $0.33 per share); $2.1 million in non-operating foreign currency losses (after-tax impact of $1.6 million, or $0.30 per share); and $1.8 million in income tax benefits related to stock compensation ($0.33 per share).

Items included in the Company’s net income for the first six months of 2017:

a $9.2 million goodwill and other long-lived asset impairment charge in other businesses (after-tax impact of $5.8 million, or $1.03 per share); $5.2 million in non-operating foreign currency gains (after-tax impact of $3.3 million, or $0.58 per share); and $5.9 million in income tax benefits related to stock compensation ($1.06 per share).

Revenue for the first six months of 2018 was $1,332.1 million, up 6% from $1,258.8 million in the first six months of 2017. Revenues increased at the television broadcasting and manufacturing businesses, offset by a decline at the education division. The Company reported operating income of $109.8 million for the first six months of 2018, compared to $60.0 million for first six months of 2017. Operating results improved at the education, television broadcasting and manufacturing businesses.

On April 27, 2017, certain subsidiaries of Kaplan, Inc. (Kaplan), a subsidiary of Graham Holdings Company entered into a Contribution and Transfer Agreement (Transfer Agreement) to contribute the institutional assets and operations of Kaplan University (KU) to an Indiana non-profit, public-benefit corporation that is a subsidiary affiliated with Purdue University (Purdue). The closing of the transactions contemplated by the Transfer Agreement occurred on March 22, 2018. At the same time, the parties entered into a Transition and Operations Support Agreement (TOSA) pursuant to which Kaplan will provide key non-academic operations support to the new university. The new university will operate almost exclusively online as a new Indiana public university affiliated with Purdue under the name Purdue University Global (Purdue Global).

Division Results

Education

Education division revenue totaled $370.0 million for the second quarter of 2018, down 4% from $386.5 million for the same period of 2017. Kaplan reported operating income of $37.6 million for the second quarter of 2018, up 13% from $33.3 million for the second quarter of 2017.

For the first six months of 2018, education division revenue totaled $745.5 million, down 2% from revenue of $759.4 million for the same period of 2017. Kaplan reported operating income of $60.3 million for the first six months of 2018, a 41% increase from $42.8 million for the first six months of 2017.

As a result of the KU Transaction that closed on March 22, 2018, the Company has revised the financial reporting for its education division to provide operating results for Higher Education and Professional (U.S.).

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

Kaplan International includes English-language programs, and postsecondary education and professional training businesses largely outside the United States. Kaplan International revenue increased 7% and 9% for the second quarter and first six months of 2018, respectively. On a constant currency basis, revenue increased 3% for both the second quarter and first six months of 2018. Operating income increased to $24.2 million in the second quarter of 2018, compared to $16.0 million in the second quarter of 2017. Operating income increased to $44.6 million for the first six months of 2018, compared to $23.7 million for the same period of 2017. These increases are due largely to improved results at Pathways, UK Professional, English-language and MPW.

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 second quarter and first six months of 2018, Higher Education revenue was down 23% and 17%, respectively, and operating results declined, due largely to the sale of KU on March 22, 2018 and fewer average enrollments at KU prior to the sale. The Company recorded the service fee with Purdue Global in the second quarter of 2018, 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.

Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. KTP revenue declined 9% for the second quarter and first six months of 2018 due to soft enrollments in certain test preparation programs and the disposition of Dev Bootcamp, which made up the majority of KTP’s new economy skills training programs. KTP operating results improved in the second quarter and first six months of 2018, due primarily to decreased losses from the new economy skills training programs. Operating losses for the new economy skills training programs were $1.8 million and $7.2 million for the first six months of 2018 and 2017, respectively. Dev Bootcamp was closed in the second half of 2017.

Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. In the second quarter of 2018, Kaplan Professional (U.S.) revenue was up 13% and operating results improved 5%, due partly 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. Revenues were up 6% for the first half of 2018, while operating results decreased 4% due to increased spending on sales and technology.

Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities, with increased healthcare and pension expense in 2018.

Television Broadcasting

Revenue at the television broadcasting division increased 8% to $114.1 million in the second quarter of 2018, from $106.1 million in the same period of 2017 due to an $8.7 million increase in retransmission revenues and a $3.9 million increase in political advertising revenue. Operating income for the second quarter of 2018 increased 3% to $41.1 million, from $39.8 million in the same period of 2017 due to higher revenues.

Revenue at the television broadcasting division increased 13% to $222.9 million in the first six months of 2018, from $197.6 million in the same period of 2017. The revenue increase is due primarily to $16.9 million in higher retransmission revenues, $8.6 million in 2018 incremental winter Olympics-related advertising revenue at the Company’s NBC stations, and a $6.1 million increase in political advertising revenue. Operating income for the first six months of 2018 increased 23% to $81.7 million from $66.3 million in the same period of 2017, due to higher revenues.

Manufacturing

Manufacturing includes four businesses: Dekko, a manufacturer of electrical workspace solutions, architectural lighting and electrical components and assemblies; Joyce/Dayton Corp., a manufacturer of screw jacks and other linear motion systems; Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications; and Hoover Treated Wood Products, Inc., a supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications that the Company acquired in April 2017.

Manufacturing revenues and operating income increased in the second quarter and first six months of 2018 due primarily to the Hoover acquisition.

In the second quarter of 2017, the Company recorded a $9.2 million goodwill and other long-lived asset impairment charge at Forney, due to lower than expected revenues resulting from sluggish overall demand for its energy products.

