Graham Holdings Company — Q1 2024 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Graham Holdings is a diversified company operating in education, television broadcasting, manufacturing, healthcare, automotive and other businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $1,152.7 | $1,031.5 | +12% |
| Operating income | $35.4 | $27.7 | +28% |
| Operating margin | 3.1% | 2.7% | +0.4 percentage points |
| Income before taxes | $168.8 | $72.2 | |
| Net income attributable to common stockholders | $124.4 | $52.3 | |
| Diluted EPS | $27.72 | $10.88 | |
| Net cash from operating activities | $1.1 | $22.8 | |
| Capital expenditures | $21.5 | $22.6 cash paid |
Reported earnings included a $104.2 million net gain on marketable equity securities, versus $18.0 million a year earlier. The 2024 gain added $17.27 per share after tax, making reported net income and EPS materially sensitive to investment-market movements. Net non-operating pension and postretirement benefit income was $42.4 million, compared with $31.8 million. Net interest expense rose to $17.2 million from $13.1 million.
Operating cash flow was low despite higher net income, primarily reflecting noncash gains and working-capital changes. Management cited lower customer collections and higher inventory purchases as key reasons for the year-over-year decline.
Business performance and material changes
- Education: Revenue rose 12% to $422.6 million and operating income increased to $30.6 million from $23.0 million. Kaplan International revenue grew 19%, with improved results in Pathways, Australia, UK Professional and Singapore. Higher Education operating income declined, in part because of a lower Purdue Global fee and higher development costs. Supplemental Education revenue eased 2% amid softness in some test-preparation and publishing activities.
- Television broadcasting: Revenue was essentially flat at $113.1 million; operating income increased 4% to $29.6 million. Political and digital advertising gains were partly offset by weaker other advertising. Management expects retransmission revenue, net of network fees, to decline in 2024 and says cord-cutting is expected to continue.
- Manufacturing: Revenue fell 11% to $101.9 million and operating income declined 58% to $3.1 million, reflecting lower demand and results at several businesses, particularly Hoover.
- Healthcare: Revenue grew 26% to $128.2 million and operating income rose to $6.1 million from $2.9 million, driven largely by CSI Pharmacy and growth in home health and hospice.
- Automotive: Revenue increased 31% to $303.8 million, helped by the Toyota of Richmond acquisition, the new Kia dealership and sales growth. Operating income declined 11% to $9.7 million as lower vehicle gross margins offset some gains.
- Other businesses: Revenue declined 9% to $83.3 million. Retail and media were weaker, while specialty revenue was flat. Operating losses narrowed modestly, principally due to improved results at Slate. Society6 and World of Good Brands faced lower traffic and a soft digital advertising market; the Leaf restructuring and cost-reduction process was expected to be largely completed by the end of Q2 2024.
Liquidity, debt and capital allocation
- At March 31, 2024, cash and cash equivalents were $130.9 million, restricted cash $48.1 million, marketable equity securities and other investments $802.9 million, and total debt $815.6 million. Cash, marketable securities and other investments totaled $981.9 million including restricted cash.
- Debt increased from $811.8 million at year-end. Borrowings included $398.4 million of 5.75% unsecured notes due 2026 and $108.1 million drawn on the $300 million revolving facility. The company reported $191.9 million of undrawn revolver capacity and an additional undrawn $50 million delayed-draw term loan at the automotive subsidiary.
- Working capital was $709.1 million, versus $619.6 million at December 31, 2023. Management said it expects sufficient resources for the next 12 months, including working capital, capital expenditures, debt service, potential acquisitions and investments, dividends and share repurchases. The company reported compliance with applicable debt covenants. S&P affirmed its rating and Stable outlook in April 2024; Moody’s rating was Ba1 with a Stable outlook.
- Marketable equity securities had a fair value of $794.3 million, including Berkshire Hathaway holdings valued at $470.8 million. Unrealized gains on the portfolio totaled $568.3 million. These holdings create meaningful equity-price exposure.
- Capital expenditures are estimated at $95 million to $105 million for 2024. The company repurchased 28,606 Class B shares for approximately $20.2 million in Q1 and had authorization for 207,797 additional shares at quarter-end. The quarterly dividend was $1.72 per share; management expected a $6.88 per-share dividend for 2024.
- Approximately $97 million of cash and cash equivalents was held outside the U.S.; management noted that a significant portion of foreign-held cash is not readily available for U.S. operations.
Outlook, risks and unusual items
- The filing does not provide company-wide earnings or revenue guidance. It does provide the 2024 capital expenditure estimate and expected annual dividend noted above.
- Results face exposure to marketable-equity price movements, interest rates, foreign exchange rates, cord-cutting and advertising demand, education enrollment and demand trends, and operating performance across diverse businesses. Management cautioned that quarterly results may not indicate future results.
- Management said future Purdue Global fees recorded by Kaplan will be assessed quarterly; the amount may depend on Purdue Global’s cash position at its June fiscal year-end, and the timing of cash flows can affect the fee recognized.
- Legal proceedings arise in the ordinary course of business. Management does not believe existing matters are likely to have a material effect, but estimates that reasonably possible future losses above recorded amounts could reach approximately $10 million.
- In Q1 2024, the company recorded a $0.4 million impairment of a cost-method investment and $1.9 million of interest expense from remeasuring a mandatorily redeemable noncontrolling interest. The prior-year cash flow statement was revised for nonmaterial balance-sheet-related misstatements; the revision did not change reported operating cash flow.
- The company amended its defined-benefit pension plan effective January 1, 2024, increasing benefits for certain participants and adding benefits for some employees; the change was funded by pension-plan assets, and matching contributions to certain 401(k) plans were eliminated.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the $104.2 million securities gain and pension-related income.
- Whether working-capital demands, including inventory and customer collections, improve enough to support stronger operating cash flow.
- Performance and margin trends in manufacturing and automotive, and whether healthcare growth and Education’s International gains continue.
- The impact of cord-cutting and advertising conditions on broadcasting, and progress in the Leaf businesses’ restructuring and cost reductions.
- Future Purdue Global fee recognition, debt levels and borrowing costs, and the market value and concentration risk of the securities portfolio.
- Execution of the $95 million–$105 million capital expenditure plan, planned dividends and share repurchases, and any material developments in legal contingencies.