Graham Holdings Company 2016 Annual Report
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GRAHAM HOLDINGS GRAHAM HOLDINGS 1300 NORTH 17TH STREET p SUITE 1700 ARLINGTON p VA 22209 2016 ANNUAL REPORT 703 345 6300 p GHCO.COM REVENUE BY PRINCIPAL OPERATIONS n EDUCATION 64% n BROADCASTING 17% n OTHER BUSINESSES 19% FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) 2016 2015 Change Operating revenues $2,481,890 $2,586,114 (4%) Income (loss) from operations $ 303,534 $ (80,825) — Net income (loss) attributable to common shares $ 168,590 $ (101,286) — Diluted earnings (loss) per common share from continuing operations $ 29.80 $ (25.23) — Diluted earnings (loss) per common share $ 29.80 $ (17.87) — Dividends per common share $ 4.84 $ 9.10 (47%) Common stockholders’ equity per share $ 439.88 $ 429.15 3% Diluted average number of common shares outstanding 5,589 5,818 (4%) OPERATING REVENUES INCOME (LOSS) FROM OPERATIONS ($ in millions) ($ in millions) 2016 2,482 2016 304 2015 2,586 2015 (81) 2014 2,737 2014 233 2013 2,601 2013 149 2012 2,585 2012 (6) NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHARES RETURN ON AVERAGE COMMON ($ in millions) STOCKHOLDERS’ EQUITY* 2016 169 2016 7.5% 2015 (101) 2015 (4.1%) 2014 1,293 2014 46.6% 2013 236 2013 9.0% 2012 131 2012 5.2% DILUTED EARNINGS (LOSS) PER COMMON SHARE DILUTED EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS ($) ($) 2016 29.80 2016 29.80 2015 (25.23) 2015 (17.87) 2014 115.40 2014 195.03 2013 8.61 2013 32.05 2012 (7.17) 2012 17.39 * Computed on a comparable basis, excluding the impact of the adjustment for pensions and other postretirement plans on average common stockholders’ equity. TO OUR SHAREHOLDERS We are pleased to report that Graham Holdings had a better year in 2016 than in 2015. There was no single action that drove most of our progress. A combination of continued focus on cost reductions and operating margin improvements, moderate investments in organic growth initiatives, acquisitions in line with our investment philosophy and divestment of non-core businesses and assets all made meaningful contributions to our results this year. More specifically, Kaplan and Graham Media Group, most significantly at Kaplan University, were somewhat our two major operating units, each reported improved offset by improvements at other businesses. results, and our Other Businesses showed positive trends on both the top and bottom lines. Total adjusted operating expenses (non-GAAP) declined in 2016 by 9%(1) led by the reset cost structures at the Operating income for the Company rose to $304 mil- Kaplan and Graham Holdings corporate offices. Much lion in 2016, up from an operating loss of $81 million of the major restructuring has been completed, and we in 2015. To be fair to 2015, however, I should note continue to look for ways to spend our dollars more that a non-cash impairment charge at our Higher efficiently. I don’t think costs will be reduced again as Education business of just under $260 million greatly substantially as they were in late 2015 and early 2016, diminished last year’s reported results. Adjusting for but we are committed to remaining as lean at the cor- that charge diminishes the scale of 2016’s improve- porate level as we can and focusing our expenses on ment; but, nonetheless, adjusted operating income those that are necessary for the Company. Our margin (non-GAAP) increased by $127 million.(1) of safety as a company will increase with an improved operating margin. Below, I once again include a Revenue for 2016 continued its multi-year downward graphic that tracks our adjusted operating income progression, declining by just under 4%, from $2.586 margin (non-GAAP) of 10.7%(1) in 2016 and improve- billion to $2.482 billion. Revenue declines at Kaplan, ments or declines as compared to recent years. (1)ADJUSTED OPERATING INCOME MARGIN (NON-GAAP) (in thousands) 2016 2015 2014 2013 Operating Revenues $2,481,890 $2,586,114 $2,737,032 $2,600,602 Operating Expenses 2,178,356 2,666,939 2,504,312 2,451,168 Less: Impairment of Goodwill and Other Long-lived Assets (1,603) (259,700) (17,302) (3,250) Less: Amortization of Intangible Assets (26,671) (19,017) (18,187) (11,919) Add: Net Pension Credit 67,097 60,557 64,780 20,727 Adjusted Operating Expenses* (non-GAAP) $2,217,179 $2,448,779 $2,533,603 $2,456,726 Adjusted Operating Income** (non-GAAP) $ 264,711 $ 137,335 $ 203,429 $ 143,876 Adjusted Operating Income Margin*** (non-GAAP) 10.7% 5.3% 7.4% 5.5% *Adjusted Operating Expenses (non-GAAP) is calculated as Operating Expenses excluding impairment of goodwill and other long-lived assets, amortization of intangible assets and net pension credit. **Adjusted Operating Income (non-GAAP) is calculated as Operating Revenues, less Adjusted Operating Expenses (non-GAAP). ***Adjusted Operating Income Margin (non-GAAP) is calculated as Adjusted Operating Income (non-GAAP) divided by Operating Revenues. 