Graham Holdings Company 2014 Annual Report
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GRAHAM HOLDINGS 2014 ANNUAL REPORT REVENUE BY PRINCIPAL OPERATIONS n EDUCATION 61% n CABLE 23% n TELEVISION BROADCASTING 10% n OTHER BUSINESSES 6% FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) 2014 2013 Change Operating revenues $ 3,535,166 $ 3,407,911 4% Income from operations $ 407,932 $ 319,169 28% Net income attributable to common shares $ 1,292,996 $ 236,010 — Diluted earnings per common share from continuing operations $ 138.88 $ 23.36 — Diluted earnings per common share $ 195.03 $ 32.05 — Dividends per common share $ 10.20 $ — — Common stockholders’ equity per share $ 541.54 $ 446.73 21% Diluted average number of common shares outstanding 6,559 7,333 –11% INCOME FROM NET INCOME ATTRIBUTABLE OPERATING REVENUES OPERATIONS TO COMMON SHARES ($ in millions) ($ in millions) ($ in millions) 3,861 582 1,293 3,453 3,535 3,373 3,408 408 314 319 149 277 236 116 131 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 RETURN ON DILUTED EARNINGS PER AVERAGE COMMON COMMON SHARE FROM DILUTED EARNINGS STOCKHOLDERS’ EQUITY* CONTINUING OPERATIONS PER COMMON SHARE ($) ($) 46.6% 138.88 195.03 38.16 9.8% 9.0% 23.36 31.04 32.05 5.2% 17.32 4.4% 14.70 17.39 6.40 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 * Computed on a comparable basis, excluding the impact of the adjustment for pensions and other postretirement plans on average common stockholders’ equity. 2014 ANNUAL REPORT 1 To OUR SHAREHOLDERS Quite a lot happened in 2014. around it. The sale requires regulatory approvals and won’t be closed for months. / We wrapped up selling the remaining assets of The Washington Post newspaper. As a result of all these transactions (plus the sale of The Washington Post and Newsweek in previous / We completed a transaction with Berkshire years), we have changed quite a bit as a company. Hathaway, trading our television station in Miami, WPLG, to Berkshire along with cash and some / We’re smaller. In revenues, 2014 ended up at BRK stock in exchange for most of BRK’s stake $3.5 billion. In 2010, revenues were $4.7 billion, in our Company. reflecting our ownership of The Washington Post and higher revenues at Kaplan Higher Education. / We announced that in 2015 we will spin-off Cable In 2015, with Cable ONE spun-off, we’ll be ONE, making the cable company we’ve owned smaller still. for almost 30 years an independent company. / We have many fewer shares outstanding. At / Toward the end of the year, Tim O’Shaughnessy, the beginning of 2010, the number was about the 33-year-old founder of LivingSocial, started 9.3 million. At the end of 2014, it was around work as our president. 5.8 million — 38% fewer shares outstanding in five years. / Just as this report was going to press, Kaplan announced an agreement to sell its 38 U.S. col- / We’re quite strong financially. On our balance lege campuses (those are the vocational educa- sheet we have almost $800 million in cash and tion campuses) to ECA. We aren’t selling Kaplan $194 million in stocks. The balance sheet will be University and the campuses affiliated with it, and strengthened at the time of the Cable ONE we certainly aren’t selling Kaplan. We’ll be building spin-off, when we receive a $400 million to $500 million dividend from Cable ONE, roughly equal to our tax basis in that company. Outstand- We have a world of opportunity in front ing debt is about $450 million, as it has been for of us. Our television business is one of years. And this means: the most profitable (as well as highest / We have a world of opportunity in front of us. quality) in its industry. Education has a Our television business is one of the most prof- lot of growth opportunity in front of it, itable (as well as highest quality) in its industry. now and over the years. Education has a lot of growth opportunity in front 2 2014 ANNUAL REPORT of it, now and over the years. Our small acquisi- we did not include our headquarters building at 1150 tions, made over the past few years, look good. 15th Street, NW; our stake in Classified Ventures; and We can invest in our familiar, traditional busi- some land in Alexandria, VA, that includes warehouses nesses; we can invest in new businesses; once in formerly used by Robinson Terminal. a great while, we can invest in starting a business (we promise not to get too carried away with our- All of these were sold in late 2013 and 2014, except selves for the amazing success of SocialCode); the Alexandria land. (We hope to complete this sale and, we can invest in stocks if, from time to time, in 2015, but the sale must be approved by local they seem to us undervalued. And, of course, authorities.) The office building brought us almost we can continue to buy in our own stock when it $160 million, and, to our utter astonishment, our looks attractive. 