2020 Annual Report
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2020 ANNUAL REPORT GRAHAM HOLDINGS 1300 NORTH 17TH STREET SUITE 1700 ARLINGTON, VA 22209 703 345 6300 GHCO.COM Revenue by Principal Operations EDUCATION 45% BROADCASTING 18% MANUFACTURING 14% HEALTHCARE 7% OTHER BUSINESSES 16% “2020 was a pivotal year at Graham Holdings Company. Against the backdrop of a global health crisis, we delivered stronger results than I would have forecast when COVID took hold in the spring…” Financial Highlights (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2020 2019 CHANGE Operating revenues $2,889,121 $2,932,099 (1%) Income from operations $ 100,407 $ 144, 546 (31%) Net income attributable to common shares $ 300,365 $ 327,855 (8%) Diluted earnings per common share $ 58.13 $ 61.21 (5%) Dividends per common share $ 5.80 $ 5.56 4% Common stockholders’ equity per share $ 754.45 $ 624.83 21% Diluted average number of common shares outstanding 5,139 5,327 (4%) OPERATING REVENUES INCOME FROM OPERATIONS ($ in millions) ($ in millions) 2020 2,889 2020 100 2019 2,932 2019 145 2018 2,696 2018 246 2017 2,592 2017 136 2016 2,482 2016 223 NET INCOME ATTRIBUTABLE TO COMMON SHARES RETURN ON AVERAGE COMMON ($ in millions) STOCKHOLDERS’ EQUITY 2020 300 2020 8.5% 2019 328 2019 10.5% 2018 271 2018 9.3% 2017 302 2017 11.3% 2016 169 2016 6.8% DILUTED EARNINGS PER COMMON SHARE ($) 2020 58.13 2019 61.2 1 2018 50.20 2017 53.89 2016 29.80 To Our Shareholders 2020 was a pivotal year at Graham Holdings for someone to get an item framed without Company. Against the backdrop of a global leaving home. It has also launched five health crisis, we delivered stronger results retail locations on the East Coast to allow than I would have forecast when COVID took customers to engage in person with our hold in the spring, with adjusted operating design consultants and bring art directly to income of $187 million and adjusted operating the store. We expect both of these channels cash flow of $262 million. to grow substantially in the coming years. Our balance sheet’s relative strength was This business has many of the characteristics enormously helpful. we look for: we can easily understand what makes it tick and its unit economics; we think First and foremost, we slept soundly knowing it may present opportunities to reinvest capital that our liquidity and debt levels were both well in additional store locations and manufacturing within our comfort zones, regardless of what capacity; and, it has a great management was to unfold in the coming months. Next, we team that should be around for years to come. were able to protect investments in projects Susan Tynan, the founder and CEO, and we thought worthwhile and had no need to her team understand how to deliver a great forgo mid- and long-term opportunities to customer experience in a reinvented framing service short-term cash preservation needs. process. With an average Net Promoter Score Lastly, we played offense, using our balance (NPS) of 77 in 2020, it is clear people love sheet to do two things quite rare in Q2 of what Framebridge delivers. 2020: an acquisition and substantial share repurchases. I hope to spend a little time We also began repurchasing shares in explaining not only the “what”; but also the meaningful amounts in Q2. By the end of “why” in these decisions. 2020, we repurchased 7.6% of total shares outstanding at an average price of $398 In May, we acquired Framebridge, an omni- per share. For long-time shareholders, our channel custom-framing retailer, in which we approach should look familiar: buy only when had previously been an investor. If certain the stock is priced, in management’s view, metrics are achieved, which we expect will at a material discount to its intrinsic value. happen, total consideration for the business This has been true ever since Warren Buffett will be $95 million. We believe the business introduced Kay Graham to his thinking about can be worth more. share repurchases in the late 1970s. In 2020, this was true for much of the year. Framebridge has become a primary way America gets its art, photos and treasured It’s challenging to know what the right price moments framed. It has a best-in-class for a share of GHC should be, but it’s easier to online experience that makes it convenient know when it’s the wrong price. When taking 2 | GRAHAM HOLDINGS “First and foremost, we slept soundly knowing that our liquidity and debt levels were both well within our comfort zones, regardless of what was to unfold in the coming months.” into account our net cash and marketable The last major capital allocation decision of securities, along with the value of our pension the year was the sale of Megaphone to Spotify. overfunding, at times “Mr. Market” ascribed an An internal startup, Megaphone has become