Graham Holdings Company — Q1 2022 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Graham Holdings is a diversified company with education, television broadcasting, manufacturing, healthcare, automotive and other businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $914.7 | $712.5 | +28% |
| Operating income | $40.0 | $33.8 | +18% |
| Income before taxes | $132.2 | $154.0 | −14% |
| Net income attributable to Graham Holdings common stockholders | $95.6 | $112.5 | −15% |
| Diluted EPS | $19.45 | $22.44 | −13% |
| Net cash from operating activities | $44.9 | $24.0 | +$20.9 |
| Capital expenditures (cash paid) | $14.2 | $13.1 | +$1.1 |
Operating margin was approximately 4.4%, versus 4.7% a year earlier. The effective tax rate was 26.9% in both periods. Net income included $46.9 million of net gains on marketable equity securities in 2022, compared with $79.2 million in 2021, and $50.5 million of non-operating pension and postretirement benefit income, versus $28.8 million. Equity in affiliate earnings fell to $2.6 million from $13.4 million. These non-operating items materially affected reported earnings.
At March 31, cash and cash equivalents were $132.2 million; restricted cash was $26.5 million; marketable equity securities and other investments totaled $817.0 million; and total debt was $627.9 million, down from $667.5 million at year-end. Working capital was $724.1 million. The company had $170.9 million drawn and $129.1 million undrawn on its $300 million revolving facility. It reported $44.9 million of operating cash flow, $19.5 million of net investing cash inflow and $64.4 million of financing cash outflow; cash and restricted cash together decreased $0.2 million.
Material changes and business performance
- Revenue rose across education, television broadcasting, healthcare, automotive and other businesses. Automotive revenue more than doubled, mainly reflecting the Ford dealership acquired in December 2021 and higher selling prices amid vehicle shortages.
- Education revenue increased 9% and operating income rose to $20.4 million from $18.9 million. Kaplan International revenue grew 19% and operating income approximately doubled as Languages losses narrowed and Pathways improved. Supplemental Education revenue fell 4%, with operating income down 73%, amid weaker test-preparation demand and higher advertising and product-development costs. Higher Education revenue was flat and operating income declined 19%.
- Television broadcasting revenue grew 9% and operating income 21%, helped by retransmission fees, political advertising and Olympics/Super Bowl-related advertising, partly offset by higher network fees.
- Manufacturing revenue was essentially flat; operating income increased 12%, with improved Dekko and Forney results partly offset by lower wood-inventory gains at Hoover.
- Healthcare revenue grew 34%, supported by acquisitions and growth at CSI and home health. Operating income fell 11% because of higher marketing, recruiting and clinical staffing costs.
- Other businesses recorded a larger operating loss, $30.7 million versus $19.9 million, primarily reflecting Leaf Group losses and higher Framebridge losses; improved restaurant results partly offset the declines.
Outlook, risks and unusual items
- Management expects significantly improved Languages results for the rest of 2022, assuming no new travel restrictions. It also said restaurant improvement was expected to continue. These expectations are conditional; the filing provides no company-wide earnings or revenue guidance.
- Management estimates 2022 capital expenditures of $75–$85 million and expects a $6.32-per-share dividend for 2022. It believes available resources will be sufficient for the next 12 months, including operating needs, investment, dividends and repurchases.
- On May 3, 2022, after quarter-end, the company amended its revolving credit facility, extending maturity to May 30, 2027 and replacing USD LIBOR as a U.S.-dollar benchmark.
- Kaplan faces Department of Education borrower-defense claims: 1,449 applications seek discharge of approximately $35 million in student loans. Kaplan disputes the claims; any reimbursement action could create significant liability. Kaplan Singapore program restrictions have already had an adverse effect, and unsuccessful re-registration applications could further harm revenue, operating results and cash flow.
- Management said existing and threatened legal, regulatory and other proceedings could result in future losses of approximately $15 million above recorded amounts, though it did not believe existing matters were likely to have a material effect based on information available.
- Other risks include uncertainty around COVID-19, international travel and demand, Purdue Global fee collectability, automotive supply constraints and pricing, volatile wood prices, higher healthcare labor costs, and market-price, interest-rate and foreign-exchange exposure. Marketable equity securities were valued at $801.2 million and generated a $46.9 million quarterly net gain; investment-price changes can materially affect earnings.
- Cash flow benefited from customer collections and working-capital movements. The quarter also included $55.7 million of proceeds from equity-security sales, $18.5 million invested in healthcare affiliates, $9.5 million of share repurchases, and $7.7 million of dividends paid. Pension benefit income and investment gains are non-operating items and should not be treated as recurring operating performance.
Most important facts for investors to verify
- Whether core operating performance and cash generation improve independently of investment gains and pension-related income.
- Developments in Kaplan’s borrower-defense claims and Singapore program re-registration, and their potential financial exposure.
- Whether Kaplan International’s expected recovery materializes and whether test-preparation demand, Purdue Global fee collection and healthcare staffing costs change.
- The sustainability of automotive margins amid supply constraints and the contribution of the acquired Ford dealership; also monitor wood-price volatility and losses at investment-stage businesses.
- Market value and concentration of the equity portfolio, debt and revolver utilization, and progress against management’s capital-expenditure and dividend expectations.