GRAHAM HOLDINGS COMPANY This analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto. OVERVIEWGraham Holdings Company (the Company) is a diversified education and media company whose operations include educational services; television broadcasting; online, print and local TV news; podcast technology; social-media advertising services; manufacturing; automotive dealerships; restaurants and entertainment venues; and home health and hospice care. Education is the largest business, and through its subsidiaryKaplan, Inc. , the Company provides extensive worldwide education services for individuals, schools and businesses. The Company's second largest business is television broadcasting. SinceNovember 2012 , the Company has completed several acquisitions in home health services and manufacturing. In 2019, the Company completed acquisitions of automotive dealerships and restaurants. The Company's business units are diverse and subject to different trends and risks. The Company's education division is the largest operating division of the Company, accounting for 50% of the Company's consolidated revenues in 2019. The Company has devoted significant resources and attention to this division for many years, given its geographic and product diversity; the investment opportunities and growth prospects during this time; and challenges related to government regulation. Kaplan is organized into the following four operating segments:Kaplan International , Kaplan Higher Education (KHE),Kaplan Test Preparation (KTP) and Professional (U.S. ).Kaplan International reported revenue increases for 2019 due to growth atUK Pathways,UK Professional andAustralia , and from a recent English-language acquisition, offset by declines inSingapore .Kaplan International operating results declined in 2019 due to a VAT provision recorded atUK Pathways, and declines inSingapore and English Language, offset by increases atUK Professional andAustralia . Prior to theKaplan University (KU) Transaction closing onMarch 22, 2018 , Higher Education included Kaplan's domestic postsecondary education business, made up of fixed-facility colleges and online postsecondary and career programs. Following the KU Transaction closing, the Higher Education division includes the results as a service provider to higher education institutions. KHE's revenue declined in 2019, largely due to the sale ofKaplan University . KHE recorded$12.3 million and$16.8 million in fees fromPurdue University Global (Purdue Global) in its Higher Education operating results in 2019 and 2018, respectively, based on an assessment of its collectability under the Transition and Operations Support Agreement (TOSA). Each quarter, the Company assesses the collectability of the fee from Purdue Global to make a determination as to whether to record all or part of the fee and whether to make adjustments to fee amounts recognized in earlier periods. KTP revenues and operating results declined in 2019 due to declines in KTP's retail comprehensive test preparation programs. Professional (U.S. ) revenues were up in 2019, due primarily to two acquisitions that closed in May and July of 2018. Operating results declined due mostly to increased spending on sales, marketing and technology, offset by income from the acquisitions. Kaplan made one acquisition in 2019; five acquisitions in 2018; and two acquisitions in 2017. The Company's television broadcasting division reported lower revenues and operating income in 2019, due to decreases in political advertising revenue, and winterOlympics -related advertising revenue at the Company'sNBC stations, offset by increases in retransmission revenue. In recent years, the television broadcasting division has consistently generated significantly higher operating income amounts and operating income margins than the education division and other businesses. With the recent healthcare and manufacturing acquisitions, the recent acquisition at SocialCode, and the recent acquisitions of two automotive dealerships andClyde's Restaurant Group, the Company has invested in new lines of business from late 2012 through 2019. The Company also has three investment stage businesses - Megaphone, Pinna and CyberVista. The Company generates a significant amount of cash from its businesses that is used to support its operations, pay down debt and fund capital expenditures, share repurchases, dividends, acquisitions and other investments. 41 -------------------------------------------------------------------------------- RECENT DEVELOPMENTS Currently,the People's Republic of China and other countries are facing a coronavirus outbreak and the Company is closely monitoring developments. The impact of the outbreak has significantly affected business and other activities withinChina , including the ability of Chinese residents to travel to undertake overseas study. A number of the countries in whichKaplan International operates have issued travel restrictions or quarantine requirements on Chinese residents, includingAustralia ,Singapore andthe United States (U.S. ). Additional travel and other restrictions may be put in place to control the outbreak, including immigration restrictions on students from other countries and school or campus closures. Additional countries may also adopt similar measures, including theUnited Kingdom (U.K. ). Chinese resident students constitute a significant percentage of students applying to programs offered byKaplan International's operations, including Pathways, language training, Kaplan Australia, KaplanSingapore and ManderPortman Woodward . Travel restrictions and study cancellations from students fromthe People's Republic of China and other countries will adversely affectKaplan International in 2020 and will adversely affect Kaplan's revenues and operating results. If the outbreak spreads further withinChina or to other countries, the adverse impact onKaplan International may be significantly greater, may continue into future years and may further adversely affect Kaplan's revenues and operating results. Disruptions in the Company's supply chains, perceived risks of infection in public places, or other developments may also adversely impact the Company's other businesses. The financial impact of this recent development is unknown at this time and the Company's results could be impacted materially due to this risk. RESULTS OF OPERATIONS - 2019 COMPARED TO 2018 Net income attributable to common shares was$327.9 million ($61.21 per share) for the year endedDecember 31, 2019 , compared to$271.2 million ($50.20 per share) for the year endedDecember 31, 2018 . Items included in the Company's net income for 2019 are listed below: • a$17.1 million provision recorded atKaplan International related to a Value
Added Tax (VAT) receivable at
or
• an
equipment gains in connection with the spectrum repacking mandate of the
Federal Communications Commissions (
• a
television broadcasting division (after-tax impact of
per share);
• a
pension purchase (after-tax impact of
•
Program (SIP) at the education division (after-tax impact of
•
• non-operating gain of
(after-tax impact of
•
million, or
•
million, or
•
share).
42--------------------------------------------------------------------------------
Items included in the Company's net income for 2018 are listed below:
• a
equipment gains in connection with the spectrum repacking mandate of the
(after-tax impact of
• a
(after-tax impact of
•
redeemable noncontrolling interest (
•
or
• a
pension offering and curtailment gain related to changes in the Company's
postretirement healthcare benefit plan (after-tax impact of
•
of
• non-operating gain, net, of
of cost method and equity method investments, and related to sales of land and
businesses, including guarantor lease obligations (after-tax impact of
million, or
• a
•
million, or
• a nonrecurring discrete
release of valuation allowances (
•
share).
Revenue for 2019 was$2,932.1 million , up 9% from$2,696.0 million in 2018 largely due to the acquisition of two automotive dealerships inJanuary 2019 and the acquisition ofClyde's Restaurant Group (CRG) inJuly 2019 . Revenues increased at the healthcare division, SocialCode and other businesses, partially offset by a decline at the television broadcasting and manufacturing divisions. Operating costs and expenses for the year increased to$2,787.6 million in 2019, from$2,449.8 million in 2018. Expenses in 2019 increased at other businesses, education and television broadcasting divisions, and SocialCode, offset by decreases at manufacturing and healthcare. The Company reported operating income for 2019 of$144.5 million , compared to$246.2 million in 2018. Operating results declined at most of the Company's divisions in 2019, with a large portion of the decline at television broadcasting due to significant political andOlympics -related revenue in 2018; this was partially offset by improvement at healthcare. Division Results Education Education division revenue in 2019 totaled$1,451.8 million , flat from$1,451.0 million in 2018. Kaplan reported operating income of$48.1 million for 2019, a 51% decrease from$97.1 million in 2018. In 2019, operating results decreased across all of Kaplan reporting units. 43 --------------------------------------------------------------------------------
A summary of Kaplan's operating results is as follows:
Year Ended December 31
(in thousands) 2019 2018 % Change
Revenue
Kaplan international $ 750,245 $ 719,982 4
Higher education 305,672 342,085 (11 )
Test preparation 243,917 256,102 (5 )
Professional (U.S.) 144,897 134,187 8
Kaplan corporate and other 9,480 1,142 -
Intersegment elimination (2,461 ) (2,483 ) -
$ 1,451,750 $ 1,451,015 0
Operating Income (Loss)
Kaplan international $ 42,129 $ 70,315 (40 )
Higher education 13,960 15,217 (8 )
Test preparation 7,399 19,096 (61 )
Professional (U.S.) 27,088 28,608 (5 )
Kaplan corporate and other (26,891 ) (26,702 ) (1 )Amortization of intangible assets (14,915 ) (9,362 ) (59 ) Impairment of long-lived assets (693 )
- -
Intersegment elimination (5 ) (36 ) -
$ 48,072 $ 97,136 (51 )
Kaplan International includes English-language programs and postsecondary
education and professional training businesses largely outside the U.S. In July
2019 , Kaplan acquired Heverald, the owner of ESL Education, Europe's largest
language-travel agency and Alpadia, a chain of German and French language
schools and junior summer camps. Kaplan International revenue increased 4% in
2019, and on a constant currency basis, revenue increased 8%, primarily due to
growth at UK Pathways, UK Professional and Australia , and from the Heverald
acquisition, offset by a decline in Singapore . Kaplan International operating
income declined 40% in 2019, due to the VAT provision recorded at UK Pathways,
and declines in Singapore and English Language, offset by increases at UK
Professional and Australia . In the fourth quarter of 2019, Kaplan International
operating results were adversely affected by $4.6 million in losses at Heverald,
due to the timing of program starts.
In 2017, HMRC raised assessments against Kaplan UK Pathways for VAT relating to
2014 to 2017, which were paid by Kaplan. Kaplan challenged these assessments and
the Company believes it has met all requirements under UK VAT law and is
entitled to recover the amounts from assessments and subsequent payments through
December 31, 2019 . Due to developments in the case, in the third quarter of
2019, the Company recorded a full provision against a receivable to expense, of
which £14.1 million ($17.1 million ) relates to years 2014 to 2018. The Company
recorded additional annual VAT expense at the UK Pathways business of
approximately $6.0 million related to this matter for 2019. If the Company
ultimately prevails in this case, the provision will be reversed and a pre-tax
credit will be recorded in the Company's Consolidated Statement of Operations.
The result of the case is expected to be finalized by the end of 2020.
In November 2018 , Kaplan Learning Institute in Singapore (KLI) was notified by
SkillsFuture Singapore (SSG), a statutory board under the Singapore Ministry of
Education , that its right to deliver workforce skills qualifications (WSQ)
courses under the Leadership & People Management framework would be suspended
for six months from December 1, 2018 . In June 2019 , SSG notified KLI that from
July 1, 2019 , SSG was suspending KLI's WSQ Approved Training Organization
status. The notice further revoked accreditation and funding for all WSQ courses
with effect from July 1, 2019 . KLI confirmed its intention to cease offering WSQ
courses and subsequently began voluntarily de-registering as a private education
institution. These actions adversely impacted Kaplan Singapore's revenues and
operating results for 2019, as compared to 2018.
Prior to the KU Transaction closing on March 22, 2018 , Higher Education included
Kaplan's domestic postsecondary education business, made up of fixed-facility
colleges and online postsecondary and career programs. Following the KU
Transaction closing, the Higher Education division includes the results as a
service provider to higher education institutions. In 2019, Higher Education
revenue declined 11% due largely to the sale of KU on March 22, 2018 . During
2019, the Company recorded $12.3 million in fees from Purdue Global in its
Higher Education operating results based on an assessment of its collectability
under the TOSA. In 2018, the Company recorded $16.8 million in fees from Purdue
Global in its Higher Education operating results, based on an assessment of its
collectability under the TOSA. Following the transition from KU, Purdue Global
launched a planned marketing campaign to fully establish its new brand. This
significant marketing spend, along with investments in program quality and
student experience, all of which the Company supports, impacts the cash
generated by Purdue Global and its current ability to fully pay the KHE fee
under the TOSA. The Company will continue to assess the collectability of the
fee from Purdue Global on a quarterly basis to make a determination as
44
--------------------------------------------------------------------------------
to whether to record all or part of the fee in the future and whether to make
adjustments to fee amounts recognized in earlier periods.
Kaplan Test Preparation (KTP) includes Kaplan's standardized test preparation
programs. In September 2018 , KTP acquired the test preparation and study guide
assets of Barron's Educational Series , a New York -based education publishing
company. KTP revenue declined 5% in 2019. Excluding revenues from the Barron's
acquisition, revenues were down 10% for 2019. These revenue declines were due to
declines in KTP's retail comprehensive test preparation programs. Operating
losses for the new economy skills training programs were $4.0 million and $3.6
million for 2019 and 2018, respectively. Excluding losses from the new economy
skills training programs, KTP operating results were down in 2019, due primarily
to revenue declines in KTP's retail comprehensive test preparation programs.
In the second quarter of 2019, the Company approved a SIP to reduce the number
of employees at KTP and Higher Education. In connection with the SIP, the
Company recorded $6.6 million in non-operating pension expense in the second
quarter of 2019.
Kaplan Professional (U.S. ) includes the domestic professional and other
continuing education businesses. In 2019, Kaplan Professional (U.S. ) revenue was
up 8% due primarily to the May 2018 acquisition of Professional Publications,
Inc. (PPI), an independent publisher of professional licensing exam review
materials that provides engineering, surveying, architecture, and interior
design licensure exam review products, and the July 2018 acquisition of College
for Financial Planning (CFFP), a provider of financial education and training to
individuals through programs of study for professionals pursuing a career in
Financial Planning. Kaplan Professional (U.S. ) operating results declined 5% in
2019, due mostly to increased spending on sales, marketing and technology,
offset by income from PPI and CFFP.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.'s
corporate office, other minor businesses and certain shared activities.
Television Broadcasting
A summary of television broadcasting's operating results is as follows:
Year Ended December 31
(in thousands) 2019 2018 % Change
Revenue $ 463,464 $ 505,549 (8 )
Operating Income 152,668 210,533 (27 )
Revenue at the television broadcasting division declined 8% to $463.5 million in
2019, from $505.5 million in 2018. The revenue decrease is due to a $60.2
million decrease in political advertising revenue and $8.6 million in 2018
incremental winter Olympics -related advertising revenue at the Company's NBC
stations, partially offset by $18.3 million in higher retransmission revenues.
The growth rate for retransmission revenues declined in 2019 due to subscriber
declines at traditional cable and satellite distributors. In 2019 and 2018, the
television broadcasting division recorded $11.8 million and $3.9 million ,
respectively, in reductions to operating expenses related to property, plant and
equipment gains due to new equipment received at no cost in connection with the
spectrum repacking mandate of the FCC . In the fourth quarter of 2019, the
television broadcasting division recorded a $7.8 million intangible asset
impairment charge on FCC licenses at the WSLS (Roanoke-NBC) and WCWJ
(Jacksonville-CW) stations acquired in 2017, due to a decline in local market
conditions. Operating income for 2019 was down 27% to $152.7 million , from
$210.5 million in 2018, due to lower revenues and higher network fees, and the
intangible asset impairment charge, partially offset by higher property, plant
and equipment gains.
In March 2019 , the Company's television station in Orlando (WKMG) entered into a
new network affiliation agreement with CBS that covers the period April 7, 2019
through June 30, 2022 .
In October 2019 , the Company's television stations in Houston (KPRC), Detroit
(WDIV) and Roanoke (WSLS) entered into a new three-year NBC Affiliation
Agreement effective January 1, 2020 through December 31, 2022 .
Operating margin at the television broadcasting division was 33% in 2019 and 42%
in 2018.
The Company's television stations continue to garner healthy viewership and are
well-positioned in their respective markets. On average for the year, KSAT in
San Antonio and WJXT in Jacksonville ranked number one in the key 6am , 6pm and
late newscasts among the vital 25 to 54 demographic. KPRC in Houston ended the
year as number one at 6am and number two at 6pm and 10pm . WDIV in Detroit ended
the year as number one at 6pm and in late news, while number two in the
mornings. WKMG finished 2019 ranked number two at 6am and 6pm , while ranking
third in late news. WSLS in Roanoke ranked third in key newscasts, while WCWJ's
syndicated viewership niche continues in daytime and early fringe in the
Jacksonville market.
45
--------------------------------------------------------------------------------Manufacturing
A summary of manufacturing's operating results is as follows:
Year Ended December 31
(in thousands) 2019 2018 % Change
Revenue $ 449,053 $ 487,619 (8 )
Operating Income 20,467 28,851 (29 )
Manufacturing includes four businesses: Hoover Treated Wood Products, Inc. , a
supplier of pressure impregnated kiln-dried lumber and plywood products for fire
retardant and preservative applications; Dekko, a manufacturer of electrical
workspace solutions, architectural lighting and electrical components and
assemblies; Joyce/Dayton Corp. , a manufacturer of screw jacks and other linear
motion systems; and Forney , a global supplier of products and systems that
control and monitor combustion processes in electric utility and industrial
applications. In July 2018 , Dekko acquired Furnlite, Inc. , a Fallston, NC -based
manufacturer of power and data solutions for the hospitality and residential
furniture industries.
Manufacturing revenues declined in 2019 due primarily to a decline at Hoover
from lower wood prices, partially offset by increases due to the Furnlite
acquisition. Operating income declined in 2019 due largely to increased labor
and other operating costs at Hoover and a decline at Forney .
Healthcare
A summary of healthcare's operating results is as follows:
Year Ended December 31
(in thousands) 2019 2018 % Change
Revenue $ 161,768 $ 149,275 8
Operating Income (Loss) 7,908 (8,401 ) -
The Graham Healthcare Group (GHG) provides home health and hospice services in
three states. Healthcare revenues increased 8% in 2019, largely due to patient
growth in both home health and hospice. The improvement in GHG operating results
in 2019 is due to increased revenues and the absence of integration costs and
other overall cost reduction. In the third quarter of 2018, GHG recorded a $7.9
million intangible asset impairment charge related to the Celtic trademark,
which was phased out in the second half of 2018.
In December 2019 , GHG acquired a 75% interest in CSI Pharmacy Holding Company,
LLC (CSI), a Wake Village, TX -based company, which coordinates the prescriptions
and nursing care for patients receiving in-home infusion treatments.
SocialCode
A summary of SocialCode's operating results is as follows:
Year Ended December 31
(in thousands) 2019 2018 % Change
Revenue $ 62,754 $ 58,728 7
Operating Loss (3,283 ) (1,081 ) -
SocialCode is a provider of marketing solutions managing data, creative, media
and marketplaces to accelerate client growth. In the third quarter of 2018,
SocialCode acquired Marketplace Strategy, a Cleveland -based Amazon sales
acceleration agency. SocialCode's revenue increased 7% in 2019. SocialCode
reported an operating loss of $3.3 million in 2019, compared to an operating
loss of $1.1 million in 2018. SocialCode's operating results included a credit
of $0.3 million related to phantom equity plans in 2019; whereas 2018 results
included a credit of $7.1 million related to phantom equity plans in 2018.
Excluding the amounts related to phantom equity plans for the relevant periods,
SocialCode results improved in 2019, largely due to cost reductions.
Other Businesses
On July 31, 2019 , the Company acquired Clyde's Restaurant Group (CRG). CRG owns
and operates thirteen restaurants and entertainment venues in the Washington, DC
metropolitan area, including Old Ebbitt Grill and The Hamilton , two of the top
twenty highest grossing independent restaurants in the U.S. CRG is managed by
its existing management team as a wholly-owned subsidiary of the Company.
On January 31, 2019 , the Company acquired two automotive dealerships, Lexus of
Rockville and Honda of Tysons Corner , from Sonic Automotive. The Company also
announced it had entered into an agreement with Christopher J. Ourisman , a
member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and
his team of
46
--------------------------------------------------------------------------------
industry professionals operate and manage the dealerships. In the fourth quarter
of 2019, the Company and Mr. Ourisman commenced operations at a new Jeep
automotive dealership, which began generating sales in January 2020 as Ourisman
Jeep of Bethesda . Mr. Ourisman and his team are also operating and managing this
new dealership. Graham Holdings Company holds a 90% stake in all three
dealerships.
Revenues from other businesses increased due mostly to the automotive dealership
and CRG acquisitions. Operating results for the automotive dealerships and CRG
were both positive for 2019, although results were adversely impacted by
transaction and transition expenses. Automotive results were also adversely
impacted by start-up costs for the new Jeep dealership.
Other businesses also include Slate and Foreign Policy , which publish online and
print magazines and websites; and three investment stage businesses, Megaphone,
Pinna and CyberVista. All five of these businesses reported revenue increases in
2019. Losses from each of these five businesses in 2019 adversely affected
operating results.
Corporate Office
Corporate office includes the expenses of the Company's corporate office and
certain continuing obligations related to prior business dispositions.
Equity in Earnings (Losses) of Affiliates
At December 31, 2019 , the Company held an approximate 12% interest in
Intersection Holdings, LLC , a company that provides digital marketing and
advertising services and products for cities, transit systems, airports, and
other public and private spaces. The Company also holds interests in a number of
home health and hospice joint ventures, and several other affiliates. The
Company recorded equity in earnings of affiliates of $11.7 million and $14.5
million for 2019 and 2018, respectively. In the third quarter of 2018, the
Company recorded $7.9 million in gains in equity in earnings of affiliates
related to two of its investments.
Net Interest Expense, Debt Extinguishment Costs and Related Balances
In connection with the auto dealership acquisition that closed on January 31,
2019 , a subsidiary of the Company borrowed $30 million to finance a portion of
the acquisition and entered into an interest rate swap to fix the interest rate
on the debt at 4.7% per annum. The subsidiary is required to repay the loan over
a 10-year period by making monthly installment payments. In connection with the
CSI acquisition that closed in December 2019 , a subsidiary of GHG borrowed
$11.25 million to finance a portion of the acquisition. The debt bears interest
at 4.35% per annum. The GHG subsidiary is required to repay the loan over a
five-year period by making monthly installment payments.
On May 30, 2018 , the Company issued $400 million of 5.75% unsecured eight-year
fixed-rate notes due June 1, 2026 . Interest is payable semi-annually on June 1
and December 1 . On June 29, 2018 , the Company used the net proceeds from the
sale of the notes and other cash to repay $400 million of 7.25% notes that were
due February 1, 2019 . The Company incurred $11.4 million in debt extinguishment
costs related to the early termination of the 7.25% notes.
The Company incurred net interest expense of $23.6 million in 2019, compared to
$32.5 million in 2018. The Company incurred $6.2 million in interest expense
related to the mandatorily redeemable noncontrolling interest at GHG settled in
the second quarter of 2018.
At December 31, 2019 , the Company had $512.8 million in borrowings outstanding
at an average interest rate of 5.1%, and cash, marketable securities and other
investments of $814.0 million . At December 31, 2018 , the Company had $477.1
million in borrowings outstanding at an average interest rate of 5.1%, and cash,
marketable securities and other investments of $778.7 million .
Non-Operating Pension and Postretirement Benefit Income, Net
The Company recorded net non-operating pension and postretirement benefit income
of $162.8 million in 2019, compared to $120.5 million in 2018.
In the fourth quarter of 2019, the Company's pension plan purchased a group
annuity contract from an insurance company for a group of retirees. As a result,
the Company recorded a $91.7 million settlement gain in the fourth quarter of
2019. In the second quarter of 2019, the Company recorded $6.6 million in
non-operating pension expense related to a SIP at the education division.
In the fourth quarter of 2018, the Company recorded a $26.9 million gain related
to a bulk lump sum pension program offering. Also in the fourth quarter of 2018,
the Company made changes to its postretirement healthcare benefit plan,
resulting in a $3.4 million curtailment gain.
47
--------------------------------------------------------------------------------
Gain (Loss) on Marketable Equity Securities , Net
The Company recognized $98.7 million in net gains and $15.8 million in net
losses on marketable equity securities in 2019 and 2018, respectively.
Other Non-Operating Income (Expense)
The Company recorded total other non-operating income, net, of $32.4 million in
2019, compared to $2.1 million in 2018. The 2019 amounts included a $29.0
million gain on the sale of the Company's interest in Gimlet Media; $5.1 million
in fair value increases on cost method investments; and other items; partially
offset by $1.1 million in losses on guarantor lease obligations in connection
with the 2015 sale of the KHE Campuses businesses; $1.1 million in foreign
currency losses; and $0.6 million in net losses related to sales of businesses
and contingent consideration. The 2018 non-operating income, net, included $11.7
million in fair value increases on cost method investments; $8.2 million in net
gains related to sales of businesses and contingent consideration; a $2.8
million gain on sale of a cost method investment; a $2.5 million gain on sale of
land and other items, partially offset by $17.5 million in losses on guarantor
lease obligations in connection with the 2015 sale of the KHE Campuses
businesses; $3.8 million in foreign currency losses; and $2.7 million in
impairments on cost method investments.
Provision for Income Taxes
The Company's effective tax rate for 2019 was 23.1%. In the first quarter of
2019, the Company recorded income tax benefits related to stock compensation of
$1.7 million . Excluding this $1.7 million benefit, the overall income tax rate
for 2019 was 23.5%.
The Company's effective tax rate for 2018 was 16.1%. In the third quarter of
2018, the Company recorded a $17.8 million deferred state tax benefit related to
the release of valuation allowances. Excluding this $17.8 million benefit and
income tax benefits related to stock compensation of $1.8 million recorded in
the first quarter of 2018, the overall income tax rate for 2018 was 22.2%.
RESULTS OF OPERATIONS - 2018 COMPARED TO 2017
Net income attributable to common shares was $271.2 million ($50.20 per share)
for the year ended December 31, 2018 , compared to $302.0 million ($53.89 per
share) for the year ended December 31, 2017 . The Company's results for 2017
include a significant net deferred income tax benefit related to the Tax Cuts
and Jobs Act legislation enacted in December 2017 .
Items included in the Company's net income for 2018 are listed below:
• a
(after-tax impact of
• a
equipment gains in connection with the spectrum repacking mandate of the
(after-tax impact of
•
redeemable noncontrolling interest (
•
or
• a
curtailment gain related to changes in the Company's postretirement healthcare
benefit plan (after-tax impact of
•
of
• non-operating gain, net, of
of cost method and equity method investments, and related to sales of land and
businesses, including guarantor lease obligations (after-tax impact of
million, or
• a
•
million, or
• a nonrecurring discrete
release of valuation allowances (
•
share).
48--------------------------------------------------------------------------------
Items included in the Company's net income for 2017 are listed below:
•
charges at the education division (after-tax impact of
per share);
• a
the manufacturing businesses (after-tax impact of
share);
•
million or
•
Cuts and Jobs Act in
•
share).
Revenue for 2018 was$2,696.0 million , up 4% from$2,591.8 million in 2017. Revenues increased at the television broadcasting and manufacturing divisions, offset by a decline at the education division. Operating costs and expenses for the year decreased slightly to$2,449.8 million in 2018, from$2,455.4 million in 2017. Expenses in 2018 decreased at the education division, offset by increases at the manufacturing and television broadcasting divisions. The Company reported operating income for 2018 of$246.2 million , an increase of 80%, from$136.4 million in 2017. Operating results improved at most of the Company's divisions in 2018. OnApril 27, 2017 , certain subsidiaries ofKaplan, Inc. (Kaplan), a subsidiary ofGraham Holdings Company entered into a Contribution and Transfer Agreement (Transfer Agreement) to contribute the institutional assets and operations ofKaplan University (KU) to anIndiana nonprofit, public-benefit corporation that is a subsidiary affiliated withPurdue University (Purdue). The closing of the transactions contemplated by the Transfer Agreement occurred onMarch 22, 2018 . At the same time, the parties entered into a TOSA pursuant to which Kaplan provides key non-academic operations support to the new university. The new university operates largely online as anIndiana public university affiliated with Purdue under the name Purdue Global. Division Results Education Education division revenue in 2018 totaled$1,451.0 million , down 4% from$1,516.8 million in 2017. Kaplan reported operating income of$97.1 million for 2018, a 25% increase from$77.7 million in 2017. In 2018, operating results increased atKaplan International , Kaplan Test Preparation and Kaplan Professional (U.S. ), partially offset by decreased results at Higher Education. In recent years, Kaplan has formulated and implemented restructuring plans at its various businesses that have resulted in restructuring costs, with the objective of establishing lower cost levels in future periods. There were no significant restructuring charges during 2018. Across all businesses, restructuring costs totaled$9.1 million in 2017. As a result of the KU Transaction that closed onMarch 22, 2018 , the Company has revised the financial reporting for its education division to provide operating results for Higher Education and Professional (U.S. ). 49 --------------------------------------------------------------------------------
A summary of Kaplan's operating results is as follows:
Year Ended December 31
(in thousands) 2018 2017 % Change
Revenue
Kaplan international $ 719,982 $ 697,999 3
Higher education 342,085 431,425 (21 )
Test preparation 256,102 273,298 (6 )
Professional (U.S.) 134,187 115,839 16
Kaplan corporate and other 1,142 294 -
Intersegment elimination (2,483 ) (2,079 ) -
$ 1,451,015 $ 1,516,776 (4 )
Operating Income (Loss)
Kaplan international $ 70,315 $ 51,623 36
Higher education 15,217 16,719 (9 )
Test preparation 19,096 11,507 66
Professional (U.S.) 28,608 27,558 4
Kaplan corporate and other (26,702 ) (24,701 ) (8 )Amortization of intangible assets (9,362 ) (5,162 ) (81 ) Intersegment elimination
(36 ) 143 -
$ 97,136 $ 77,687 25
Kaplan International includes English-language programs and postsecondary
education and professional training businesses largely outside the U.S. Kaplan
International revenue increased 3% in 2018, and on a constant currency basis,
revenue increased 1%, primarily due to growth in Pathways enrollments. Kaplan
International operating income increased 36% in 2018, due largely to improved
results at English-language, Pathways and UK Professional. Restructuring costs
at Kaplan International totaled $2.9 million in 2017.
