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 $77.6 million ($15.22 per share) for the third quarter of 2020, compared to $43.1 million ($8.05 per share) for the third 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 nine months of 2020, largely from reduced demand for the Company’s products and services. This significant adverse impact is expected to continue for the remainder of 2020 and into 2021. The Company’s management has taken 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 third 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 $108.1 million for the third quarter of 2020, compared to $58.2 million for the third quarter of 2019. Excluding these items, income before income taxes was $61.8 million for the third quarter of 2020, compared to $55.7 million for the third 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 third quarter of 2020:

• $1.9 million in long-lived asset impairment charges at the education division;
• $1.9 million in restructuring charges at education division;
• $2.8 million in accelerated depreciation at other businesses;
• a $1.2 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
• $7.0 million in expenses related to a non-operating Separation Incentive Program at the education division;
• $59.4 million in net gains on marketable equity securities;
• a non-operating gain of $1.6 million from the write-up of a cost method investment; and
• $2.3 million in non-operating foreign currency losses.

Items included in the Company’s income before income taxes 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;
• a $1.1 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
• $17.4 million in net gains on marketable equity securities;
• non-operating gain of $3.7 million from write-ups of cost method investments; and
• $0.7 million in non-operating foreign currency gains.

Revenue for the third quarter of 2020 was $717.0 million, down 3% from $738.8 million in the third quarter of 2019, largely due to the impact of COVID-19. Revenues declined at education and manufacturing, partially offset by increases at television broadcasting, healthcare and other businesses. The Company reported operating income of $40.2 million for the third quarter of 2020, compared to $16.3 million for the third quarter of 2019. The operating income increase is driven by higher earnings in education, television broadcasting and healthcare, partially offset by declines in manufacturing and other businesses.

For the first nine months of 2020, the Company reported net income attributable to common shares of $63.2 million ($12.11 per share) compared to $182.0 million ($33.96 per share) for the first nine months of 2019. The results for the first nine months of 2020 and 2019 were affected by a number of items as described in the following paragraphs. Including these items, income before income taxes was $89.5 million for the first nine months of 2020, compared to $241.4 million for the first nine months of 2019. Excluding these items, income before income taxes was $140.9 million for the first nine months of 2020, compared to $169.7 million for the first nine 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 income before income taxes for the nine months of 2020:

• $27.6 million in goodwill and other long-lived asset impairment charges;
• $12.1 million in restructuring charges at the education division;
• $5.7 million in accelerated depreciation at other businesses;
• a $2.5 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC;
• $11.6 million in expenses related to non-operating Separation Incentive Programs at the education division and other businesses;
• $1.1 million in net losses on marketable equity securities;
• non-operating gain, net, of $3.3 million from write-ups, sales and impairments of cost and equity method investments; and
• $0.9 million in non-operating foreign currency gains.

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

• a $17.1 million provision recorded at Kaplan International related to a VAT receivable at UK Pathways;
• a $10.7 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;
• $49.3 million in net gains on marketable equity securities;
• $29.0 million gain from the sale of Gimlet Media;
• non-operating gain of $5.1 million from the write-ups of cost method investments; and
• $1.3 million in non-operating foreign currency gains.

Revenue for the first nine months of 2020 was $2,102.1 million, down 3% from $2,168.6 million in the first nine months of 2019, largely due to the impact of COVID-19. Revenues declined at education and manufacturing, partially offset by increases at television broadcasting, healthcare and other businesses. The Company reported operating income of $54.2 million for the first nine months of 2020, compared to $114.2 million for the first nine months of 2019. Operating results declined in education, television broadcasting, manufacturing, 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 third quarter and first nine months of 2020. The impact began in February and continued through the third quarter 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, 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 through the remainder of 2020 and into 2021, particularly at Kaplan International Languages. KHE did not experience any significant disruption in its service delivery and Purdue Global has experienced an increase in program demand in the first nine months 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; and reduced capital expenditures. Importantly, Kaplan also accelerated development and promotion of various online programs and solutions, rapidly transitioned most of its classroom-based programs online and addressed the individual needs of its students and partners, substantially reducing the disruption from COVID-19.

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 first nine months of 2020, Kaplan recorded $12.5 million in lease restructuring costs and in the third quarter and first nine months of 2020, Kaplan recorded $1.9 million and $3.1 million in severance restructuring costs, respectively. The lease restructuring costs included $3.4 million in accelerated depreciation expense in the first nine months of 2020. Kaplan also recorded $1.9 million and $11.9 million in lease impairment charges in connection with these restructuring plans in the third quarter and first nine months of 2020, respectively. These impairment charges included $0.2 million and $2.2 million in property, plant and equipment write-downs in the third quarter and first nine months of 2020, respectively. In the second and third quarters of 2020, the Company approved Separation Incentive Programs that reduced the number of employees at all of Kaplan’s divisions, resulting in $7.8 million and $12.8 million in non-operating pension expense in the third quarter and first nine months of 2020, respectively. Additional restructuring and cost reduction plans are under development at Kaplan and are expected to be implemented in the fourth quarter 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 in the process of being implemented and is designed to create and reinforce Kaplan’s competitiveness in each market and new markets into which Kaplan extends.

Education division revenue totaled $302.5 million for the third quarter of 2020, down 15% from $357.3 million for the same period of 2019. Kaplan reported operating income of $3.3 million for the third quarter of 2020, compared to an operating loss of $7.2 million for the third quarter of 2019.

