Graham Holdings Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Graham Holdings is a diversified education and media company, with healthcare, manufacturing, automotive dealerships, and other businesses. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $737.6 million | $672.7 million | $1,429.8 million | $1,332.1 million |
| Operating income | $58.0 million | $65.6 million | $98.0 million | $109.8 million |
| Net income attributable to common stockholders | $57.1 million | $46.6 million | $138.8 million | $89.5 million |
| Diluted EPS | $10.65 | $8.63 | $25.91 | $16.40 |
| Operating margin, approximate | 7.9% | 9.8% | 6.9% | 8.2% |
- Q2 revenue grew 10%, primarily from the January acquisition of two automotive dealerships. Six-month revenue rose 7% for the same principal reason.
- Operating income declined 12% in Q2 and 11% year to date, despite higher revenue. Education and manufacturing were key sources of pressure; television broadcasting, healthcare, and other businesses partly offset the declines.
- Net income increased, but included significant non-operating gains. First-half 2019 included $31.9 million of marketable-securities gains and a $29.0 million gain on the sale of the Gimlet Media investment. Q2 also included $7.8 million of securities gains. Lower interest expense contributed to the comparison as well.
- Education revenue fell 1% in Q2 and first-half operating income fell 14%. Higher education revenue and operating income were down, partly reflecting the Kaplan University transaction and uncertainty over collection of service fees from Purdue Global. Kaplan International revenue rose 2% in both periods; Test Preparation revenue and operating results declined.
- Television broadcasting revenue increased 2% in Q2 and 1% year to date; first-half operating income declined 2%. Healthcare revenue grew, with improved operating results. Manufacturing revenue and operating income declined.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was a use of $16.7 million, versus cash provided of $70.5 million in 2018. Management attributed the decrease mainly to working-capital changes and higher incentive-compensation payments.
- First-half investing cash outflow was $100.9 million, including $84.1 million for business investments and $52.7 million of cash capital expenditures. Financing provided $40.3 million. Cash and restricted cash decreased $76.5 million to $187.6 million.
- At June 30, cash and cash equivalents were $172.0 million; marketable equity securities were $518.1 million; and other investments were also held. The company reported cash, marketable securities, and other investments totaling $724.5 million, compared with borrowings of $506.4 million.
- Total debt was $506.4 million, up from $477.1 million at year-end 2018. It included $395.0 million of 5.75% notes due 2026, an $82.3 million U.K. credit facility, and a $29.0 million automotive commercial note. The automotive borrowing is hedged to a stated fixed rate of 4.7% at the current margin.
- Cash, restricted cash, and investments are not all freely available: approximately $86 million of cash and cash equivalents was held outside the U.S., and the company said a significant portion of overseas cash supports local operating, capital, and regulatory needs.
- Working capital was $670.7 million, down from $720.2 million at December 31, 2018. A $300 million revolving credit facility matures in 2023; the company reported compliance with its financial covenants. Management said it expects sufficient liquidity for cash needs over the next 12 months.
- Adoption of lease accounting in January 2019 added $369.3 million of right-of-use assets and $418.3 million of lease liabilities at adoption. At June 30, lease liabilities totaled $404.1 million.
Outlook, commentary, risks, and unusual items
- The company estimated 2019 capital expenditures of $90–$100 million; first-half capital expenditures were $51.1 million. Some television spectrum-repacking expenditures were expected to be largely reimbursed by the FCC.
- Management provided no specific consolidated revenue or earnings forecast in the filing. It cautioned that interim results may not indicate future results.
- Singapore regulator SkillsFuture Singapore suspended Kaplan Learning Institute’s training-provider status for 12 months from July 1, 2019, terminated course accreditation and funding, and Kaplan Singapore began voluntary deregistration. The company said this would adversely affect 2019 revenue and results.
- Kaplan continues to assess whether Purdue Global can pay service fees under its transition agreement; the university’s marketing spending affects its cash generation and current ability to pay in full. Recorded fees may be adjusted as collectability is reassessed.
- Kaplan is seeking recovery of £16.8 million in U.K. VAT assessments already paid. If unsuccessful, the company said it would record a pre-tax operating expense charge of that amount. Separately, future VAT costs could arise if a U.K. cost-sharing exemption is not preserved.
- Management said future losses on existing and threatened legal, regulatory, and other proceedings in excess of recorded amounts could reach approximately $45 million. Kaplan also remains exposed to certain lease guarantees for a sold higher-education business; $17.5 million of estimated losses was recorded in 2018, with no significant estimate change in the first half of 2019.
- Q2 included $6.6 million of education-division separation-incentive expense, $7.8 million of broadcast operating-expense reductions from FCC spectrum-repacking equipment gains, and a $0.7 million long-lived-asset impairment charge. First-half results also included the Gimlet sale gain and securities gains noted above.
- After quarter-end, Kaplan acquired Heverald/ESL Education and Alpadia, Graham Healthcare Group acquired an interest in a small business, and the company closed its acquisition of Clyde’s Restaurant Group on July 31, 2019.
Important facts for investors to verify
- Whether revenue and operating performance improve in education and manufacturing, and whether automotive acquisition growth translates into sustainable operating earnings.
- The cash conversion and working-capital outlook, including the causes of negative first-half operating cash flow and the availability of overseas cash.
- Future collectability of Purdue Global service fees and the financial impact of the Singapore regulatory action.
- The outcome and timing of the £16.8 million U.K. VAT dispute, potential future VAT exposure, and the resolution of legal, program-review, and lease-guarantee matters.
- The sustainability of reported net income given the material contribution from marketable-securities gains and the Gimlet Media sale.