Graham Holdings Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Graham Holdings is a diversified education and media company with manufacturing, healthcare and other businesses. The filing describes significant effects from the COVID-19 pandemic.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $652.9m | $737.6m | $1,385.1m | $1,429.8m |
| Operating income | $5.9m | $58.0m | $14.0m | $98.0m |
| Net income (loss) attributable to common stockholders | $18.9m | $57.1m | $(14.4)m | $138.8m |
| Diluted EPS | $3.60 | $10.65 | $(2.77) | $25.91 |
Revenue fell 11% in Q2 and 3% in the first half year over year. Operating margin was approximately 0.9% in Q2 versus 7.9% a year earlier, and 1.0% for the half versus 6.9%. Q2 included $39.9m in net gains on marketable equity securities; the first half instead included $60.5m in net losses on those securities. First-half results also included $27.9m of goodwill and other long-lived asset impairment charges. In 2019, first-half results benefited from a $29.0m gain on the sale of Gimlet Media.
Cash flow: First-half operating cash flow was $121.4m, versus cash used of $16.7m in 2019. Management attributed the improvement principally to working-capital movements, including receivables collections, a $31.5m Medicare advance and deferred payroll taxes. Investing cash flow was positive $26.7m, including $93.8m of proceeds from marketable securities sales; financing used $78.0m, including $62.9m for share repurchases and $15.3m for dividends.
Liquidity and debt: At June 30, cash and cash equivalents were $260.2m, restricted cash was $18.8m, and marketable equity securities and other investments were $444.7m. Total debt was $511.5m, including $73.9m drawn on the $300m revolving credit facility; $226.1m remained undrawn. Working capital was $590.3m. Management said resources should be sufficient for business needs over the next 12 months. Moody’s affirmed Ba1 but changed its outlook to Negative; S&P lowered its rating to BB and also assigned a Negative outlook.
Business trends and changes
- Education: Q2 revenue fell 9% and operating income fell 53%. Travel restrictions and exam postponements hurt international language, test preparation and professional programs; online Higher Education demand improved, including at Purdue Global. Kaplan announced a planned combination of its U.S. divisions as Kaplan North America and was developing further cost reductions.
- Television broadcasting: Q2 revenue fell 14% and operating income fell 47%, mainly due to weaker advertising demand. Political advertising and retransmission revenue partly offset the decline.
- Manufacturing: Q2 revenue fell 28%; the segment recorded an operating loss, reflecting lower demand, notably at Dekko.
- Healthcare: Q2 revenue rose 21% and operating income increased to $8.8m. Growth included the CSI Pharmacy acquisition; home health volumes were pressured. CARES Act provider relief contributed $5.5m of revenue and a $1.7m credit to operating costs in Q2.
- SocialCode: Q2 revenue fell 36% and operating loss widened to $3.0m as advertising clients reduced spending. In July, it announced plans to separate its agency business from its software platform, to be renamed Decile.
- Other businesses: Restaurants and auto dealerships faced pandemic-related disruption. The company acquired control of Framebridge in May, bringing its ownership to 93.4%; three 2020 acquisitions had aggregate purchase consideration of $96.8m including contingent consideration.
Outlook, risks and unusual items
- Management expected COVID-19 effects to continue to weigh on results in the second half of 2020, while noting it could not predict the pandemic’s severity or duration. Expected pressure included Kaplan International Languages, broadcasting advertising, manufacturing, healthcare home health, SocialCode and restaurants.
- The company estimated 2020 capital expenditures of $50m–$60m and was postponing noncritical spending. It reported $35.6m of capital expenditures in the first half on an incurred basis.
- COVID-19-related impairment reviews resulted in $16.4m of first-quarter goodwill and indefinite-lived asset charges at CRG and the auto dealerships; second-quarter impairment charges were also recorded. Further disruption or weaker projections could cause additional, potentially material impairments.
- GHG’s $31.5m Medicare accelerated payment is an advance subject to recoupment beginning 120 days after payment. Provider Relief Fund proceeds are subject to program conditions. CARES Act tax-payment deferrals and other government assistance also affected cash timing.
- Kaplan’s leased Bournemouth student residence received a fire-hazard improvement notice requiring remedial work, including removal of facade cladding. The appeal was stayed through August 31, 2020; the filing does not quantify potential costs if further work is required. Management estimated reasonably possible losses from existing or threatened legal matters above recorded amounts at approximately $15m.
- Other items included $31.3m of restructuring-related costs in the first half, a $2.8m Q2 accelerated depreciation charge for a restaurant closing (with another $2.8m expected in Q3), and a 69.0% Q2 effective tax rate. Management reported compliance with applicable debt covenants.
Key facts for investors to verify
- Whether revenue and operating performance recover as pandemic restrictions ease, particularly in education, broadcasting, manufacturing and restaurants.
- Marketable-security values and their effect on reported earnings: the portfolio had $431.8m fair value and $219.0m unrealized gains at June 30, 2020.
- Whether impairment assumptions, restructuring costs and the announced business reorganizations lead to expected savings or further charges.
- Collection of Purdue Global receivables, including $89.6m of current receivables and a $19.1m long-term receivable, and the quarterly assessment of related fee collectability.
- Liquidity and debt-rating developments, and the timing and conditions for repayment or recoupment of government advances and assistance.
- Resolution and potential cost of the Bournemouth residence notice and other disclosed contingencies.