Graham Holdings Company — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Graham Holdings is a diversified holding company with education, broadcasting, manufacturing, healthcare, automotive and other businesses.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,111.5 million | $1,012.4 million | $3,248.1 million | $2,860.5 million |
| Operating income (loss) | $(57.1) million | $59.5 million | $28.6 million | $138.8 million |
| Net income (loss) attributable to common stockholders | $(23.0) million | $32.8 million | $152.0 million | $60.9 million |
| Diluted EPS | $(5.02) | $6.76 | $32.14 | $12.48 |
| Net cash provided by operating activities | Not stated for quarter | Not stated for quarter | $202.5 million | $203.7 million |
Revenue increased 10% in Q3 and 14% year to date. The Q3 operating loss included $98.3 million of goodwill and long-lived asset impairments. For the first nine months, net income benefited from $113.4 million of net gains on marketable equity securities; operating income was down substantially year over year, chiefly because of impairment charges and weaker results in several businesses. Results also include significant non-operating pension income: $35.7 million in Q3 and $97.3 million year to date, both below the prior-year amounts.
Segments and notable changes
- Education: Revenue rose 16% in Q3 and 12% year to date; operating income increased to $29.9 million and $83.0 million, respectively. Kaplan International growth was a key contributor.
- Television broadcasting: Revenue fell 14% in Q3 and 9% year to date; operating income declined 39% and 29%. Lower political advertising and, year to date, the absence of 2022 Olympics and Super Bowl advertising contributed.
- Manufacturing: Revenue declined 11% in Q3 and 6% year to date. Operating results included a $47.8 million Dekko goodwill impairment; demand for certain commercial-office products remained weak.
- Healthcare: Revenue increased 33% in Q3 and 44% year to date, partly reflecting acquisitions and CSI growth. Operating income was roughly flat in Q3 and down 7% year to date, affected by a new pension-credit retention program.
- Automotive: Revenue increased 29% in Q3 and 50% year to date, with acquisitions contributing. Q3 operating income fell 25%, while year-to-date operating income rose 12%.
- Other businesses: Revenue declined 14% in Q3 and 13% year to date. Results included a $50.2 million World of Good Brands goodwill impairment, amid advertising weakness and continued operating losses.
Cash, debt and capital allocation
- At September 30, cash and cash equivalents were $160.0 million, restricted cash was $40.7 million, and marketable equity securities and other investments totaled $672.3 million. Management reported $873.0 million in cash and investments against $761.7 million of debt.
- Working capital was $646.2 million, versus $534.1 million at December 31, 2022. The $300 million revolving facility had $60.9 million drawn, leaving $239.1 million available; a separate $50 million automotive delayed-draw facility was undrawn.
- Debt increased from $726.4 million at year-end 2022 to $761.7 million. New borrowings included a $149.3 million term loan and automotive term loans. The $75.2 million automotive real estate loan was hedged at a fixed overall rate of 6.42%. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $119.4 million, including $77.0 million for acquisitions, $61.2 million of cash capital expenditures and a $30 million loan to Intersection. Financing cash outflow was $69.7 million, including $132.2 million of share repurchases and $23.5 million of dividends.
- Management estimated 2023 capital expenditures of $95 million to $105 million and expected a $6.60-per-share dividend for 2023. It said existing resources, operating cash flow and available borrowing capacity should be sufficient for business needs over the next 12 months.
Outlook, risks and unusual items
- The filing gives no consolidated revenue or earnings guidance. Management expects retransmission revenue, net of network fees, to decline modestly in 2023 versus 2022 and said cord-cutting is expected to continue.
- Impairment estimates rely on projected cash flows, discount rates and growth assumptions. Framebridge’s estimated fair value exceeded carrying value by less than 10%; management warned that future impairment charges could be material.
- Kaplan faces potential exposure tied to borrower-defense claims involving former schools. The filing describes 1,449 applications seeking discharge of approximately $35 million in loans; the Department of Education may separately pursue recoupment. Management said it intends to defend against liability.
- Management estimated that future losses from existing and threatened legal, regulatory and other proceedings, beyond recorded amounts, could reach approximately $15 million. It did not identify existing matters likely to have a material effect, based on information available.
- Marketable securities create equity-price risk; variable-rate borrowings create interest-rate risk; and international operations create foreign-exchange risk. The filing also notes acquisition, demand, advertising-market and labor-retention pressures.
- Other material items included a $10.0 million noncash gain on the Pinna transaction, a $4.6 million credit to interest expense from terminated swaps, and $9.6 million of non-operating separation-program expenses year to date.
Key facts for investors to verify
- Underlying segment earnings and cash generation excluding impairments, marketable-security gains and pension-related items.
- Progress in addressing weak demand at Dekko and continuing losses and advertising declines at World of Good Brands; reassess Framebridge impairment headroom.
- Automotive acquisition performance, debt repayment needs, variable-rate exposure and covenant headroom.
- Developments in Kaplan borrower-defense matters and any related Department of Education recoupment action.
- Execution of the stated 2023 capital-expenditure plan, planned dividend and remaining share-repurchase authorization.