2 2016 ANNUAL REPORT Graham Media Group delivered again in 2016. Boosted by both the Olympics and political advertising, GMG delivered its largest ever operating income year. While in 2016 we were able to increase operating u We sold our long-held waterfront real estate income in the face of revenue declines, we know located in Alexandria, VA. this is most unusual and ruefully acknowledge we have not found some new business formula buried u We opportunistically repurchased shares of our in the depths of a “Graham & Dodd” book. In order stock throughout the year. Outstanding shares in to achieve the long-term operating income growth the Company went down by about 4% at a cost of we believe possible, we need to return to top-line $109 million. growth; more on that later in this letter. Graham Media Group delivered again in 2016. So what decisions did we make in 2016? Boosted by both the Olympics and political adver- tising, GMG delivered its largest ever operating In 2016, we continued the portfolio shift that was income year. The stations, in most cases, managed enabled, and in many ways necessitated, by the to add to their leads in terms of local rankings. Our Cable ONE spin-off in 2015. Here is a brief list of investment in increased news programming over the what we did: past several years has created unique content and brand attachment that allowed many of our stations u We agreed to acquire two broadcast television to navigate the trend away from linear television bet- stations within Graham Media Group. The deal ter than most. was completed in January 2017. Perhaps most impressively, WKMG, our CBS affiliate u We closed on our acquisition of Mander Portman in Orlando led by Jeff Hoffman, wins the award for Woodward (MPW), a set of sixth-form schools in most improved. Jeff grew our rankings in nearly every the U.K. We have been very pleased with the first time slot as compared to prior years, all while provid- year of operations at MPW. In conjunction with ing tremendous coverage of the Pulse nightclub the acquisition, we took out £75 million in debt at shooting and Hurricane Matthew. Jeff’s performance what we believe are favorable terms. fits right in with the rest of our station managers at Graham Media Group. Whether it be an all-time high u Dekko acquired Electri-Cable Assemblies as a in broadcast cash flow at WJXT, or becoming the tuck-in to its business, which further strengthens leader in key time slots at KPRC, or having a market its power and data business. leading share by a tremendous margin like that at KSAT, or deftly navigating a challenging market like u We merged our two healthcare businesses to WDIV, each one of our stations performed optimally achieve greater scale and operating efficiency. and made us proud. u We sold Colloquy, a unit of Kaplan that offered In May, we announced we were buying WCWJ in online learning solutions to colleges and universi- Jacksonville and WSLS in Roanoke from Nexstar ties, as it did not meet our financial objectives. and Media General in conjunction with their merger. 2016 ANNUAL REPORT 3 If you told me on January 1, 2016, that we would sign need to provide ongoing training, certification, an agreement to acquire two broadcast TV stations continuing education and professional development five months later, I would not have believed you. The for their employees, Kaplan Professional will be a circumstances that led to our ownership of WCWJ key partner. It is important to understand that this and WSLS are unlikely to occur again, and, indeed, I is a cyclical business, and the results may be uneven still pinch myself they happened at all. My view that from year to year. In economic cycles where hiring the long-term future of broadcast TV is a cloudy crys- is dampened, less training is usually needed. While tal ball remains unchanged. However, when you can others may fret when the inevitable down cycles own two stations in the market and strengthen your occur, we view them as opportunities to go shopping affiliation with NBC, while doing so at a decent price to build out our product offerings, while not paying for shareholders, you make the deal. Our overfunded peak market prices. retirement plan helped us, as we assumed some of the pension liabilities of the seller. My belief is that under Andy Rosen, Kaplan’s results will improve more years than not. His efforts from Kaplan had a year of mixed results, but the overall years ago provided the Company with new platforms picture was an improvement from the previous year.