Healthcare

The Graham Healthcare Group (GHG) provides home health and hospice services in three states. At the end of June 2017, GHG acquired Hometown Home Health and Hospice, a Lapeer, MI-based healthcare services provider. Healthcare revenues were up 1% in the first six months of 2018, while overall operating results were similar to results in 2017.

SocialCode

SocialCode is a provider of marketing solutions on social, mobile and video platforms. SocialCode revenue increased 2% for the first six months of 2018, due to modest growth in digital advertising service revenues. SocialCode reported operating losses of $1.7 million and $5.5 million in the second quarter and first six months of 2018, respectively, compared to operating income of $2.6 million and an operating loss of $1.9 million in the second quarter and first six months of 2017, respectively. The decline in 2018 results is largely attributable to a $4.7 million and $3.9 million credit related to SocialCode’s phantom equity plan that was included in the second quarter and first six months of 2017, respectively.

Other Businesses

Other businesses include Slate and Foreign Policy, which publish online and print magazines and websites; and two investment stage businesses, Panoply and CyberVista. Losses from each of these businesses in the first half of 2018 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 (Losses) of Affiliates

At June 30, 2018, the Company held interests in a number of home health and hospice joint ventures, and interests in several other affiliates. In the second half of 2017, the Company acquired approximately 11% of Intersection Holdings, LLC, which provides digital marketing and advertising services and products for cities, transit systems, airports, and other public and private spaces. The Company recorded equity in earnings of affiliates of $0.9 million for the second quarter of 2018, compared to $1.3 million for the second quarter of 2017. The Company recorded equity in earnings of affiliates of $3.5 million for the first six months of 2018, compared to $2.0 million for the first six months of 2017.

Net Interest Expense, Debt Extinguishment Costs and Related Balances

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, beginning on December 1, 2018. 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 $15.3 million and $22.0 million for the second quarter and first six months of 2018, compared to $7.9 million and $14.6 million for the second quarter and first six months of 2017. 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 increased 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.

At June 30, 2018, the Company had $485.3 million in borrowings outstanding at an average interest rate of 5.0% and cash, marketable equity securities and other investments of $776.9 million.

Non-operating Pension and Postretirement Benefit Income, net

In the first quarter of 2018, the Company adopted new accounting guidance that changes the income statement classification of net periodic pension and postretirement pension cost. Under the new guidance, service cost is included in operating income, while the other components (including expected return on assets) are included in non-operating income. The new guidance was required to be applied retrospectively, with prior period financial information revised to reflect the reclassification. From a segment reporting perspective, this change had a significant impact on Corporate office reporting, with minimal impact on the television broadcasting and Kaplan corporate reporting.

The Company recorded net non-operating pension and postretirement benefit income of $23.0 million and $44.4 million for the second quarter and first six months of 2018, compared to $18.6 million and $37.4 million for the second quarter and first six months of 2017.

Loss on Marketable Equity Securities, net

In the first quarter of 2018, the Company adopted new guidance that requires changes in the fair value of marketable equity securities to be included in non-operating income (expense) on a prospective basis. Overall, the Company recognized $2.6 million and $16.7 million in net losses on marketable equity securities in the second quarter and first six months of 2018, respectively.

Other Non-Operating Income (Expense)

The Company recorded total other non-operating income, net, of $2.3 million for the second quarter of 2018, compared to $4.1 million for the second quarter of 2017. The 2018 amounts included a $1.4 million contingent consideration gain related to the sale of a business; a $2.5 million gain on sale of land and other items; partially offset by $2.3 million in foreign currency losses. The 2017 amounts included $3.5 million in foreign currency gains, and other items.

The Company recorded total other non-operating income, net, of $11.5 million for the first six months of 2018, compared to $4.9 million for the first six months of 2017. The 2018 amounts included a $7.2 million gain on sales of businesses and related contingent consideration; a $2.8 million gain on sale of a cost method investment; a $2.5 million gain on sale of land and other items; offset by $2.1 million in foreign currency losses. The 2017 amounts included $5.2 million in foreign currency gains, offset by other items.

Provision for Income Taxes

The Company’s effective tax rate for the first six months of 2018 was 24.9%. The Tax Cuts and Jobs Act was enacted in December 2017, which included lowering the federal corporate income tax rate from 35% to 21%.

The Company’s effective tax rate for the first six months of 2017 was 29.7%. This low effective tax rate is due to a $5.9 million income tax benefit related to the vesting of restricted stock awards. In the first quarter of 2017, the Company adopted a new accounting standard that requires all excess income tax benefits and deficiencies from stock compensation to be recorded as discrete items in the provision for income taxes. Excluding this $5.9 million benefit, the overall income tax rate for the first six months of 2017 was 36.3%.

Earnings Per Share

The calculation of diluted earnings per share for the second quarter and first six months of 2018 was based on 5,362,277 and 5,417,162 weighted average shares outstanding, compared to 5,577,275 and 5,573,167 for the second quarter and first six months of 2017. At June 30, 2018, there were 5,346,550 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 315,646 shares as of June 30, 2018.

Adoption of Revenue Recognition Standard

On January 1, 2018, the Company adopted the new revenue recognition guidance using the modified retrospective approach. If the company applied the accounting policies under the previous guidance, revenue would have been $1.3 million lower and operating expenses would have been $0.8 million lower for the first six months of 2018.

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.

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