Graham Holdings Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Graham Holdings is a diversified education and media company with manufacturing, healthcare, automotive, restaurant and other businesses. Results were materially affected by COVID-19 and market declines.
Financial performance and position
- Revenue: $732.3 million, up 6% from $692.2 million. Acquisitions, including Clyde’s Restaurant Group and automotive dealerships, contributed to growth.
- Operating income and margin: $8.1 million versus $40.0 million; operating margin was approximately 1.1%, down from 5.8%. The decline primarily reflected weaker Education and Other Businesses results and impairment charges.
- Net result: Net loss attributable to common stockholders was $33.2 million, or $6.32 per diluted share, versus income of $81.7 million, or $15.26 per diluted share. The 2020 loss included $100.4 million of marketable-equity-securities losses and $16.4 million of goodwill and intangible-asset impairments.
- Cash flow: Operating activities provided $12.4 million, versus $37.9 million used in Q1 2019. Investing activities provided $9.6 million, mainly reflecting $48.0 million in marketable-securities sale proceeds; financing activities used $26.7 million, including $33.6 million of share repurchases and $7.7 million of dividends. Cash and restricted cash ended at $201.6 million.
- Liquidity and debt: Working capital was $511.6 million. Total debt was $508.9 million, including $78.6 million current; cash, marketable equity securities and other investments totaled $653.0 million. The $300 million revolving credit facility was undrawn at March 31 and May 5, 2020. Management said resources should be sufficient for the next 12 months.
- Balance sheet: Total assets were $5.65 billion, down from $5.93 billion at year-end 2019. Cash and cash equivalents were $178.6 million; marketable equity securities were $436.2 million.
Material changes and segment results
- Education: Revenue fell 4% to $356.4 million and operating income fell to $4.7 million from $25.6 million. COVID-related travel restrictions, school closures and postponed exams affected demand and revenue timing. Test Preparation revenue declined 30%; Kaplan International revenue rose 7%, partly due to acquisition activity.
- Television Broadcasting: Revenue increased 7% to $115.4 million, supported by political advertising; operating income was nearly flat at $35.8 million.
- Manufacturing: Revenue decreased 1% to $113.5 million, while operating income rose to $6.5 million from $3.3 million. Some plants moved to reduced operations late in March.
- Healthcare: Revenue increased 22% to $46.0 million and operating income increased to $3.2 million, principally reflecting the CSI Pharmacy acquisition and improved hospice results.
- SocialCode: Revenue decreased 11% to $12.0 million; the operating loss narrowed slightly to $3.8 million.
- Other Businesses: Operating loss widened to $29.7 million from $8.5 million. Restaurant closures and weaker dealership demand contributed, alongside $16.4 million of impairment charges at CRG and the automotive dealerships.
- Investment and unusual items: Marketable securities generated a $100.4 million net loss, versus a $24.1 million gain in Q1 2019. Q1 2019 also included a $29.0 million gain on the sale of Gimlet Media. Q1 2020 included $2.1 million of Education restructuring charges, $6.1 million of impairments on cost- and equity-method investments, and $4.3 million of foreign-exchange gains.
Outlook, risks and contingencies
- Management expected COVID-19’s adverse effects to continue through the second and third quarters and through the end of 2020, while noting that duration, severity and financial impact could not be predicted. Cost, staffing and capital-spending reductions were underway; the company was also accelerating online program development.
- 2020 capital expenditures were estimated at $40–$50 million. No specific earnings or revenue guidance was provided.
- Further COVID-related disruption could cause additional impairment charges. Hoover goodwill was also identified as a monitoring area because its estimated fair value had been less than 25% above carrying value in the 2019 annual test.
- Credit outlooks turned negative: Moody’s affirmed its rating but revised the outlook to Negative; S&P downgraded the rating to BB and revised the outlook to Negative. The company reported covenant compliance at March 31.
- Management stated that future losses on existing and threatened legal, regulatory and other proceedings in excess of recorded amounts could reasonably reach approximately $15 million. Separately, Kaplan Bournemouth appealed requirements related to a fire-hazard notice at a leased student residence; mediation was postponed, and additional substantial work may be required if the appeal is unsuccessful.
- The effective tax rate was 57.3%, elevated in part by COVID-related impacts and securities losses. The company recorded a $20.7 million current tax receivable and corresponding liability to Cable One related to an expected tax refund; it expected no impact on its results or financial position.
Important facts for investors to verify
- How COVID-related demand, closures and delayed exams affected subsequent-quarter revenue, cash generation and impairment assumptions.
- Performance and valuation of the concentrated marketable-equity portfolio, including realized and unrealized gains or losses.
- Liquidity availability, including the undrawn revolver, cash held outside the U.S., and the implications of negative credit outlooks and the S&P downgrade.
- Whether Purdue Global-related receivables and deferred fees remain collectible; Kaplan reported $82.0 million of accounts receivable and an $18.7 million long-term receivable from Purdue Global.
- Outcome and potential cost of the Bournemouth fire-hazard appeal, and any additional legal or regulatory exposure.