Prior to the KU Transaction closing on March 22, 2018 , Higher Education included
Kaplan's domestic postsecondary education business, made up of fixed-facility
colleges and online postsecondary and career programs. Following the KU
Transaction closing, the Higher Education division includes the results as a
service provider to higher education institutions.
In 2018, Higher Education revenue declined 21% due largely to the sale of KU on
March 22, 2018 and fewer average enrollments at KU prior to the sale. The
Company recorded $16.8 million in fees from Purdue Global in its Higher
Education operating results in 2018, based on an assessment of its
collectability under the TOSA. Each quarter, the Company assesses the
collectability of the fee with Purdue Global to make a determination as to
whether to record all or part of the fee and whether to make adjustments to fee
amounts recognized in earlier periods. Restructuring costs at Higher Education
were $1.4 million for 2017.
KTP includes Kaplan's standardized test preparation programs. In September 2018 ,
KTP acquired the test preparation and study guide assets of Barron's Educational
Series , a New York -based education publishing company. KTP revenue declined 6%
in 2018 due to reduced demand for classroom-based offerings, and the disposition
of Dev Bootcamp, which made up the majority of KTP's new economy skills training
programs, offset in part by growth in online-based programs. KTP operating
results improved in 2018 due primarily to decreased losses from the new economy
skills training programs. Operating losses for the new economy skills training
programs were $3.6 million and $16.7 million for 2018 and 2017, respectively,
including restructuring costs incurred in connection with the closing of Dev
Bootcamp that was completed in the second half of 2017. Excluding losses from
the new economy skills training programs, KTP operating results were down in
2018, due primarily to revenue declines for classroom-based offerings.
Kaplan Professional (U.S. ) includes the domestic professional and other
continuing education businesses. In 2018, Kaplan Professional (U.S. ) revenue was
up 16% due primarily to the May 2018 acquisition of Professional Publications,
Inc. (PPI), an independent publisher of professional licensing exam review
materials that provides engineering, surveying, architecture, and interior
design licensure exam review products, and the July 2018 acquisition of College
for Financial Planning (CFFP), a provider of financial education and training to
individuals through programs of study for professionals pursuing a career in
Financial Planning. Kaplan Professional (U.S. ) operating results improved 4% in
2018, due mostly to income from PPI and CFFP, offset by increased spending on
sales, marketing and technology.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.'s
corporate office, other minor businesses and certain shared activities.
50
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Television Broadcasting
A summary of television broadcasting's operating results is as follows:
Year Ended December 31
(in thousands) 2018 2017 % Change
Revenue $ 505,549 $ 409,916 23
Operating Income 210,533 139,258 51
Revenue at the television broadcasting division increased 23% to $505.5 million
in 2018, from $409.9 million in 2017. The revenue increase is due to a $64.9
million increase in political advertising revenue, $38.0 million in higher
retransmission revenues, $8.6 million in 2018 incremental winter
Olympics -related advertising revenue at the Company's NBC stations, and the
adverse impact from hurricanes Harvey and Irma in the third quarter of 2017.
Operating income for 2018 was up 51% to $210.5 million , from $139.3 million in
2017, due to higher revenues.
In 2018, the television broadcasting division recorded $3.9 million in
reductions to operating expenses related to non-cash property, plant and
equipment gains due to new equipment received at no cost in connection with the
spectrum repacking mandate of the FCC .
Operating margin at the television broadcasting division was 42% in 2018 and 34%
in 2017.
The Company's television stations continue to deliver competitive audience
ratings and are well-positioned in their markets. On average for the year, KPRC
in Houston , KSAT in San Antonio and WJXT in Jacksonville ranked number one in
the key 6am , 6pm and late newscasts among the critical 25 to 54 demographic.
WDIV in Detroit ended the year as a solid number one at 6pm and 11pm and number
two in the mornings. WKMG in Orlando and WSLS in Roanoke ranked third in their
respective markets, while WCWJ in Jacksonville successfully found a niche with
their strong syndicated programming lineup in daytime and early fringe.
Manufacturing
A summary of manufacturing's operating results is as follows:
Year Ended December 31
(in thousands) 2018 2017 % Change
Revenue $ 487,619 $ 414,193 18
Operating Income 28,851 14,947 93
Manufacturing includes four businesses: Dekko, a manufacturer of electrical
workspace solutions, architectural lighting and electrical components and
assemblies; Joyce/Dayton Corp. , a manufacturer of screw jacks and other linear
motion systems; Forney , a global supplier of products and systems that control
and monitor combustion processes in electric utility and industrial
applications; and Hoover Treated Wood Products, Inc. , a supplier of pressure
impregnated kiln-dried lumber and plywood products for fire retardant and
preservative applications that the Company acquired in April 2017 . In July 2018 ,
Dekko acquired Furnlite, Inc. , a Fallston, NC -based manufacturer of power and
data solutions for the hospitality and residential furniture industries.
Manufacturing revenues and operating income increased in 2018 due largely to the
Hoover acquisition. Also, in the second quarter of 2017, the Company recorded a
$9.2 million goodwill and other long-lived asset impairment charge at Forney ,
due to lower than expected revenues resulting from sluggish overall demand for
its energy products. While Hoover holds inventory for relatively short periods,
wood prices declined on a consistent basis in the second half of 2018, resulting
in losses on inventory sales.
Healthcare
A summary of healthcare's operating results is as follows:
Year Ended December 31
(in thousands) 2018 2017 % Change
Revenue $ 149,275 $ 154,202 (3 )
Operating Loss (8,401 ) (2,569 ) -
Graham Healthcare Group (GHG) provides home health and hospice services in three
states. At the end of June 2017 , GHG acquired Hometown Home Health and Hospice ,
a Lapeer, MI -based healthcare services provider. Healthcare revenues declined 3%
in 2018, primarily due to a new management services agreement (MSA) with one of
GHG's joint ventures that was effective in the third quarter of 2018. In the
third quarter of 2018, GHG recorded a $7.9 million intangible asset impairment
charge related to the Celtic trademark, which was phased out in the second half
of 2018. The decline in GHG operating results in 2018 is due to the intangible
asset impairment charge and a decline in results from the MSA with one of GHG's
joint ventures, offset by lower bad debt expense and overall cost reductions.
51
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A summary of SocialCode's operating results is as follows:
Year Ended December 31
(in thousands) 2018 2017 % Change
Revenue $ 58,728 $ 62,077 (5 )
Operating Loss (1,081 ) (3,674 ) 71
SocialCode is a provider of marketing solutions on social, mobile and video
platforms. In the third quarter of 2018, SocialCode acquired Marketplace
Strategy, a Cleveland -based Amazon sales acceleration agency. SocialCode revenue
decreased 5% in 2018, resulting from declines in digital advertising service
revenues, partly due to a transition from agency-based clients to
direct-relationship clients. SocialCode reported an operating loss of $1.1
million in 2018 compared to $3.7 million in 2017. SocialCode's operating results
included a credit of $7.1 million related to phantom equity plans in 2018;
whereas 2017 results included expense of $1.4 million related to phantom equity
plans in 2017. Excluding the amounts related to phantom equity plans for the
relevant periods, SocialCode results are down in 2018, largely due to revenue
declines. As of December 31, 2018 , the accrual balance related to these plans
was $0.4 million .
Other Businesses
Other businesses include Slate and Foreign Policy , which publish online and
print magazines and websites; and three investment stage businesses, Megaphone,
Pinna and CyberVista. Revenues increased 26% in 2018 largely due to growth at
Megaphone. Losses from each of these businesses in 2018 adversely affected
operating results.
Corporate Office
Corporate office includes the expenses of the Company's corporate office and
certain continuing obligations related to prior business dispositions.
Equity in Earnings (Losses) of Affiliates
At December 31, 2018 , the Company held interests in a number of home health and
hospice joint ventures, and interests in several other affiliates. During 2017,
the Company acquired an approximate 12% interest in Intersection Holdings, LLC ,
a company that provides digital marketing and advertising services and products
for cities, transit systems, airports, and other public and private spaces. In
the third quarter of 2018, the Company recorded $7.9 million in gains in
earnings of affiliates related to two of its investments. In total, the Company
recorded equity in earnings of affiliates of $14.5 million for 2018, compared to
losses of $3.2 million in 2017.
Net Interest Expense, Debt Extinguishment Costs and Related Balances
On May 30, 2018 , the Company issued $400 million of 5.75% unsecured eight-year
fixed-rate notes due June 1, 2026 . Interest is payable semi-annually on June 1
and December 1 . On June 29, 2018 , the Company used the net proceeds from the
sale of the notes and other cash to repay $400 million of 7.25% notes that were
due February 1, 2019 . The Company incurred $11.4 million in debt extinguishment
costs related to the early termination of the 7.25% notes.
The Company incurred net interest expense of $32.5 million in 2018, compared to
$27.3 million in 2017. The Company incurred $6.2 million in interest expense
related to the mandatorily redeemable noncontrolling interest at GHG settled in
the second quarter of 2018.
At December 31, 2018 , the Company had $477.1 million in borrowings outstanding
at an average interest rate of 5.1%, and cash, marketable securities and other
investments of $778.7 million . At December 31, 2017 , the Company had $493.3
million in borrowings outstanding at an average interest rate of 6.3%, and cash,
marketable securities and other investments of $964.7 million .
Non-Operating Pension and Postretirement Benefit Income, Net
In the first quarter of 2018, the Company adopted new accounting guidance that
changes the income statement classification of net periodic pension and
postretirement pension cost. Under the new guidance, service cost is included in
operating income, while the other components (including expected return on
assets) are included in non-operating income. The new guidance was required to
be applied retroactively, with prior period financial information revised to
reflect the reclassification. From a segment reporting perspective, this change
had a significant impact on Corporate office reporting, with minimal impact on
the television broadcasting and Kaplan corporate reporting.
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In the fourth quarter of 2018, the Company recorded a $26.9 million gain related
to a bulk lump sum pension program offering. Also in the fourth quarter of 2018,
the Company made changes to its postretirement healthcare benefit plan,
resulting in a $3.4 million curtailment gain. In total, the Company recorded net
non-operating pension and postretirement benefit income of $120.5 million in
2018 compared to $72.7 million in 2017.
Loss on Marketable Equity Securities , Net
In the first quarter of 2018, the Company adopted new guidance that requires
changes in the fair value of marketable equity securities to be included in
non-operating income (expense) on a prospective basis. Overall, the Company
recognized $15.8 million in net losses on marketable equity securities in 2018.
Other Non-Operating Income (Expense)
The Company recorded total other non-operating income, net, of $2.1 million in
2018, compared to $4.2 million in 2017. The 2018 non-operating income, net,
included $11.7 million in fair value increases on cost method investments; $8.2
million in net gains related to sales of businesses and contingent
consideration; a $2.8 million gain on sale of a cost method investment; a $2.5
million gain on sale of land and other items, partially offset by $17.5 million
in losses on guarantor lease obligations in connection with the 2015 sale of the
KHE Campuses businesses; $3.8 million in foreign currency losses; and $2.7
million in impairments on cost method investments. The 2017 non-operating
income, net, included $3.3 million in foreign currency gains and other items.
Provision for (Benefit From) Income Taxes
The Company's effective tax rate for 2018 was 16.1%. In the third quarter of
2018, the Company recorded a $17.8 million deferred state tax benefit related to
the release of valuation allowances. Excluding this $17.8 million benefit and a
$1.8 million income tax benefit related to stock compensation, the overall
income tax rate for 2018 was 22.2%. The Tax Cuts and Jobs Act was enacted in
December 2017 , which included lowering the federal corporate income tax rate
from 35% to 21%.
The Company reported an income tax benefit of $119.7 million for 2017, which was
significantly impacted by the enactment of the Tax Cuts and Jobs Act in December
2017 . Overall, the Company recorded a $177.5 million net deferred tax benefit in
the fourth quarter of 2017 as a result of enactment of this legislation, due
largely to the revaluation of the Company's U.S. deferred tax assets and
liabilities to the lower federal tax rate and a significant reduction in the
amount of deferred taxes previously provided on undistributed earnings of
investments in non-U.S. subsidiaries. In the first quarter of 2017, the Company
recorded a $5.9 million income tax benefit related to the vesting of restricted
stock awards in connection with the adoption of a new accounting standard that
requires all excess income tax benefits and deficiencies from stock compensation
to be recorded as discrete items in the provision for income taxes. Excluding
the effect of these items, the effective tax rate for 2017 was 34.9%.
Adoption of Revenue Recognition Standard
On January 1, 2018 , the Company adopted the new revenue recognition guidance
using the modified retrospective approach. In connection with the KU
Transaction, Kaplan recognized $4.5 million in fee revenue and operating income
in the third quarter of 2018. Under the previous guidance, this would not have
been recognized, as a determination would not have been made until the end of
Purdue Global's fiscal year (June 30, 2019 ). If the company applied the
accounting policies under the previous guidance for all other revenue streams,
revenue and operating expenses would have been $1.7 million and $0.6 million
lower, respectively, for 2018.
FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES
The Company considers the following when assessing its liquidity and capital
resources:
As of December 31
(In thousands) 2019 2018
Cash and cash equivalents $ 200,165 $ 253,256
Restricted cash $ 13,879 $ 10,859
Investments in marketable equity securities and other investments $ 599,967 $ 514,581
Total debt $ 512,829 $ 477,137
Cash generated by operations is the Company's primary source of liquidity. The
Company maintains investments in a portfolio of marketable equity securities,
which is considered when assessing the Company's sources of liquidity. An
additional source of liquidity includes the Company's $300 million five-year
revolving credit facility.
During 2019, the Company's cash and cash equivalents decreased by $53.1 million ,
due largely to the acquisition of eight businesses and other investments. In
2019, the Company's borrowings increased by $35.7 million due to
53
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additional borrowings of $41.3 million to partially fund the acquisition of two
businesses, partially offset by repayments.
As of December 31, 2019 and 2018, the Company had money market investments of
$45.2 million and $75.5 million , respectively, that are included in cash and
cash equivalents. At December 31, 2019 , the Company held approximately $130
million in cash and cash equivalents in businesses domiciled outside the U.S. ,
of which approximately $7 million is not available for immediate use in
operations or for distribution. Additionally, Kaplan's business operations
outside the U.S. retain cash balances to support ongoing working capital
requirements, capital expenditures, and regulatory requirements. As a result,
the Company considers a significant portion of the cash and cash equivalents
balance held outside the U.S. as not readily available for use in U.S.
operations.
At December 31, 2019 , the fair value of the Company's investments in marketable
equity securities was $585.1 million , which includes investments in the common
stock of six publicly traded companies. At December 31, 2019 , the unrealized
gain related to the Company's investments totaled $302.7 million .
The Company had working capital of $621.6 million and $720.2 million at
December 31, 2019 and 2018, respectively. The Company maintains working capital
levels consistent with its underlying business requirements and consistently
generates cash from operations in excess of required interest or principal
payments.
At December 31, 2019 and 2018, the Company had borrowings outstanding of $512.8
million and $477.1 million , respectively. The Company's borrowings at
December 31, 2019 were mostly from $400.0 million of 5.75% unsecured notes due
June 1, 2026 , £60 million in outstanding borrowings under the Kaplan Credit
Agreement and a commercial note of $27.5 million at the Automotive subsidiary.
The interest on $400.0 million of 5.75% unsecured notes is payable semiannually
on June 1 and December 1 . The Company's borrowings at December 31, 2018 were
mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026 , and £65
million in outstanding borrowings under the Kaplan Credit Agreement. The Company
did not have any outstanding commercial paper borrowing or revolving credit
borrowing as of December 31, 2019 and 2018.
During 2019 and 2018, the Company had average borrowings outstanding of
approximately $500.6 million and $517.2 million , respectively, at average annual
interest rates of approximately 5.1% and 5.6%, respectively. The Company
incurred net interest expense of $23.6 million and $32.5 million , respectively,
during 2019 and 2018.
On May 24, 2019 , Moody's affirmed the Company's credit ratings and maintained
the outlook as Stable. Standard & Poor's also affirmed their credit rating and
Stable outlook of the Company on December 10, 2019 .
The Company's current credit ratings are as follows:
Moody's Standard & Poor's
Long-term Ba1 BB+
The Company expects to fund its estimated capital needs primarily through
existing cash balances and internally generated funds and, to a lesser extent,
borrowings under its revolving credit facility. In management's opinion, the
Company will have sufficient financial resources to meet its business
requirements in the next 12 months, including working capital requirements,
potential acquisitions, strategic investments, dividends and stock repurchases.
In summary, the Company's cash flows for each period were as follows:
Year Ended December 31
(In thousands) 2019 2018 2017
Net cash provided by operating activities $ 165,164 $ 287,019 $ 268,055
Net cash used in investing activities (236,735 ) (230,964 ) (442,019 )
Net cash provided by (used in) financing activities 18,734 (192,359 ) (100,106 )
Effect of currency exchange rate change 2,766 (7,147 ) 10,820
Net decrease in cash and cash equivalents and
restricted cash $ (50,071 ) $ (143,451 ) $ (263,250 )
54--------------------------------------------------------------------------------
Operating Activities. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The Company's net cash flow provided by operating activities were as follows:
Year Ended December 31
(In thousands) 2019 2018 2017
Net Income $ 327,879 $ 271,408 $ 302,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and goodwill and other
long-lived asset impairment 121,648 112,245 113,310
Amortization of lease right-of-use asset 84,185 - -
Net pension benefit, settlement, early retirement and special separation benefit expense
(137,909 ) (100,948 ) (57,214 )
Debt extinguishment costs - 10,563 -
Other non-cash activities (34,714 ) (877 ) (99,798 )
Change in operating assets and liabilities (195,925 ) (5,372 ) 9,268
Net Cash Provided by Operating Activities $ 165,164 $
287,019
Net cash provided by operating activities consists primarily of cash receipts
from customers, less disbursements for costs, benefits, income taxes, interest
and other expenses.
For 2019 compared to 2018, the decrease in net cash provided by operating
activities is primarily due to lower operating income and changes in operating
assets and liabilities. Changes in operating assets and liabilities were driven
by accounts receivable, partially offset by deferred revenue.
For 2018 compared to 2017, the increase in net cash provided by operating
activities is primarily due to increased operating income and changes in
operating assets and liabilities. Changes in operating assets and liabilities
were driven by accounts receivable, partially offset by accounts payable and
accrued liabilities.
Investing Activities. The Company's net cash flow used in investing activities
were as follows:
Year Ended December 31
(In thousands) 2019 2018 2017
Investments in certain businesses, net of cash
acquired $ (179,421 ) $ (111,546 ) $ (299,938 )
Purchases of property, plant and equipment (93,504 ) (98,192 ) (60,358 )
Net proceeds from sales of marketable equity
securities 11,804 24,082 -
Investments in equity affiliates, cost method and
other investments (27,529 ) (11,702 ) (82,944 )
Net proceeds (payments) from sales of businesses,
property, plant and equipment and other assets 54,495 (10,344 ) 3,265
Other (2,580 ) (23,262 ) (2,044 )
Net Cash Used in Investing Activities $ (236,735 ) $
(230,964 )
Acquisitions. During 2019, the Company acquired eight businesses: one in education, three in healthcare, one in manufacturing, and three in other businesses for$211.8 million in cash and contingent consideration and the assumption of$25.8 million in floor plan payables. During 2018, the Company acquired eight businesses: five in education, one in manufacturing, one in healthcare, and one at SocialCode for$121.1 million in cash and contingent consideration. During 2017, the Company acquired six businesses: two in education, two in television broadcasting, one in manufacturing, and one in healthcare for$318.9 million in cash and contingent consideration, and the assumption of$59.1 million in certain pension and postretirement obligations. Capital Expenditures. The 2019 and 2018 capital expenditures are significantly higher than 2017 resulting from the construction of an academic and student residential facility in connection with Kaplan's Pathways program inLiverpool, U.K. and capital expenditures in connection with spectrum repacking at the Company's television stations inDetroit, MI ,Jacksonville, FL , andRoanoke, VA , as mandated by theFCC ; these spectrum repacking expenditures are expected to be largely reimbursed to the Company by theFCC . The amounts reflected in the Company's Statements of Cash Flows are based on cash payments made during the relevant periods, whereas the Company's capital expenditures for 2019, 2018 and 2017 disclosed in Note 19 to the Consolidated Financial Statements include assets acquired during the year. The Company estimates that its capital expenditures will be in the range of$65 million to$75 million in 2020. Proceeds from sale of investments and businesses. InNovember 2019 , KaplanUK completed the sale of a small business which was included inKaplan International . The Company sold its interest in Gimlet Media duringFebruary 2019 ; the total proceeds from the sale were$33.5 million . InFebruary 2018 , Kaplan completed the sale of a small business which was included in Test Preparation. InSeptember 2018 , Kaplan Australia completed the sale of a small business which was included inKaplan International . InFebruary 2017 , GHG completed the sale ofCeltic Healthcare of Maryland . In the fourth quarter of 2017, Kaplan Australia completed the sale of a small business, which was included inKaplan International . 55 -------------------------------------------------------------------------------- Kaplan University Transaction. OnApril 27, 2017 , certain subsidiaries of Kaplan entered into a Contribution and Transfer Agreement to contribute the institutional assets and operations ofKaplan University to anIndiana nonprofit, public-benefit corporation that is a subsidiary affiliated withPurdue University . The closing of the transactions contemplated by the Transfer Agreement occurred onMarch 22, 2018 . At the same time, the parties entered into the TOSA pursuant to which Kaplan provides key non-academic operations support to the new university. At closing, Kaplan paid Purdue Global an advance in the amount of$20 million , representing, and in lieu of, priority payments for Purdue Global's fiscal years endingJune 30, 2019 and 2020. Financing Activities. The Company's net cash flow used in financing activities were as follows: Year Ended December 31 (In thousands) 2019 2018 2017 Issuance (repayments) of borrowings and early redemption premium$ 32,548 $ (17,159 ) $ (7,715 ) Net proceeds from vehicle floor plan payable 14,384 - - Common shares repurchased (2,103 ) (118,030 ) (50,770 ) Dividends paid (29,553 ) (28,617 ) (28,329 ) Other 3,458
(28,553 ) (13,292 )
Net Cash Provided by (Used in) Financing Activities
Borrowings and Vehicle Floor Plan Payable. In 2019, the Company had cash inflows from borrowings to fund the acquisition of two businesses at Automotive and Healthcare and used floor vehicle plan financing to fund the purchase of new vehicles at its Automotive subsidiary. The Company's net outflow in 2018 was the result of the redemption of its$400 million of 7.25% notes, which included$11.4 million in debt extinguishment costs due to the early termination, in addition to repayments of other borrowings. The Company had net repayments of borrowings in 2017 primarily from required payments under the Kaplan U.K. Credit Facility. Common Stock Repurchases. During 2019, 2018, and 2017, the Company purchased a total of 3,392, 199,023, and 88,361 shares, respectively, of its Class B common stock at a cost of approximately$2.1 million ,$118.0 million , and$50.8 million , respectively. OnNovember 9, 2017 , the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock. The Company did not announce a ceiling price or time limit for the purchases. The authorization included 163,237 shares that remained under the previous authorization. AtDecember 31, 2019 , the Company had remaining authorization from the Board of Directors to purchase up to 270,263 shares of Class B common stock. Dividends. The annual dividend rate per share was$5.56 ,$5.32 and$5.08 in 2019, 2018 and 2017, respectively. Other. InMarch 2019 , a Hoover minority shareholder put some shares to the Company, which had a redemption value of$0.6 million . InJune 2018 , the Company incurred$6.2 million of interest expense related to the mandatorily redeemable noncontrolling interest redemption settlement at GHG; the mandatorily redeemable noncontrolling interest was redeemed and paid inJuly 2018 for$16.5 million . Contractual Obligations. The following reflects a summary of the Company's contractual obligations as ofDecember 31, 2019 : (in thousands) 2020 2021 2022 2023 2024 Thereafter Total Debt and interest$ 107,742 $ 28,690 $ 28,498 $ 28,305 $ 34,292 $ 448,281 $ 675,808 Operating leases 115,112 98,530 80,255 65,024 51,731 322,674 733,326 Programming purchase commitments (1) 9,354 7,936 7,133 4,382 25 - 28,830 Other purchase obligations (2) 87,180 61,276 32,106 7,817 5,481 20,446 214,306 Long-term liabilities (3) 3,363 3,159 3,051 2,900 2,697 14,203 29,373 Total$ 322,751 $ 199,591 $ 151,043 $ 108,428 $ 94,226 $ 805,604 $ 1,681,643 ___________________
(1) Includes commitments for the Company's television broadcasting business that
are reflected in the Company's Consolidated Financial Statements and
commitments to purchase programming to be produced in future years.
(2) Includes purchase obligations related to employment agreements, capital
projects and other legally binding commitments. Other purchase orders made in
the ordinary course of business are excluded from the table above. Any
amounts for which the Company is liable under purchase orders are reflected
in the Company's Consolidated Balance Sheets as accounts payable and accrued
liabilities.
(3) Primarily made up of multiemployer pension plan withdrawal obligations and
postretirement benefit obligations other than pensions. The Company has other
long-term liabilities excluded from the table above, including obligations
for deferred compensation, long-term incentive plans and long-term deferred
revenue.
Other. The Company does not have any off-balance-sheet arrangements or
financing activities with special-purpose entities (SPEs).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the amounts reported in the financial statements. On an ongoing basis,
the Company evaluates its estimates and assumptions. The Company bases its
estimates on historical experience and other assumptions believed to be
reasonable under the circumstances, the results of
56
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which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates.
An accounting policy is considered to be critical if it is important to the
Company's financial condition and results and if it requires management's most
difficult, subjective and complex judgments in its application. For a summary of
all of the Company's significant accounting policies, see Note 2 to the
Company's Consolidated Financial Statements.
Revenue Recognition, Trade Accounts Receivable and Allowance for Doubtful
Accounts. Education revenue is primarily derived from postsecondary education
services, professional education and test preparation services. Revenue, net of
any refunds, corporate discounts, scholarships and employee tuition discounts is
recognized ratably over the instruction period or access period for higher
education, professional education and test preparation services.
At Kaplan International and KTP, estimates of average student course length are
developed for each course, along with estimates for the anticipated level of
student drops and refunds from test performance guarantees, and these estimates
are evaluated on an ongoing basis and adjusted as necessary. As Kaplan's
businesses and related course offerings have changed, including more online
programs, the complexity and significance of management's estimates have
increased.
KHE provides non-academic operations support services to Purdue Global pursuant
to a TOSA, which includes technology support, help-desk functions, human
resources support for faculty and employees, admissions support, financial aid
administration, marketing and advertising, back-office business functions, and
certain student recruitment services. KHE is not entitled to receive any
reimbursement of costs incurred in providing support services, or any fee,
unless and until Purdue Global has first covered all of its operating costs
(subject to a cap), received payment for cost efficiencies, if any, and during
the first five years of the TOSA receive a priority payment of $10 million per
year in addition to the operating cost reimbursements and cost efficiency
payments. KHE will receive reimbursement for its operating costs of providing
the support services after payment of Purdue Global's operating costs, cost
efficiency payments, and priority payment. If there are sufficient revenues, KHE
may be entitled to a cost efficiency payment, if any, and additional fee equal
to 12.5% of Purdue Global's revenue. Subject to certain limitations, a portion
of the fee that is earned by KHE in one year may be carried over to subsequent
years for payment to Kaplan.
