Graham Holdings Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing is unaudited. Graham Holdings is a diversified education and media company with additional manufacturing, healthcare, automotive, restaurant, and other businesses. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $717.0 | $738.8 | $2,102.1 | $2,168.6 |
| Operating income | $40.2 | $16.3 | $54.2 | $114.2 |
| Net income attributable to common stockholders | $77.6 | $43.1 | $63.2 | $182.0 |
| Diluted earnings per share | $15.22 | $8.05 | $12.11 | $33.96 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $240.9 | $72.3 |
- Operating margin was approximately 5.6% in Q3 2020 versus 2.2% in Q3 2019; for the nine-month periods, approximately 2.6% versus 5.3%.
- At September 30, cash and cash equivalents were $295.7; marketable equity securities and other investments were $506.2; total debt was $515.4. Working capital was $603.6, and $222.8 remained available on the $300 million revolving credit facility.
- Debt included $395.9 carrying value of 5.75% unsecured notes due 2026 and $77.2 drawn on the revolving facility. Management said it expects adequate resources for the next 12 months. Moody’s rating was Ba1 with a Negative outlook; S&P’s was BB with a Negative outlook.
Changes versus comparable periods
- Q3 revenue fell 3%, while operating income rose to $40.2 from $16.3. The quarter’s $59.4 net gain on marketable equity securities materially supported net income; net income also included $10.5 of non-operating pension and postretirement benefit income.
- Nine-month revenue declined 3%, and operating income fell to $54.2 from $114.2. Common-stockholder net income declined to $63.2 from $182.0. The prior-year period included a $29.0 gain on the sale of Gimlet Media and $49.3 of net gains on marketable securities; the 2020 nine-month period recorded a $1.1 net loss on those securities.
- By segment, Q3 education revenue declined 15%, manufacturing declined 4%, while television broadcasting rose 16% and healthcare rose 26%. Nine-month education revenue fell 10% and manufacturing fell 11%; television broadcasting increased 3% and healthcare increased 23%.
- Nine-month operating cash flow increased to $240.9 from $72.3, principally reflecting changes in operating assets and liabilities, including receivables collections, healthcare advance payments, and deferred payroll taxes. Investing cash flow was positive $12.7 versus negative $202.5; financing cash flow was negative $153.7, including $123.2 of share repurchases.
Outlook, commentary, risks, and unusual items
- Management said COVID-19’s adverse impact was expected to continue through the remainder of 2020 and into 2021, but noted it could not predict the pandemic’s severity, duration, or financial effects. Kaplan was affected by travel restrictions, closures, and postponed exams; the company reduced costs and capital spending and expanded online delivery. Further Kaplan cost-reduction plans were being developed for Q4.
- Television results benefited from political advertising, which partially offset pandemic-related advertising weakness; management expected continuing adverse effects into 2021. Manufacturing demand remained weak, particularly at Dekko. Hoover’s wood-price declines beginning in October were expected to cause significant Q4 inventory-sale losses. Restaurant operations at Clyde’s remained impaired, with further adverse effects expected into 2021.
- The company estimated 2020 capital expenditures of $55–$65 and was postponing noncritical spending. It repurchased 321,864 Class B shares for approximately $123.2 during the first nine months; 448,399 shares remained authorized at September 30.
- The nine-month income statement included $29.8 of goodwill and other long-lived asset impairment charges, alongside restructuring and accelerated-depreciation costs. COVID-related impairment risk could persist; the filing highlighted reduced valuation cushion at Dekko and potential future impairment at other businesses and affiliates.
- Healthcare received $7.4 under the CARES Act Provider Relief Fund and $31.5 in Medicare accelerated payments, the latter subject to recoupment beginning 365 days after payment. The company also deferred $14.1 of employer FICA taxes. These items, among other working-capital movements, contributed to operating cash flow.
- Kaplan’s UK Pathways VAT dispute remained unresolved; management said the result was expected by year-end 2020. Kaplan had recorded a provision for the disputed receivable and expected approximately $8.0 of VAT expense in 2020; a favorable outcome could reverse the provision. Separately, the filing cited reasonably possible future losses of approximately $15 from existing and threatened legal matters beyond recorded amounts.
- Management reported no material change in internal control over financial reporting during the quarter. The filing cautions that interim results may not indicate future performance.
Most important facts for investors to verify
- How much Q3 earnings depended on the $59.4 marketable-securities gain, and how portfolio values and gains or losses may change.
- Whether COVID-19-related demand weakness, reopening conditions, and expected Q4 Hoover inventory losses developed as management anticipated.
- The timing and outcome of the UK Pathways VAT matter, and any resulting expense, recovery, or cash-flow effects.
- How much operating cash flow reflects sustainable operations versus temporary advances, tax deferrals, and working-capital changes; also monitor debt, credit ratings, and revolving-facility capacity.