Graham Holdings Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is unaudited. Graham Holdings is a diversified holding company with education, television broadcasting, manufacturing, healthcare, automotive and other businesses.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $1,105.0 million | $933.3 million | $2,136.5 million | $1,848.0 million |
| Operating income | $58.1 million | $39.3 million | $85.7 million | $79.3 million |
| Net income attributable to common stockholders | $122.8 million | Loss of $67.5 million | $175.1 million | $28.1 million |
| Diluted earnings per share | $25.89 | Loss of $13.95 | $36.67 | $5.74 |
| Operating cash flow | Not separately stated for the quarter | $62.2 million | $99.4 million |
Revenue rose 18% in Q2 and 16% in the first half. Operating margin was approximately 5.3% in Q2 versus 4.2% a year earlier; for the first half, it was approximately 4.0% versus 4.3%. The substantial earnings swing primarily reflects marketable equity securities results: a Q2 gain of $78.6 million in 2023 compared with a $165.5 million loss in 2022, and first-half gains of $96.7 million versus losses of $118.6 million.
Segments and material period changes
- Education: Q2 revenue increased 14% to $402.2 million and operating income rose to $30.1 million from $18.7 million. Higher education results benefited from a larger Purdue Global fee recorded and lower development costs; Kaplan continues to assess collectability of the fee quarterly.
- Television broadcasting: Q2 revenue declined 3% to $118.8 million and operating income fell 16% to $33.2 million, reflecting lower political and national advertising and higher network fees.
- Manufacturing: Q2 revenue declined 5% to $120.1 million, while operating income increased to $12.0 million from $4.5 million, primarily due to improved Hoover results.
- Healthcare: Q2 revenue increased 48% to $113.3 million, largely from acquisitions and growth at CSI, home health and hospice. Operating income increased 34% to $8.4 million in Q2, but declined 10% to $11.3 million for the first half, partly due to pension expense from a retention program.
- Automotive: Q2 revenue rose 77% to $260.7 million and operating income increased 28% to $9.5 million, mainly reflecting dealerships acquired in July 2022 and growth at certain existing dealerships.
- Other businesses: Q2 revenue declined 16% to $90.4 million, with weakness in retail and media businesses. Pinna was merged with Realm in June; Graham deconsolidated Pinna, retained an equity-method interest in Realm and recorded a $10.0 million non-cash gain.
First-half operating cash flow fell to $62.2 million from $99.4 million. Management attributed the decrease mainly to lower net income after adjusting for non-cash items; market-price movements in equity investments materially affected the comparison. The company repurchased $69.1 million of shares in the first half, paid $15.7 million in dividends and invested $40.9 million in property, plant and equipment.
Liquidity, debt and capital resources
- At June 30, cash and cash equivalents were $111.7 million, restricted cash was $40.6 million, and marketable equity securities and other investments totaled $661.3 million. Working capital was $557.5 million.
- Total debt was $706.7 million, including $188.1 million drawn on the $300 million revolving credit facility; $111.9 million of that facility remained undrawn. The company reported compliance with its debt covenants.
- Borrowings averaged 5.9% interest in the first half, versus 4.5% a year earlier. The company held approximately $84 million of cash outside the U.S.; it considers a significant portion unavailable for U.S. operations.
- On July 28, 2023, the company entered into a $150 million term note bearing variable interest at SOFR plus 1.75%, with a final principal payment due May 30, 2027.
- Management said it expects sufficient resources for the next 12 months, including working capital, capital expenditures, interest, potential acquisitions and strategic investments, dividends and repurchases.
Outlook, risks and unusual items
- The company estimated 2023 capital expenditures of $90 million to $100 million and expected 2023 dividends of $6.60 per share. It did not provide consolidated revenue or earnings guidance.
- Management noted cord-cutting pressure on broadcast retransmission revenue and expected 2023 retransmission revenue net of network fees to be similar to 2022. Test-preparation demand remained soft in several categories; Leaf businesses faced lower traffic and a weak digital advertising market.
- Kaplan disclosed 1,449 borrower-defense applications seeking discharge of approximately $35 million in student loans. The Department of Education may separately pursue recoupment from Kaplan; the company says it will defend against such claims. Management also cited regulatory uncertainty related to Purdue Global.
- Management believes existing legal matters are not likely to have a material effect, but says reasonably possible future losses beyond recorded amounts could reach approximately $15 million.
- Results include volatile investment gains and losses, pension-related income and special separation program expenses, the Pinna transaction gain, and fair-value changes in contingent consideration and redeemable noncontrolling interests. These items affect period-to-period comparability.
- Market risks include equity-price exposure, variable interest rates and foreign exchange movements. Berkshire Hathaway shares valued at $383.2 million exceeded 5% of total assets at June 30.
Important facts for investors to verify
- How much of reported earnings growth is attributable to equity-market gains, pension accounting and transaction-related or other non-operating items, rather than recurring operating performance.
- Whether Purdue Global receivables and fees are collectible: Kaplan reported $113.3 million in total receivables from Purdue Global, including a $19.5 million long-term receivable.
- The potential scope, timing and financial consequences of borrower-defense claims, possible Department of Education recoupment and other education-related regulatory matters.
- Cash conversion and liquidity, including the decline in first-half operating cash flow, cash held outside the U.S., variable-rate debt exposure and the effect of the July 2023 term note.
- Segment trends—especially broadcast advertising and network costs, healthcare pension-program costs, and losses and revenue declines in Leaf and other businesses.