The support fee and reimbursement for KHE support costs are entirely dependent
on the availability of cash at the end of Purdue Global's fiscal year (June 30 ),
and therefore, all consideration in the contract is variable. The Company uses
significant judgment to forecast the operating results of Purdue Global, the
availability of cash at the end of each fiscal year, and the consideration it
expects to receive from Purdue Global annually. Key assumptions used in the
forecast model include student census and degree enrollment data, Purdue Global
and KHE expenses, changes to working capital, contractually stipulated minimum
payments, and lead conversion rates. The forecast is updated as uncertainties
are resolved. The Company reviews and updates the assumptions regularly, as a
significant change in one or more of these estimates could affect revenue
recognized. Changes to the estimated variable consideration were not material
for the year ended December 31, 2019 .
The determination of whether revenue should be reported on a gross or net basis
is based on an assessment of whether the Company acts as a principal or an agent
in the transaction. In certain cases, the Company is considered the agent, and
the Company records revenue equal to the net amount retained when the fee is
earned. In these cases, costs incurred with third-party suppliers is excluded
from the Company's revenue. The Company assesses whether it obtained control of
the specified goods or services before they are transferred to the customer as
part of this assessment. In addition, the Company considers other indicators
such as the party primarily responsible for fulfillment, inventory risk and
discretion in establishing price.
Accounts receivable have been reduced by an allowance for amounts that may be
uncollectible in the future. This estimated allowance is based primarily on the
aging category, historical collection experience and management's evaluation of
the financial condition of the customer. The Company generally considers an
account past due or delinquent when a student or customer misses a scheduled
payment. The Company writes off accounts receivable balances deemed
uncollectible against the allowance for doubtful accounts following the passage
of a certain period of time, or generally when the account is turned over for
collection to an outside collection agency.
Goodwill and Other Intangible Assets. The Company has a significant amount of
goodwill and indefinite-lived intangible assets that are reviewed at least
annually for possible impairment.
As of December 31
(in millions) 2019 2018
Goodwill and indefinite-lived intangible assets$ 1,528.5 $ 1,396.8 Total assets$ 5,931.2 $ 4,764.0 Percentage of goodwill and indefinite-lived intangible assets to total assets 26 % 29 % 57
-------------------------------------------------------------------------------- The Company performs its annual goodwill and intangible assets impairment test as ofNovember 30 .Goodwill and other intangible assets are reviewed for possible impairment between annual tests if an event occurred or circumstances changed that would more likely than not reduce the fair value of the reporting unit or other intangible assets below its carrying value.Goodwill The Company tests its goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially performs an assessment of qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment test. The Company quantitatively tests goodwill for impairment if, based on its assessment of the qualitative factors, it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if it decides to bypass the qualitative assessment. The quantitative goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The Company had 18 reporting units as ofDecember 31, 2019 . The reporting units with significant goodwill balances as ofDecember 31, 2019 , were as follows, representing 86% of the total goodwill of the Company: (in millions) Goodwill Education Kaplan international$ 595.6 Higher education 63.2 Test preparation 64.7 Professional (U.S.) 86.3 Television broadcasting 190.8 Healthcare 98.4 Hoover 91.3 Total$ 1,190.3 As ofNovember 30, 2019 , in connection with the Company's annual impairment testing, the Company decided to perform the quantitative goodwill impairment process at all of the reporting units. The Company's policy requires the performance of a quantitative impairment review of the goodwill at least once every three years. The Company used a discounted cash flow model, and, where appropriate, a market value approach was also utilized to supplement the discounted cash flow model to determine the estimated fair value of its reporting units. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit's estimated fair value. The methodology used to estimate the fair value of the Company's reporting units onNovember 30, 2019 , was consistent with the one used during the 2018 annual goodwill impairment test. The Company made changes to certain of its assumptions utilized in the discounted cash flow models for 2019 compared with the prior year to take into account changes in the economic environment, regulations and their impact on the Company's businesses. The key assumptions used by the Company were as follows: • Expected cash flows underlying the Company's business plans for the periods
2020 through 2024 were used. The expected cash flows took into account
historical growth rates, the effect of the changed economic outlook at the
Company's businesses, industry challenges and an estimate for the possible
impact of any applicable regulations.
• Cash flows beyond 2024 were projected to grow at a long-term growth rate, which
the Company estimated between 1.5% and 3% for each reporting unit.
• The Company used a discount rate of 7% to 22.5% to risk adjust the cash flow
projections in determining the estimated fair value.
The fair value of each of the reporting units exceeded its respective carrying value as ofNovember 30, 2019 . The estimated fair value of the Hoover reporting unit at the manufacturing businesses exceeded its carrying value by a margin less than 25% following a decrease in its estimated fair value compared with the prior year. The total goodwill at this reporting unit was$91.3 million as ofDecember 31, 2019 , or 7% of the total goodwill of the Company. There exists a reasonable possibility that a decrease in the assumed projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of this reporting unit, could result in an impairment charge. 58 -------------------------------------------------------------------------------- The estimated fair value of the Company's other reporting units with significant goodwill balances exceeded their respective carrying values by a margin in excess of 25%. It is possible that impairment charges could occur in the future, given changes in market conditions and the inherent variability in projecting future operating performance. Indefinite-Lived Intangible Assets The Company initially assesses qualitative factors to determine if it is more likely than not that the fair value of its indefinite-lived intangible assets is less than its carrying value. The Company compares the fair value of the indefinite-lived intangible asset with its carrying value if the qualitative factors indicate it is more likely than not that the fair value of the asset is less than its carrying value or if it decides to bypass the qualitative assessment. The Company records an impairment loss if the carrying value of the indefinite-lived intangible assets exceeds the fair value of the assets for the difference in the values. The Company uses a discounted cash flow model, and, in certain cases, a market value approach is also utilized to supplement the discounted cash flow model to determine the estimated fair value of the indefinite-lived intangible assets. The Company makes estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and other market values to determine the estimated fair value of the indefinite-lived intangible assets. The Company's policy requires the performance of a quantitative impairment review of the indefinite-lived intangible assets at least once every three years. The Company's intangible assets with an indefinite life are principally from trade names andFCC licenses. In 2019, the Company recorded an indefinite-lived intangible asset impairment charge of$7.8 million related to theFCC licenses at the television broadcasting division. The fair value of the other indefinite-lived intangible assets exceeded their respective carrying values as ofNovember 30, 2019 . There is always a possibility that impairment charges could occur in the future, given the inherent variability in projecting future operating performance. Pension Costs. The Company sponsors a defined benefit pension plan for eligible employees in theU.S. Excluding curtailment gains, settlement gains and special termination benefits, the Company's net pension credit was$52.7 million ,$74.0 million and$59.0 million for 2019, 2018 and 2017, respectively. The Company's pension benefit obligation and related credits are actuarially determined and are impacted significantly by the Company's assumptions related to future events, including the discount rate, expected return on plan assets and rate of compensation increases. The Company evaluates these critical assumptions at least annually and, periodically, evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover, and updates them to reflect its experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The Company assumed a 6.25% expected return on plan assets for 2019, 2018 and 2017. The Company's actual return (loss) on plan assets was 23.9% in 2019, (2.5)% in 2018 and 19.2% in 2017. The 10-year and 20-year actual returns on plan assets on an annual basis were 12.3% and 8.1%, respectively. Accumulated and projected benefit obligations are measured as the present value of future cash payments. The Company discounts those cash payments using the weighted average of market-observed yields for high-quality fixed-income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and generally increase subsequent-year pension costs; higher discount rates decrease present values and decrease subsequent-year pension costs. The Company's discount rate atDecember 31, 2019 , 2018 and 2017, was 3.3%, 4.3% and 3.6%, respectively, reflecting market interest rates. Changes in key assumptions for the Company's pension plan would have had the following effects on the 2019 pension credit, excluding curtailment gains, settlement gains and special termination benefits: • Expected return on assets - A 1% increase or decrease to the Company's assumed
expected return on plan assets would have increased or decreased the pension
credit by approximately
• Discount rate - A 1% decrease to the Company's assumed discount rate would have
increased the pension credit by approximately
the Company's assumed discount rate would have increased the pension credit by
approximately
The Company's net pension credit includes an expected return on plan assets
component, calculated using the expected return on plan assets assumption
applied to a market-related value of plan assets. The market-related value of
plan assets is determined using a five-year average market value method, which
recognizes realized and unrealized appreciation and depreciation in market
values over a five-year period. The value resulting from applying this method is
adjusted, if necessary, such that it cannot be less than 80% or more than 120%
of the market value of plan assets as of the relevant measurement date. As a
result, year-to-year increases or decreases in the market-related value of plan
assets impact the return on plan assets component of pension credit for the
year.
At the end of each year, differences between the actual return on plan assets
and the expected return on plan assets are combined with other differences in
actual versus expected experience to form a net unamortized
59
--------------------------------------------------------------------------------
actuarial gain or loss in accumulated other comprehensive income. Only those net
actuarial gains or losses in excess of the deferred realized and unrealized
appreciation and depreciation are potentially subject to amortization.
The types of items that generate actuarial gains and losses that may be subject
to amortization in net periodic pension (credit) cost include the following:
• Asset returns that are more or less than the expected return on plan assets for
the year;
• Actual participant demographic experience different from assumed (retirements,
terminations and deaths during the year);
• Actual salary increases different from assumed; and
• Any changes in assumptions that are made to better reflect anticipated
experience of the plan or to reflect current market conditions on the measurement date (discount rate, longevity increases, changes in expected participant behavior and expected return on plan assets). Amortization of the unrecognized actuarial gain or loss is included as a component of pension credit for a year if the magnitude of the net unamortized gain or loss in accumulated other comprehensive income exceeds 10% of the greater of the benefit obligation or the market-related value of assets (10% corridor). The amortization component is equal to that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. At the end of 2016, the Company had net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, an amortized gain of$4.4 million was included in the pension credit for 2017. During 2017, there were pension asset gains offset by a further decrease in the discount rate that resulted in unamortized gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, an amortized gain of$1.0 million was included in the pension credit for the first three months of 2018. As a result of theKaplan University transaction, the Company remeasured the accumulated and projected benefit obligations as ofMarch 22, 2018 , and recorded a curtailment gain. During the first three months there was an increase in the discount rate offset by pension assets losses that resulted in net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, an amortized gain of$9.0 million was included in the pension credit for the last nine months of 2018. During the last nine months of 2018, there were significant pension asset losses offset by a further increase in the discount rate that resulted in no net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain amount was included in the pension credit for 2019. During 2019, there were significant pension asset gains offset by a decrease in the discount rate and the purchase of a group annuity contract; however, the Company currently estimates that there will be no net unamortized gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain amount was included in the estimated pension credit for 2020. Overall, the Company estimates that it will record a net pension credit of approximately$55 million in 2020. Note 15 to the Company's Consolidated Financial Statements provides additional details surrounding pension costs and related assumptions. Accounting for Income Taxes. Valuation Allowances Deferred income taxes arise from temporary differences between the tax and financial statement recognition of assets and liabilities. In evaluating its ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about forecasts of future taxable income. As ofDecember 31, 2019 , the Company had state income tax net operating loss carryforwards of$849.3 million , which will expire at various future dates. Also atDecember 31, 2019 , the Company had$57.8 million of non-U.S. income tax loss carryforwards, of which$38.5 million may be carried forward indefinitely;$13.8 million of losses that, if unutilized, will expire in varying amounts through 2024; and$5.5 million of losses that, if unutilized, will start to expire after 2024. AtDecember 31, 2019 , the Company has established approximately$46.2 million in total valuation allowances, primarily against deferred state tax assets, net ofU.S. Federal income taxes, and non-U.S. deferred tax assets, as the Company believes that it is more likely than not that the benefit from certain state and non-U.S. net operating loss carryforwards and other deferred tax assets will not be realized. The Company has 60 -------------------------------------------------------------------------------- established valuation allowances against state income tax benefits recognized, without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing deferred tax benefits recognized since these temporary differences are not likely to reverse in the foreseeable future. However, certain deferred state tax assets have an indefinite life. As a result, the Company has considered deferred tax liabilities for prepaid pension cost and goodwill as a source of future taxable income for realizing those deferred state tax assets. The valuation allowances established against state and non-U.S. income tax benefits recorded may increase or decrease within the next 12 months, based on operating results, the market value of investment holdings or business and tax planning strategies; as a result, the Company is unable to estimate the potential tax impact, given the uncertain operating and market environment. The Company will be monitoring future operating results and projected future operating results on a quarterly basis to determine whether the valuation allowances provided against state and non-U.S. deferred tax assets should be increased or decreased, as future circumstances warrant. The Company's education division released valuation allowances against state deferred tax assets of$20.0 million during 2018, as the education division generated positive operating results that support the realization of these deferred tax assets. Uncertain Tax Positions The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related to appeals or litigation processes based on the technical merits. The Company records a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on the Company's tax return. Changes in the estimate are recorded in the period in which such termination is made. The Company expects that a$1.6 million state tax benefit, net of$0.3 million federal tax expense, will reduce the effective tax rate in the future if recognized. Recent Accounting Pronouncements. See Note 2 to the Company's Consolidated Financial Statements for a discussion of recent accounting pronouncements. 61 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders ofGraham Holdings Company Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets ofGraham Holdings Company and its subsidiaries (the "Company") as ofDecember 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in common stockholders' equity and cash flows for each of the three years in the period endedDecember 31, 2019 , including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as ofDecember 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 in conformity with accounting principles generally accepted inthe United States of America . Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Changes in Accounting Principles As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management's Report on Internal Control Over Financial Reporting, management has excluded Graham-Ourisman Automotive andClyde's Restaurant Group from its assessment of internal control over financial reporting as ofDecember 31, 2019 because they were acquired by the Company in a purchase business combination during 2019. We have also excluded Graham-Ourisman Automotive andClyde's Restaurant Group from our audit of internal control over financial reporting. Graham-Ourisman Automotive andClyde's Restaurant Group are majority-owned and wholly-owned subsidiaries, respectively, whose total assets and total revenues excluded from management's assessment and our audit of internal control over financial reporting collectively represent 4% and 10%, respectively, of the related consolidated financial statement amounts as of and for the year endedDecember 31, 2019 . Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting 62 -------------------------------------------------------------------------------- includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill Impairment Assessment - Hoover Reporting Unit As described in Notes 2 and 9 to the consolidated financial statements, the Company's consolidated goodwill balance was$1,388 million as ofDecember 31, 2019 . As disclosed by management, the goodwill associated with the Hoover reporting unit was$91.3 million as ofDecember 31, 2019 . Management reviews goodwill for possible impairment at least annually, as ofNovember 30 , or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. An impairment charge is recognized for the amount by which the carrying value of goodwill exceeds the estimated fair value of the reporting unit. Management reviews the carrying value of goodwill utilizing a discounted cash flow model. To determine the estimated fair value of the reporting unit, management makes assumptions related to the expected cash flows, discount rate, and long-term growth rate. The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Hoover reporting unit is a critical audit matter are there was significant judgment by management when developing the estimated fair value of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence related to management's estimates of expected cash flows and significant assumptions, including forecasted revenue, forecasted operating income margins and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's goodwill impairment assessment, including controls over the valuation of the Company's reporting unit. These procedures also included, among others, testing management's process for developing the fair value estimates and evaluating the appropriateness of the discounted cash flow model, testing the completeness, accuracy and relevance of underlying data used in the model, and evaluating the significant assumptions used by management, including forecasted revenue, forecasted operating income margins and the discount rate. Evaluating significant assumptions related to forecasted revenue and forecasted operating income margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rate. /s/PricewaterhouseCoopers LLP McLean, Virginia February 26, 2020
We have served as the Company's auditor since 1946.
63
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GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
(in thousands, except per share amounts) 2019 2018 2017
Operating Revenues $ 2,932,099 $ 2,695,966 $ 2,591,846
Operating Costs and Expenses
Operating 2,023,205 1,687,432 1,454,343
Selling, general and administrative 642,700 650,128 887,790
Depreciation of property, plant and equipment 59,253 56,722 62,509
Amortization of intangible assets 53,243 47,414 41,187
Impairment of goodwill and other long-lived assets 9,152 8,109 9,614
2,787,553 2,449,805 2,455,443
Income from Operations 144,546 246,161 136,403
Equity in earnings (losses) of affiliates, net 11,664 14,473 (3,249 )
Interest income 6,151 5,353 6,581
Interest expense (29,779 ) (37,902 ) (33,886 )
Debt extinguishment costs - (11,378 ) -
Non-operating pension and postretirement benefit
income, net 162,798 120,541 72,699
Gain (loss) on marketable equity securities, net 98,668 (15,843 ) -
Other income, net 32,431 2,103 4,241
Income Before Income Taxes 426,479 323,508 182,789
Provision for (Benefit from) Income Taxes 98,600 52,100 (119,700 )
Net Income 327,879 271,408 302,489
Net Income Attributable to Noncontrolling Interests (24 ) (202 ) (445 ) Net Income Attributable to Graham Holdings Company Common Stockholders
$ 327,855 $ 271,206 $ 302,044 Per Share Information Attributable toGraham Holdings Company Common Stockholders Basic net income per common share$ 61.70 $ 50.55 $ 54.24 Basic average number of common shares outstanding 5,285 5,333 5,516 Diluted net income per common share$ 61.21 $ 50.20 $ 53.89 Diluted average number of common shares outstanding 5,327 5,370 5,552
See accompanying Notes to Consolidated Financial Statements.
64
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GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31
(in thousands) 2019 2018 2017
Net Income $ 327,879 $ 271,408 $ 302,489
Other Comprehensive Income (Loss), Before Tax
Foreign currency translation adjustments:
Translation adjustments arising during the year 5,371 (35,584 ) 33,175
Adjustment for sales of businesses with foreign
operations 2,011 - 137
7,382 (35,584 ) 33,312 Unrealized gains on available-for-sale securities: Unrealized gains for the year
- - 112,086
Pension and other postretirement plans:
Actuarial gain (loss) 231,104 (101,013 ) 179,674
Prior service (cost) credit (5,725 ) 4,262 (75 )
Amortization of net actuarial gain included in net income
(2,046 ) (11,349 ) (6,527 )
Amortization of net prior service (credit) cost
included in net income (4,142 ) (947 ) 477
Curtailments and settlements included in net income (91,676 ) (30,267 ) -
127,515 (139,314 ) 173,549
Cash flow hedges (loss) gain (1,344 ) 551 112
Other Comprehensive Income (Loss), Before Tax 133,553 (174,347 ) 319,059 Income tax (expense) benefit related to items of other comprehensive income (loss)
(34,087 ) 37,510 (90,923 )
Other Comprehensive Income (Loss), Net of Tax 99,466 (136,837 ) 228,136
Comprehensive Income 427,345 134,571 530,625 Comprehensive income attributable to noncontrolling interests
(24 ) (202 ) (445 )
Total Comprehensive Income Attributable to Graham
Holdings Company $ 427,321 $
134,369
See accompanying Notes to Consolidated Financial Statements.
65
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GRAHAM HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31
(In thousands, except share amounts) 2019 2018
Assets
Current Assets
Cash and cash equivalents $ 200,165 $ 253,256
Restricted cash 13,879 10,859
Investments in marketable equity securities and other
investments 599,967 514,581
Accounts receivable, net 624,216 582,280
Income taxes receivable 10,735 19,166
Inventories and contracts in progress 108,928 69,477
Other current assets 105,595 82,723
Total Current Assets 1,663,485 1,532,342
Property, Plant and Equipment, Net 384,670 293,085
Lease Right-of-Use Assets 526,417 -
Investments in Affiliates 162,249 143,813
Goodwill, Net 1,388,279 1,297,712
Indefinite-Lived Intangible Assets 140,197 99,052
Amortized Intangible Assets, Net 233,481 263,261 Prepaid Pension Cost 1,292,350 1,003,558 Deferred Income Taxes 11,629 13,388 Deferred Charges and Other Assets 128,479 117,830 Total Assets$ 5,931,236 $ 4,764,041 Liabilities and Equity Current Liabilities Accounts payable and accrued liabilities$ 507,701 $ 486,578 Deferred revenue 355,156 308,728 Income taxes payable 4,121 10,496 Current portion of lease liabilities 92,714 - Current portion of long-term debt 82,179
6,360
Total Current Liabilities 1,041,871
812,162
Accrued Compensation and Related Benefits 193,836 179,652 Other Liabilities 27,223 57,901 Deferred Income Taxes 427,372 322,421 Mandatorily Redeemable Noncontrolling Interest 829 - Lease Liabilities 477,004 - Long-Term Debt 430,650 470,777 Total Liabilities 2,598,785 1,842,913 Commitments and Contingencies (Note 18) Redeemable Noncontrolling Interests 5,655
4,346
Preferred Stock,
- -
Common Stockholders' Equity
Common stock
Class A Common stock, $1 par value; 7,000,000 shares
authorized; 964,001 shares issued and outstanding 964 964
Class
19,036 19,036
Capital in excess of par value 381,669
378,837
Retained earnings 6,534,427
6,236,125
Accumulated other comprehensive income, net of taxes Cumulative foreign currency translation adjustment
(21,888 ) (29,270 )
Unrealized gain on pensions and other postretirement plans 325,921 232,836
Cash flow hedges (738 ) 263
Cost of 14,687,763 and 14,699,041 shares of Class B common stock held in treasury
(3,920,152 ) (3,922,009 )
Total Common Stockholders' Equity 3,319,239 2,916,782
Noncontrolling Interests 7,557 -
Total Equity 3,326,796 2,916,782
Total Liabilities and Equity $ 5,931,236 $ 4,764,041 See accompanying Notes to Consolidated Financial Statements.
66
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GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(In thousands) 2019 2018 2017
Cash Flows from Operating Activities
Net Income $ 327,879 $ 271,408 $ 302,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and goodwill and other
long-lived asset impairment 121,648 112,245 113,310
Amortization of lease right-of-use asset 84,185 - -
Net pension benefit, settlement, early retirement and special separation benefit expense
(137,909 ) (100,948 ) (57,214 ) (Gain) loss on marketable equity securities and cost method investments, net
(103,748 ) 4,180 -
Provision for doubtful trade and other receivables 22,726 10,209 33,830 Stock-based compensation expense, net
6,278 6,412 10,169
Debt extinguishment costs - 10,563 -
Foreign exchange loss (gain) 1,070 3,844 (3,310 )
Net loss (gain) on sales and disposition of businesses 1,936 (8,157 ) 569
Net (gain) loss on sales or write-downs of an equity
affiliate and cost method investments (29,262 ) (148 ) 200
Equity in (earnings) losses of affiliates, net of
distributions (2,678 ) (10,606 ) 3,646
Provision for (benefit from) deferred income taxes 69,751 (7,123 ) (146,452 )
Net (gain) loss on sales or write-downs of property,
plant and equipment (1,020 ) (1,642 ) 413
Change in operating assets and liabilities:
Accounts receivable, net (53,602 ) 49,638 (22,744 )
Inventories (5,317 ) (7,351 ) (541 )
Accounts payable and accrued liabilities (47,069 ) (44,892 ) 19,380
Deferred revenue 30,487 14,801 13,903
Income taxes receivable/payable 1,828 9,405 24,739
Other assets and other liabilities, net (122,252 ) (26,973 ) (25,469 )
Other 233 2,154 1,137
Net Cash Provided by Operating Activities 165,164 287,019 268,055
Cash Flows from Investing Activities
Investments in certain businesses, net of cash
acquired (179,421 ) (111,546 ) (299,938 )
Purchases of property, plant and equipment (93,504 ) (98,192 ) (60,358 ) Proceeds from sales of marketable equity securities 19,303 66,741
-
Purchases of marketable equity securities (7,499 ) (42,659 ) -
Loans to related party and affiliate and advance
related to Kaplan University transaction (3,500 ) (28,061 ) (6,771 )
Investments in equity affiliates, cost method and
other investments (27,529 ) (11,702 ) (82,944 )
Net proceeds (payments) from sales of businesses,
property, plant and equipment and other assets 54,495 (10,344 ) 3,265
Return of investment in equity affiliates 920 4,799 4,727
Net Cash Used in Investing Activities (236,735 ) (230,964 ) (442,019 )
Cash Flows from Financing Activities
Repayments of borrowings and early redemption premium (8,702 ) (417,159 ) (7,715 )
Issuance of borrowings 41,250 400,000 -
Net proceeds from vehicle floor plan payable 14,384 - -
Common shares repurchased (2,103 ) (118,030 ) (50,770 )
Dividends paid (29,553 ) (28,617 ) (28,329 )
Purchase of noncontrolling interest and deferred
payment of acquisition (2,805 ) (16,500 ) (5,187 )
Payments of financing costs (33 ) (6,501 ) -
Repayments of bank overdrafts (185 ) (5,717 ) (9,505 )
Issuance of noncontrolling interest 6,000 - -
Other 481 165 1,400
Net Cash Provided by (Used in) Financing Activities 18,734 (192,359 ) (100,106 )
Effect of Currency Exchange Rate Change 2,766 (7,147 ) 10,820
Net Decrease in Cash and Cash Equivalents and
Restricted Cash (50,071 ) (143,451 ) (263,250 )
Cash and Cash Equivalents and Restricted Cash at
Beginning of Year 264,115 407,566 670,816 Cash and Cash Equivalents and Restricted Cash at End of Year
$ 214,044 $ 264,115 $ 407,566 Supplemental Cash Flow Information Cash paid during the year for: Income taxes$ 28,000 $ 54,000 $ 4,000 Interest$ 30,000 $ 42,000 $ 33,000
See accompanying Notes to Consolidated Financial Statements.
67
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GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Class A Class B Capital in Redeemable
Common Common Excess of Retained Accumulated Other Treasury Noncontrolling Noncontrolling
(in thousands) Stock Stock Par Value Earnings Comprehensive Income Stock Interest Total Equity
Interest
As of
- $ 2,452,941 $ 50
Net income for the year 302,489 302,489
Acquisition of redeemable noncontrolling interest - 3,666 Net income attributable to redeemable noncontrolling interests (445 ) (445 ) 445 Change in redemption value of redeemable noncontrolling interests (446 ) (446 ) 446 Dividends paid on common stock (28,329 ) (28,329 ) Repurchase of Class B common stock (50,770 ) (50,770 ) Issuance of Class B common stock, net of restricted stock award forfeitures (4,401 ) 4,786 385 Amortization of unearned stock compensation and stock option expense 11,184 11,184 Other comprehensive income, net of income taxes 228,136 228,136 Reclassification of stranded tax effects as a result of tax reform (70,933 ) 70,933
-
As of December 31, 2017 964 19,036 370,700 5,791,724 535,555 (3,802,834 ) - 2,915,145 4,607 Net income for the year 271,408 271,408 Net income attributable to redeemable noncontrolling interests (202 ) (202 ) 202 Change in redemption value of redeemable noncontrolling interests 413 413 (413 ) Dividends paid on common stock (28,617 ) (28,617 ) Repurchase of Class B common stock (118,030 ) (118,030 ) Issuance of Class B common stock, net of restricted stock award forfeitures (340 ) (1,145 ) (1,485 ) Amortization of unearned stock compensation and stock option expense 8,064 8,064 Other comprehensive loss, net of income taxes (136,837 ) (136,837 ) Cumulative effect of accounting change 201,812 (194,889 ) 6,923 Other - (50 ) As of December 31, 2018 964 19,036 378,837 6,236,125 203,829 (3,922,009 ) - 2,916,782 4,346 Net income for the year 327,879 327,879 Issuance of noncontrolling interest 6,556 6,556 Acquisition of redeemable noncontrolling interest - 1,715 Net loss attributable to noncontrolling interest 152 (152 ) - Acquisition of noncontrolling interest 1,153 1,153 Net income attributable to redeemable noncontrolling interests (176 ) (176 ) 176 Change in redemption value of redeemable noncontrolling interests 32 32 (32 ) Dividends paid on common stock (29,553 ) (29,553 ) Repurchase of Class B common stock (2,103 ) (2,103 ) Issuance of Class B common stock, net of restricted stock award forfeitures (3,721 ) 3,960 239 Amortization of unearned stock compensation and stock option expense 6,521 6,521 Other comprehensive income, net of income taxes 99,466 99,466 Purchase of redeemable noncontrolling interest - (550 )
As of
See accompanying Notes to Consolidated Financial Statements.
