Graham Holdings Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The unaudited filing covers a diversified education, media, manufacturing, healthcare, automotive and other-business company. Results may not indicate future performance.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $809.4 million | $717.0 million | $2,323.0 million | $2,102.1 million |
| Operating income (loss) | $(16.6) million | $40.2 million | $54.8 million | $54.2 million |
| Operating margin | (2.1)% | 5.6% | 2.4% | 2.6% |
| Net income attributable to common stockholders | $39.6 million | $77.6 million | $267.4 million | $63.2 million |
| Diluted earnings per share | $7.90 | $15.22 | $53.33 | $12.11 |
| Cash provided by operating activities | — | — | $197.3 million | $240.9 million |
Q3 revenue rose 13% year over year, but operating results swung to a loss, primarily reflecting a $26.7 million Dekko goodwill impairment and weakness in manufacturing; operating income also declined in television broadcasting, healthcare and other businesses. Nine-month operating income was broadly flat despite 11% revenue growth.
Net income comparisons were materially affected by investment gains and other non-operating items. Marketable-equity-security gains were $14.1 million in Q3 2021 versus $59.4 million a year earlier, and $177.0 million for the first nine months of 2021 versus a $1.1 million loss in 2020. Nine-month results also included $81.6 million of non-operating pension and postretirement benefit income, compared with $41.0 million in 2020. The 2021 nine-month effective tax rate was 22.6%, including a favorable $15.7 million deferred-tax adjustment.
Segments and material changes
- Education: Q3 revenue rose 11% to $336.0 million and operating income increased to $9.9 million from $3.3 million. Kaplan International revenue benefited from growth in Pathways, UK Professional and Languages, though Languages remained affected by COVID-related disruption. Nine-month education revenue rose 1% and operating income increased to $42.0 million from $20.3 million.
- Television broadcasting: Q3 revenue fell 5% to $126.5 million and operating income fell 23% to $40.6 million, mainly due to lower political advertising and higher network fees. Nine-month revenue increased 3%, while operating income declined 3%.
- Manufacturing: Q3 revenue declined 6% to $99.8 million and the segment recorded a $39.5 million operating loss, including the Dekko impairment. Falling wood prices led to inventory-sale losses at Hoover; Dekko also faced weak demand, labor and commodity cost increases, and supply-chain challenges.
- Healthcare: Q3 revenue rose 8% to $55.4 million, while operating income declined 35% to $5.3 million, primarily due to lower hospice census and higher business-development costs.
- Automotive: Q3 revenue rose 10% to $84.7 million and operating income increased to $4.5 million. Higher vehicle prices and sales benefited results, amid inventory shortages and manufacturer production delays.
- Other businesses: Revenue increased substantially, partly due to the June acquisition of Leaf Group. Leaf contributed $57.5 million of Q3 revenue and a $7.2 million operating loss; Framebridge and Leaf were among the investment-stage businesses reporting losses.
The company acquired Leaf Group for approximately $322 million in cash, including assumed compensation-plan liabilities, and reported it in other businesses. It also changed its reportable-segment presentation to seven segments; prior-period segment results were restated.
Liquidity, debt and outlook
- At September 30, 2021, cash and cash equivalents were $133.9 million, restricted cash was $15.1 million, and marketable equity securities and other investments totaled $779.1 million. The company reported working capital of $681.0 million.
- Total debt was $555.9 million, up from $512.6 million at year-end 2020; this excludes lease liabilities. The balance included $122.3 million drawn on a $300 million revolving facility, leaving $177.7 million available. The company reported compliance with financial covenants. Credit outlooks from Moody’s and S&P were Stable.
- Operating cash flow was $197.3 million, down from $240.9 million. Investing activities used $420.5 million, including $272.4 million for business acquisitions and $140.9 million for property and equipment. Cash and restricted cash decreased by $274.1 million during the period.
- Management estimated 2021 capital expenditures of $155 million to $165 million and said existing cash, internally generated funds and, as needed, revolving-credit borrowings should be sufficient for business requirements over the next 12 months. This is not specific earnings guidance.
Risks, contingencies and unusual items
- Management expected COVID-19 effects to continue to adversely affect certain businesses through the remainder of 2021, while noting uncertainty about the pandemic’s severity, duration and financial impact. Additional impairment charges remain possible.
- Kaplan received U.S. Department of Education information requests concerning claims by former students of previously owned schools; the number of potential claims and any liability were uncertain. Kaplan Singapore was directed to stop new enrollment in several diploma programs and teach out existing students; further regulatory action could materially affect that business.
- The filing identified a proposed federal vaccination-or-testing requirement for employers with at least 100 employees as a risk, including potential employee attrition and labor-cost effects.
- Management stated that reasonably possible future losses from existing and threatened legal, regulatory and other proceedings above recorded amounts could reach approximately $15 million. It did not identify existing proceedings likely to have a material effect based on information then available.
- Other notable items included a $6.6 million impairment of an affiliate investment, $26.8 million of Q3 goodwill and other long-lived-asset impairment charges, and a $2.6 million Q3 non-cash interest expense to remeasure a mandatorily redeemable noncontrolling interest.
Key facts for investors to verify
- How much of reported earnings reflects recurring operating performance versus marketable-security gains, pension income, tax adjustments and other non-operating items.
- Whether manufacturing performance stabilizes after the Dekko impairment, Hoover inventory losses and disclosed cost and supply-chain pressures.
- The pace of recovery in Kaplan International Languages and the status of U.S. and Singapore education-related regulatory matters.
- Leaf Group’s contribution to revenue, operating losses and cash needs, and whether expected acquisition benefits materialize.
- Cash-flow and liquidity trends, including acquisition and capital-expenditure spending, debt levels, and the availability of cash held outside the United States.
- Potential further impairments or affiliate losses, including exposure to COVID-19 disruption and the risks identified for investments such as Intersection.