For the first nine months of 2020, education division revenue totaled $992.0 million, down 10% from revenue of $1,097.5 million for the same period of 2019. Kaplan reported operating income of $20.3 million for the first nine months of 2020, a 55% decline from $44.7 million for the first nine months of 2019.

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. 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 31% and 12% for the third quarter and first nine months of 2020, respectively. On a constant currency basis, revenue decreased 32% and 10% for the third quarter and first nine months of 2020, respectively. The revenue decreases were due to significant declines at Languages, along with declines at U.S. and Australia Pathways, UK Professional and Singapore, partially offset by growth at UK Pathways and Australia. Kaplan International reported an operating loss of $13.8 million in the third quarter of 2020, compared to $14.2 million in the third quarter of 2019. Operating income decreased to $21.3 million in the first nine months of 2020, compared to $35.6 million in the first nine months of 2019. The decline in operating results in the first nine months of 2020 is due primarily to significant losses at Languages, along with declines at U.S. and Australia Pathways, and UK Professional, partially offset by the $17.1 million VAT provision recorded at UK Pathways in the third quarter of 2019, and improved results at UK Pathways and Australia. In particular, Kaplan International Languages 2020 operating results were negatively impacted by COVID-19 travel restrictions, along with U.S. and Australia Pathways. 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 $2.2 million of severance restructuring costs at Languages in the first nine months 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 continued challenges in Languages’ operating environment for the remainder of 2020 and into 2021. 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.

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 amounts from assessments and subsequent payments. Due to developments in the case, in the third quarter of 2019, the Company recorded a full provision against a receivable to expense, of which £14.1 million ($17.1 million) related to years 2014 to 2018. The Company recorded additional annual VAT expense at the UK Pathways business of approximately $6.0 million related to this matter for 2019 and will record an estimated $8.0 million for 2020. 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 finalized by the end of 2020.

The Higher Education division primarily includes the results of Kaplan as a service provider to higher education institutions. In the third quarter and first nine months of 2020, Higher Education revenue was up 7% and 3%, respectively, due to an increase in the Purdue University Global fee recorded and revenue from new university agreements. For the first nine months 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 for the first nine months of 2020, which resulted in improved Higher Education results for the third quarter and first nine 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 first nine months of 2020, Kaplan Higher Education recorded $3.5 million in lease restructuring costs, of which $0.1 million was accelerated depreciation expense.

Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. KTP revenue decreased 8% and 20% for the third quarter and first nine 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 nine months of 2020; however, substantially all of this will be recognized over the remainder of 2020. KTP operating results increased in the third quarter of 2020 due to savings from cost reduction and related restructuring plans implemented in 2020, and additional revenue recognized in the third quarter of 2020 due to product-life extensions made earlier in the year, offset by $0.9 million in severance restructuring costs. Operating results decreased in the first nine months of 2020 due to revenue declines and $4.5 million of lease restructuring costs ($1.8 million of which was accelerated depreciation expense) and $0.9 million in severance restructuring costs.

Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. Kaplan Professional (U.S.) revenue in the third quarter and first nine months of 2020 declined 3% and 9%, respectively, due to declines in CFA, securities and accountancy programs, partly due to the postponement of certification exams, offset in part by growth in real estate, architecture and engineering programs. Kaplan Professional (U.S.) operating results increased in the third quarter of 2020 due to savings from cost reduction and related restructuring plans implemented in 2020, and additional revenue recognized in the third quarter of 2020 due to the postponement of certification exams earlier in the year. Operating results decreased in the first nine 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 nine months of 2020 due to lower compensation costs.

In the third quarter of 2020, the Company approved a SIP that reduced the number of employees at Higher Education, KTP, Kaplan Professional (U.S.) and Kaplan corporate, resulting in $7.8 million in non-operating pension expense. In the second quarter of 2020, the Company approved a 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 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.

Television Broadcasting

Revenue at the television broadcasting division increased 16% to $133.8 million in the third quarter of 2020, from $115.2 million in the same period of 2019. The revenue increase is due to a $24.8 million increase in political advertising revenue and $3.1 million increase in retransmission revenues, partially offset by reduced local and national advertising demand related to the COVID-19 pandemic. In the third quarter of 2020 and 2019, the television broadcasting division recorded $1.2 million and $1.1 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 2020 increased 43% to $52.7 million, from $36.8 million in the same period of 2019, due to revenue increases, partially offset by higher network fees. While revenues and operating results continued to be adversely impacted by the COVID-19 pandemic in the third quarter of 2020, local and national advertising revenues have improved steadily throughout the second and third quarters of 2020.

Revenue at the television broadcasting division increased 3% to $350.0 million in the first nine months of 2020, from $340.0 million in the same period of 2019. The revenue increase is due a $38.2 million increase in political advertising revenue and a $7.2 million increase in retransmission revenue, partially offset by reduced local and national advertising demand related to the COVID-19 pandemic. In the first nine months of 2020 and 2019, the television broadcasting division recorded $2.5 million and $10.7 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 nine months of 2020 decreased 4% to $112.1 million, from $116.8 million in the same period of 2019, due to a reduction in property, plant and equipment gains and higher network fees, partially offset by increased revenues.

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 has negatively impacted advertising revenue and the operating results at the television broadcasting division for the first nine months of 2020 and is expected to adversely impact results for the remainder of 2020 and into 2021. In 2020, significant political revenues have substantially offset these adverse trends.

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 4% and 11% in the third quarter and first nine months of 2020, respectively. The revenue declines are due primarily to a significant reduction in product demand at Dekko, particularly in the commercial office electrical products, hospitality, transportation and industrial sectors.

Contacts

Wallace R. Cooney

(703) 345-6470

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