68
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GRAHAM HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. ORGANIZATION AND NATURE OF OPERATIONS
Graham Holdings Company (the Company), is a diversified education and media company. The Company's Kaplan subsidiary provides a wide variety of educational services, both domestically and outsidethe United States (U.S. ). The Company's media operations comprise the ownership and operation of seven television broadcasting stations.Education-Kaplan, Inc. provides an extensive range of educational services for students and professionals. Kaplan's various businesses comprise four categories:Kaplan International , Higher Education (KHE), Test Preparation (KTP) and Professional (U.S. ).Media-The Company's diversified media operations comprise television broadcasting, several websites and print publications, podcast technology and a marketing solutions provider. Television broadcasting. As ofDecember 31, 2019 , the Company owned seven television stations located inHouston, TX ;Detroit, MI ;Orlando, FL ;San Antonio, TX ;Roanoke, VA ; and two stations inJacksonville, FL. All stations are network-affiliated except for WJXT inJacksonville, FL. Manufacturing-The Company's manufacturing businesses include Hoover, Dekko,Joyce/Dayton andForney .Other-The Company's other business operations include automotive dealerships, restaurants and entertainment venues and home health and hospice services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation. The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) inthe United States and include the assets, liabilities, results of operations and cash flows of the Company and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. Business Combinations. The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity over the net of the amounts assigned to the assets acquired and liabilities assumed is recognized as goodwill. The net assets and results of operations of an acquired entity are included in the Company's Consolidated Financial Statements from the acquisition date. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand, short-term investments with original maturities of three months or less and investments in money market funds with weighted average maturities of three months or less. Restricted Cash. Restricted cash represents amounts required to be held by non-U.S. higher education institutions for prepaid tuition pursuant to foreign government regulations. These regulations stipulate that the Company has a fiduciary responsibility to segregate certain funds to ensure these funds are only used for the benefit of eligible students. Concentration of Credit Risk. Cash and cash equivalents are maintained with several financial institutions domestically and internationally. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with investment-grade credit ratings. The Company routinely assesses the financial strength of significant customers, and this assessment, combined with the large number and geographical diversity of its customers, limits the Company's concentration of risk with respect to receivables from contracts with customers. Allowance for Doubtful Accounts. Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical collection experience and management's evaluation of the financial condition of the customer. The Company 69 -------------------------------------------------------------------------------- generally considers an account past due or delinquent when a student or customer misses a scheduled payment. The Company writes off accounts receivable balances deemed uncollectible against the allowance for doubtful accounts following the passage of a certain period of time, or generally when the account is turned over for collection to an outside collection agency. Investments inEquity Securities . The Company measures its investments in equity securities at fair value with changes in fair value recognized in earnings. The Company elected the measurement alternative to measure cost method investments that do not have readily determinable fair value at cost less impairment, adjusted by observable price changes with any fair value changes recognized in earnings. If the fair value of a cost method investment declines below its cost basis and the decline is considered other than temporary, the Company will record a write-down, which is included in earnings. The Company uses the average cost method to determine the basis of the securities sold. Prior to 2018, the Company's investments in marketable equity securities were classified as available-for-sale and, therefore, were recorded at fair value in the Consolidated Financial Statements, with the change in fair value during the period excluded from earnings and recorded net of income taxes as a separate component of other comprehensive income. Additionally, the Company used the cost method of accounting for its minority investments in nonpublic companies where it did not have significant influence over the operations and management of the investee. Investments were recorded at the lower of cost or fair value as estimated by management. Charges recorded to write down cost method investments to their estimated fair value and gross realized gains or losses upon the sale of cost method investments were included in other income (expense), net, in the Company's Consolidated Statements of Operations. Fair value estimates were based on a review of the investees' product development activities, historical financial results and projected discounted cash flows. The Company includes cost method investments in deferred charges and other assets in the Company's Consolidated Balance Sheets. Fair Value Measurements. Fair value measurements are determined based on the assumptions that a market participant would use in pricing an asset or liability based on a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs, such as quoted prices in active markets (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company's assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. The Company measures certain assets-including goodwill; intangible assets; property, plant and equipment; lease right-of-use assets; cost and equity-method investments-at fair value on a nonrecurring basis when they are deemed to be impaired. The fair value of these assets is determined with valuation techniques using the best information available and may include quoted market prices, market comparables and discounted cash flow models. Fair Value of Financial Instruments. The carrying amounts reported in the Company's Consolidated Financial Statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, the current portion of deferred revenue and the current portion of debt approximate fair value because of the short-term nature of these financial instruments. The fair value of long-term debt is determined based on a number of observable inputs, including the current market activity of the Company's publicly traded notes, trends in investor demands and market values of comparable publicly traded debt. The fair value of the interest rate hedges are determined based on a number of observable inputs, including time to maturity and market interest rates. Inventories and Contracts in Progress. Inventories and contracts in progress are stated at the lower of cost or net realizable values and are based on the first-in, first-out (FIFO) method. Inventory costs include direct material, direct and indirect labor, and applicable manufacturing overhead. The Company allocates manufacturing overhead based on normal production capacity and recognizes unabsorbed manufacturing costs in earnings. The provision for excess and obsolete inventory is based on management's evaluation of inventories on hand relative to historical usage, estimated future usage and technological developments. Vehicle inventory is based on the specific identification method. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and transportation. In certain instances, vehicle manufacturers provide incentives which are reflected as a reduction in the carrying value of each vehicle purchased. 70 -------------------------------------------------------------------------------- Property, Plant and Equipment. Property, plant and equipment is recorded at cost and includes interest capitalized in connection with major long-term construction projects. Replacements and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the property, plant and equipment: 3 to 20 years for machinery and equipment; 20 to 50 years for buildings. The costs of leasehold improvements are amortized over the lesser of their useful lives or the terms of the respective leases. Evaluation of Long-Lived Assets. The recoverability of long-lived assets and finite-lived intangible assets is assessed whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. A long-lived asset is considered to not be recoverable when the undiscounted estimated future cash flows are less than the asset's recorded value. An impairment charge is measured based on estimated fair market value, determined primarily using estimated future cash flows on a discounted basis. Losses on long-lived assets to be disposed of are determined in a similar manner, but the fair market value would be reduced for estimated costs to dispose.Goodwill and Other Intangible Assets.Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company's intangible assets with an indefinite life are principally from trade names and trademarks, franchise agreements andFCC licenses. Amortized intangible assets are primarily student and customer relationships and trade names and trademarks, with amortization periods up to 10 years. Costs associated with renewing or extending intangible assets are insignificant and expensed as incurred. The Company reviews goodwill and indefinite-lived intangible assets at least annually, as ofNovember 30 , for possible impairment.Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or indefinite-lived intangible asset below its carrying value. The Company tests its goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially assesses qualitative factors to determine if it is necessary to perform the goodwill or indefinite-lived intangible asset quantitative impairment review. The Company reviews the goodwill and indefinite-lived assets for impairment using the quantitative process if, based on its assessment of the qualitative factors, it determines that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, or if it decides to bypass the qualitative assessment. The Company reviews the carrying value of goodwill and indefinite-lived intangible assets utilizing a discounted cash flow model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine the estimated fair value of each reporting unit and indefinite-lived intangible asset. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. Investments in Affiliates. The Company uses the equity method of accounting for its investments in and earnings or losses of affiliates that it does not control, but over which it exerts significant influence. The Company considers whether the fair values of any of its equity method investments have declined below their carrying values whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate's industry), a write-down would be recorded to estimated fair value. Revenue Recognition. The Company adopted the new revenue guidance onJanuary 1, 2018 , using the modified retrospective approach for contracts not completed as of the adoption date. Prior to the adoption of the new revenue guidance, the Company recognized revenue when persuasive evidence of an arrangement existed, the fees were fixed or determinable, the product or service had been delivered and collectability was assured. The Company considered the terms of each arrangement to determine the appropriate accounting treatment. Subsequent to the adoption of the new guidance, the Company identifies a contract for revenue recognition when there is approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and the collectability of consideration is probable. The Company evaluates each contract to determine the number of distinct performance obligations in the contract, which requires the use of judgment. Education Revenue. Education revenue is primarily derived from postsecondary education, professional education and test preparation services provided both domestically and abroad. Generally, tuition and other fees are paid upfront and recorded in deferred revenue in advance of the date when education services are provided to the student. In some instances, installment billing is available to students, which reduces the amount of cash consideration received in advance of performing the service. The contractual terms and conditions associated with installment billing indicate that the student is liable for the total contract price; therefore, mitigating the Company's exposure to losses associated with nonpayment. The Company determined the installment billing does not represent a significant financing component. 71 --------------------------------------------------------------------------------Kaplan International .Kaplan International provides higher education, professional education, and test preparation services and materials to students primarily in theUnited Kingdom (U.K. ),Singapore , andAustralia . SomeKaplan International contracts consist of one performance obligation that is a combination of indistinct promises to the student, while otherKaplan International contracts include multiple performance obligations as the promises in the contract are capable of being both distinct and distinct within the context of the contract. OneKaplan International business offers an option whereby students receive future services at a discount that is accounted for as a material right. The transaction price is stated in the contract and known at the time of contract inception; therefore, no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.Kaplan International generally determines standalone selling prices based on prices charged to students. Revenue is recognized ratably over the instruction period or access period for higher education, professional education and test preparation services.Kaplan International generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of these services. Course materials determined to be a separate performance obligation are recognized at the point in time when control transfers to the student, generally when the products are delivered to the student. Higher Education (KHE). In the first quarter of 2018, KHE provided postsecondary education services to students through KU's online programs and fixed-facility colleges. These contracts consisted either of one performance obligation that is a combination of distinct promises to a student, or two performance obligations if the student also enrolled in the Kaplan Tuition Cap, which established a maximum amount of tuition that KHE may charge students for higher education services. The Kaplan Tuition Cap was accounted for as a material right. The transaction price of a higher education contract was stated in the contract and known at the time of contract inception; therefore, no variable consideration existed. A portion of the transaction price was allocated to the material right, if applicable, based on the expected value method. Higher education services revenue was recognized ratably over the instruction period. The Company used the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of higher education services. OnMarch 22, 2018 , Kaplan contributed the institutional assets and operations of KU to Purdue University Global (Purdue Global) (see Note 3). Subsequent to the transaction, KHE provides non-academic operations support services to Purdue Global pursuant to a Transition and Operations Support Agreement (TOSA). This contract has a 30-year term and consists of one performance obligation, which represents a series of daily promises to provide support services to Purdue Global. The transaction price is entirely made up of variable consideration related to the reimbursement of KHE support costs and the KHE fee. The TOSA outlines a payment structure, which dictates how cash will be distributed at the end of Purdue Global's fiscal year, which is the 30th of June. The collectability of the KHE support costs and KHE fee is entirely dependent on the availability of cash at the end of the fiscal year. This variable consideration is constrained based on fiscal year forecasts prepared for Purdue Global. The forecasts are updated throughout the fiscal year until the uncertainty is ultimately resolved, which is at the end of each Purdue Global fiscal year. As KHE's performance obligation is made up of a series, the variable consideration is allocated to the distinct service period to which it relates, which is the Purdue Global fiscal year. Support services revenue is recognized over time based on the expenses incurred to date and the percentage of expected reimbursement. KHE fee revenue is also recognized over time based on the amount of Purdue Global revenue recognized to date and the percentage of fee expected to be collected for the fiscal year. The Company used these input measures as Purdue Global simultaneously receives and consumes the benefits of the services provided by KHE. Kaplan Test Preparation (KTP). KTP offers test preparation services and materials to students related to pre-college, graduate, health and bar review products. Generally KTP contracts include promises for test preparation services and course materials. As each promise is both capable of being distinct and distinct in the context of the contract, each promise is accounted for as a separate performance obligation. As the transaction price is stated in the contract and known at the time of contract inception, no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. KTP generally determines standalone selling prices based on prices charged to students. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract. Test preparation services revenue is recognized ratably over the period of access. At KTP, an estimate of average access period is developed for each course, and this estimate is evaluated on an ongoing basis and adjusted as 72 -------------------------------------------------------------------------------- necessary. KTP generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to test preparation services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student. KTP offers a guarantee on certain courses that gives students the ability to repeat a course if they are not satisfied with their exam score. The Company accounts for this guarantee as a separate performance obligation. Professional (U.S. ): Professional (U.S. ) provides professional training and exam preparation for professional certifications and licensures to students. Professional (U.S. ) contracts include promises for professional education services and course materials. Generally, Professional (U.S. ) revenue contracts consist of multiple performance obligations as each distinct promise is both capable of being distinct and distinct in the context of the contract. The transaction price is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. Professional (U.S. ) generally determines standalone selling prices based on the prices charged to students. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract. Professional education services revenue is recognized ratably over the period of access. Professional (U.S. ) generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to professional education services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student. Television Broadcasting Revenue. Television broadcasting revenue atGraham Media Group (GMG) is primarily comprised of television and internet advertising revenue, and retransmission revenue. Television Advertising Revenue. GMG accounts for the series of advertisements included in television advertising contracts as one performance obligation and recognizes advertising revenue over time. The Company elected the right to invoice practical expedient, an output method, as GMG has the right to consideration that equals the value provided to the customer for advertisements delivered to date. As a result of the election to use the right to invoice practical expedient, GMG does not determine the transaction price or allocate any variable consideration at contract inception. Rather, GMG recognizes revenue commensurate with the amount to which GMG has the right to invoice the customer. Payment is typically received in arrears within 60 days of revenue recognition. Retransmission Revenue. Retransmission revenue represents compensation paid by cable, satellite and other multichannel video programming distributors (MVPDs) to retransmit GMG's stations' broadcasts in their designated market areas. The retransmission rights granted to MVPDs are accounted for as a license of functional intellectual property as the retransmitted broadcast provides significant standalone functionality. As such, each retransmission contract with an MVPD includes one performance obligation for each station's retransmission license. GMG recognizes revenue using the usage-based royalty method, in which revenue is recognized in the month the broadcast is retransmitted based on the number of MVPD subscribers and the applicable per user rate identified in the retransmission contract. Payment is typically received in arrears within 60 days of revenue recognition. Manufacturing Revenue. Manufacturing revenue consists primarily of product sales generated by four businesses: Hoover, Dekko, Joyce andForney . The Company has determined that each item ordered by the customer is a distinct performance obligation as it has standalone value and is distinct within the context of the contract. For arrangements with multiple performance obligations, the Company initially allocates the transaction price to each obligation based on its standalone selling price, which is the retail price charged to customers. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract. The Company sells some products and services with a right of return. This right of return constitutes variable consideration and is constrained from revenue recognition on a portfolio basis, using the expected value method until the refund period expires. The Company recognizes revenue when or as control transfers to the customer. Some manufacturing revenue is recognized ratably over the manufacturing period, if the product created for the customer does not have an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. The determination of the method by which the Company measures its progress toward the satisfaction of its performance obligations requires judgment. The Company measures its progress for these products using the units delivered method, an output measure. These arrangements represented 28% and 27% of the manufacturing revenue recognized for the years endedDecember 31, 2019 and 2018, respectively. Other manufacturing revenue is recognized at the point in time when control transfers to the customer, generally when the products are shipped. Some customers have a bill and hold arrangement with the Company. Revenue for 73 -------------------------------------------------------------------------------- bill and hold arrangements is recognized when control transfers to the customer, even though the customer does not have physical possession of the goods. Control transfers when the bill-and-hold arrangement has been requested from the customer, the product is identified as belonging to the customer and is ready for physical transfer, and the product cannot be directed for use by anyone but the customer. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 90 days of delivery. The Company evaluated the terms of the warranties and guarantees offered by its manufacturing businesses and determined that these should not be accounted for as a separate performance obligation as a distinct service is not identified. Healthcare Revenue. The Company contracts with patients to provide home health or hospice services. Payment is typically received from third-party payors such as Medicare, Medicaid, and private insurers. The payor is a third party to the contract that stipulates the transaction price of the contract. The Company identifies the patient as the party who benefits from its healthcare services and as such, the patient is its customer. The Company determined that healthcare services contracts generally have one performance obligation to provide healthcare services to patients. The transaction price reflects the amount of revenue the Company expects to receive in exchange for providing these services. As the transaction price for healthcare services is known at the time of contract inception, no variable consideration exists. Healthcare revenue is recognized ratably over the period of care. The Company generally uses the time-elapsed method, an input measure as it best depicts the simultaneous delivery and consumption of healthcare services. Payment is received from third-party payors within 60 days after a claim is filed, or in some cases in two installments, one during the contract and one after the services have been provided. Medicare is the most common third-party payor. Home health revenue contracts may be modified to account for changes in the patient's plan of care. The Company identifies contract modifications when the modification changes the existing enforceable rights and obligations. As modifications to the plan of care modify the original performance obligation, the Company accounts for the contract modification as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. Other Revenue. The Company recognizes revenue associated with management services it provides to its affiliates. The Company accounts for the management services provided as one performance obligation and recognizes revenue over time as the services are delivered. The Company uses the right to invoice practical expedient, an output method, as the Company's right to revenue corresponds directly with the value delivered to the affiliate. As a result of the election to use the right to invoice practical expedient, the Company does not determine the transaction price or allocate any variable consideration at contract inception. Rather, the Company recognizes revenue commensurate with the amount to which it has the right to invoice the affiliate, which is based on contractually identified percentages. Payment is received monthly in arrears. SocialCode Revenue. SocialCode generates media management revenue in exchange for providing social media marketing solutions to its clients. The Company determined that SocialCode contracts generally have one performance obligation made up of a series of promises to manage the client's media spend on advertising platforms for the duration of the contract period. SocialCode recognizes revenue, net of media acquisition costs, over time as media management services are delivered to the customer. Generally, SocialCode recognizes revenue using the right to invoice practical expedient, an output method, as SocialCode's right to revenue corresponds directly with the value delivered to its customer. As a result of the election to use the right to invoice practical expedient, SocialCode does not determine the transaction price or allocate any variable consideration at contract inception. Rather, SocialCode recognizes revenue commensurate with the amount to which it has the right to invoice the customer which is a function of the cost of social media placement plus a management fee, less any applicable discounts. Payment is typically received within 100 days of revenue recognition. SocialCode evaluates whether it is the principal (i.e. presents revenue on a gross basis) or agent (i.e. presents revenue on a net basis) in its contracts. SocialCode presents revenue for media management services, net of media acquisition costs, as an agent, as SocialCode does not control the media before placement on social media platforms. Other Revenue. Automotive Revenue. The automotive subsidiary generates revenue primarily through the sale of new and used vehicles, the arrangement of vehicle financing, insurance and other service contracts (F&I revenue) and the performance of vehicle repair and maintenance services. 74 -------------------------------------------------------------------------------- New and used vehicle revenue contracts generally contain one performance obligation to deliver the vehicle to the customer in exchange for the stated contract consideration. Revenue is recognized at the point in time when control of the vehicle passes to the customer. F&I revenue is recognized at the point in time when the agreement between the customer and financing, insurance or service provider is executed. As the automotive division acts as an agent in these F&I revenue transactions, revenue is recognized net of any financing, insurance and service provider costs. Repair and maintenance services revenue is recognized over time, as the service is performed. Restaurant Revenue. Restaurant revenues consists of sales generated byClyde's Restaurant Group. Food and beverage revenue, net of discounts and taxes, is recognized at the point in time when it is delivered to the customer. Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue upon redemption by the customer. Other Revenue. Other revenue primarily includes advertising and circulation revenue from Slate, Megaphone andForeign Policy . The Company accounts for other advertising revenues consistently with the advertising revenue streams addressed above. Circulation revenue consists of fees that provide customers access to online and print publications. The Company recognizes circulation revenue ratably over the subscription period beginning on the date that the publication is made available to the customer. Circulation revenue contracts are generally annual or monthly subscription contracts that are paid in advance of delivery of performance obligations. Revenue Policy Elections. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of the good as a fulfillment cost rather than as an additional promised service. Therefore, revenue for these performance obligations is recognized when control of the good transfers to the customer, which is when the good is ready for shipment. The Company accrues the related shipping and handling costs over the period when revenue is recognized. The Company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Revenue Practical Expedients. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the amount of revenue recognized is based on the amount to which the Company has the right to invoice the customer for services performed, (iii) contracts for which the consideration received is a usage-based royalty promised in exchange for a license of intellectual property and (iv) contracts for which variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. Costs to Obtain a Contract. The Company incurs costs to obtain a contract that are both incremental and expected to be recovered as the costs would not have been incurred if the contract was not obtained and the revenue from the contract exceeds the associated cost. The revenue guidance provides a practical expedient to expense sales commissions as incurred in instances where the amortization period is one year or less. The amortization period is defined in the guidance as the contract term, inclusive of any expected contract renewal periods. The Company has elected to apply this practical expedient to all contracts except for contracts in its education division. In the education division, costs to obtain a contract are amortized over the applicable amortization period except for cases in which commissions paid on initial contracts and renewals are commensurate. The Company amortizes these costs to obtain a contract on a straight line basis over the amortization period. These expenses are included as operating expenses in the Company's Consolidated Statements of Operations. Leases. The Company has operating leases for substantially all of its educational facilities, corporate offices and other facilities used in conducting its business, as well as certain equipment. The Company determines if an arrangement is a lease at inception. Prior to the adoption of the new leasing guidance onJanuary 1, 2019 , the Company evaluated the lease agreement to determine whether the lease was an operating or capital lease at lease inception. Additionally, many of the Company's lease agreements contained renewal options, tenant improvement allowances, rent holidays and/or rent escalation clauses. When such items were included in a lease agreement, the Company recorded a deferred rent asset or liability in the Consolidated Financial Statements and recorded these items in rent expense evenly over the terms of the lease. The Company was also required to make additional payments under operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period; such items were expensed as incurred. Rental deposits were included as other assets in the Company's Consolidated Balance Sheets for lease agreements that require payments in advance or deposits held for security that are refundable, less any damages, at the end of the respective lease. Subsequent to the adoption of the new guidance, operating leases are included in lease right-of-use ("ROU") assets, current portion of lease liabilities, and lease liabilities on the Company's Consolidated Balance Sheets. ROU assets 75 -------------------------------------------------------------------------------- represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. ROU assets also include any initial direct costs, prepaid lease payments and lease incentives received, when applicable. As most of the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate onDecember 31, 2018 for operating leases that commenced prior to that date. The Company's lease terms may include options to extend or terminate the lease by one to 10 years or more when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less are not recorded on the balance sheet; however, lease expense for these leases is recognized on a straight-line basis. The Company has elected the practical expedient to not separate lease components from nonlease components. As such, lease expense includes these nonlease components, when applicable. Fixed lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized when incurred. The Company's lease agreements do not contain any significant residual value guarantees or restrictive covenants. In some instances, the Company subleases its leased real estate facilities to third parties. As ofDecember 31, 2019 , the Company had$4.1 million in net, property, plant and equipment and current finance lease liabilities, respectively, related to service loaner vehicles at the automotive subsidiary. Service loaner vehicles are generally purchased from the lessor within six months of contract commencement and upon purchase the vehicles are placed into used vehicle inventory at cost. The Company does not have any other significant financing leases. Pensions and Other Postretirement Benefits. The Company maintains various pension and incentive savings plans. Most of the Company's employees are covered by these plans. The Company also provides healthcare and life insurance benefits to certain retired employees. These employees become eligible for benefits after meeting age and service requirements. The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its Consolidated Balance Sheets and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. The Company measures changes in the funded status of its plans using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate, the expected return on plan assets and the rate of compensation increase. The Company uses a measurement date ofDecember 31 for its pension and other postretirement benefit plans.Self-Insurance . The Company uses a combination of insurance and self-insurance for a number of risks, including claims related to employee healthcare and dental care, disability benefits, workers' compensation, general liability, property damage and business interruption. Liabilities associated with these plans are estimated based on, among other things, the Company's historical claims experience, severity factors and other actuarial assumptions. The expected loss accruals are based on estimates, and, while the Company believes that the amounts accrued are adequate, the ultimate loss may differ from the amounts provided. Income Taxes. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations; this evaluation is made on an ongoing basis. In the event the Company were to determine that it was able to realize net deferred income tax assets in the future in excess of their net recorded amount, the Company would record an adjustment to the valuation allowance, which would reduce the provision for income taxes. The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The Company records a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on the Company's tax return. Changes in the estimate are recorded in the period in which such determination is made. Foreign Currency Translation. Income and expense accounts of the Company's non-U.S. operations where the local currency is the functional currency are translated intoU.S. dollars using the current rate method, whereby 76 -------------------------------------------------------------------------------- operating results are converted at the average rate of exchange for the period, and assets and liabilities are converted at the closing rates on the period end date. Gains and losses on translation of these accounts are accumulated and reported as a separate component of equity and other comprehensive income. Gains and losses on foreign currency transactions, including foreign currency denominated intercompany loans on entities with a functional currency inU.S. dollars, are recognized in the Consolidated Statements of Operations. Equity-Based Compensation. The Company measures compensation expense for awards settled in shares based on the grant date fair value of the award. The Company measures compensation expense for awards settled in cash, or that may be settled in cash, based on the fair value at each reporting date. The Company recognizes the expense over the requisite service period, which is generally the vesting period of the award. Stock award forfeitures are accounted for as they occur. Earnings Per Share. Basic earnings per share is calculated under the two-class method. The Company treats restricted stock as a participating security due to its nonforfeitable right to dividends. Under the two-class method, the Company allocates to the participating securities their portion of dividends declared and undistributed earnings to the extent the participating securities may share in the earnings as if all earnings for the period had been distributed. Basic earnings per share is calculated by dividing the income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated similarly except that the weighted average number of common shares outstanding during the period includes the dilutive effect of the assumed exercise of options and restricted stock issuable under the Company's stock plans. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Mandatorily Redeemable Noncontrolling Interest. The Company's mandatorily redeemable noncontrolling interest represents the noncontrolling interest inGHC One LLC, (GHC One ), a subsidiary ofGraham Healthcare Group (GHG). The minority shareholders must liquidate their 5% interest inGHC One upon its required liquidation in 2026. This interest is reported as a noncurrent liability atDecember 31, 2019 in the Consolidated Balance Sheets. The Company presents this liability at fair value, which is computed annually at the current redemption value. Changes in the redemption value is recorded as interest expense or income in the Company's Consolidated Statement of Operations. Prior toJuly 2018 , the Company's mandatorily redeemable noncontrolling interest represented the noncontrolling interest inGraham Healthcare Group (GHG), which was 90% owned. The minority shareholders had an option to put their shares to the Company starting in 2020 and were required to put a percentage of their shares in 2022 and 2024, with the remaining shares required to be put by the minority shareholders in 2026. Since the noncontrolling interest was mandatorily redeemable by 2026, it was reported as a noncurrent liability. This mandatorily redeemable noncontrolling interest was redeemed and paid inJuly 2018 (see Note 3). Redeemable Noncontrolling Interest. The Company's redeemable noncontrolling interest represents the noncontrolling interest in Hoover, which is 98.01% owned andCSI Pharmacy , which is 75% owned. Hoover's minority shareholders have an option to put some of their shares to the Company in 2019 and the remaining shares starting in 2021. The Company has an option to buy the shares of minority shareholders starting in 2027. CSI's minority shareholders may put up to 50% of their shares to the Company. The first put period begins in 2022. A second put period for another tranche of shares begins in 2024.The Company presents the redeemable noncontrolling interests at the greater of its carrying amount or redemption value at the end of each reporting period in the Consolidated Balance Sheets. Changes in the redemption value are recorded to capital in excess of par value in the Company's Consolidated Balance Sheets. Comprehensive Income. Comprehensive income consists of net income, foreign currency translation adjustments, net changes in cash flow hedges, and pension and other postretirement plan adjustments. Recently Adopted and Issued Accounting Pronouncements. InFebruary 2016 , theFinancial Accounting Standards Board (FASB) issued new guidance that requires, among other things, a lessee to recognize a right-of-use asset representing an entity's right to use the underlying asset for the lease term and a liability for lease payments on its balance sheet, regardless of classification of a lease as operating or financing. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and account for the lease similar to previous guidance for operating leases. This new guidance supersedes all prior guidance. The guidance is effective for interim and fiscal years beginning afterDecember 15, 2018 . The standard provides two methods of adoption under the modified retrospective approach. Under the comparative date method, lessees and lessors are required to recognize and measure leases as of the beginning of the earliest period presented. Under the effective date method, lessees and lessors are required to recognize and measure leases as of the period of adoption. The Company adopted the new guidance onJanuary 1, 2019 using the effective date method. The Company elected the available package of transition practical expedients, which allowed the Company to use its historical assessments of whether contracts are or contain leases, lease classification and initial direct costs. 77 -------------------------------------------------------------------------------- Additionally, the Company elected the transition practical expedient to use hindsight to determine the lease term. Upon adoption of the new guidance, the Company recognized right-of-use assets of$369.3 million and lease liabilities of$418.3 million . The cumulative effect of the changes to the Company's Consolidated Balance Sheets as a result of adopting the new guidance was as follows: Balance as of Balance as of December 31, 2018 Adjustments January 1, 2019 Assets Other current assets $ 82,723$ (5,595 ) $ 77,128 Lease Right-of-Use Assets - 369,333 369,333 Liabilities
Accounts payable and accrued liabilities
- 86,747 86,747
Other Liabilities 57,901 (40,500 ) 17,401
Lease Liabilities - 331,520 331,520
In June 2016 , the FASB issued new guidance that requires financial assets
measured at amortized cost, including accounts receivable, to be measured using
the current expected credit losses model (CECL). CECL requires current expected
credit losses to be measured upon the initial recognition of a financial asset
by considering all available relevant information, including information about
past events, current conditions and reasonable and supportable forecasts of
future economic conditions. The guidance is effective for interim and fiscal
years beginning after December 15, 2019 . The standard requires adoption through
a cumulative-effect adjustment to retained earnings in the period of adoption
under a modified retrospective transition method. The Company does not expect
this guidance to have a significant impact on its Consolidated Financial
Statements.
