Graham Holdings Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Graham Holdings is a diversified education and media company with broadcasting, manufacturing, healthcare, and other businesses. Results are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $801.2 million | $652.9 million | $1,513.6 million | $1,385.1 million |
| Operating income | $37.6 million | $5.9 million | $71.4 million | $14.0 million |
| Net income (loss) attributable to common stockholders | $115.4 million | $18.9 million | $227.8 million | $(14.4) million |
| Diluted EPS | $22.99 | $3.60 | $45.43 | $(2.77) |
| Cash from operating activities | Not provided by quarter | $72.8 million | $121.4 million |
Q2 operating margin was approximately 4.7%, versus 0.9% a year earlier; first-half operating margin was approximately 4.7%, versus 1.0%. Reported net income included substantial non-operating investment gains: gains on marketable equity securities were $83.7 million in Q2 and $162.9 million in the first half, compared with Q2 gains of $39.9 million and first-half losses of $60.5 million in 2020. First-half 2021 also included $54.0 million of net non-operating pension and postretirement benefit income.
At June 30, cash and cash equivalents were $114.8 million, restricted cash was $10.7 million, marketable equity securities and other investments totaled $765.7 million, and debt was $510.3 million. Working capital was $738.0 million. The $300 million revolving credit facility had $76.2 million drawn and $223.8 million available. Management said resources should be sufficient for business needs over the next 12 months. The company reported compliance with its financial covenants.
Changes versus the comparable period
- Q2 revenue rose 23% and first-half revenue rose 9%. Operating income improved markedly in both comparisons; first-half common-stockholder results swung from a loss to profit.
- Revenue increased across broadcasting, manufacturing, healthcare, and other businesses, while first-half education revenue declined 3%. Broadcasting benefited from recovering advertising demand; manufacturing growth reflected higher wood prices and demand at Hoover.
- Operating cash flow fell to $72.8 million from $121.4 million in the first half, while investing cash flow shifted to a $310.5 million use, principally reflecting the Leaf acquisition. Cash and cash equivalents declined by approximately $299 million from year-end.
- On June 14, Graham acquired Leaf Group for approximately $322 million, including assumed liabilities. The acquisition contributed to higher goodwill and intangible assets. The company also paid $30.9 million in deferred and contingent acquisition payments.
Outlook, risks and unusual items
- Management said COVID-19 disruptions were expected to continue to adversely affect several businesses through the remainder of 2021, particularly Kaplan International Languages. The company noted uncertainty about the pandemic’s duration, demand effects, and financial consequences.
- Manufacturing benefited from significant first-half inventory gains at Hoover, but wood prices began declining in June and continued to decline in July. Management expected significant Hoover inventory-sale losses in Q3, offsetting first-half gains.
- Estimated 2021 capital expenditures were $160 million to $170 million, including approximately $100 million for land and building purchases at Kaplan International and Automotive. The filing did not provide consolidated earnings or revenue guidance.
- Kaplan’s Purdue Global fee depends on collectability and cash available for distribution; Kaplan had $87.8 million in receivables from Purdue Global, including a $19.1 million long-term receivable. Kaplan said it would reassess fee recognition quarterly.
- The U.S. Department of Education sought fact-finding and documents concerning more than 800 borrower-defense claims involving previously owned Kaplan schools, and separately requested information concerning over 1,400 student claims. Kaplan said it would defend against liability; the potential number and amount of claims were uncertain.
- Management identified possible future legal losses above recorded amounts of approximately $10 million. COVID-19-related disruption could also cause further asset or investment impairments. The filing reported $3.8 million of long-lived-asset impairment charges in Q2 2021 and $4.8 million for the first half.
- Ratings agencies affirmed the company’s ratings and revised outlooks from Negative to Stable; Moody’s rated it Ba1 and S&P rated it BB. Market risks include equity-price, interest-rate, and foreign-exchange exposure.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operating performance versus marketable-security gains, pension income, and other non-operating items.
- Whether COVID-19 recovery, particularly at Kaplan International Languages and restaurants, progresses as expected, and whether Hoover’s anticipated Q3 inventory losses materialize.
- Leaf’s post-acquisition performance, integration costs, and the preliminary purchase-price allocation, which remained subject to change.
- Future Purdue Global fee recognition and collectability, and any financial exposure from the Department of Education student claims and related proceedings.
- Cash generation and liquidity after the Leaf acquisition, planned capital expenditures, dividends, and potential acquisitions or share repurchases.