16.5% stake in Classified Ventures brought us more than $500 million (both sums are pre-tax). Tim and I are different in many ways. (Irritatingly, he’s a lot younger than I.) But the Graham and O’Shaughnessy families are alike in one way: we’re We want to make the stock more heavily concentrated in GHC stock—in my case, valuable for us and for you, our it’s well over 90% of my family’s assets. We want shareholders/partners. Our outlook to make the stock more valuable for us and for will be long term. you, our shareholders/partners. Our outlook will be long term; as always, the focus on quarterly results around here will be zero. (If you are a shareholder The CV sale deserves some retrospective atten- and YOU care about our quarterly results, perhaps tion. It was the third of three newspaper-industry you should think about selling the stock.) The focus joint ventures we invested in in the 1990s. The first on long-term increase in value will be total. two, New Century Network and CareerPath, were expensive failures. One reason was the consortium / / / form of management: each of our partners was a decent company, represented by excellent execu- When we sold The Washington Post to Jeff Bezos in tives. But disagreements among us all led to slow 2013, we included, along with the newspaper, several decision making. other assets: a printing plant in Springfield, VA, and the land around it; Robinson Terminal Warehouse That CV survived and thrived in the face of the Corp.; the weekly and semi-weekly newspapers same problem was due to the talent and persis- originally called The Gazette Newspapers; Express tence of its CEO Dan Jauernig and an able team, and El Tiempo Latino; and Greater Washington among whom Dick Burke and Mitch Golub were Publishing. After asking Jeff if he was interested, long enduring. I would also like to thank Alan Spoon, 2014 ANNUAL REPORT 3 Early in 2014, Warren Buffett suggested The transaction represents a big change: WPLG had we consider a transaction in which been part of our Company since the early 1970s, and we are proud of the station. Graham Holdings would exchange our Miami television station and cash for Warren had bought shares of The Washington Post most of Berkshire Hathaway’s shares in Company in 1973, quickly joined our board and, Graham Holdings. in effect, become our lead director. (My mother, Katharine Graham, then our CEO, had to overcome some negative advice from people she normally Steve Hills and, particularly, the infinitely patient trusted. But, after one meeting with Warren and Gerry Rosberg—all board members—on behalf of Charlie Munger, she reached the conclusion that our Company. these were the smartest businesspeople she had ever met. The conclusion held up well over time.) The total amount generated by the sale of the Post and affiliated properties was a bit over $900 million, There was a period after 1986 when Warren left our plus whatever the Alexandria land ultimately brings. board. (He had bought 20% of the stock of Capital (It will not be a large sum in this context.) Cities Communications, which had bought ABC; both companies owned TV stations in Detroit.) / / / But he remained such a respected adviser to our Company that when people were discussing the Early in 2014, Warren Buffett suggested we con- then-new concept of lead directors at a confer- sider a transaction in which Graham Holdings would ence she attended, Mrs. Graham said, “I have a lead exchange our Miami television station and cash for director who’s not a director.” most of Berkshire Hathaway’s shares in Graham Holdings. Here’s what was finally exchanged: I’ve recounted in past reports how much Warren’s advice has been worth to The Washington Post / We gave Berkshire WPLG, which had 2013 net Company/Graham Holdings. Kay took his advice revenues of $66 million and operating income of and switched pension advisers in the late 1970s. $26 million (it was valued at $438 million); $328 Result: perhaps the most overfunded pension plan million in cash; and shares of Berkshire Hathaway, in the Fortune 1000. He also recommended that then worth $400 million. she consider repurchasing our stock, a most unusual thing for public companies at the time. Over the / In exchange, we received approximately 1.6 mil- years, our share count decreased from 20 million at lion shares, about 22%, of our outstanding stock.