Other new pronouncements issued but not effective until after December 31,
2019 , are not expected to have a material impact on the Company's Consolidated
Financial Statements.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Acquisitions. During 2019, the Company acquired eight businesses: one in
education, three in healthcare, one in manufacturing, and three in other
businesses for $211.8 million in cash and contingent consideration and the
assumption of $25.8 million in floor plan payables. The assets and liabilities
of the companies acquired were recorded at their estimated fair values at the
date of acquisition.
On January 31, 2019 , the Company acquired an interest in two automotive
dealerships for cash and the assumption of floor plan payables (see Note 6). In
connection with the acquisition, the automotive subsidiary of the Company
borrowed $30 million to finance the acquisition and entered into an interest
rate swap to fix the interest rate on the debt at 4.7% per annum (see Note 11).
The Company has a 90% interest in the automotive subsidiary. The Company also
entered into a management services agreement with an entity affiliated with
Christopher J. Ourisman , a member of the Ourisman Automotive Group family of
dealerships. Mr. Ourisman and his team operate and manage the dealerships. The
Company paid a fee of $2.3 million for the year ended December 31, 2019 in
connection with the management services provided under this agreement. In
addition, the Company advanced $3.5 million to the minority shareholder, an
entity controlled by Mr. Ourisman , at an interest rate of 6% per annum. The
minority shareholder has the option to acquire up to an additional 10% interest
in the automotive subsidiary. The acquisition is expected to provide benefits in
the future by diversifying the Company's business operations and is included in
other businesses.
In July 2019 , GHG acquired a 100% interest in a small business which is expected
to provide certain strategic benefits in the future and is included in
healthcare. On July 11, 2019 , Kaplan acquired a 100% interest in Heverald, the
owner of ESL Education, Europe's largest language-travel agency and Alpadia, a
chain of German and French language schools and junior summer camps. The
acquisition is expected to provide synergies within Kaplan's International
English business and is included in Kaplan's international division.
On July 31, 2019 , the Company announced the closing of its acquisition of
Clyde's Restaurant Group (CRG). CRG owns and operates 13 restaurants and
entertainment venues in the Washington, DC metropolitan area, including Old
Ebbitt Grill and The Hamilton . In connection with the acquisition, the Company
entered into several leases with an entity affiliated with some of CRG's senior
managers. The acquisition is expected to provide benefits in the future by
diversifying the Company's business operations and is included in other
businesses.
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In September 2019 , Joyce/Dayton Corp. acquired the assets of a small business.
The acquisition is expected to complement current product offerings and is
included in manufacturing.
On December 1, 2019 , GHG acquired 75% of the preferred shares of CSI Pharmacy
Holding Company, LLC , (CSI). In connection with the acquisition, CSI entered
into an $11.25 million Term Loan (see Note 11) to finance the acquisition. CSI
is a specialty and home infusion pharmacy which provides intravenous
immunoglobulin therapies to patients. The minority shareholders may put up to
50% of their preferred shares to GHG and the first put period begins in 2022. A
second put period for another tranche of preferred shares begins in 2024. The
fair value of the redeemable noncontrolling interest in CSI was $1.7 million at
the acquisition date, determined using an income approach. The acquisition is
expected to expand the product offerings of the healthcare division.
During 2018, the Company acquired eight businesses: five in education, one in
manufacturing, one in healthcare, and one at SocialCode for $121.1 million in
cash and contingent consideration. The assets and liabilities of the companies
acquired were recorded at their estimated fair values at the date of
acquisition.
In January and February 2018 , Kaplan acquired the assets of i-Human Patients,
Inc. , a provider of cloud-based, interactive patient encounter simulations for
medical and nursing professionals and educators, and another small business in
test preparation and international, respectively. These acquisitions are
expected to provide strategic benefits in the future.
In May 2018 , Kaplan acquired a 100% interest in Professional Publications, Inc.
(PPI), an independent publisher of professional licensing exam review materials
and engineering, surveying, architecture, and interior design licensure exam
review, by purchasing all of its issued and outstanding shares. This acquisition
is expected to provide certain strategic benefits in the future. This
acquisition is included in Professional (U.S. ).
On July 12, 2018 , Kaplan acquired 100% of the issued and outstanding shares of
the College for Financial Planning (CFFP), a provider of financial education and
training to individuals pursuing the Certified Financial Planner certification,
a Master of Science in Personal Financial Planning, or a Master of Science in
Finance. The acquisition is expected to expand Kaplan's financial education
product offerings and is included in Professional (U.S. ).
On July 31, 2018 , Dekko acquired 100% of the issued and outstanding shares of
Furnlite, Inc. , a Fallston, NC -based manufacturer of power and data solutions
for the hospitality and residential furniture industries. Dekko's primary
reasons for the acquisition are to complement existing product offerings and to
provide potential synergies across the businesses. The acquisition is included
in manufacturing.
In August 2018 , SocialCode acquired 100% of the membership interests of
Marketplace Strategy (MPS), a Cleveland -based digital marketing agency that
provides strategy consulting, optimization services, advertising management and
creative solutions on online marketplaces including Amazon. SocialCode's primary
reason for the acquisition is to expand its platform offerings.
In September 2018 , GHG acquired the assets of a small business and Kaplan
acquired the test preparation and study guide assets of Barron's Educational
Series , a New York -based education publishing company. The acquisitions are
expected to complement the healthcare and test preparation services currently
offered by GHG and Kaplan, respectively. GHG is included in the healthcare
division. The Barron's Educational Series acquisition is included in test
preparation.
During 2017, the Company acquired six businesses: two in education, two in
television broadcasting, one in manufacturing, and one in healthcare for $318.9
million in cash and contingent consideration, and the assumption of $59.1
million in certain pension and postretirement obligations. The assets and
liabilities of the companies acquired were recorded at their estimated fair
values at the date of acquisition.
On January 17, 2017 , the Company closed on its agreement with Nexstar
Broadcasting Group, Inc. and Media General, Inc. to acquire the assets of WCWJ,
a CW affiliate television station in Jacksonville, FL , and WSLS, an NBC
affiliate television station in Roanoke, VA , for cash and the assumption of
certain pension obligations. The acquisition of WCWJ and WSLS will complement
the other stations that GMG operates. Both of these acquisitions are included in
television broadcasting.
In February 2017 , Kaplan acquired a 100% interest in Genesis Training Institute ,
a Dubai -based provider of professional development training in the United Arab
Emirates , by purchasing all of its issued and outstanding shares. Additionally,
Kaplan acquired a 100% interest in Red Marker Pty Ltd. , an Australia -based
regulatory technology company by purchasing all of its outstanding shares. These
acquisitions are expected to provide certain strategic benefits in the future.
Both of these acquisitions are included in Kaplan International .
In April 2017 , the Company acquired 97.72% of the issued and outstanding shares
of Hoover Treated Wood Products, Inc. , a Thomson, GA -based supplier of pressure
impregnated kiln-dried lumber and plywood products for fire retardant and
preservative applications for $206.8 million , net of cash acquired. The fair
value of the
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redeemable noncontrolling interest in Hoover was $3.7 million at the acquisition
date, determined using a market approach. The minority shareholders have an
option to put some of their shares to the Company as of 2019 and their remaining
shares starting in 2021. The Company has an option to buy the shares of minority
shareholders starting in 2027. This acquisition is consistent with the Company's
ongoing strategy of investing in companies with a history of profitability and
strong management. Hoover is included in manufacturing.
At the end of June 2017 , GHG acquired a 100% interest in Hometown Home Health
and Hospice , a Lapeer, MI -based healthcare services provider by purchasing all
of its issued and outstanding shares. This acquisition expands GHG's service
area in Michigan . GHG is included in healthcare.
Acquisition-related costs for acquisitions that closed during 2019, 2018 and
2017 were $3.0 million , $1.5 million and $4.1 million , respectively, and
expensed as incurred. The aggregate purchase price of these acquisitions was
allocated as follows, based on acquisition date fair values to the following
assets and liabilities:
Purchase Price Allocation
Year Ended December 31
(in thousands) 2019 2018 2017
Accounts receivable $ 6,762 $ 2,344 $ 12,502
Inventory 34,134 1,268 25,253
Property, plant and equipment 56,391 1,518 29,921
Lease right-of-use assets 100,364 - -
Goodwill 84,515 41,840 143,149
Indefinite-lived intangible assets 46,900 - 33,800
Amortized intangible assets 21,291 78,427 170,658
Other assets 8,308 5,198 1,880
Floor plan payables (25,755 ) - -
Pension and other postretirement benefits liabilities - - (59,116 )
Other liabilities (42,555 ) (7,678 ) (12,177 )
Deferred income taxes (2,703 ) (4,900 ) (37,289 )
Current and noncurrent lease liabilities (100,990 ) - -
Redeemable noncontrolling interest (1,715 ) - (3,666 )
Noncontrolling interest (1,154 ) - -
Aggregate purchase price, net of cash acquired
The 2019 fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change within the measurement period (up to one year from the acquisition date). The recording of deferred tax assets or liabilities, working capital and the final amount of residual goodwill and other intangibles are not yet finalized.Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded due to these acquisitions is attributable to the assembled workforces of the acquired companies and expected synergies. The Company expects to deduct$70.7 million ,$32.3 million and$11.0 million of goodwill for income tax purposes for the acquisitions completed in 2019, 2018 and 2017, respectively. The acquired companies were consolidated into the Company's financial statements starting on their respective acquisition dates. The Company's Consolidated Statements of Operations include aggregate revenue and operating loss of$308.8 million and$5.0 million , respectively, for the year endedDecember 31, 2019 . The following unaudited pro forma financial information presents the Company's results as if the current year acquisitions had occurred at the beginning of 2018. The unaudited pro forma information also includes the 2018 acquisitions as if they occurred at the beginning of 2017 and the 2017 acquisitions as if they had occurred at the beginning of 2016: Year Ended December 31 (in thousands) 2019 2018 2017
Operating revenues
326,927 275,074 311,397
These pro forma results were based on estimates and assumptions, which the
Company believes are reasonable, and include the historical results of
operations of the acquired companies and adjustments for depreciation and
amortization of identified assets and the effect of pre-acquisition transaction
related expenses incurred by the Company and the acquired entities. The pro
forma information does not include efficiencies, cost reductions and synergies
expected to result from the acquisitions. They are not the results that would
have been realized had these entities been part of the Company during the
periods presented and are not necessarily indicative of the Company's
consolidated results of operations in future periods.
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Kaplan University Transaction. On April 27, 2017 , certain subsidiaries of Kaplan
entered into a Contribution and Transfer Agreement to contribute the
institutional assets and operations of Kaplan University to an Indiana
nonprofit, public-benefit corporation that is a subsidiary affiliated
with Purdue University . The closing of the transactions contemplated by the
Transfer Agreement occurred on March 22, 2018 . At the same time, the parties
entered into the TOSA pursuant to which Kaplan provides key non-academic
operations support to the new university.
The new university operates largely online as a new Indiana public university
affiliated with Purdue under the name Purdue Global. As part of the transfer
to Purdue Global, KU transferred students, academic personnel, faculty and
operations, property leases for KU's campuses and learning centers, Kaplan-owned
academic curricula and content related to KU courses. The operations support
activities that Kaplan provides to Purdue Global includes technology support,
help-desk functions, human resources support for transferred faculty and
employees, admissions support, financial aid administration, marketing and
advertising, back-office business functions, certain test preparation and
domestic and international student recruiting services.
The transfer of KU does not include any of the assets of the KU School of
Professional and Continuing Education , which provides professional training and
exam preparation for professional certifications and licensures, nor does it
include the transfer of other Kaplan businesses such as Kaplan Test Preparation
and Kaplan International . Those entities, programs and business lines remain
part of Kaplan. Kaplan received nominal cash consideration upon transfer of the
institutional assets.
Pursuant to the TOSA, Kaplan is not entitled to receive any reimbursement of
costs incurred in providing support functions, or any compensation, unless and
until Purdue Global has first covered all of its operating costs (subject to a
cap). If Purdue Global achieves cost efficiencies in its operations, then Purdue
Global may be entitled to an additional payment equal to 20% of such cost
efficiencies (Purdue Efficiency Payment). In addition, during each of Purdue
Global's first five years, prior to any payment to Kaplan, Purdue Global is
entitled to a priority payment of $10 million per year beyond costs. To the
extent Purdue Global's revenue is insufficient to pay the $10 million per year
priority payment, Kaplan is required to advance an amount to Purdue Global to
cover such insufficiency. At closing, Kaplan paid to Purdue Global an advance in
the amount of $20 million , representing, and in lieu of, priority payments for
Purdue Global's fiscal years ending June 30, 2019 and June 30, 2020 .
To the extent that there are sufficient revenues to pay the Purdue Efficiency
Payment, Purdue Global is reimbursed for its operating costs (subject to a cap)
and the priority payment to Purdue Global is paid. To the extent there is
remaining revenue, Kaplan will then receive reimbursement for its operating
costs (subject to a cap) of providing the support activities. If Kaplan achieves
cost efficiencies in its operations, then Kaplan may be entitled to an
additional payment equal to 20% of such cost efficiencies (Kaplan Efficiency
Payment). If there are sufficient revenues, Kaplan may also receive a fee equal
to 12.5% of Purdue Global's revenue. The fee will increase to 13% beginning with
Purdue Global's fiscal year ending June 30, 2023 and continuing through Purdue
Global's fiscal year ending June 30, 2027 , and then the fee will return to 12.5%
thereafter. Subject to certain limitations, a portion of the fee that is earned
by Kaplan in one year may be carried over and instead paid to Kaplan in
subsequent years.
After the first five years of the TOSA, Kaplan and Purdue Global will be
entitled to payments in a manner consistent with the structure described above,
except that (i) Purdue Global will no longer be entitled to a priority payment
and (ii) to the extent that there are sufficient revenues after payment of the
Kaplan Efficiency Payment (if any), Purdue Global will be entitled to an annual
payment equal to 10% of the remaining revenue after the Kaplan Efficiency
Payment (if any) is paid and subject to certain other adjustments. The TOSA has
a 30-year initial term, which will automatically renew for five-year periods
unless terminated. After the sixth year, Purdue Global has the right to
terminate the agreement upon payment of a termination fee equal to 1.25 times
Purdue Global's revenue for the preceding 12-month period, which payment would
be made pursuant to a 10-year note, and at the election of Purdue Global, it may
receive for no additional consideration certain assets used by Kaplan to provide
the support activities pursuant to the TOSA. At the end of the 30-year term, if
Purdue Global does not renew the TOSA, Purdue Global will be obligated to make a
final payment of 75% of its total revenue earned during the preceding 12-month
period, which payment will be made pursuant to a 10-year note, and at the
election of Purdue Global, it may receive for no additional consideration
certain assets used by Kaplan to provide the support activities pursuant to the
TOSA.
Either party may terminate the TOSA at any time if Purdue Global generates (i)
$25 million in cash operating losses for three consecutive years or (ii)
aggregate cash operating losses greater than $75 million at any point during the
initial term. Operating loss is defined as the amount of revenue Purdue Global
generates minus the sum of (1) Purdue Global's and Kaplan's respective costs in
performing academic and support functions and (2) the $10 million priority
payment to Purdue Global in each of the first five years. Upon termination for
any reason, Purdue Global will retain the assets that Kaplan contributed
pursuant to the Transfer Agreement. Each party also has certain termination
rights in connection with a material default or material breach of the TOSA by
the other party.
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Pursuant to the U.S. Department of Education (ED) requirements, Purdue assumes
responsibility for any liability arising from the operation of the institution.
This assumption will not limit Kaplan's obligation to indemnify Purdue for
pre-closing liabilities under the Transfer Agreement. As a result of the
transfer of KU, Kaplan will no longer own or operate KU or any other institution
participating in student financial aid programs that have been created under
Title IV of the U.S. Federal Higher Education Act of 1965, as amended.
Consequently, Kaplan is no longer responsible for operating KU. However,
pursuant to the TOSA, Kaplan will be performing functions that fall within the
ED's definition of a third-party servicer and will, therefore, assume certain
regulatory responsibilities that require approval by the ED. The third-party
servicer arrangement between Kaplan and Purdue Global is also subject to
information security requirements established by the Federal Trade Commission as
well as all aspects of the Family Educational Rights and Privacy Act. As a
third-party servicer, Kaplan may be required to undergo an annual compliance
audit of its administration of the Title IV functions or services that it
performs.
As a result of the KU Transaction, the Company recorded a pre-tax gain of $4.3
million in the first quarter of 2018. For financial reporting purposes, Kaplan
may receive payment of additional consideration for the sale of the
institutional assets as part of the fee to the extent there are sufficient
revenues available after paying all amounts required by the TOSA. The Company
recorded a $1.4 million and $1.9 million contingent consideration gain related
to the disposition for the years ended December 31, 2019 and December 31, 2018 ,
respectively.
The revenue and operating income related to the KU business disposed of is as
follows:
Year Ended December 31
(in thousands) 2018 2017
Revenue $ 91,526 $ 430,645
Operating income 213 17,869
Sale of Businesses. In November 2019 , Kaplan UK completed the sale of a small
business which was included in Kaplan International . In February 2018 , Kaplan
completed the sale of a small business which was included in Test Preparation.
In September 2018 , Kaplan Australia completed the sale of a small business which
was included in Kaplan International . In February 2017 , GHG completed the sale
of Celtic Healthcare of Maryland . In the fourth quarter of 2017, Kaplan
Australia completed the sale of a small business, which was included in Kaplan
International . As a result of these sales, the Company reported gains (losses)
in other non-operating income (see Note 16).
Other Transactions. During 2019, the Company established GHC One as a vehicle to
invest in a portfolio of healthcare businesses together with a group of senior
managers of GHG. As a holder of preferred units, the Company is obligated to
contribute 95% of the capital required for the acquisition of portfolio
investments with the remaining 5% of the capital coming from the group of senior
managers. The operating agreement of GHC One requires the dissolution of the
entity on March 31, 2026 , at which time the net assets will be distributed to
its members. As a preferred unit holder, the Company will receive an amount up
to its contributed capital plus a preferred annual return of 8% (guaranteed
return) after the group of senior managers has received a redemption of their 5%
interest in net assets (manager return). All distributions in excess of the
manager and guaranteed return will be paid to common unit holders, which
currently comprise the group of senior managers of GHG. The Company may convert
its preferred units to common units at any time after which it will receive 80%
of all distributions in excess of the manager return, with the remaining 20% of
excess distributions going to the group of senior managers as holders of the
other common units.
As of December 31, 2019 , the Company holds a controlling financial interest in
GHC One and therefore includes the assets, liabilities, results of operations
and cash flows in its consolidated financial statements. GHC One acquired CSI
and another small business during 2019. The Company accounts for the minority
ownership of the group of senior managers as a mandatorily redeemable
noncontrolling interest (see Note 2).
In March 2019 , a Hoover minority shareholder put some shares to the Company,
which had a redemption value of $0.6 million . Following the redemption, the
Company owns 98.01% of Hoover. In June 2018 , the Company incurred $6.2 million
of interest expense related to the mandatorily redeemable noncontrolling
interest redemption settlement at GHG. The mandatorily redeemable noncontrolling
interest was redeemed and paid in July 2018 .
4. INVESTMENTS
Money Market Investments. As of
82
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Investments in
As of December 31
(in thousands) 2019 2018
Total cost $ 282,349 $ 282,563
Gross unrealized gains 302,731 216,111
Gross unrealized losses - (2,284 )
Total Fair Value $ 585,080 $ 496,390
At December 31, 2019 and 2018, the Company owned 28,000 shares in Markel
Corporation (Markel) valued at $32.0 million and $29.1 million , respectively.
The Co-Chief Executive Officer of Markel, Mr. Thomas S. Gayner , is a member of
the Company's Board of Directors.
The Company purchased $7.5 million and $42.7 million of marketable equity
securities during 2019 and 2018, respectively. There were no purchases during
2017.
During 2019 and 2018, the gross cumulative realized net gains from the sales of
marketable equity securities were $9.5 million and $37.3 million , respectively.
The total proceeds from such sales were $19.3 million and $66.7 million ,
respectively. There were no sales of marketable equity securities during 2017.
The net gain (loss) on marketable equity securities comprised the following:
Year ended
(in thousands) December 31, 2019 December 31, 2018
Gain (loss) on marketable equity securities, net $ 98,668 $ (15,843 )
Less: Net (gains) losses in earnings from marketable
equity securities sold and donated (2,810 ) 4,271
Net unrealized gains (losses) in earnings from marketable equity securities still held at the end of the year
$ 95,858 $ (11,572 )
Investments in Affiliates. As of December 31, 2019 , the Company held an
approximate 12% interest in Intersection Holdings, LLC , and in several other
affiliates; GHG held a 40% interest in Residential Home Health Illinois, a 42.5%
interest in Residential Hospice Illinois, a 40% interest in the joint venture
formed between GHG and a Michigan hospital, and a 40% interest in the joint
venture formed between GHG and Allegheny Health Network (AHN). For the year
ended December 31, 2019 and 2018, the Company recorded $9.3 million and $12.1
million , respectively, in revenue for services provided to the affiliates of
GHG.
The Company had $25.6 million and $21.2 million in its investment account that
represents cumulative undistributed income in its investments in affiliates as
of December 31, 2019 and 2018, respectively.
In the second quarter of 2019, the Company made an investment in Framebridge , a
custom framing service company based in Washington, DC . The Company accounts for
this investment under the equity method, and included it in Investments in
Affiliates on the Consolidated Balance Sheet. Timothy J. O'Shaughnessy ,
President and Chief Executive Officer of Graham Holdings Company , is a personal
investor in Framebridge and serves as Chairman of the Board.
In February 2019 , the Company sold its interest in Gimlet Media. In connection
with this sale, the Company recorded a gain of $29.0 million in the first
quarter of 2019. The total proceeds from the sale were $33.5 million .
Additionally, Kaplan International Holdings Limited (KIHL) held a 45% interest
in a joint venture formed with York University . KIHL agreed to loan the joint
venture £25 million, of which £16 million was advanced as of December 31, 2017 .
In the second quarter of 2018, KIHL advanced a final amount of £6 million in
additional funding to the joint venture under this agreement, bringing the total
amount advanced to £22 million. The loan is repayable over 25 years at an
interest rate of 7% and the loan is guaranteed by the University of York .
In the third quarter of 2018, the Company recorded a $2.1 million gain in equity
in earnings of affiliates following the receipt of a final distribution upon the
liquidation of HomeHero , a company that managed an online senior home care
marketplace. Also in the third quarter of 2018, the Company recorded a $5.8
million gain in equity in earnings of affiliates due to a funding event that
increased the estimated liquidation value of the Company's investment in one of
its affiliates. As a result of operating losses, in the fourth quarter of 2017,
the Company recorded a $2.8 million write-down on its investment in an
affiliate.
Cost Method Investments. The Company held investments without readily
determinable fair values in a number of equity securities that are accounted for
as cost method investments, which are recorded at cost, less impairment, and
adjusted for observable price changes for identical or similar investments of
the same issuer. The carrying
83
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value of these investments was $38.5 million and $30.6 million as of
December 31, 2019 and 2018, respectively. During the years ended December 31,
2019 and 2018, the Company recorded gains of $5.1 million and $11.7 million ,
respectively, to those equity securities based on observable transactions.
During 2018, the Company recorded impairment losses of $2.7 million to those
equity securities.
5. ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable consist of the following:
As of December 31
(in thousands) 2019 2018
Receivables from contracts with customers, less doubtful
accounts of
$ 595,321 $ 538,021 Other receivables 28,895 44,259$ 624,216 $ 582,280
The changes in allowance for doubtful accounts was as follows:
Additions -
Charged to Balance at
Balance at Costs and End of
(in thousands) Beginning of Period Expenses Deductions Period
2019 $ 14,775 $ 1,706 $ (2,205 ) $ 14,276
2018 $ 22,975 $ 10,209 $ (18,409 ) $ 14,775
2017 $ 26,723 $ 33,830 $ (37,578 ) $ 22,975 Accounts payable and accrued liabilities consist of the following:
As of December 31
(in thousands) 2019 2018
Accounts payable and accrued liabilities
$ 507,701 $ 486,578
Cash overdrafts of
Inventories and contracts in progress consist of the following:
As of December 31
(in thousands) 2019 2018
Raw materials $ 35,119 $ 37,248
Work-in-process 10,775 11,633
Finished goods 58,696 17,861Contracts in progress 4,338 2,735
$ 108,928 $ 69,477 The Company finances all new vehicle inventory through a standardized floor plan facility (the "floor plan facility") withSunTrust Bank . The new vehicle floor plan facility bears interest at variable rates that are based on LIBOR plus 1.15% per annum. The weighted average interest rate for the floor plan facility was 3.3% for year endedDecember 31, 2019 . As ofDecember 31, 2019 , the aggregate capacity under the floor plan facility was$50 million , of which$40.1 million had been utilized, and is included in accounts payable and accrued liabilities in the Consolidated Balance Sheet. Changes in the vehicle floor plan payable are reported as cash flows from financing activities in the Consolidated Statements of Cash Flows. The floor plan facility is collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with respect to the creation of liens and changes in ownership, officers and key management personnel. The Company was in compliance with all of these restrictive covenants as ofDecember 31, 2019 . The floor plan interest expense related to the new vehicle floor plan arrangements is offset by amounts received from manufacturers in the form of floor plan assistance capitalized in inventory and recorded against operating 84 -------------------------------------------------------------------------------- expense in the Consolidated Statements of Operations when the associated inventory is sold. For the year endedDecember 31, 2019 , the Company recognized a reduction in operating expense of$1.8 million related to manufacturer floor plan assistance. 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
As of December 31
(in thousands) 2019 2018
Land $ 17,489 $ 15,965
Buildings 133,189 108,683
Machinery, equipment and fixtures 370,218 382,064 Leasehold improvements
233,842 206,170
Construction in progress 79,963 68,064
834,701 780,946
Less accumulated depreciation (450,031 ) (487,861 )
$ 384,670 $ 293,085 Depreciation expense was$59.3 million ,$56.7 million , and$62.5 million in 2019, 2018 and 2017, respectively. The Company capitalized$2.1 million ,$0.8 million , and$0.3 million of interest related to the construction of buildings in 2019, 2018 and 2017, respectively. The Company recorded property, plant and equipment impairment charges of$0.3 million ,$0.2 million and$1.0 million in 2019, 2018 and 2017, respectively. The Company estimated the fair value of the property, plant and equipment using income and market approaches. 8. LEASES
The components of lease expense were as follows:
Year Ended
(in thousands) December 31, 2019
Operating lease cost $ 104,007
Short-term and month-to-month lease cost 19,267
Variable lease cost 20,582
Sublease income (20,108 )
Total net lease cost $ 123,748
The Company recorded impairment charges of $1.1 million in 2019. The Company
estimated the fair value of the right-of-use assets using an income approach.
In connection with the sale of the KHE Campuses business, the Company is the
guarantor of several leases for which it has established ROU assets and lease
liabilities (see Note 18). Any net lease cost or sublease income related to
these leases is recorded in other non-operating income. The total net lease cost
related to these leases was $0.8 million for the year ended December 31, 2019 .
