Business context and reporting period
Graham Holdings Company is a diversified education and media company with additional manufacturing, healthcare, automotive, restaurant and other operations. This unaudited Form 10-Q covers the three months ended March 31, 2021; comparisons are with the first quarter of 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $712.5 million | $732.3 million |
| Operating income | $33.8 million | $8.1 million |
| Net income (loss) attributable to Graham common stockholders | $112.5 million | $(33.2) million |
| Diluted EPS | $22.44 | $(6.32) |
| Cash provided by operating activities | $24.0 million | $12.4 million |
Revenue declined 3% year over year. Cost of services fell, while goods costs increased. Operating income improved notably, but net income was heavily influenced by a $79.2 million gain on marketable equity securities, $28.8 million of non-operating pension and postretirement benefit income, and $13.4 million of equity earnings from affiliates. These items make reported earnings less indicative of underlying operating trends.
At March 31, 2021, cash and cash equivalents were $350.1 million, restricted cash was $22.5 million, and marketable equity securities and other investments totaled $715.6 million. Total debt was $510.3 million, including $396.3 million carrying value of 5.75% notes due June 2026 and $75.6 million outstanding on the revolving facility. Working capital was $909.7 million. Management said resources would be sufficient for the next 12 months; $224.4 million remained available under the $300 million revolver. Cash, cash equivalents and restricted cash declined $50.4 million during the quarter.
Material changes versus the prior comparable period
- Net income shifted from a loss to a profit, reflecting improved operating results and a swing in marketable-security gains/losses: a $79.2 million gain in Q1 2021 versus a $100.4 million loss in Q1 2020.
- Operating income increased to $33.8 million from $8.1 million, with improvement in education, manufacturing, healthcare and other businesses, partly offset by lower television broadcasting results.
- Education revenue fell 8%; television broadcasting revenue fell 2%. Manufacturing revenue rose 2% and healthcare revenue rose 9%.
- Operating cash flow rose to $24.0 million from $12.4 million. Investing cash flow was a $63.3 million use, including $48.0 million of marketable-equity purchases; Q1 2020 investing cash flow was $9.6 million provided.
Outlook, risks and unusual items
- Management expected COVID-19 disruptions to continue affecting several businesses through the rest of 2021, particularly Kaplan International Languages and Clyde’s Restaurant Group. The extent and duration of the impact remained uncertain.
- Kaplan reported $18.9 million of operating income versus $4.7 million a year earlier. Results benefited from restructuring savings, while Kaplan International Languages incurred approximately $13 million of losses amid travel restrictions. Recognition of Purdue Global fees remains subject to quarterly collectability assessments; Kaplan reported $88.6 million in receivables from Purdue Global, including $19.0 million long-term.
- Intersection’s weaker results and liquidity remain a potential impairment risk; Graham recorded a $5.4 million equity-method loss related to Intersection in Q1 and expected further losses during 2021. Additional COVID-related asset or affiliate impairments are possible.
- On April 5, 2021, after quarter-end, the company announced an agreement to acquire Leaf Group for $8.50 per share in cash, valued at approximately $323 million. Closing was expected in June or July 2021, subject to shareholder and regulatory approvals and other conditions.
- Estimated 2021 capital expenditures were $55 million to $65 million. Standard & Poor’s affirmed the company’s rating and revised its outlook from Negative to Stable on April 27, 2021; Moody’s outlook remained Negative.
- Management said existing legal and threatened matters could result in future losses exceeding recorded amounts by approximately $10 million, though it did not believe existing claims were likely to have a material effect.
Important facts for investors to verify
- How much of earnings growth is repeatable after excluding marketable-security gains, pension income, and affiliate results?
- Whether COVID-19 recovery, travel restrictions and restaurant reopening materially change the outlook for Kaplan and other affected businesses.
- Future market value and concentration risk in the $700.4 million marketable-equity portfolio, which included $419.5 million of unrealized gains.
- Collection and future recognition of Purdue Global fees, and the financial performance and liquidity of Intersection and other affiliates.
- Whether the Leaf Group transaction closes on the announced terms and how it is financed; the filing text does not provide a completed transaction outcome.