Graham Holdings Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; selected fourth-quarter figures are included below. Amounts are in U.S. dollars unless noted.
Business context
Graham Holdings is a diversified company spanning education (Kaplan), television broadcasting, manufacturing, healthcare, digital media and marketing, restaurants, and automotive dealerships. Education generated about half of consolidated revenue. The company completed eight acquisitions in 2019, including two automotive dealerships, Clyde’s Restaurant Group, Kaplan’s Heverald acquisition, and healthcare businesses.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2,932.1 million | $2,696.0 million | +9% |
| Operating income | $144.5 million | $246.2 million | −41% |
| Operating margin | 4.9% | 9.1% | −4.2 percentage points |
| Net income attributable to common stockholders | $327.9 million | $271.2 million | +21% |
| Diluted earnings per share | $61.21 | $50.20 | +22% |
| Cash provided by operating activities | $165.2 million | $287.0 million | −42% |
| Capital expenditures paid | $93.5 million | $98.2 million | −5% |
| Working capital at year-end | $621.6 million | $720.2 million | −14% |
| Borrowings at year-end | $512.8 million | $477.1 million | +$35.7 million |
Cash and cash equivalents were $200.2 million; marketable equity securities were valued at $585.1 million. Management reported $814.0 million of cash, marketable securities, and other investments combined. Separately, $40.1 million was outstanding under the vehicle floor-plan facility and is included in accounts payable, not the reported total debt. The company had no borrowings under its $300 million revolving credit facility at year-end. The $400 million principal amount of 5.75% unsecured notes is due June 2026; the Kaplan U.K. credit facility had £60 million outstanding and was due in July 2020.
Operating cash flow less cash capital expenditures was approximately $71.7 million, down from approximately $188.8 million in 2018. The filing attributes the operating cash flow decline mainly to lower operating income and changes in operating assets and liabilities, particularly receivables.
Material changes and segment performance
- Revenue growth largely reflected the 2019 dealership and restaurant acquisitions. Revenue also increased in healthcare and SocialCode, while television broadcasting and manufacturing revenue declined.
- Education revenue was essentially flat at $1,451.8 million, but operating income fell 51% to $48.1 million. Kaplan International income declined amid the U.K. VAT provision and weaker Singapore and English-language results; test-preparation income fell with retail comprehensive-course demand. Higher Education revenue continued to reflect the 2018 transfer of Kaplan University to Purdue Global.
- Television broadcasting revenue fell 8% to $463.5 million and operating income fell 27% to $152.7 million. Lower political and Olympics-related advertising outweighed higher retransmission revenue; operating margin declined to 33% from 42%.
- Manufacturing revenue fell 8% to $449.1 million and operating income fell 29% to $20.5 million, reflecting lower wood prices, higher Hoover labor and operating costs, and weaker Forney results.
- Healthcare revenue increased 8% to $161.8 million; it moved from an $8.4 million operating loss to $7.9 million of operating income, primarily reflecting patient growth and the absence of prior-year impairment and integration costs.
- Fourth-quarter revenue was $763.5 million, operating income was $30.3 million, and net income attributable to common stockholders was $145.9 million. Fourth-quarter net income included a $91.7 million pre-tax pension settlement gain and $49.4 million in marketable-securities gains.
Outlook, commentary, risks, and unusual items
- Management stated it expected to have sufficient resources for the next 12 months, including working capital, potential acquisitions and investments, dividends, and repurchases. Estimated 2020 capital expenditures were $65–$75 million. Management estimated a 2020 net pension credit of about $55 million.
- Net income growth should be viewed alongside substantial non-operating and one-time items: $98.7 million in net marketable-equity gains, a $91.7 million pension settlement gain, and a $29.0 million Gimlet Media sale gain. Operating income, by contrast, declined materially. The 2019 tax rate was 23.1%, versus 16.1% in 2018, which included a discrete state tax benefit.
- The company recorded a $17.1 million provision related to the U.K. Pathways VAT receivable and about $6.0 million of additional 2019 VAT expense. It had paid £18.6 million in assessments and related amounts and was challenging the assessments; the outcome was expected in 2020. A favorable outcome could reverse the provision.
- The filing warned that the coronavirus outbreak and travel restrictions could adversely affect Kaplan International in 2020, particularly programs serving Chinese students. The financial impact was unknown as of the filing date.
- Other material risks include changes to U.K. immigration and education regulation, Brexit-related uncertainty, Singapore’s suspension of Kaplan’s workforce-skills accreditation and funding, and regulatory exposure from Kaplan’s Purdue Global servicing agreement and retained liabilities for former education operations.
- Kaplan reported $68.4 million of accounts receivable from Purdue Global and an $18.6 million long-term receivable relating to its prior advance. Fees depend on Purdue Global’s available cash and are subject to collection assessments.
- Kaplan Bournemouth received a fire-safety improvement notice in January 2020. It accepted the requirement to remove specified cladding but appealed other requirements; additional substantial work could be required if the appeal is unsuccessful. Management also disclosed that future losses from existing and threatened proceedings in excess of recorded amounts could reach approximately $15 million.
- Goodwill was $1.388 billion. Management said the Hoover reporting unit’s estimated fair value exceeded carrying value by less than 25%, making it comparatively more sensitive to weaker cash-flow assumptions or a higher discount rate.
Important facts for investors to verify
- Progress and financial effects of the U.K. VAT litigation, including any recovery or reversal of the provision.
- Coronavirus-related enrollment, travel, and operating impacts at Kaplan International, and any subsequent updates to management’s expectations.
- Cash collection under the Purdue Global agreement, receivable recoverability, and continued compliance with applicable Title IV requirements.
- Refinancing or repayment of the £60 million Kaplan facility due in July 2020, covenant headroom, and the company’s use of its revolving credit capacity.
- Whether recent acquisitions and new businesses can sustain revenue growth and improve operating results, given lower 2019 operating income and cash flow.
- Potential costs from the Bournemouth fire-safety notice, ECA-related lease guarantees, and other legal or regulatory contingencies.