enterprise value for all of our businesses and a leader in the podcasting technology infra- other assets of less than $1 billion. In 2020 structure and advertising ecosystem. In just five alone, our businesses generated $262 million years, Megaphone had grown to substantial in adjusted operating cash flow. We think strategic importance in this burgeoning industry. being able to acquire shares in a business we understand well (our own) at between three As 2020 progressed, Brendan Monaghan, and four times cash flow is an exceptional use Megaphone CEO, and I began having discus- of our balance sheet and very rewarding for sions about how to best position Megaphone continuing shareholders. And, when that cash to maintain industry leadership. It became flow is also diminished due to the pandemic clear we would either need to get much and investments in promising businesses like more aggressive in participating in additional Framebridge, we think those purchases look parts of the podcasting ecosystem, such as all the more attractive. owning and distributing our own content, or 2020 (1)Adjusted Operating Income and Adjusted Operating Cash Flow (non-GAAP) Total (IN THOUSANDS) Company Operating Income $100,407 Less: Amortization of Intangible Assets and Impairment of Goodwill and Other Long-Lived Assets 86,950 Adjusted Operating Income (non-GAAP) 187,357 Add: Depreciation Expense 74,257 Adjusted Operating Cash Flow (non-GAAP) $261,614 1Adjusted Operating Income (non-GAAP) is calculated as Operating Income excluding Amortization of Intangible Assets and Impairment of Goodwill and Other Long-Lived Assets. Adjusted Operating Cash Flow (non-GAAP) is calculated as Adjusted Operating Income, plus Depreciation Expense. 2020 ANNUAL REPORT | 3 “Graham Media Group, our powerhouse set of broadcast television stations, once again led earnings for the year.” we would need to join forces with another managed to navigate through (although we company that had scale in those areas. We are hopeful for the Games to go on in the determined if we could achieve what we summer of 2021). deemed to be a fair price for the business, we would explore a sale to another company We are honest with ourselves that we don’t that possessed those traits. With the sale to know all of the answers as to the future Spotify, we believe both the price adequate of broadcast television. Cord cutting and and the home superb for Megaphone. ratings declines of the last few years may or may not stop and have been strong forces On balance we were pleased with our operat- for the business and its future prospects. It ing results in 2020, considering the unexpected is important for both Graham Media Group headwinds at several of our businesses. Our and the broadcast industry at large that major operations performed more than admi- some of the green shoots we see around rably, and we had other units show signs they digital and streaming growth begin to turn can become major businesses in their own into blooming flowers. As we have com- right sometime in the future. municated consistently, we will continue to monitor the landscape to inform our views Graham Media Group, our powerhouse set of of the business. broadcast television stations, once again led earnings for the year. Ratings levels not seen in years and the work of Emily Barr positioned Kaplan our stations to receive more than their fair share At Kaplan in recent years, the biggest source of of political advertising tied to the elections. income has been its international operations. Catherine Badalamente has created a digital In 2020, this business was greatly impacted operation that has added great earning power by the pandemic. When cross-border travel to the group, as well as a continuous focus on abruptly stopped, the efforts and creativity figuring out how to invent the future. of our managers went into hyperdrive. While results were down dramatically, we did not Operating income for GMG was $194 million, get knocked out. Most of our global education with political spend far exceeding our expec- businesses were able to retool and recalibrate tations. COVID-related advertising pullbacks their offerings, and students largely proved and the loss of the Summer Olympics willing to start or finish in-person offerings in were meaningful headwinds that the team an online setting. 4 | GRAHAM HOLDINGS One notable exception: our business teaching Despite the actions outlined above, we the English, French and German languages. will continue to suffer real losses and lose Students generally take our programs because money in 2021. We won’t see recovery until they want an immersive, in-market experience the travel restrictions and safety concerns where they are surrounded by the language related to the pandemic have subsided. and the culture of the place of study.