Graham Holdings Company — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a filing limited to the fourth quarter. Graham Holdings is a diversified company spanning education, television broadcasting, manufacturing, healthcare, automotive and other businesses. Education generated 43% of consolidated revenue.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $3,186.0 million | $2,889.1 million |
| Operating income | $77.4 million | $100.4 million |
| Net income attributable to common stockholders | $352.1 million | $300.4 million |
| Diluted EPS | $70.45 | $58.13 |
| Cash from operating activities | $202.4 million | $210.7 million |
| Capital expenditures | $162.5 million cash outflow | $69.6 million cash outflow |
Revenue increased 10%, while operating income fell 23%. Operating margin was approximately 2.4%, versus 3.5% in 2020. Net income included $243.1 million of net gains on marketable equity securities and $109.2 million of non-operating pension and postretirement benefit income; these items materially supported reported earnings. A $17.2 million deferred-tax benefit also reduced the 2021 tax provision. The reported effective tax rate was 21.4%, or 25.2% excluding that benefit.
Cash and cash equivalents were $145.9 million at year-end, and working capital was $680.8 million. Marketable equity securities were valued at $810.0 million; cash, marketable securities and other investments totaled $983.3 million according to management. Total debt was $667.5 million, including $209.6 million drawn on the $300 million revolving facility, leaving $90.4 million undrawn. Debt included $400 million of 5.75% notes due June 2026. Management said resources would be sufficient for the next 12 months. The filing reports no clear consolidated gross-margin figure.
Segments and changes versus 2020
| Business | 2021 revenue | 2021 operating income (loss) | Change and principal drivers |
|---|---|---|---|
| Education | $1,361.2 million | $50.6 million | Revenue +4%; operating income improved from $11.6 million as International and Supplemental Education results recovered. |
| Television broadcasting | $494.2 million | $149.4 million | Revenue −6% and operating income −23%, mainly from an $89.0 million decline in political advertising and higher network fees. |
| Manufacturing | $458.1 million | $(16.0) million | Revenue +10%, but operating results were reduced by $28.0 million of impairment charges, including a $26.7 million Dekko goodwill impairment. |
| Healthcare | $223.0 million | $26.8 million | Revenue +13%; operating income +3%, with growth at CSI Pharmacy and home health partly offset by hospice weakness and higher staffing costs. |
| Automotive | $327.1 million | $11.8 million | Revenue increased 27%; results recovered from a 2020 loss, helped by higher sales and vehicle prices. Ford of Manassas was acquired in December. |
| Other businesses | $324.4 million | $(86.1) million | Revenue rose with Leaf and Framebridge; losses at Leaf, Framebridge and other investment-stage businesses remained substantial. |
The Company acquired Leaf Group in June 2021 for $308.6 million in cash, plus $9.2 million of assumed liabilities related to its stock compensation plan. Total 2021 acquisitions were six businesses, with an aggregate purchase price of $357.5 million net of cash acquired. Cash used in investing activities was $494.6 million, compared with $199.4 million provided in 2020, when the Company received $223.0 million of net proceeds from the Megaphone sale.
Cash declined during 2021 as acquisitions, capital spending, securities purchases, dividends and repurchases exceeded operating cash generation and other inflows. The Company repurchased $55.7 million of shares and paid $30.1 million in dividends. The annual dividend was $6.04 per share; management expected $6.32 per share in 2022. Estimated 2022 capital expenditures were $80–$90 million.
Outlook, risks and unusual items
- COVID-19 and operating conditions: Management expected pandemic effects to continue into 2022, although at a reduced level. Travel restrictions and reduced international student demand affected Kaplan, especially language programs; manufacturing supply and labor pressures, healthcare staffing shortages, restaurant demand and advertising also remained risks.
- Education regulation: Singapore regulators stopped new enrollment in multiple Kaplan diploma programs during 2021. Kaplan said the actions would significantly adversely affect future Singapore revenue, results and cash flow; re-registration applications were not assured. Purdue Global’s provisional Title IV certification was extended to June 30, 2022. Changes to federal rules governing revenue-sharing service arrangements could affect Kaplan’s TOSA economics.
- Kaplan contingencies: Kaplan received 1,449 borrower-defense applications seeking discharge of approximately $35 million in loans, mostly from former Kaplan University students. The Department of Education could seek reimbursement from Kaplan if claims are approved; the ultimate outcome is uncertain. Kaplan also continues to face potential costs under leases guaranteed for Education Corporation of America, which is in receivership. The Company recorded $1.1 million of related legal and lease expense in 2021.
- Other legal matters: Management said existing and threatened proceedings could reasonably result in future losses of approximately $15 million above recorded amounts. The filing states that no existing proceeding is currently expected to have a material effect, based on information available.
- Impairments and valuation: The $26.7 million Dekko goodwill impairment reflected weak demand, labor and commodity costs, and supply-chain challenges. Dekko’s estimated fair value was less than 25% above carrying value after the impairment, leaving potential for further impairment if assumptions weaken. Total goodwill and indefinite-lived intangibles were $1.79 billion.
- Pension and investment volatility: Marketable securities generated $243.1 million of net gains in 2021, largely non-cash and subject to market movements. Management estimated a $179 million pension credit in 2022; actual pension results depend on investment returns and actuarial assumptions.
- Broadcasting and other risks: Cord-cutting and network fees constrain retransmission revenue growth; advertising varies with economic conditions and election cycles. The Company also identified risks from changing consumer behavior, regulation, cyber incidents, privacy requirements, acquisitions and goodwill valuations.
Key facts for investors to verify
- How much of 2021 net income and EPS came from investment gains, pension income and the deferred-tax benefit, versus recurring operating performance.
- Whether Kaplan can collect its Purdue Global fees and receivables under the TOSA, and the effect of Purdue Global bringing certain support functions in-house.
- The outcome and financial exposure of the borrower-defense claims, Singapore program re-registration and ECA lease guarantees.
- Whether Dekko and other acquired or investment-stage businesses require further impairment charges or ongoing support.
- Liquidity after acquisition spending, the $209.6 million revolver draw, debt maturities and planned capital expenditures, repurchases and dividends.
- Whether recovery in international education, broadcasting, restaurants and healthcare can offset labor, supply-chain, regulatory and demand pressures.