Graham Holdings Co quarterly report, Q3 FY2022

Graham Holdings Company — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Graham Holdings is a diversified education and media company with businesses in broadcasting, manufacturing, healthcare, automotive, and other sectors. Amounts below are in U.S. dollars.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Revenue	$1,012.4 million	$809.4 million	$2,860.5 million	$2,323.0 million
Operating income (loss)	$59.5 million	$(16.6) million	$138.8 million	$54.8 million
Net income attributable to common stockholders	$32.8 million	$39.6 million	$60.9 million	$267.4 million
Diluted EPS	$6.76	$7.90	$12.48	$53.33
Operating margin	5.9%	(2.1)%	4.9%	2.4%

Revenue rose 25% in Q3 and 23% for the first nine months. The company reported higher revenue across most divisions, with automotive acquisitions a significant contributor.
Operating income improved substantially against Q3 2021, which included a $26.8 million goodwill and long-lived asset impairment charge. Nine-month operating income gains came principally from education, broadcasting, manufacturing and automotive; healthcare and other businesses declined.
Net income fell year over year despite improved operating performance. Marketable securities produced losses of $54.3 million in Q3 and $172.9 million for nine months in 2022, versus gains of $14.1 million and $177.0 million in the respective 2021 periods. Results also include sizeable non-operating pension benefit income: $50.7 million in Q3 and $152.1 million year to date.
For nine months, operating cash flow was $203.7 million, compared with $197.3 million in 2021. Investing used $171.6 million (versus $420.5 million); financing used $8.2 million (versus $48.0 million). Cash and restricted cash increased $12.0 million.

Divisions and material changes

Education: Revenue increased 6% in Q3 and nine months; operating income rose to $18.6 million and $57.8 million, respectively. Kaplan International improved as language, pathway and UK professional activity grew and COVID-related language-program losses eased. Supplemental Education weakened amid lower test-preparation demand and higher advertising and product-development costs. Higher Education revenue also declined.
Television broadcasting: Q3 revenue increased 7% and operating income 29%, helped by political advertising and lower incentive compensation. Management expects retransmission revenue, net of network fees, to be flat in 2022 versus 2021 amid subscriber losses from cord-cutting; it expects this trend to continue.
Manufacturing: Q3 revenue rose 23%; operating income was $9.6 million versus a $39.5 million loss. The comparison benefited from the prior-year Dekko impairment and lower prior-year Hoover wood-inventory results. Wood prices remained volatile.
Healthcare: Revenue rose 57% in Q3 and 44% year to date, including acquired businesses and CSI growth. Nine-month operating income declined 11%, reflecting acquisition losses and higher staffing, recruiting, marketing and compensation costs.
Automotive: Revenue and operating income rose substantially following dealership acquisitions and changes in vehicle pricing and inventory. The company acquired two dealerships in July and financed the transaction with new borrowings.
Other businesses: The segment remained loss-making; Leaf and Framebridge reported significant operating losses. Code3 revenue declined amid sluggish client marketing spending. Clyde’s results improved as dining restrictions eased.

Liquidity, debt and capital allocation

At September 30, 2022, cash and cash equivalents were $149.8 million; marketable equity securities were valued at $597.5 million. Cash, marketable securities and other investments totaled $781.6 million, while total debt was $710.3 million. These investments are exposed to market-price risk, and some overseas cash is not readily available for U.S. operations.
Working capital was $498.3 million, down from $680.8 million at December 31, 2021. The $300 million revolving facility had $180.7 million drawn and $119.3 million available. The company reported compliance with debt covenants.
Total debt rose $42.8 million from year-end, principally due to automotive borrowing. Net interest expense for the first nine months increased to $36.8 million from $22.5 million. The company amended its revolving facility, extending maturity to May 2027; it also used interest-rate swaps to fix the rate on $27.2 million of new automotive notes.
The company repurchased $54.6 million of shares and paid $23.1 million of dividends in the first nine months. Management expected a 2022 dividend of $6.32 per share and estimated 2022 capital expenditures of $70–$80 million.

Outlook, risks and unusual items

Management said it expects to meet business needs over the next 12 months using existing cash, internally generated funds and, if needed, revolving-credit borrowings. No earnings or revenue guidance was provided.
Key risks include equity-market volatility, higher interest costs, foreign-exchange exposure, COVID-19 effects, supply-chain and vehicle-inventory constraints, and business-specific demand and execution challenges.
Kaplan faces borrower-defense claims concerning former schools seeking discharge of approximately $35 million of student loans, excluding interest. The filing describes potential future recoupment liability and evolving U.S. Department of Education rules. Separately, Kaplan Singapore’s earlier program restrictions were expected to adversely affect results, although some affected programs received re-registration approvals.
Management said existing legal matters are not expected to have a material effect based on information then available, but reasonably possible future losses from existing and threatened proceedings could exceed recorded amounts by approximately $15 million.
The nine-month comparison is affected by unusually large investment gains in 2021 versus investment losses in 2022, the prior-year Dekko impairment, and a $15.7 million deferred-tax benefit recorded in 2021. Pension benefit income also materially affects reported earnings and is not equivalent to operating cash generation.

Important facts for investors to verify

How much of revenue and operating improvement reflects acquisitions, political advertising, pricing and other temporary or cyclical factors rather than sustained organic growth.
The concentration, valuation sensitivity and liquidity of marketable equity securities, and how their results may affect earnings and available liquidity.
Automotive acquisition returns, related debt and variable-rate exposure, and healthcare acquired-business profitability and integration costs.
Developments in Kaplan borrower-defense matters and Singapore program approvals, including any financial or operating consequences.
Whether cash generation, working capital and available revolving capacity remain sufficient as debt costs, capital spending and shareholder distributions continue.