Graham Holdings Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Graham Holdings is a diversified education and media company, with additional manufacturing, healthcare, automotive and other businesses. Amounts below are in U.S. dollars; financial figures are approximate unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $933.3M | $801.2M | $1,848.0M | $1,513.6M |
| Operating income | $39.3M | $37.6M | $79.3M | $71.4M |
| Operating margin | 4.2% | 4.7% | 4.3% | 4.7% |
| Net income (loss) attributable to common stockholders | $(67.5)M | $115.4M | $28.1M | $227.8M |
| Diluted earnings (loss) per share | $(13.95) | $22.99 | $5.74 | $45.43 |
| Operating cash flow | Not separately reported | Not separately reported | $99.4M | $72.8M |
Q2 operating income rose modestly despite a lower operating margin. The reported net loss principally reflected a $165.5M loss on marketable equity securities, including $160.7M of unrealized losses on securities still held at quarter-end. For the first half, the corresponding securities loss was $118.6M, versus a $162.9M gain in 2021. Significant non-operating pension income partly offset these losses: $50.9M in Q2 and $101.4M for the first half.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $126.4M; total debt was $606.2M, down from $667.5M at December 31, 2021. Working capital was $581.0M, versus $680.8M at year-end.
- Marketable equity securities and other investments totaled $662.8M on the balance sheet; the marketable equity securities portion had a fair value of $648.6M.
- The $300M revolving credit facility had $150.8M drawn and $149.2M available. The facility was amended in May, extending maturity to May 2027. The company reported compliance with its financial covenants.
- First-half investing cash use was $17.9M, including $32.2M of cash capital expenditures and $28.0M of investments in affiliates and other investments. Financing cash use was $89.6M, including $34.3M of share repurchases and $15.5M of dividends.
Material changes and business trends
- Revenue increased 16% in Q2 and 22% in the first half. Growth came from education, television broadcasting, healthcare, automotive and other businesses; manufacturing revenue declined.
- Education revenue rose 4% in Q2 and 6% for the first half; operating income increased 42% and 22%, respectively. Kaplan International growth and reduced COVID-related losses helped, while Supplemental Education results weakened amid lower test-preparation demand and higher advertising and product-development costs.
- Television broadcasting revenue and operating income increased in both periods, helped by political, retransmission and event-related advertising.
- Manufacturing operating income fell 64% in Q2 and 32% in the first half, principally due to lower wood-price-related gains at Hoover; Q2 included inventory-sale losses versus significant gains in Q2 2021.
- Healthcare revenue grew 40% in Q2 and 37% in the first half, aided by acquisitions and growth at CSI, but operating income declined amid higher staffing, recruiting and other costs.
- Automotive revenue increased 64% in Q2 and 89% in the first half, primarily reflecting the Ford dealership acquired in December 2021 and higher vehicle selling prices. On July 5, 2022, after quarter-end, the company acquired two more dealerships, partly funded by $77.4M of borrowing.
- Other businesses’ results were pressured by operating losses at Leaf and Framebridge; Clyde’s restaurants improved as COVID-related dining restrictions eased.
Outlook, risks and unusual items
- Management expects sufficient resources for the next 12 months, including working capital, capital spending, interest, potential acquisitions, dividends and repurchases. It expects 2022 capital expenditures of $70M–$80M and a 2022 dividend of $6.32 per share.
- Kaplan expected significantly improved results at Languages and Australia for the remainder of 2022, assuming no new travel restrictions. Management also expected Clyde’s improvement to continue. These are expectations, not guarantees.
- Kaplan faces potential exposure related to borrower-defense claims involving former schools: 1,449 applications sought discharge of approximately $35M in loans. The Department of Education’s proposed settlement in a separate case could cover students from certain schools, but was not final as of the filing; any recoupment from Kaplan would require separate proceedings. Management said it would defend against liability.
- Kaplan Singapore’s 2021 regulatory actions were expected to adversely affect future revenue and results; some impacted programs received re-registration approval in July 2022, after quarter-end.
- Management said future legal and regulatory losses above recorded amounts could reach approximately $15M. It also noted that Leaf and Framebridge goodwill fair values exceeded carrying values by less than 10%, creating impairment risk if conditions worsen.
- Market risks include equity-price exposure from investment holdings, interest-rate exposure on borrowings, and foreign-exchange exposure. The company recorded substantial securities-related volatility and higher net interest expense ($15.3M in Q2; $26.0M in the first half, versus $5.5M and $13.0M, respectively, in 2021).
- The company stopped actively considering a proposed pension-surplus transaction after the IRS said it would no longer issue private-letter rulings on such transactions. COVID-19 impacts, market conditions and business-specific demand remain uncertainties.
Most important facts for investors to verify
- How investment-portfolio gains and losses affect reported earnings, and the portfolio’s concentration, valuation and liquidity.
- Whether operating performance and margins improve across manufacturing, healthcare and loss-making other businesses, and whether education growth offsets weaker test-preparation demand.
- The outcome and potential financial exposure from borrower-defense claims, Kaplan Singapore’s regulatory matters, and other legal contingencies.
- Post-quarter dealership acquisition financing, leverage and integration effects, alongside planned capital spending, dividends and share repurchases.
- Whether Leaf and Framebridge results or changing market assumptions lead to goodwill impairment, and how pension-related income and assumptions evolve.