Graham Holdings Company — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; quarterly figures below include the three months ended December 31, 2020. Unless otherwise stated, financial amounts are in U.S. dollars.
Business context
Graham Holdings is a diversified education and media company. Its principal operations include Kaplan education services, seven television stations, manufacturing, home health and hospice care, and other businesses including restaurants, automotive dealerships and custom framing. Education generated 45% of consolidated revenue in 2020. The year was materially affected by COVID-19 restrictions, lower demand and operational disruptions. The company sold podcast technology business Megaphone in December.
Key financial results and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $2,889.1 million | $2,932.1 million |
| Operating income | $100.4 million | $144.5 million |
| Net income attributable to common stockholders | $300.4 million | $327.9 million |
| Diluted earnings per share | $58.13 | $61.21 |
| Net cash from operating activities | $210.7 million | $165.2 million |
| Capital expenditures (cash paid) | $69.6 million | $93.5 million |
Consolidated operating margin was approximately 3.5%, compared with 4.9% in 2019. Reported operating income excludes significant non-operating gains and pension income; net income included $60.8 million of net gains on marketable equity securities and a $209.8 million pretax gain on the Megaphone sale.
At year-end, cash and cash equivalents were $414.0 million, marketable equity securities and other investments were $587.6 million, total debt was $512.6 million, and working capital was $824.5 million. The company had $225.3 million available under its $300 million revolving credit facility. It reported $650.8 million of operating lease payments due over time. Management said resources should be sufficient for business needs over the next 12 months.
Fourth quarter: Revenue was $787.0 million and operating income was $46.2 million. Net income attributable to common stockholders was $237.1 million, including the Megaphone sale gain; diluted EPS was $47.34.
Material changes versus 2019
- Revenue declined 1%; operating income fell 31%, while net income attributable to common stockholders declined 8%.
- Kaplan revenue decreased 10% to $1,305.7 million and operating income fell 76% to $11.6 million. Kaplan International revenue fell 13%, with Languages recording $55 million of COVID-related losses. Supplemental Education revenue fell 16%; Higher Education revenue rose 3%, including $31.6 million in Purdue Global fees versus $12.3 million in 2019.
- Television Broadcasting revenue increased 13% to $525.2 million and operating income rose 27% to $194.5 million, driven by $88.5 million more political advertising and $12.4 million more retransmission revenue. Segment operating margin was 37%, versus 33%.
- Manufacturing revenue fell 7% to $416.1 million and operating income fell 40% to $12.3 million, principally reflecting weaker Dekko demand.
- Healthcare revenue rose 23% to $198.2 million and operating income increased to $26.1 million from $7.9 million, reflecting the CSI Pharmacy acquisition and improved home health and hospice results.
- Other businesses reported an operating loss of $92.2 million, versus a $33.4 million loss. COVID-related restaurant disruption, impairments and losses at investment-stage businesses contributed.
- Operating cash flow increased to $210.7 million. Cash and cash equivalents rose by $213.8 million during the year, supported by operating cash and asset-sale proceeds, partly offset by share repurchases, dividends, capital spending and acquisitions. The company repurchased $161.8 million of Class B shares.
Outlook, risks and unusual items
- Management expected COVID-19 to continue materially affecting results, operations and cash flows in 2021, particularly Kaplan Languages, manufacturing and restaurants. It did not quantify an overall earnings outlook.
- Management estimated 2021 capital expenditures of $55 million to $65 million and a 2021 net pension credit of approximately $98 million.
- 2020 included $30.2 million in reported goodwill and other long-lived asset impairment charges, as well as education restructuring and other restructuring-related costs. The filing identifies $47.2 million of restructuring-related costs across businesses, including pension expense and asset impairments.
- GHG received $7.4 million from the Provider Relief Fund and a $31.5 million Medicare advance. The advance is subject to recoupment beginning 365 days after payment. The company also deferred $21.5 million of employer FICA taxes.
- Kaplan recorded $8.4 million of 2020 expense related to the UK Pathways VAT matter after an adverse court ruling in November 2020; earlier provisions had already been recorded.
- Key risks include pandemic and enrollment uncertainty; changing international travel, immigration and Brexit-related rules; regulation of higher education and Purdue Global’s dependence on Title IV eligibility; standardized-test demand; broadcast advertising and cord-cutting; Medicare reimbursement and audits; restaurant restrictions; cybersecurity and privacy; and potential further impairments. The company noted that Hoover and Dekko goodwill valuations had less than a 25% cushion over carrying value.
- The company disclosed that reasonably possible future losses from existing and threatened legal, regulatory and other proceedings could exceed recorded amounts by approximately $15 million. It also remains exposed to guarantor lease obligations tied to the failed Education Corporation of America, with limited expected recovery from that entity.
- Credit ratings were Moody’s Ba1 and S&P BB, both with a negative outlook. The company reported compliance with its credit-facility covenants at year-end.
Important facts for investors to verify
- How much of reported earnings and cash generation is sustainable apart from Megaphone proceeds, marketable-security gains, pension items and government relief or advance payments.
- Whether Kaplan’s international student volumes recover and whether Purdue Global fees under the TOSA remain collectible and compliant with evolving Department of Education rules.
- Whether broadcast advertising and retransmission revenue can offset cord-cutting and post-election declines in political advertising.
- Progress in restoring restaurant and manufacturing operations, and whether additional impairments or restructuring costs arise.
- Repayment and recoupment timing for the Medicare advance, deferred payroll taxes, and other pandemic-related relief; and any changes to debt availability or credit ratings.
- Developments in the UK VAT dispute, ECA lease guarantees, other legal contingencies, and the valuation headroom for manufacturing goodwill.