85
--------------------------------------------------------------------------------Supplemental information related to leases was as follows:
Year ended
(in thousands) December 31, 2019
Cash Flow Information:
Operating cash flows from operating leases (payments) $ 112,671
Right-of-use assets obtained in exchange for new operating
lease liabilities (noncash) 236,714
As of December 31,
2019
Balance Sheet Information:
Lease right-of-use assets $ 526,417
Current lease liabilities $ 92,714
Noncurrent lease liabilities 477,004
Total lease liabilities $ 569,718
Weighted average remaining lease term (years) 10.5
Weighted average discount rate
4.3 %
AtDecember 31, 2019 , maturities of lease liabilities were as follows: (in thousands) December 31, 2019 2020 $ 115,112 2021 98,530 2022 80,255 2023 65,024 2024 51,731 Thereafter 322,674 Total payments 733,326 Less: Imputed interest (163,608 ) Total $ 569,718 As ofDecember 31, 2019 , the Company has entered into operating leases, including educational and other facilities, that have not yet commenced that have minimum lease payments of$17.2 million . These operating leases will commence in fiscal year 2020 with lease terms of one to 10 years. Disclosure related to periods prior to the adoption of new lease accounting guidance AtDecember 31, 2018 , future minimum rental payments under noncancelable operating leases approximate the following: (in thousands)December 31, 2018 2019 $ 101,009 2020 84,945 2021 72,031 2022 53,709 2023 47,091 Thereafter 115,948 Total $ 474,733 Minimum payments have not been reduced by minimum sublease rentals of$66.0 million due in the future under noncancelable subleases. Rent expense under operating lease was approximately$83.4 million and$81.1 million in 2018 and 2017, respectively. Sublease income was approximately$15.6 million and$14.8 million in 2018 and 2017, respectively. 86 --------------------------------------------------------------------------------
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company changed the presentation of its segments in the third quarter of 2019 into the following eight reportable segments:Kaplan International , Higher Education, Test Preparation, Professional (U.S. ),Television Broadcasting , Manufacturing, Healthcare and SocialCode (see Note 19). In the fourth quarter of 2019,Television Broadcasting recorded an intangible asset impairment charge of$7.8 million related toFCC licenses at two of its stations, due to a decline in local market conditions. The fair value of the intangible asset was estimated using an income approach. In the third quarter of 2018, Healthcare recorded an intangible asset impairment charge of$7.9 million following the decision to discontinue the use of the Celtic trade name. The fair value of the intangible asset was estimated using an income approach. In the second quarter of 2017, as a result of a challenging operating environment, theForney reporting unit recorded a goodwill and intangible asset impairment charge of$8.6 million . The Company performed an interim review of the goodwill and other long-lived assets of the reporting unit by utilizing a discounted cash flow model to estimate the fair value. The carrying value of the reporting unit exceeded the estimated fair value, resulting in a goodwill impairment charge for the amount by which the carrying value exceeded the reporting unit's estimated fair value.Forney is included in manufacturing. Amortization of intangible assets for the years endedDecember 31, 2019 , 2018 and 2017, was$53.2 million ,$47.4 million and$41.2 million , respectively. Amortization of intangible assets is estimated to be approximately$53 million in 2020,$47 million in 2021,$41 million in 2022,$34 million in 2023,$24 million in 2024 and$34 million thereafter. The changes in the carrying amount of goodwill, by segment, were as follows: Television Other (in thousands) Education Broadcasting Manufacturing Healthcare SocialCode Businesses Total As of December 31, 2017 Goodwill$ 1,171,812 $ 190,815 $ 220,041 $ 69,409 $ 6,099 $ 7,685 $ 1,665,861 Accumulated impairment losses (350,850 ) - (7,616 ) - - (7,685 ) (366,151 ) 820,962 190,815 212,425 69,409 6,099 - 1,299,710 Acquisitions 20,424 - 11,438 217 9,761 - 41,840 Dispositions (11,191 ) - - - - - (11,191 ) Foreign currency exchange rate changes (32,647 ) - - - - - (32,647 ) As of December 31, 2018 Goodwill 1,128,699 190,815 231,479 69,626 15,860 7,685 1,644,164 Accumulated impairment losses (331,151 ) - (7,616 ) - - (7,685 ) (346,452 ) 797,548 190,815 223,863 69,626 15,860 - 1,297,712 Acquisitions 6,207 - 3,514 28,795 - 45,999 84,515 Dispositions (579 ) - - - - - (579 ) Foreign currency exchange rate changes 6,631 - - - - - 6,631 As of December 31, 2019 Goodwill 1,140,958 190,815 234,993 98,421 15,860 53,684 1,734,731 Accumulated impairment losses (331,151 ) - (7,616 ) - - (7,685 ) (346,452 )$ 809,807 $ 190,815 $ 227,377 $ 98,421 $ 15,860 $ 45,999 $ 1,388,279 87
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The changes in carrying amount of goodwill at the Company's education division
were as follows:
Kaplan Higher Test
(in thousands) International Education Preparation Professional (U.S.) Total
As of December 31, 2017
Goodwill $ 615,861 $ 205,494 $ 166,098 $ 184,359 $ 1,171,812
Accumulated impairment
losses - (131,023 ) (102,259 ) (117,568 ) (350,850 )
615,861 74,471 63,839 66,791 820,962
Acquisitions 62 - 822 19,540 20,424
Dispositions - (11,191 ) - - (11,191 )
Foreign currency exchange
rate changes (32,499 ) (40 ) - (108 ) (32,647 )
As of December 31, 2018
Goodwill 583,424 174,564 166,920 203,791 1,128,699
Accumulated impairment
losses - (111,324 ) (102,259 ) (117,568 ) (331,151 )
583,424 63,240 64,661 86,223 797,548
Acquisitions 6,207 - - - 6,207
Dispositions (579 ) - - - (579 )
Foreign currency exchange
rate changes 6,552 - - 79 6,631
As of December 31, 2019
Goodwill 595,604 174,564 166,920 203,870 1,140,958
Accumulated impairment
losses - (111,324 ) (102,259 ) (117,568 ) (331,151 )
$ 595,604 $ 63,240 $ 64,661 $ 86,302 $ 809,807 Other intangible assets consist of the following:
As of December 31, 2019 As of December 31, 2018
Useful Gross Net Gross Net
Life Carrying Accumulated Carrying Carrying Accumulated Carrying (in thousands)
Range Amount Amortization Amount Amount Amortization Amount
Amortized Intangible
Assets
Student and customer
relationships 2-10 years $ 291,626 $ 144,625 $ 147,001 $ 282,761 $ 114,429 $ 168,332
Trade names and
trademarks 2-10 years 87,190 42,770 44,420 87,285 39,825 47,460
Network affiliation
agreements 10 years 17,400 5,148 12,252 17,400 3,408 13,992
Databases and
technology 3-6 years 30,623 12,850 17,773 27,041 8,471 18,570
Noncompete agreements 2-5 years 1,313 929 384 1,088 838 250
Other 1-8 years 24,800 13,149 11,651 24,530 9,873 14,657
$ 452,952 $ 219,471 $ 233,481 $ 440,105 $ 176,844 $ 263,261
Indefinite-Lived
Intangible Assets
Trade names and
trademarks $ 100,491 $ 80,102
Franchise agreements 28,556 -
FCC licenses 11,000 18,800
Licensure and
accreditation 150 150
$ 140,197 $ 99,052
10. INCOME TAXES
Income before income taxes consists of the following:
Year Ended December 31
(in thousands) 2019 2018 2017
U.S. $ 390,144 $ 257,312 $ 134,276
Non-U.S. 36,335 66,196 48,513
$ 426,479 $ 323,508 $ 182,789 The provision for (benefit from) income taxes consists of the following:
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(in thousands) Current Deferred Total
Year Ended December 31, 2019
U.S. Federal $ 16,500 $ 63,838 $ 80,338
State and Local 2,949 6,630 9,579
Non-U.S. 9,400 (717 ) 8,683
$ 28,849 $ 69,751 $ 98,600
Year Ended December 31, 2018
U.S. Federal $ 46,059 $ 16,718 $ 62,777
State and Local 2,240 (23,809 ) (21,569 )
Non-U.S. 10,924 (32 ) 10,892
$ 59,223 $ (7,123 ) $ 52,100
Year Ended December 31, 2017
U.S. Federal $ 10,743 $ (153,217 ) $ (142,474 )
State and Local 5,930 3,306 9,236
Non-U.S. 10,079 3,459 13,538
$ 26,752 $ (146,452 ) $ (119,700 )
The provision for income taxes differs from the amount of income tax determined
by applying the U.S. Federal statutory rate of 21% in 2019 and 2018, and 35% in
2017, to the income before taxes, as a result of the following:
Year Ended December 31
(in thousands) 2019 2018 2017
(4,064 )
(1,279 ) 6,949
Valuation allowances against state tax benefits, net
of
11,632 (15,767 ) (946 )
Stock-based compensation (1,743 )
(1,731 ) (6,023 )
Valuation allowances against other non-
1,202 1,322 (1,935 )
U.S. Federal Manufacturing Deduction tax benefits -
- (1,329 )
Deferred tax impact of
-
- (153,336 )
Deferred tax benefit on unremitted non-
- - (28,324 )
Other, net 2,012 1,618 1,268
Provision for (Benefit from) Income Taxes $ 98,600 $
52,100
The Tax Cuts and Jobs Act (the Tax Act) was enacted onDecember 22, 2017 , making significant changes to the Internal Revenue Code. Changes as a result of the Tax Act include, but are not limited to, a reduction in the federal corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 ; the imposition of a one-time transition tax on historic earnings of certain non-U.S. subsidiaries that were previously tax deferred; and the imposition of newU.S. taxes on certain non-U.S. earnings. TheU.S. Federal corporate income tax rate change resulted in a one-time, non-cash benefit and corresponding reduction of the Company'sU.S. Federal deferred tax liabilities, net of the state tax impact, of$153.3 million , which was recorded in the fourth quarter of 2017, the period in which the legislation was enacted. The Company did not incur, and did not record, any liability with respect to the one-timeU.S. transition tax imposed by the Tax Act on unremitted non-U.S. subsidiary earnings. The Company estimates that unremitted non-U.S. subsidiary earnings, when distributed, will not be subject to tax except to the extent non-U.S. withholding taxes are imposed. Accordingly, the Company recorded net deferred tax benefits and a corresponding reduction inU.S. deferred tax liabilities of$28.3 million in the fourth quarter of 2017 with respect to unremitted non-U.S. subsidiary earnings. Approximately$1.7 million of deferred tax liabilities remained recorded on the books atDecember 31, 2019 with respect to future non-U.S. withholding taxes the Company estimated may be imposed on future cash distributions. 89 --------------------------------------------------------------------------------
Deferred income taxes consist of the following:
As of December 31
(in thousands) 2019 2018
Employee benefit obligations $ 69,013 $ 68,392
Accounts receivable 3,545
4,449
State income tax loss carryforwards 51,608
34,107
State capital loss carryforwards 307
1,093
U.S. Federal income tax loss carryforwards 1,765
2,100
15,214 15,868
Non-U.S. capital loss carryforwards 3,583 3,609 Leases 84,923 - Other 6,003 14,657 Deferred Tax Assets 236,678 145,262 Valuation allowances (46,243 ) (33,120 ) Deferred Tax Assets, Net$ 190,435 $ 112,142 Prepaid pension cost 345,856 269,412
Unrealized gain on available-for-sale securities 75,709 51,242
92,233 88,798
Property, plant and equipment 16,303 9,997 Leases 74,407 - Non-U.S. withholding tax 1,670 1,726 Deferred Tax Liabilities$ 606,178 $ 421,175 Deferred Income Tax Liabilities, Net$ 415,743 $
309,033
The Company has$849.3 million of state income tax net operating loss carryforwards available to offset future state taxable income. State income tax loss carryforwards, if unutilized, will start to expire approximately as follows: (in millions) 2020$ 15.7 2021 17.5 2022 0.8 2023 7.5 2024 62.0 2025 and after 745.8 Total$ 849.3 The Company has recorded atDecember 31, 2019 ,$51.6 million in deferred state income tax assets, net ofU.S. Federal income tax, with respect to these state income tax loss carryforwards. The Company has established$29.8 million in valuation allowances against these deferred state income tax assets, since the Company has determined that it is more likely than not that some of these state tax losses may not be fully utilized in the future to reduce state taxable income. During 2018, the Company's education division released valuation allowances recorded against state deferred tax assets, net ofU.S. Federal tax, of approximately$20.0 million because the education division generated positive operating results that support the realization of these deferred tax assets. The Company has$8.4 million ofU.S. Federal income tax loss carryforwards obtained as a result of prior stock acquisitions.U.S. Federal income tax loss carryforwards are expected to be fully utilized as follows: (in millions) 2020$ 3.5 2021 1.4 2022 1.1 2023 0.7 2024 0.7 2025 and after 1.0 Total$ 8.4
The Company has established at
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For U.S. Federal income tax purposes, the Company has $0.7 million of foreign
tax credits available to be credited against future U.S. Federal income tax
liabilities. If unutilized, these foreign tax credits will start to expire in
2023. The Company has established at December 31, 2019 , $0.7 million of U.S.
Federal deferred tax assets with respect to these U.S. Federal foreign tax
credit carryforwards, and the Company has recorded a full valuation allowance
against these deferred tax assets since the Company determined that it is more
likely than not these foreign tax credit carryforwards may not be utilized in
the future to reduce U.S. Federal income taxes.
The Company has $57.8 million of non-U.S. income tax loss carryforwards as a
result of operating losses and carryforwards obtained through prior stock
acquisitions that are available to offset future non-U.S. taxable income and has
recorded, with respect to these losses, $15.2 million in non-U.S. deferred
income tax assets. The Company has established $7.4 million in valuation
allowances against the deferred tax assets for the portion of non-U.S. tax
losses that may not be utilized to reduce future non-U.S. taxable income. The
$57.8 million of non-U.S. income tax loss carryforwards consist of $38.5 million
in losses that may be carried forward indefinitely; $13.8 million of losses
that, if unutilized, will expire in varying amounts through 2024; and $5.5
million of losses that, if unutilized, will start to expire after 2024.
The Company has $12.0 million of non-U.S. capital loss carryforwards that may be
carried forward indefinitely and are available to offset future non-U.S. capital
gains. The Company recorded a $3.6 million non-U.S. deferred income tax asset
for these non-U.S. capital loss carryforwards and has established a full
valuation allowance against this non-U.S. deferred tax asset since the Company
has determined that it is more likely than not that the capital loss
carryforwards may not be utilized to reduce taxable income in the future.
Deferred tax valuation allowances and changes in deferred tax valuation
allowances were as follows:
Balance at Balance at
Beginning of Tax Expense and End of
(in thousands) Period Revaluation Deductions Period
Year ended
December 31, 2019 $ 33,120 $ 14,512 $ (1,389 ) $ 46,243
December 31, 2018 $ 48,742 $ 4,413 $ (20,035 ) $ 33,120
December 31, 2017 $ 41,319 $ 7,423 $ - $ 48,742
The Company has established $34.0 million in valuation allowances against
deferred state tax assets recognized, net of U.S. Federal tax. As stated above,
approximately $29.8 million of the valuation allowances, net of U.S. Federal
income tax, relate to state income tax loss carryforwards. In most instances,
the Company has established valuation allowances against deferred state income
tax assets without considering potentially offsetting deferred tax liabilities
established with respect to prepaid pension cost and goodwill. Prepaid pension
cost and goodwill have not been considered a source of future taxable income for
realizing those deferred state tax assets recognized since these temporary
differences are not likely to reverse in the foreseeable future. However,
certain deferred state tax assets have an indefinite life. As a result, the
Company has considered deferred tax liabilities for prepaid pension cost and
goodwill as a source of future taxable income for realizing those deferred state
tax assets. The valuation allowances established against deferred state income
tax assets may increase or decrease within the next 12 months, based on
operating results or the market value of investment holdings. The Company will
monitor future results on a quarterly basis to determine whether the valuation
allowances provided against deferred state tax assets should be increased or
decreased as future circumstances warrant. The Company's education division
released valuation allowances against state deferred tax assets of $20.0 million
during 2018, as the education division generated positive operating results that
support the realization of these deferred tax assets.
The Company has established $11.4 million in valuation allowances against
non-U.S. deferred tax assets, and, as stated above, $7.4 million of the non-U.S.
valuation allowances relate to non-U.S. income tax loss carryforwards and $3.6
million relate to non-U.S. capital loss carryforwards. Valuation allowances
established against non-U.S. deferred tax assets are recorded at the education
division and other businesses. These non-U.S. valuation allowances may increase
or decrease within the next 12 months, based on operating results. As a result,
the Company is unable to estimate the potential tax impact, given the uncertain
operating environment. The Company will monitor future education division and
other businesses' operating results and projected future operating results on a
quarterly basis to determine whether the valuation allowances provided against
non-U.S. deferred tax assets should be increased or decreased as future
circumstances warrant.
The Tax Act generally provides a 100% dividends received deduction for
distributions from non-U.S. subsidiaries after December 31, 2017. The Tax Act
established a new regime, the Global Intangible Low Taxed Income (GILTI) tax,
that may currently subject to U.S. tax the operations of non-U.S. subsidiaries.
The GILTI tax is imposed annually based on all current year non-U.S. operations
starting January 1, 2018. The Company has elected to record the GILTI tax regime
as a periodic tax expense for book purposes. Annually, the Company may elect to
credit or deduct foreign taxes for U.S. Federal tax purposes. For the year ended
December 31, 2019, the Company
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plans to elect to credit foreign taxes. The GILTI tax recorded, net of foreign
taxes credited, for the years ended December 31, 2019 and 2018 is not material.
U.S. Federal and state tax liabilities may be recorded if the investment in
non-U.S. subsidiaries become held for sale instead of being held indefinitely,
but calculation of the tax due is not practicable.
The 2016 U.S. Federal tax return and subsequent years remain open to IRS
examination. The Company files income tax returns with the U.S. Federal
government and in various state, local and non-U.S. governmental jurisdictions,
with the consolidated U.S. Federal tax return filing considered the only major
tax jurisdiction.
The Company endeavors to comply with tax laws and regulations where it does
business, but cannot guarantee that, if challenged, the Company's interpretation
of all relevant tax laws and regulations will prevail and that all tax benefits
recorded in the financial statements will ultimately be recognized in full.
The following summarizes the Company's unrecognized tax benefits, excluding
interest and penalties, for the respective periods:
Year Ended December 31
(in thousands) 2019 2018 2017
Beginning unrecognized tax benefits $ 2,483 $ 17,331 $ 17,331 Increases related to current year tax positions - - - Increases related to prior year tax positions 1,072 500 - Decreases related to prior year tax positions -
(12,187 ) - Decreases related to settlement with tax authorities (1,291 ) -
-
Decreases due to lapse of applicable statutes of
limitations (692 ) (3,161 ) -
Ending unrecognized tax benefits $ 1,572 $ 2,483 $ 17,331
The unrecognized tax benefits relate to state income tax filing positions applicable to the 2012-2014 tax periods. In making these determinations, the Company presumes that taxing authorities pursuing examinations of the Company's compliance with tax law filing requirements will have full knowledge of all relevant information, and, if necessary, the Company will pursue resolution of disputed tax positions by appeals or litigation. Although the Company cannot predict the timing of resolution with tax authorities, the Company estimates that some of the unrecognized tax benefits may change in the next 12 months due to settlement with the tax authorities. The Company expects that a $1.6 million state tax benefit, net of $0.3 million federal tax expense, will reduce the effective tax rate in the future if the unrecognized tax benefits are recognized. The Company classifies interest and penalties related to uncertain tax positions as a component of interest and other expenses, respectively. As of December 31, 2019, the Company has accrued $0.8 million of interest related to the unrecognized tax benefits. The Company has not accrued any penalties related to the unrecognized tax benefits. 11. DEBT
The Company's borrowings consist of the following:
As of December 31
(in thousands) 2019 2018
5.75% unsecured notes due June 1, 2026 (1) $ 395,393 $ 394,675
U.K. Credit facility (2) 78,650 82,366
SunTrust commercial note 27,500 -
Pinnacle Bank term loan 11,203 -
Other indebtedness 83 96
Total Debt 512,829 477,137
Less: current portion (82,179 ) (6,360 )
Total Long-Term Debt $ 430,650 $ 470,777
____________(1) The carrying value is net of $4.6 million and $5.3 million of unamortized
debt issuance costs as of December 31, 2019 and 2018, respectively.
(2) The carrying value is net of $0.1 million and $0.2 million of unamortized
debt issuance costs as of December 31, 2019 and 2018, respectively.
The Company had no borrowings outstanding under the revolving credit facility as
of December 31, 2019 and 2018. The Company's other indebtedness at December 31,
2019 and December 31, 2018, is at an interest rate of 2% and matures in 2026.
On December 2, 2019, a subsidiary of GHG entered into a Loan & Security
Agreement with Pinnacle Bank for a Term Loan of $11.25 million and a two-year
Line of Credit for $2.25 million. The Term Loan is payable over a five-
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year period in monthly installments, plus accrued and unpaid interest, due on
the second of each month, beginning on January 2, 2020, with the remaining
balance due on December 2, 2024. The Term Loan bears interest at 4.35% per
annum. The Term Loan can be redeemed at any time, in whole or in part, without
any premium or penalty. Borrowings on the Line of Credit bear interest at a rate
per annum of LIBOR plus an applicable interest rate of 2.75%, determined on a
monthly basis. Under the credit agreement, the borrower is required to pay a
commitment fee on a quarterly basis, at the rate per annum equal to 0.25% on the
average daily unused portion of the credit facility. The borrower may use the
proceeds of the facility for working capital and general corporate purposes. Any
outstanding borrowings must be repaid on or prior to the final termination date.
The agreement contains terms and conditions, including remedies in the event of
a default.
On January 31, 2019, the Company's automotive subsidiary entered into a
Commercial Note with SunTrust Bank in an aggregate principal amount of $30
million. The Commercial Note is payable over a 10 year period in monthly
installments of $0.25 million, plus accrued and unpaid interest, due on the
first of each month, with a final payment on January 31, 2029. The Commercial
Note bears interest at LIBOR plus an applicable interest rate of 1.75% or 2% per
annum, in each case determined on a quarterly basis based upon the automotive
subsidiary's Adjusted Leverage Ratio. The Commercial Note contains terms and
conditions, including remedies in the event of a default by the automotive
subsidiary. On the same date, the Company's automotive subsidiary entered into
an interest rate swap agreement with a total notional value of $30 million and a
maturity date of January 31, 2029. The interest rate swap agreement will pay the
automotive subsidiary variable interest on the $30 million notional amount at
the one-month LIBOR, and the automotive subsidiary will pay counterparties a
fixed rate of 2.7%, effectively resulting in a total fixed interest rate of 4.7%
on the outstanding borrowings at the current applicable margin of 2.0%. The
interest rate swap agreement was entered into to convert the variable rate
borrowing under the Commercial Note into a fixed rate borrowing. Based on the
terms of the interest rate swap agreement and the underlying borrowing, the
interest rate swap was determined to be effective and thus qualifies as a cash
flow hedge. As such, changes in the fair value of the interest rate swap are
recorded in other comprehensive income on the accompanying Consolidated Balance
Sheets until earnings are affected by the variability of cash flows.
On May 30, 2018, the Company issued $400 million senior unsecured fixed-rate
notes due June 1, 2026 (the Notes). The Notes are guaranteed, jointly and
severally, on a senior unsecured basis, by certain of the Company's existing and
future domestic subsidiaries, as described in the terms of the indenture, dated
as of May 30, 2018 (the Indenture). The Notes have a coupon rate of 5.75% per
annum, payable semi-annually on June 1 and December 1. The Company may redeem
the Notes in whole or in part at any time at the respective redemption prices
described in the Indenture.
On June 29, 2018, the Company used the net proceeds from the sale of the Notes,
together with cash on hand, to redeem the $400 million of 7.25% notes due
February 1, 2019. The Company incurred $11.4 million in debt extinguishment
costs in relation to the early termination of the 7.25% notes.
In combination with the issuance of the Notes, the Company and certain of the
Company's domestic subsidiaries named therein as guarantors entered into an
amended and restated credit agreement providing for a U.S. $300 million
five-year revolving credit facility (the Revolving Credit Facility) with each of
the lenders party thereto, certain of the Company's foreign subsidiaries from
time to time party thereto as foreign borrowers, Wells Fargo Bank, N.A ., as
Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A ., as Syndication
Agent, and HSBC Bank USA , N.A. and Bank of America, N.A . as Documentation Agents
(the Amended and Restated Credit Agreement), which amends and restates the
Company's existing Five Year Credit Agreement, dated as of June 29, 2015, among
the Company, certain of its domestic subsidiaries as guarantors, the several
lenders from time to time party thereto, Wells Fargo Bank, N.A ., as
Administrative Agent and JPMorgan Chase Bank, N.A ., as Syndication Agent (the
Existing Credit Agreement). The Amended and Restated Credit Agreement amends the
Existing Credit Agreement to (i) extend the maturity of the Revolving Credit
Facility to May 30, 2023, unless the Company and the lenders agree to further
extend the term, (ii) increase the aggregate principal amount of the Revolving
Credit Facility to U.S. $300 million, consisting of a U.S. Dollar tranche of
U.S. $200 million for borrowings in U.S. Dollars and a multicurrency tranche
equivalent to U.S. $100 million for borrowings in U.S. Dollars and certain
foreign currencies, (iii) provide for borrowings under the Revolving Credit
Facility in U.S. Dollars and certain other foreign currencies specified in the
Amended and Restated Credit Agreement, (iv) permit certain foreign subsidiaries
of the Company to be added to the Amended and Restated Credit Agreement as
foreign borrowers thereunder and (v) effect certain other modifications to the
Existing Credit Agreement.
Under the Amended and Restated Credit Agreement, the Company is required to pay
a commitment fee on a quarterly basis, based on the Company's leverage ratio, of
between 0.15% and 0.25% of the amount of the average daily unused portion of the
Revolving Credit Facility. Any borrowings under the Amended and Restated Credit
Agreement are made on an unsecured basis and bear interest at the Company's
option, either at (a) a fluctuating interest rate equal to the highest of Wells
Fargo's prime rate, 0.5 percent above the Federal funds rate or the one-month
Eurodollar rate plus 1%, or (b) the Eurodollar rate for the applicable currency
and interest period as defined in the Amended and Restated Credit Agreement,
which is generally a periodic rate equal to LIBOR, CDOR, BBSY or SOR, as
applicable, in the case of each of clauses (a) and (b) plus an applicable margin
that depends on the
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Company's consolidated debt to consolidated adjusted EBITDA (as determined
pursuant to the Amended and Restated Credit Agreement, Total Net Leverage
Ratio). The Company and its foreign subsidiaries may draw on the Revolving
Credit Facility for general corporate purposes. Any outstanding borrowings must
be repaid on or prior to the final termination date. The Amended and Restated
Credit Agreement contains terms and conditions, including remedies in the event
of a default by the Company, typical of facilities of this type and requires the
Company to maintain a Total Net Leverage Ratio of not greater than 3.5 to 1.0
and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the
ratio of consolidated adjusted EBITDA to consolidated interest expense as
determined pursuant to the Amended and Restated Credit Agreement. As of
December 31, 2019, the Company is in compliance with all financial covenants.
On July 14, 2016, Kaplan entered into a credit agreement (the Kaplan Credit
Agreement) among Kaplan International Holdings Limited , as borrower, the lenders
party thereto, HSBC BANK PLC as Facility Agent, and other agents party thereto.
The Kaplan Credit Agreement provides for a four-year credit facility in an
aggregate principal amount of £75 million. Borrowings bear interest at a rate
per annum of LIBOR plus an applicable interest rate margin between 1.25% and
1.75%, in each case determined on a quarterly basis by reference to a pricing
grid based upon the Company's total leverage ratio. The Kaplan Credit Agreement
requires that 6.66% of the amount of the loan be repaid on the first three
anniversaries of funding, with the remaining balance due on July 1, 2020. The
Kaplan Credit Agreement contains terms and conditions, including remedies in the
event of a default by the Company, typical of facilities of this type and
requires the Company to maintain a leverage ratio of not greater than 3.5 to 1.0
and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the
ratio of consolidated adjusted EBITDA to consolidated interest expense as
determined pursuant to the Kaplan Credit Agreement. As of December 31, 2019, the
Company is in compliance with all financial covenants.
On July 25, 2016, Kaplan borrowed £75 million under the Kaplan Credit Agreement.
On the same date, Kaplan entered into an interest rate swap agreement with a
total notional value of £75 million and a maturity date of July 1, 2020. The
interest rate swap agreement will pay Kaplan variable interest on the £75
million notional amount at the three-month LIBOR, and Kaplan will pay the
counterparties a fixed rate of 0.51%, effectively resulting in a total fixed
interest rate of 2.01% on the outstanding borrowings at the current applicable
margin of 1.50%. The interest rate swap agreement was entered into to convert
the variable rate British pound borrowing under the Kaplan Credit Agreement into
a fixed rate borrowing. The Company provided a guarantee on any borrowings under
the Kaplan Credit Agreement. Based on the terms of the interest rate swap
agreement and the underlying borrowing, the interest rate swap agreement was
determined to be effective and thus qualifies as a cash flow hedge. As such,
changes in the fair value of the interest rate swap are recorded in other
comprehensive income on the accompanying Consolidated Balance Sheets until
earnings are affected by the variability of cash flows.
