Graham Holdings Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited results compared with Q1 2022. Graham Holdings is a diversified holding company with education, broadcasting, manufacturing, healthcare, automotive and other businesses.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,031.5 million | $914.7 million | +13% |
| Operating income | $27.7 million | $40.0 million | -31% |
| Operating margin | 2.7% | 4.4% | Down 1.7 percentage points |
| Net income attributable to Graham Holdings common stockholders | $52.3 million | $95.6 million | -45% |
| Diluted EPS | $10.88 | $19.45 | -44% |
| Cash from operating activities | $22.8 million | $44.9 million | -49% |
Revenue growth reflected increases in education, healthcare and automotive, partly offset by declines in broadcasting, manufacturing and other businesses. Operating income fell despite higher revenue. Net income also included substantial investment-related and pension income: net gains on marketable equity securities were $18.0 million versus $46.9 million a year earlier, while non-operating pension and postretirement benefit income was $31.8 million versus $50.5 million.
Operating margin is calculated as operating income divided by revenue. Cash, cash equivalents and restricted cash totaled $154.2 million at March 31, 2023. Marketable equity securities and other investments were $616.4 million. Working capital was $514.3 million, down from $534.1 million at year-end 2022.
Debt, liquidity and capital allocation
- Total borrowings were $691.1 million at March 31, 2023, down from $726.4 million at December 31, 2022. Debt included $397.7 million of 5.75% unsecured notes due in 2026 and $168.8 million drawn on the $300 million revolving credit facility; $131.2 million of that facility remained available.
- Net interest expense increased to $13.1 million from $10.7 million, reflecting higher average borrowings and rates. The company reported compliance with its debt covenants.
- Cash and restricted cash decreased by $35.7 million during the quarter. Financing uses included $23.4 million of share repurchases, $7.9 million of dividends and debt repayments.
- Management said it expects to fund needs primarily with existing cash and internally generated funds, with revolver borrowings as needed, and believes resources are sufficient for the next 12 months.
- Management estimated 2023 capital expenditures of $90–$100 million and said it expects to pay dividends of $6.60 per share in 2023.
Material changes and segment performance
- Education: Revenue rose 6% to $378.0 million and operating income increased to $23.0 million from $20.4 million. Kaplan International grew, while Supplemental Education revenue declined amid lower test-preparation demand.
- Television broadcasting: Revenue declined 9% to $112.9 million and operating income fell 28% to $28.6 million. The prior-year quarter benefited from Olympics and Super Bowl advertising; retransmission, digital and political advertising also declined.
- Manufacturing: Revenue was down 1% to $114.6 million; operating income fell 27% to $7.3 million. Lower wood inventory gains and declines at several businesses weighed on results.
- Healthcare: Revenue increased 52% to $102.1 million, partly from acquisitions and growth in existing services. Operating income fell 54% to $2.9 million, affected by pension retention-program expense and losses at acquired businesses.
- Automotive: Revenue rose 54% to $232.6 million and operating income rose 53% to $10.8 million, primarily reflecting dealership acquisitions and growth at several existing dealerships.
- Other businesses: Revenue declined 8% to $92.0 million. Operating losses were broadly similar, with increased losses at Leaf, Framebridge, Code3 and City Cast partly offset by improvement at other businesses.
Outlook, risks and unusual items
- Results included $18.0 million of net gains on marketable equity securities; those securities remain exposed to equity-price volatility. The company held $603.5 million of marketable equity securities, including a Berkshire Hathaway position valued at $345.6 million.
- Quarterly earnings included $31.8 million of non-operating pension and postretirement benefit income. Pension assumptions and asset performance can affect reported results; the company reported a $1.7 billion prepaid pension asset.
- Kaplan faces potential exposure related to borrower-defense claims involving former schools. The 1,449 applications seek discharge of approximately $35 million in student loans, excluding interest. The Department of Education may separately pursue recoupment from Kaplan; the company said it intends to defend against such claims. Management also said reasonably possible future losses from existing and threatened legal, regulatory and other proceedings, in excess of recorded amounts, could reach approximately $15 million.
- Management cited risks including marketable-security price changes, interest-rate and foreign-exchange movements, business and acquisition performance, and regulatory and legal developments. It cautioned that interim results may not indicate future results and undertook no obligation to update forward-looking statements.
- The company recorded $0.7 million of long-lived asset impairment charges and $4.1 million of pension-related separation incentive expense. It acquired two small healthcare businesses in January 2023.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth translates into improved operating profitability, especially in healthcare and acquired businesses.
- How much future net income depends on marketable-security gains and pension-related income, rather than operating performance.
- Developments in Kaplan’s borrower-defense claims and any potential Education Department recoupment action.
- Cash generation, capital expenditure needs, debt repayment and revolving-credit availability against management’s 12-month liquidity assessment.
- Whether broadcasting, manufacturing and other-business pressures persist, and whether automotive and education growth continues.