During 2019 and 2018, the Company had average borrowings outstanding of
approximately $500.6 million and $517.2 million, respectively, at average annual
interest rates of approximately 5.1% and 5.6%, respectively. The Company
incurred net interest expense of $23.6 million, $32.5 million and $27.3 million
during 2019, 2018 and 2017, respectively.
The Company recorded interest income of $0.1 million for the year ended December
31, 2019, to adjust the fair value of the mandatorily redeemable noncontrolling
interest. The fair value of the mandatorily redeemable noncontrolling interest
was based on the fair value of the underlying subsidiaries owned by GHC One (see
Note 3), after taking into account any debt and other noncontrolling interests
of its subsidiary investments. The fair value of the owned subsidiaries is
determined by reference to either a discounted cash flow or EBITDA multiple,
which approximates fair value (Level 3 fair value assessment). In June 2018, the
Company incurred $6.2 million of interest expense related to the mandatorily
redeemable noncontrolling interest redemption settlement at GHG (see Note 3).
The fair value of the mandatorily redeemable noncontrolling interest is based on
the redemption value resulting from a negotiated settlement. The Company
recorded interest income of $2.3 million for the year ended December 31, 2017,
to adjust the fair value of the mandatorily redeemable noncontrolling interest
(see Note 3). The fair value of the mandatorily redeemable noncontrolling
interest was based on an EBITDA multiple, adjusted for working capital and other
items, which approximates fair value (Level 3 fair value assessment).
At December 31, 2019, and 2018, the fair value of the Company's 5.75% unsecured
notes, based on quoted market prices (Level 2 fair value assessment), totaled
$427.7 million and $406.7 million, respectively, compared with the carrying
amount of $395.4 million and $394.7 million. The carrying value of the Company's
other unsecured debt at December 31, 2019, approximates fair value.
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--------------------------------------------------------------------------------12. FAIR VALUE MEASUREMENTS
The Company's financial assets and liabilities measured at fair value on a recurring basis were as follows:
As of December 31, 2019
(in thousands) Level 1 Level 2 Level 3 Total
Assets
Money market investments(1) $ - $ 45,150 $ - $ 45,150
Marketable equity securities(2) 585,080 - - 585,080
Other current investments(3) 8,843 6,044 - 14,887
Interest rate swap (4) - 131 - 131
Total Financial Assets $ 593,923 $ 51,325 $ - $ 645,248
Liabilities
Deferred compensation plan liabilities(5) $ - $ 34,674 $ - $ 34,674
Interest rate swap(6) - 1,119 - 1,119
Foreign exchange swap(7) - 273 - 273
Mandatorily redeemable noncontrolling interest(8) - - 829 829
Total Financial Liabilities $ - $ 36,066 $ 829 $ 36,895
As of December 31, 2018
(in thousands) Level 1 Level 2 Total
Assets
Money market investments (1) $ - $ 75,500 $ 75,500
Marketable equity securities (2) 496,390 - 496,390
Other current investments (3) 11,203 6,988 18,191
Interest rate swap (4) - 369 369
Total Financial Assets $ 507,593 $ 82,857 $ 590,450
LiabilitiesDeferred compensation plan liabilities (5) $ - $ 36,080 $ 36,080
____________
(1) The Company's money market investments are included in cash and cash
equivalents and the value considers the liquidity of the counterparty.
(2) The Company's investments in marketable equity securities are held in common
shares of
Price quotes for these shares are readily available.
(3) Includes
deposits. These investments are valued using a market approach based on the
quoted market prices of the security or inputs that include quoted market
prices for similar instruments and are classified as either Level 1 or Level
2 in the fair value hierarchy.
(4) Included in Other current assets at December 31, 2019 and Deferred Charges
and Other Assets at December 31, 2018. The Company utilized a market approach
model using the notional amount of the interest rate swap multiplied by the
observable inputs of time to maturity and market interest rates.
(5) Includes Graham Holdings Company's Deferred Compensation Plan and
supplemental savings plan benefits under the
Supplemental Executive Retirement Plan, which are included in accrued
compensation and related benefits. These plans measure the market value of a
participant's balance in a notional investment account that is comprised
primarily of mutual funds, which are based on observable market prices.
However, since the deferred compensation obligations are not exchanged in an
active market, they are classified as Level 2 in the fair value hierarchy.
Realized and unrealized gains (losses) on deferred compensation are included
in operating income.
(6) Included in Other Liabilities. The Company utilized a market approach model
using the notional amount of the interest rate swap multiplied by the
observable inputs of time to maturity and market interest rates.
(7) Included in Accounts payable and accrued liabilities, and valued based on a
valuation model that calculates the differential between the contract price
and the market-based forward rate.
(8) The fair value of the mandatorily redeemable noncontrolling interest is based
on the fair value of the underlying subsidiaries owned by GHC One (see Note
3), after taking into account any debt and other noncontrolling interests of
its subsidiary investments. The fair value of the owned subsidiaries is
determined by reference to either a discounted cash flow or EBITDA multiple,
which approximates fair value.
For the years ended December 31, 2019 and 2018, the Company recorded gains of
$5.1 million and $11.7 million, respectively, to equity securities that are
accounted for as cost method investments based on observable transactions for
identical or similar investments of the same issuer.
For the years ended December 31, 2019, 2018 and 2017, the Company recorded
goodwill and other long-lived asset impairment charges of $9.2 million, $8.1
million and $9.6 million, respectively. The remeasurement of the goodwill and
other long-lived assets is classified as a Level 3 fair value assessment due to
the significance of unobservable inputs developed in the determination of the
fair value. The Company used a discounted cash flow model to determine the
estimated fair value of the reporting unit and other long-lived assets. A market
value approach was also utilized to supplement the discounted cash flow model.
The Company made estimates and assumptions regarding future cash flows, discount
rates, long-term growth rates and market values to determine the reporting unit
and other long-lived assets' estimated fair value.
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--------------------------------------------------------------------------------13. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company generated 76% of its revenue fromU.S. domestic sales in 2019 and 2018. The remaining 24% of revenue was generated from non-U.S. sales. In 2019 and 2018, the Company recognized 73% and 80%, respectively, of its revenue over time as control of the services and goods transferred to the customer. The remaining 27% and 20%, respectively, of revenue was recognized at a point in time, when the customer obtained control of the promised goods. The determination of the method by which the Company measures its progress towards the satisfaction of its performance obligations requires judgment and is described in the Summary of Significant Accounting Policies (Note 2). Contract Assets. As of December 31, 2019, the Company recognized a contract asset of $5.3 million related to a contract at aKaplan International business, which is included in Deferred Charges and Other Assets. The Company expects to recognize an additional $11.0 million related to this performance obligation over the next 2 years. Deferred Revenue. The Company records deferred revenue when cash payments are received or due in advance of the Company's performance, including amounts which are refundable. The following table presents the change in the Company's deferred revenue balance during the year ended December 31, 2019: As of December 31, December 31, % (in thousands) 2019 2018 Change Deferred revenue $ 359,048 $ 311,214 15 The majority of the change in the deferred revenue balance is related to current year acquisitions and increased student enrollments at theKaplan International division. During the year ended December 31, 2019, the Company recognized $281.7 million from the Company's deferred revenue balance as of December 31, 2018. Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of December 31, 2019, KTP's deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $8.3 million. KTP expects to recognize 66% of this revenue over the next twelve months and the remainder thereafter. Costs to Obtain a Contract. The following table presents changes in the Company's costs to obtain a contract asset: Balance Balance at Costs Associated Less: Costs at Beginning with New Amortized During End of (in thousands) of Year Contracts the Year Other Year 2019 $ 21,311 $ 66,607 $ (57,741 ) $ 843 $ 31,020 2018 $ 16,043 $ 55,664 $ (49,284 ) $ (1,112 ) $ 21,311 The majority of other activity was related to currency translation adjustments in both 2019 and 2018. 14. CAPITAL STOCK, STOCK AWARDS AND STOCK OPTIONS Capital Stock. Each share of Class A common stock and Class B common stock participates equally in dividends. The Class B stock has limited voting rights and as a class has the right to elect 30% of the Board of Directors; the Class A stock has unlimited voting rights, including the right to elect a majority of the Board of Directors. During 2019, 2018, and 2017 the Company purchased a total of 3,392, 199,023, and 88,361 shares, respectively, of its Class B common stock at a cost of approximately $2.1 million, $118.0 million, and $50.8 million, respectively. On November 9, 2017, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock. The Company did not announce a ceiling price or time limit for the purchases. The authorization included 163,237 shares that remained under the previous authorization. At December 31, 2019, the Company had remaining authorization from the Board of Directors to purchase up to 270,263 shares of Class B common stock. Stock Awards. In 2012, the Company adopted an incentive compensation plan (the 2012 Plan), which, among other provisions, authorizes the awarding of Class B common stock to key employees in the form of stock awards, stock options and other awards involving the actual transfer of shares. All stock awards, stock options and other awards involving the actual transfer of shares issued subsequent to the adoption of this plan are covered under this incentive compensation plan. Stock awards made under the 2012 Plan are primarily subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant's 96 -------------------------------------------------------------------------------- employment terminates before the end of a specified period of service to the Company. The number of Class B common shares authorized for issuance under the 2012 Plan is 772,588 shares. At December 31, 2019, there were 559,221 shares reserved for issuance under the 2012 incentive compensation plan. Of this number, 135,071 shares were subject to stock awards and stock options outstanding, and 424,150 shares were available for future awards. Activity related to stock awards under the 2012 incentive compensation plan for the year ended December 31, 2019 was as follows: Number of Shares Average Grant-Date Fair Value Beginning of year, unvested 32,200 $ 747.18 Awarded 16,802 639.98 Vested (15,987 ) 898.85 Forfeited (3,875 ) 879.98 End of Year, unvested 29,140 584.50 For the share awards outstanding at December 31, 2019, the aforementioned restriction will lapse in 2020 for 250 shares, in 2021 for 12,975 shares and in 2023 for 15,915 shares. Stock-based compensation costs resulting from Company stock awards were $4.2 million, $4.4 million and $8.1 million in 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $9.4 million of total unrecognized compensation expense related to these awards. That cost is expected to be recognized on a straight-line basis over a weighted average period of 2.1 years. Stock Options. The Company's 2003 employee stock option plan reserves 1,900,000 shares of the Company's Class B common stock for options to be granted under the plan. The purchase price of the shares covered by an option cannot be less than the fair value on the grant date. Options generally vest over four years and have a maximum term of ten years. At December 31, 2019, there were 77,258 shares reserved for issuance under this stock option plan, which were all subject to options outstanding. Stock options granted under the 2012 Plan cannot be less than the fair value on the grant date, generally vest over six years and have a maximum term of ten years. In 2017, a grant was issued that vests over six years. Activity related to options outstanding for the year ended December 31, 2019 was as follows: Number of Shares Average Option Price Beginning of year 184,932 $ 566.55 Granted - - Exercised (1,743 ) 276.18 Expired or forfeited - - End of Year 183,189 569.31 Of the shares covered by options outstanding at the end of 2019, 160,728 are now exercisable; 17,334 will become exercisable in 2020; 4,459 will become exercisable in 2021; 333 will become exercisable in 2022; and 335 will become exercisable in 2023. For 2019, 2018 and 2017, the Company recorded expense of $2.0 million related to stock options each year. Information related to stock options outstanding and exercisable at December 31, 2019, is as follows: Options Outstanding Options Exercisable Weighted Weighted Average Weighted Average Weighted Shares Remaining Average Shares Remaining Average Outstanding Contractual Exercise Exercisable Contractual Exercise Range of Exercise Prices at 12/31/2019 Life (years) Price at 12/31/2019 Life (years) Price $244 1,931 2.9 $ 243.85 1,931 2.9 $ 243.85 325 77,258 1.1 325.26 77,258 1.1 325.26 719 77,258 4.8 719.15 64,381 4.8 719.15 805-872 26,742 6.0 865.02 17,158 5.9 865.77 183,189 3.4 569.31 160,728 3.2 539.76 At December 31, 2019, the intrinsic value for all options outstanding, exercisable and unvested was $25.0 million, $25.0 million and $0.0 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of the Company's stock was $638.99 at December 31, 2019. At December 31, 2019, there were 22,461 unvested options related to this 97 -------------------------------------------------------------------------------- plan with an average exercise price of $780.81 and a weighted average remaining contractual term of 5.4 years. At December 31, 2018, there were 39,794 unvested options with an average exercise price of $770.29 and a weighted average remaining contractual term of 6.3 years. As of December 31, 2019, total unrecognized stock-based compensation expense related to stock options was $2.3 million, which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.4 years. There were 1,743 options exercised during 2019. The total intrinsic value of options exercised during 2019 was $0.6 million; a tax benefit from these stock option exercises of $0.2 million was realized. There were 588 options exercised during 2018. The total intrinsic value of options exercised during 2018 was $0.2 million; a tax benefit from these stock option exercises of $0.1 million was realized. There were 3,476 options exercised during 2017. The total intrinsic value of options exercised during 2017 was $0.7 million; a tax benefit from these option exercises of $0.3 million was realized. During 2017, the Company granted 2,000 options at an exercise price above the fair market value of its common stock at the date of grant. The weighted average grant-date fair value of options granted during 2017 was $120.47. No options were granted during 2019 or 2018. The fair value of options at date of grant was estimated using the Black-Scholes method utilizing the following assumptions: 2017 Expected life (years) 8 Interest rate 2.28% Volatility 26.93% Dividend yield 0.85% The Company also maintains a stock option plan at Kaplan. Under the provisions of this plan, options are issued with an exercise price equal to the estimated fair value of Kaplan's common stock, and options vest ratably over the number of years specified (generally four to five years) at the time of the grant. Upon exercise, an option holder may receive Kaplan shares or cash equal to the difference between the exercise price and the then fair value. At December 31, 2019, a Kaplan senior manager holds 7,206 Kaplan restricted shares. The fair value of Kaplan's common stock is determined by the Company's compensation committee of the Board of Directors, and in January 2020, the committee set the fair value price at $1,400 per share. No options were awarded during 2019, 2018, or 2017; no options were exercised during 2019, 2018 or 2017; and no options were outstanding at December 31, 2019. Kaplan recorded a stock compensation credit of $1.3 million in 2019, and expense of $0.5 million and $1.2 million in 2018 and 2017, respectively. At December 31, 2019, the Company's accrual balance related to the Kaplan restricted shares totaled $10.1 million. There were no payouts in 2019, 2018 or 2017. Earnings Per Share. The Company's unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator. 98 --------------------------------------------------------------------------------
The following reflects the Company's net income and share data used in the basic and diluted earnings per share computations using the two-class method:
Year Ended December 31
(in thousands, except per share amounts) 2019 2018 2017
Numerator:
Numerator for basic earnings per share:
Net income attributable to Graham Holdings Company
common stockholders $ 327,855 $ 271,206 $ 302,044
Less: Dividends paid-common stock outstanding and
unvested restricted shares (29,553 ) (28,617 ) (28,329 )
Undistributed earnings 298,302 242,589 273,715
Percent allocated to common stockholders 99.45 % 99.39 % 99.06 %
296,665 241,115 271,150
Add: Dividends paid-common stock outstanding 29,387 28,423 28,060
Numerator for basic earnings per share 326,052 269,538 299,210 Add: Additional undistributed earnings due to dilutive stock options
13 10 17
Numerator for diluted earnings per share $ 326,065 $ 269,548 $ 299,227
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 5,285 5,333 5,516
Add: Effect of dilutive stock options 42 37 36
Denominator for diluted earnings per share 5,327 5,370 5,552
Graham Holdings Company Common Stockholders:
Basic earnings per share $ 61.70 $ 50.55 $ 54.24
Diluted earnings per share $ 61.21 $ 50.20 $ 53.89
Diluted earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:
Year Ended December 31
(in thousands) 2019 2018 2017
Weighted average restricted stock 12 23 30
The 2019, 2018 and 2017 diluted earnings per share amounts exclude the effects
of 104,000 stock options outstanding, as their inclusion would have been
antidilutive due to a market condition. The 2018 and 2017 diluted earnings per
share amounts also exclude the effects of 2,650 and 5,250 restricted stock
awards, respectively, as their inclusion would have been antidilutive due to a
performance condition.
In 2019, 2018 and 2017, the Company declared regular dividends totaling $5.56,
$5.32 and $5.08 per share, respectively.
15. PENSIONS AND OTHER POSTRETIREMENT PLANS
The Company maintains various pension and incentive savings plans and
contributed to multiemployer plans on behalf of certain union-represented
employee groups. Most of the Company's employees are covered by these plans. The
Company also provides healthcare and life insurance benefits to certain retired
employees. These employees become eligible for benefits after meeting age and
service requirements.
The Company uses a measurement date of December 31 for its pension and other
postretirement benefit plans.
In December 2019, the Company purchased an irrevocable group annuity contract
from an insurance company for $216.8 million to settle $212.1 million of the
outstanding defined benefit pension obligation related to certain retirees and
beneficiaries. The purchase of the group annuity contract was funded from the
assets of the Company's pension plan. As a result of this transaction, the
Company was relieved of all responsibility for these pension obligations and the
insurance company is now required to pay and administer the retirement benefits
owed to approximately 3,800 retirees and beneficiaries, with no change to the
amount, timing or form of monthly retirement benefit payments. As a result, the
Company recorded a one-time settlement gain of $91.7 million.
On March 22, 2018, the Company eliminated the accrual of pension benefits for
certain Kaplan University employees related to their future service. As a
result, the Company remeasured the accumulated and projected benefit obligation
of the pension plan as of March 22, 2018, and the Company recorded a curtailment
gain in the first quarter of 2018. The new measurement basis was used for the
recognition of the Company's pension benefit following the remeasurement. The
curtailment gain on the Kaplan University transaction is included in the gain on
the Kaplan University transaction and reported in Other income, net on the
Consolidated Statements of Operations.
99
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On October 31, 2018, the Company made certain changes to the other
postretirement plans, including changes in eligibility, cost sharing and
surviving spouse coverage. As a result, the Company remeasured the accumulated
and projected benefit obligation of the other postretirement plans as of October
31, 2018, and the Company recorded a curtailment gain in the fourth quarter of
2018. The new measurement basis was used for the recognition of the Company's
other postretirement plans cost following the remeasurement.
Defined Benefit Plans. The Company's defined benefit pension plans consist of
various pension plans and a Supplemental Executive Retirement Plan (SERP)
offered to certain executives of the Company.
In the second quarter of 2019, the Company offered a Separation Incentive
Program (SIP) for certain Kaplan employees, which was funded from the assets of
the Company's pension plan. The Company recorded $6.4 million in expense related
to the SIP for 2019.
In the fourth quarter of 2018, the Company offered certain terminated
participants with a vested pension benefit an opportunity to take their benefits
in the form of a lump sum or an annuity. Most of the participants that elected a
lump sum benefit under the program were paid in December 2018. Additional lump
sum payments were paid in early 2019. The Company recorded a $26.9 million
settlement gain related to the bulk lump sum pension program offering.
In the fourth quarter of 2017, the Company recorded $0.9 million related to a
SIP for certain Kaplan employees, which was funded from the assets of the
Company's pension plan. In the third quarter of 2017, the Company recorded $0.9
million related to a SIP for certain Forney employees, which was funded from the
assets of the Company's pension plan.
The following table sets forth obligation, asset and funding information for the
Company's defined benefit pension plans:
Pension Plans
As of December 31
(in thousands) 2019 2018
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,116,569 $ 1,286,694
Service cost 20,422 18,221
Interest cost 46,821 46,787
Amendments 5,725 7,183
Actuarial loss (gain) 124,285 (81,851 )
Benefits paid (64,354 ) (63,852 )
Special termination benefits 6,432 -
Curtailment - (836 )
Settlement (235,544 ) (95,777 )Benefit Obligation at End of Year $ 1,020,356 $ 1,116,569 Change in Plan Assets Fair value of assets at beginning of year $ 2,120,127 $ 2,343,471 Actual return on plan assets
492,477 (63,715 )
Benefits paid (64,354 ) (63,852 )
Settlement (235,544 ) (95,777 )
Fair Value of Assets at End of Year $ 2,312,706 $ 2,120,127
Funded Status $ 1,292,350 $ 1,003,558
100--------------------------------------------------------------------------------
SERP
As of December 31
(in thousands) 2019 2018
Change in Benefit Obligation
Benefit obligation at beginning of year $ 102,548 $ 110,082
Service cost 858 819
Interest cost 4,314 3,865
Amendments - 1,028
Actuarial loss (gain) 15,544 (7,552 )
Benefits paid (7,071 ) (5,694 )Benefit Obligation at End of Year $ 116,193 $ 102,548 Change in Plan Assets Fair value of assets at beginning of year $ - $ - Employer contributions
7,071 5,694
Benefits paid (7,071 ) (5,694 )
Fair Value of Assets at End of Year $ - $ - Funded Status
$ (116,193 ) $ (102,548 )
The change in the Company's benefit obligation for the pension plan was
primarily due to the settlement gain recognized related to the annuity purchase,
offset by an actuarial loss recognized as a result of a decrease to the discount
rate used to measure the benefit obligation. The change in the benefit
obligation for the Company's SERP was due to the recognition of an actuarial
loss resulting from a decrease to the discount rate used to measure the benefit
obligation.
The accumulated benefit obligation for the Company's pension plans at
December 31, 2019 and 2018, was $991.1 million and $1,097.3 million,
respectively. The accumulated benefit obligation for the Company's SERP at
December 31, 2019 and 2018, was $114.8 million and $102.2 million, respectively.
The amounts recognized in the Company's Consolidated Balance Sheets for its
defined benefit pension plans are as follows:
Pension Plans SERP
As of December 31 As of December 31
(in thousands) 2019 2018 2019 2018
Noncurrent asset $ 1,292,350 $ 1,003,558 $ - $ -
Current liability - - (6,447 ) (6,321 )
Noncurrent liability - - (109,746 ) (96,227 ) Recognized Asset (Liability) $ 1,292,350 $ 1,003,558 $ (116,193 ) $ (102,548 )
Key assumptions utilized for determining the benefit obligation are as follows:
Pension Plans SERP
As of December 31 As of December 31
2019 2018 2019 2018
Discount rate 3.3% 4.3% 3.3% 4.3%
Rate of compensation
increase - age graded 5.0%-1.0% 5.0%-1.0% 5.0%-1.0% 5.0%-1.0%
2.77% with 3.50% with
Cash balance interest phase in to phase in to
crediting rate 3.30% in 2022 4.30% in 2021 - -
The Company made no contributions to its pension plans in 2019 and 2018, and the
Company does not expect to make any contributions in 2020. The Company made
contributions to its SERP of $7.1 million and $5.7 million for the years ended
December 31, 2019 and 2018, respectively. As the plan is unfunded, the Company
makes contributions to the SERP based on actual benefit payments.
At December 31, 2019, future estimated benefit payments, excluding charges for
early retirement programs, are as follows:
(in thousands) Pension Plans SERP
2020 $ 60,666 $ 6,552
2021 $ 60,964 $ 6,845
2022 $ 61,256 $ 7,056
2023 $ 61,497 $ 7,195
2024 $ 61,469 $ 7,293
2025-2029 $ 305,371 $ 36,760
101--------------------------------------------------------------------------------
The total (benefit) cost arising from the Company's defined benefit pension plans consists of the following components:
Pension Plans
Year Ended December 31
(in thousands) 2019 2018 2017
Service cost $ 20,422 $ 18,221 $ 18,687
Interest cost 46,821 46,787 47,925
Expected return on assets (122,790 ) (129,220 ) (121,411 )
Amortization of prior service cost 2,882 150 170
Recognized actuarial gain - (9,969 ) (4,410 )
Net Periodic Benefit for the Year (52,665 ) (74,031 ) (59,039 )
Curtailment - (806 ) -
Settlement (91,676 ) (26,917 ) -
Early retirement programs and special separation
benefit expense 6,432 - 1,825
Total Benefit for the Year $ (137,909 ) $ (101,754 ) $ (57,214 )
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Current year actuarial (gain) loss $ (245,402 ) $ 111,084 $ (180,885 )
Current year prior service cost 5,725 7,183 75
Amortization of prior service cost (2,882 ) (150 ) (170 )
Recognized net actuarial gain - 9,969 4,410
Curtailment and settlement 91,676 26,887 -
Total Recognized in Other Comprehensive Income (Before Tax Effects)
$ (150,883 ) $ 154,973 $ (176,570 )
Total Recognized in Total Benefit and Other
Comprehensive Income (Before Tax Effects) $ (288,792 ) $ 53,219 $ (233,784 )
SERP
Year Ended December 31
(in thousands) 2019 2018 2017
Service cost $ 858 $ 819 $ 858
Interest cost 4,314 3,865 4,233
Amortization of prior service cost 339 311 455
Recognized actuarial loss 2,314 2,403 1,774
Total Cost for the Year $ 7,825 $ 7,398 $ 7,320
Other Changes in Benefit Obligations Recognized in
Other Comprehensive Income
Current year actuarial loss (gain) $ 15,544 $ (7,552 ) $ 4,041
Current year prior service cost - 1,028 -
Amortization of prior service cost (339 ) (311 ) (455 )
Recognized net actuarial loss (2,314 ) (2,403 ) (1,774 ) Total Recognized in Other Comprehensive Income (Before Tax Effects)
$ 12,891 $ (9,238 ) $ 1,812 Total Recognized in Total Cost and Other Comprehensive Income (Before Tax Effects)
$ 20,716 $ (1,840 ) $ 9,132
The costs for the Company's defined benefit pension plans are actuarially
determined. Below are the key assumptions utilized to determine periodic cost:
Pension Plans SERP
Year Ended December 31 Year Ended December 31
2019 2018 2017 2019 2018 2017
Discount rate (1) 4.3% 4.0%/3.6% 4.1% 4.3% 3.6% 4.1%
Expected return on
plan assets 6.25% 6.25% 6.25% - - -
Rate of compensation
increase - age
graded 5.0%-1.0% 5.0%-1.0% 5.0%-1.0% 5.0%-1.0% 5.0%-1.0% 5.0%-1.0%
3.45% with 2.23% with 1.57% with
Cash balance phase in phase in phase in
interest crediting to 4.30% to 3.00% to 3.00%
rate in 2021 in 2020 in 2020 - - -
____________(1) As a result of the Kaplan University transaction, the Company remeasured the
accumulated and projected benefit obligation of the pension plan as of March
22, 2018. The remeasurement changed the discount rate from 3.6% for the
period January 1 to March 23, 2018 to 4.0% for the period after March 23,
2018.
102--------------------------------------------------------------------------------
Accumulated other comprehensive income (AOCI) includes the following components of unrecognized net periodic cost for the defined benefit plans:
Pension Plans SERP
As of December 31 As of December 31
(in thousands) 2019 2018 2019 2018Unrecognized actuarial (gain) loss $ (467,535 ) $ (313,809 ) $ 30,500
$ 17,270 Unrecognized prior service cost 10,116 7,273 698
1,037
Gross Amount (457,419 ) (306,536 ) 31,198
18,307
Deferred tax liability (asset) 123,503 82,765 (8,423 )
(4,943 )
Net Amount $ (333,916 ) $ (223,771 ) $ 22,775 $ 13,364
Defined Benefit Plan Assets. The Company's defined benefit pension obligations
are funded by a portfolio made up of a U.S. stock index fund, a private
investment fund, and a relatively small number of stocks and high-quality
fixed-income securities that are held by a third-party trustee. The assets of
the Company's pension plans were allocated as follows:
As of December 31
2019 2018
U.S. equities 62 % 53 %
U.S. stock index fund 14 % 28 %
U.S. fixed income 10 % 13 %
Private investment fund 7 % - %
International equities 7 % 6 %
100 % 100 %
The Company manages approximately 39% of the pension assets internally, of which
the majority is invested in a U.S. stock index fund with the remaining
investments in Berkshire Hathaway stock, a private investment fund and
short-term fixed-income securities. The remaining 61% of plan assets are managed
by two investment companies. The goal of the investment managers is to produce
moderate long-term growth in the value of these assets, while protecting them
against large decreases in value. Both investment managers may invest in a
combination of equity and fixed-income securities and cash. The managers are not
permitted to invest in securities of the Company or in alternative investments.
One investment manager cannot invest more than 15% of the assets at the time of
purchase in the stock of Alphabet and Berkshire Hathaway, no more than 30% of
the assets it manages in specified international exchanges at the time the
investment is made, and no less than 5% of the assets could be invested in
fixed-income securities. The other investment manager cannot invest more than
20% of the assets at the time of purchase in the stock of Berkshire Hathaway, no
more than 15% of the assets it manages in specified international exchanges at
the time the investment is made, and no less than 10% of the assets could be
invested in fixed-income securities. Excluding the exceptions noted above, the
investment managers cannot investment more than 10% of the assets in the
securities of any other single issuer, except for obligations of the
U.S. Government , without receiving prior approval from the Plan administrator.
In determining the expected rate of return on plan assets, the Company considers
the relative weighting of plan assets, the historical performance of total plan
assets and individual asset classes and economic and other indicators of future
performance. In addition, the Company may consult with and consider the input of
financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the
existence of significant concentrations (defined as greater than 10% of plan
assets) of credit risk as of December 31, 2019. Types of concentrations that
were evaluated include, but are not limited to, investment concentrations in a
single entity, type of industry, foreign country and individual fund. At
December 31, 2019 and 2018, the pension plan held investments in one common
stock and one U.S. stock index fund that exceeded 10% of total plan assets.
These investments were valued at $704.8 million and $945.6 million at
December 31, 2019 and 2018, respectively, or approximately 30% and 45%,
respectively, of total plan assets.
103
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The Company's pension plan assets measured at fair value on a recurring basis
were as follows:
As of December 31, 2019
(in thousands) Level 1 Level 2 Level 3 Total
Cash equivalents and other short-term
investments $ 2,133 $ 234,999 $ - $ 237,132
Equity securities
U.S. equities 1,439,098 - - 1,439,098
International equities 161,377 - - 161,377
U.S. stock index fund - - 322,229 322,229
Private investment fund - - 151,854 151,854
Total Investments $ 1,602,608 $ 234,999 $ 474,083 $ 2,311,690
Receivables, net 1,016
Total $ 2,312,706
As of December 31, 2018
(in thousands) Level 1 Level 2 Level 3 Total
Cash equivalents and other short-term
investments $ 2,068 $ 269,544 $ - $ 271,612
Equity securities
U.S. equities 1,115,323 - - 1,115,323
International equities 131,912 - - 131,912
U.S. stock index fund - - 601,395 601,395
Total Investments $ 1,249,303 $ 269,544 $ 601,395 $ 2,120,242
Payable for settlement of investments
purchased, net (115 )
Total $ 2,120,127
Cash equivalents and other short-term investments. These investments are
primarily held in U.S. Treasury securities and registered money market funds.
These investments are valued using a market approach based on the quoted market
prices of the security or inputs that include quoted market prices for similar
instruments and are classified as either Level 1 or Level 2 in the valuation
hierarchy.
U.S. equities. These investments are held in common and preferred stock of U.S.
corporations and American Depositary Receipts (ADRs) traded on U.S. exchanges.
Common and preferred shares and ADRs are traded actively on exchanges, and price
quotes for these shares are readily available. These investments are classified
as Level 1 in the valuation hierarchy.
International equities. These investments are held in common and preferred
stock issued by non-U.S. corporations. Common and preferred shares are traded
actively on exchanges, and price quotes for these shares are readily available.
These investments are classified as Level 1 in the valuation hierarchy.
U.S. stock index fund. This fund consists of investments held in a diversified
mix of securities (U.S. and international stocks, and fixed-income securities)
and a combination of other collective funds that together are designed to track
the performance of the S&P 500 Index. The fund is valued using the net asset
value (NAV) provided by the administrator of the fund and reviewed by the
Company. The NAV is based on the value of the underlying assets owned by the
fund, minus liabilities and divided by the number of units outstanding. The
investment in this fund may be redeemed daily, subject to the restrictions of
the fund. This investment is classified as Level 3 in the valuation hierarchy.
Private investment fund. This fund consists of investments held in a diversified
mix of publicly-traded securities (U.S and international stocks) and private
companies. The fund is valued using the NAV provided by the administrator of the
fund and reviewed by the Company. The NAV is based on the value of the
underlying assets owned by the fund, minus liabilities and divided by the number
of units outstanding. Five percent of the NAV of the investment may be redeemed
annually starting at the 12-month anniversary of the investment, subject to
certain limitations. Additionally, the investment in this fund may be redeemed
in part, or in full, at the 60-month anniversary of the investment, or at any
subsequent 36-month anniversary date following the initial 60-month anniversary.
This investment is classified as Level 3 in the valuation hierarchy.
104
--------------------------------------------------------------------------------The following table provides a reconciliation of changes in pension assets measured at fair value on a recurring basis, using Level 3 inputs:
Private U.S. Stock
(in thousands) Investment Fund Index Fund
As of December 31, 2017 $ - $ 706,202
Purchases, sales, and settlements, net - (80,000 )
Actual return on plan assets:
Gains relating to assets sold - 2,819
Losses relating to assets still held at year-end - (27,626 ) As of December 31, 2018 -
601,395
Purchases, sales, and settlements, net 150,000 (425,000 ) Actual return on plan assets: Gains relating to assets sold -
68,658
Gains relating to assets still held at year-end 1,854 77,176 As of December 31, 2019 $ 151,854 $ 322,229
Other Postretirement Plans. The following table sets forth obligation, asset and funding information for the Company's other postretirement plans:
Postretirement Plans
As of December 31
(in thousands) 2019 2018
Change in Benefit Obligation Benefit obligation at beginning of year $ 8,523 $ 22,785 Service cost
- 892
Interest cost 289 620
Amendments - (12,473 )
Actuarial gain (1,246 ) (2,519 )
Benefits paid, net of Medicare subsidy (750 ) (782 )
Benefit Obligation at End of Year $ 6,816 $ 8,523 Change in Plan Assets Fair value of assets at beginning of year $ - $ - Employer contributions
750 782
Benefits paid, net of Medicare subsidy (750 ) (782 )
Fair Value of Assets at End of Year $ - $ - Funded Status
$ (6,816 ) $ (8,523 )
The change in the benefit obligation for the Company's other postretirement
plans was primarily due to the recognition of an actuarial gain resulting from
repeal of the Health Insurer Fee (HIF) included in the Further Consolidation
Appropriations Act, 2020.
The amounts recognized in the Company's Consolidated Balance Sheets for its
other postretirement plans are as follows:
Postretirement Plans
As of December 31
(in thousands) 2019 2018
Current liability $ (1,153 ) $ (1,399 )
Noncurrent liability (5,663 ) (7,124 )
Recognized Liability $ (6,816 ) $ (8,523 )
The discount rates utilized for determining the benefit obligation
at December 31, 2019 and 2018, for the postretirement plans were 2.68% and
3.69%, respectively. The assumed healthcare cost trend rate used in measuring
the postretirement benefit obligation at December 31, 2019, was 7.00% for
pre-age 65, decreasing to 4.5% in the year 2026 and thereafter. The assumed
healthcare cost trend rate used in measuring the postretirement benefit
obligation at December 31, 2019, was 7.49% for post-age 65, decreasing to 4.5%
in the year 2026 and thereafter. The assumed healthcare cost trend rate used in
measuring the postretirement benefit obligation for Medicare Advantage at
December 31, 2019, was (6.89)%, due to the repeal of the HIF, and 8.15% for
2021, decreasing to 4.5% in the year 2029 and thereafter.
105
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The Company made contributions to its postretirement benefit plans of $0.8
million for both years ended December 31, 2019 and 2018. As the plans are
unfunded, the Company makes contributions to its postretirement plans based on
actual benefit payments.
At December 31, 2019, future estimated benefit payments are as follows:
Postretirement
(in thousands) Plans
2020 $ 1,153
2021 $ 955
2022 $ 856
2023 $ 724
2024 $ 569
2025-2029 $ 1,699
The total benefit arising from the Company's other postretirement plans consists of the following components:
Postretirement Plans
Year Ended December 31
(in thousands) 2019 2018 2017
Service cost $ - $ 892 $ 1,028
Interest cost 289 620 779
Amortization of prior service credit (7,363 ) (1,408 ) (148 )
Recognized actuarial gain (4,360 ) (3,783 ) (3,891 )
Net Periodic Benefit for the Year (11,434 ) (3,679 ) (2,232 )
Curtailment - (3,380 ) -
Total Benefit for the Year $ (11,434 ) $ (7,059 ) $ (2,232 )
Other Changes in Benefit Obligations Recognized in Other
Comprehensive Income
Current year actuarial gain $ (1,246 ) $ (2,519 ) $ (2,830 )
Current year prior service credit - (12,473 ) -
Amortization of prior service credit 7,363 1,408 148
Recognized actuarial gain 4,360 3,783 3,891
Curtailment and settlement - 3,380 -Total Recognized in Other Comprehensive Income (Before Tax Effects)
$ 10,477 $ (6,421 ) $ 1,209 Total Recognized in Benefit and Other Comprehensive Income (Before Tax Effects)
$ (957 ) $ (13,480 ) $ (1,023 )
The costs for the Company's postretirement plans are actuarially determined. The
discount rate utilized to determine periodic cost for the year ended
December 31, 2019 was 3.69%. As a result of the changes to the postretirement
plans, the Company remeasured the accumulated and projected benefit obligation
of the postretirement plan as of October 31, 2018. The remeasurement changed the
discount rate from 3.11% for the period January 1 through October 31, 2018 to
4.04% for the period November 1 to December 31, 2018. The discount rate utilized
to determine periodic cost for the year ended December 31, 2017 was 3.31%. AOCI
included the following components of unrecognized net periodic benefit for the
postretirement plans:
As of December 31
(in thousands) 2019 2018
Unrecognized actuarial gain $ (19,747 ) $ (22,861 )
Unrecognized prior service credit (500 ) (7,863 )
Gross Amount (20,247 ) (30,724 )
Deferred tax liability 5,467 8,295
Net Amount $ (14,780 ) $ (22,429 )
Multiemployer Pension Plans. In 2019, 2018 and 2017, the Company contributed to
one multiemployer defined benefit pension plan under the terms of a
collective-bargaining agreement that covered certain union-represented
employees. The Company's total contributions to the multiemployer pension plan
amounted to $0.1 million in each year for 2019, 2018 and 2017.
Savings Plans. The Company recorded expense associated with retirement benefits
provided under incentive savings plans (primarily 401(k) plans) of approximately
$9.8 million in 2019, $8.6 million in 2018 and $7.5 million in 2017.
106
--------------------------------------------------------------------------------16. OTHER NON-OPERATING INCOME
A summary of non-operating income is as follows:
Year Ended December 31
(in thousands) 2019 2018 2017
Gain on sale of an equity affiliate $ 28,994 $ - $ -
Loss on guarantor obligations (1,075 ) (17,518 ) -
Net gain on cost method investments 5,080 11,663 -
Net (loss) gain on sales of businesses (564 ) 8,157 (569 )
Foreign currency (loss) gain, net (1,070 ) (3,844 ) 3,310
Gain on sale of cost method investments 267 2,845 16
Impairment of cost method investments - (2,697 ) (200 ) Net (loss) gain on sale of property, plant and equipment (82 ) 2,539
-
Other, net 881 958 1,684
Total Other Non-Operating Income $ 32,431 $ 2,103 $ 4,241
In the first quarter of 2019, the Company recorded a $29.0 million gain on the sale of the Company's interest in Gimlet Media. In the first and third quarter of 2019, the Company recorded gains of $1.3 million and $3.7 million, respectively, resulting from observable price changes in the fair value of equity securities accounted for under the cost method. In 2018, the Company recorded a $17.5 million loss in guarantor lease obligations in connection with the sale of the KHE Campuses business. In the third quarter of 2018, the Company recorded an $8.5 million gain resulting from observable price changes in the fair value of equity securities accounted for under the cost method. In the fourth quarter of 2018, an additional $3.2 million gain was recorded. In 2018, the Company recorded an $8.2 million gain on the sale of three businesses in the education division, including a gain of $4.3 million on the Kaplan University transaction and $1.9 million in contingent consideration gains related to the sale of a business (see Note 3). 17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income (loss) consists of the following components:
Year Ended December 31, 2019
Before-Tax Income After-Tax
(in thousands) Amount Tax Amount
Foreign currency translation adjustments:
Translation adjustments arising during the year $ 5,371 $ - $ 5,371
Adjustment for sale of a business with foreign
operations 2,011 - 2,011
7,382 - 7,382
Pension and other postretirement plans:
Actuarial gain 231,104 (62,398 ) 168,706
Prior service cost (5,725 ) 1,546 (4,179 ) Amortization of net actuarial gain included in net income
(2,046 ) 552 (1,494 ) Amortization of net prior service credit included in net income
(4,142 ) 1,118 (3,024 )
Settlement included in net income (91,676 ) 24,752 (66,924 )
127,515 (34,430 ) 93,085
Cash flow hedges:
Loss for the year (1,344 ) 343 (1,001 )
Other Comprehensive Income $ 133,553 $ (34,087 ) $ 99,466
107--------------------------------------------------------------------------------
Year Ended December 31, 2018
Before-Tax Income After-Tax
(in thousands) Amount Tax Amount
Foreign currency translation adjustments:
Translation adjustments arising during the year $ (35,584 ) $ - $ (35,584 )
Pension and other postretirement plans:
Actuarial loss (101,013 ) 27,273 (73,740 )
Prior service credit 4,262 (1,151 ) 3,111 Amortization of net actuarial gain included in net income
(11,349 ) 3,064 (8,285 ) Amortization of net prior service credit included in net income
(947 ) 256 (691 )
Curtailments and settlements included in net income (30,267 ) 8,172 (22,095 )
(139,314 ) 37,614 (101,700 )
Cash flow hedge:
Gain for the year 551 (104 ) 447
Other Comprehensive Loss $ (174,347 ) $ 37,510 $ (136,837 )
Year Ended December 31, 2017
Before-Tax Income After-Tax
(in thousands) Amount Tax Amount
Foreign currency translation adjustments:
Translation adjustments arising during the year $ 33,175 $ - $ 33,175
Adjustment for sale of a business with foreign
operations 137 - 137
33,312 - 33,312 Unrealized gains on available-for-sale securities: Unrealized gains for the year
112,086 (44,834 ) 67,252
Pension and other postretirement plans:
Actuarial gain 179,674 (48,511 ) 131,163
Prior service cost (75 ) 20 (55 )
Amortization of net actuarial gain included in net income
(6,527 ) 2,612 (3,915 )
Amortization of net prior service cost included in net
income 477 (191 ) 286
173,549 (46,070 ) 127,479
Cash flow hedge:
Gain for the year 112 (19 ) 93
Other Comprehensive Income $ 319,059 $ (90,923 ) $ 228,136
The accumulated balances related to each component of other comprehensive income
(loss) are as follows:
Cumulative Unrealized Gain
Foreign on Pensions Accumulated
Currency Unrealized Gain on and Other Other
Translation Available-for-Sale Postretirement Cash Flow Comprehensive (in thousands, net of taxes) Adjustment
Securities Plans Hedges Income
As of December 31, 2017 $ 6,314 $ 194,889 $ 334,536 $ (184 ) $ 535,555
Reclassification of unrealized
gains on available-for-sale
securities to retained earnings
as a result of adoption of new
guidance - (194,889 ) - - (194,889 )
Other comprehensive (loss) income
before reclassifications (35,584 ) - (70,629 ) 579 (105,634 )
Net amount reclassified from
accumulated other comprehensive
income - - (31,071 ) (132 ) (31,203 )
Net other comprehensive (loss)
income (35,584 ) - (101,700 ) 447 (136,837 )
As of December 31, 2018 (29,270 ) - 232,836 263 203,829
Other comprehensive income (loss)
before reclassifications 5,371 - 164,527 (906 ) 168,992
Net amount reclassified from
accumulated other comprehensive
income 2,011 - (71,442 ) (95 ) (69,526 )
Net other comprehensive income
(loss) 7,382 - 93,085 (1,001 ) 99,466
As of December 31, 2019 $ (21,888 ) $ - $ 325,921 $ (738 ) $ 303,295
108--------------------------------------------------------------------------------
The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
Affected Line Item
Year Ended December 31 in the Consolidated
Statements of
(in thousands) 2019 2018 2017 Operations
Foreign Currency Translation
Adjustments:
Adjustment for sales of businesses with
foreign operations $ 2,011 $ - $ 137 Other income, net
Pension and Other Postretirement Plans:
Amortization of net actuarial gain (2,046 ) (11,349 ) (6,527 ) (1)
Amortization of net prior service (1)
(credit) cost (4,142 ) (947 )
477
Curtailment and settlement gains (91,676 ) (30,267 ) - (1)
(97,864 ) (42,563 ) (6,050 ) Before tax
Provision for
(benefit from)
26,422 11,492 2,421 income taxes
(71,442 ) (31,071 ) (3,629 ) Net of tax
Cash Flow Hedges
(146 ) (163 ) 152 Interest expense
Provision for
(benefit from)
51 31 (30 ) income taxes
(95 ) (132 ) 122 Net of tax Total reclassification for the year $ (69,526 ) $ (31,203 ) $ (3,370 ) Net of tax
____________
(1) These accumulated other comprehensive income components are included in the
computation of net periodic pension and postretirement plan cost (see Note
15) and are included in non-operating pension and postretirement benefit
income in the Company's Consolidated Statements of Operations.
18. CONTINGENCIES AND OTHER COMMITMENTS
Litigation, Legal and Other Matters. The Company and its subsidiaries are subject to complaints and administrative proceedings and are defendants in various civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, defamation and invasion of privacy; trademark, copyright and patent infringement; violations of employment laws and applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company's business, financial condition, results of operations or cash flows. However, based on currently available information, management believes it is reasonably possible that future losses from existing and threatened legal, regulatory and other proceedings in excess of the amounts recorded could reach approximately $15 million. On September 3, 2015, Kaplan sold to ECA substantially all of the assets of the KHE Campuses. The transaction included the transfer of certain real estate leases that were guaranteed or purportedly guaranteed by Kaplan. ECA is currently in receivership, has terminated all of its higher education operations and has sold, or is in the process of selling or liquidating, its remaining assets (includingNew England College of Business). Additionally, the receiver has repudiated all of ECA's real estate leases. Although ECA is required to indemnify Kaplan for any amounts Kaplan must pay due to ECA's failure to fulfill its obligations under the real estate leases guaranteed by Kaplan, ECA's current financial condition and the amount of secured and unsecured creditor claims outstanding against ECA make it unlikely that Kaplan will recover from ECA. In the second half of 2018, the Company recorded an estimated $17.5 million in losses on guarantor lease obligations in connection with this transaction in other non-operating expense. The Company recorded an additional estimated $1.1 million in non-operating expense in 2019, consisting of legal fees and lease costs. The Company continues to monitor the status of these obligations. Kaplan also may be liable to the current owners of KU and the KHE schools, respectively, related to the pre-sale conduct of the schools. Additionally, the pre-sale conduct of the schools could be the subject of future compliance reviews or lawsuits that could result in monetary liabilities or fines or other sanctions.Her Majesty's Revenue and Customs (HMRC), a department of theUK government responsible for the collection of taxes, has raised assessments against the KaplanU.K. Pathways business for Value Added Tax (VAT) relating to 2017 and earlier years, which Kaplan has paid. In September 2017, in a case captioned Kaplan International CollegesUK Limited v. The Commissioners forHer Majesty's Revenue and Customs , Kaplan challenged these assessments. The Company believes it has met all requirements under U.K. VAT law for a cost sharing group VAT exemption to apply and is entitled to recover the £18.6 million related to the assessments and subsequent payments that have been paid through December 31, 2019. Following a hearing held in January 2019 before the First Tier Tax Tribunal, all issues related to law in the case were referred to the Court of Justice of theEuropean Union . In the third quarter of 2019, the Company recorded a full provision of £17.3 million against a receivable to expense due to developments in the case. Of this amount, £14.1 million relates to years 2014 to 2018. If the 109 -------------------------------------------------------------------------------- Company ultimately prevails in this case, the provision will be reversed and a pre-tax credit will be recorded as a reduction to expense in the Company's Consolidated Statement of Operations. The result of the Court of Justice case is expected by the fall of 2020. Depending on the judgment of the Court of Justice, the litigation may conclude or some issues may be returned to theUK First Tier Tribunal. In March 2018, HMRC issued new VAT guidance indicating a change of policy in relation to certain aspects of a cost sharing exemption that could affect theU.K. Pathways business adversely if this guidance were to become law. As of December 31, 2019, this guidance had not yet been incorporated intoU.K. law. In a separate matter, a legal case was determined by the U.K. Supreme Court in 2019. This case could have reversed or amended the law and guidance permitting private providers to qualify as a "college of a university" and therefore receive the benefit of an exemption from charging its students VAT on tuition fees. However, the Supreme Court decided the case in the college's favor. The result was more favorable to private providers working in collaboration with a university than the opposing view. The Supreme Court emphasized five key tests for a private provider to satisfy so that it could exempt its services as a "college of a university" even if it did not have a constitutional link to the university. Satisfying these tests would generally show that the college had a sufficiently close relationship with the university and its activities were sufficiently integrated with the university to constitute a "college of a university". Although the new tests have now been incorporated into official HMRC guidance, it is not yet clear how HMRC will apply the Supreme Court judgment and the five key tests in practice. On January 10, 2020, Kaplan Bournemouth Limited received an improvement notice fromBournemouth ,Christchurch andPoole Council , a local government authority, under section 11 of theU.K. Housing Act 2004 in relation to its leased student residence inBournemouth, U.K. This notice follows the Council's assessment that a category 1 fire hazard exists at the property and requires certain remedial work to be undertaken at the property within a specified timetable. This work comprises a number of items, including the removal of aluminum composite material (ACM) cladding and high pressure laminate (HPL) cladding from the facade of the building. Kaplan Bournemouth Limited appealed the notice on January 31, 2020, to contest certain remedial requirements, although it will not contest the requirement for the removal of the ACM and HPL cladding. If Kaplan is not successful in its appeal, additional substantial work may be required in connection with the building. Other Commitments. The Company's broadcast subsidiaries are parties to certain agreements that commit them to purchase programming to be produced in future years. At December 31, 2019, such commitments amounted to approximately $28.8 million. If such programs are not produced, the Company's commitment would expire without obligation. 19. BUSINESS SEGMENTS Basis of Presentation. The Company's organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customers, the nature of products and services and use of resources. The business segments disclosed in the Consolidated Financial Statements are based on this organizational structure and information reviewed by the Company's management to evaluate the business segment results. The Company changed the presentation of its segments in the third quarter of 2019 into the following eight reportable segments:Kaplan International , Kaplan Higher Education, Kaplan Test Preparation, Kaplan Professional (U.S. ), Television Broadcasting, Manufacturing, Healthcare, and SocialCode. The Company evaluates segment performance based on operating income before amortization of intangible assets and impairment of goodwill and other long-lived assets. The accounting policies at the segments are the same as described in Note 2. In computing income from operations by segment, the effects of equity in earnings (losses) of affiliates, interest income, interest expense, non-operating pension and postretirement benefit income, other non-operating income and expense items and income taxes are not included. Intersegment sales are not material. Identifiable assets by segment are those assets used in the Company's operations in each business segment. The Prepaid Pension cost is not included in identifiable assets by segment. Investments in marketable equity securities are discussed in Note 4. Education. Education products and services are provided byKaplan, Inc. Kaplan International includes professional training and postsecondary education businesses largely outside theU.S. , as well as English-language programs. Prior to the KU Transaction closing on March 22, 2018, KHE included Kaplan's domestic postsecondary education business, made up of fixed-facility colleges and online postsecondary and career programs. Following the KU Transaction closing, KHE includes the results as a service provider to higher education institutions. KTP includes Kaplan's standardized test preparation and new economy skills training programs. Professional (U.S. ) includes the domestic professional training and other continuing education businesses. 110 -------------------------------------------------------------------------------- As of December 31, 2019, KHE had a total outstanding accounts receivable balance of $68.4 million from Purdue Global related to amounts due for reimbursements for services and a deferred fee. In addition, KHE has an $18.6 million long-term receivable balance due from Purdue Global at December 31, 2019, related to the advance of $20.0 million during the initial KU Transaction. In recent years, Kaplan has formulated and implemented restructuring plans at its various businesses. There were no significant restructuring costs in 2019 and 2018. Across all Kaplan businesses, restructuring costs of $9.1 million were recorded in 2017 as follows: Year Ended (in thousands) December 31, 2017 Accelerated depreciation $ 339 Severance 6,099 Other 2,627 $ 9,065Kaplan International incurred restructuring costs of $2.9 million in 2017. These restructuring costs were largely in theU.K. andAustralia and included severance charges and accelerated depreciation. KHE incurred restructuring costs of $1.4 million in 2017 primarily from severance and accelerated depreciation. KTP incurred restructuring costs of $4.3 million in 2017 primarily from severance. Total accrued restructuring costs at Kaplan were $1.3 million and $4.6 million at the end of 2019 and 2018, respectively. Television Broadcasting. Television broadcasting operations are conducted through seven television stations serving theDetroit ,Houston ,San Antonio ,Orlando ,Jacksonville andRoanoke television markets. All stations are network-affiliated (except for WJXT inJacksonville ), with revenues derived primarily from sales of advertising time. In addition, the stations generate revenue from retransmission consent agreements for the right to carry their signals. Manufacturing. Manufacturing operations include Hoover, aThomson, GA -based supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications (acquired in April 2017); Dekko, aGarrett, IN -based manufacturer of electrical workspace solutions, architectural lighting, and electrical components and assemblies;Joyce/Dayton Corp. , aDayton, OH -based manufacturer of screw jacks and other linear motion systems; andForney , a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications. Healthcare. Graham Healthcare Group provides home health, hospice and palliative services. SocialCode. SocialCode is a provider of marketing solutions managing data, creative, media and marketplaces to accelerate client growth. Other Businesses. Other businesses includes the following: • Three automotive dealerships, including Lexus ofRockville and Honda ofTysons Corner , which were acquired on January 31, 2019 andJeep ofBethesda , which opened in December 2019.
•
thirteen restaurants and entertainment venues in the Washington, DC
metropolitan area.
• The Slate Group and Foreign Policy Group, which publish online and printmagazines and websites; and three investment stage businesses, Megaphone,
Pinna and Cybervista.
Corporate Office. Corporate office includes the expenses of the Company's corporate office, a net pension credit and certain continuing obligations related to prior business dispositions. Geographical Information. The Company's non-U.S. revenues in 2019, 2018 and 2017 totaled approximately $691 million, $657 million and $637 million, respectively, primarily from Kaplan's operations outside theU.S. Additionally, revenues in 2019, 2018 and 2017 totaled approximately $384 million, $345 million, and $320 million, respectively, from Kaplan's operations in theU.K. The Company's long-lived assets in non-U.S. countries (excluding goodwill and other intangible assets), totaled approximately $431 million and $124 million at December 31, 2019 and 2018, respectively. 111 -------------------------------------------------------------------------------- Company information broken down by operating segment and education division: Year Ended December 31 (in thousands) 2019 2018 2017 Operating Revenues Education $ 1,451,750 $ 1,451,015 $ 1,516,776 Television broadcasting 463,464 505,549 409,916 Manufacturing 449,053 487,619 414,193 Healthcare 161,768 149,275 154,202 SocialCode 62,754 58,728 62,077 Other businesses 344,092 43,880 34,733 Corporate office - - - Intersegment elimination (782 ) (100 ) (51 ) $ 2,932,099 $ 2,695,966 $ 2,591,846 Income (Loss) from Operations Education $ 48,072 $ 97,136 $ 77,687 Television broadcasting 152,668 210,533 139,258 Manufacturing 20,467 28,851 14,947 Healthcare 7,908 (8,401 ) (2,569 ) SocialCode (3,283 ) (1,081 ) (3,674 ) Other businesses (30,129 ) (28,016 ) (30,536 ) Corporate office (51,157 ) (52,861 ) (58,710 ) $ 144,546 $ 246,161 $ 136,403 Equity in Earnings (Losses) of Affiliates, Net 11,664 14,473 (3,249 ) Interest Expense, Net (23,628 ) (32,549 ) (27,305 ) Debt Extinguishment Costs - (11,378 ) - Non-Operating Pension and Postretirement Benefit Income, Net 162,798 120,541 72,699 Gain (Loss) on Marketable Equity Securities, net 98,668 (15,843 ) - Other Income, Net 32,431 2,103 4,241 Income Before Income Taxes $ 426,479 $ 323,508 $ 182,789 Depreciation of Property, Plant and Equipment Education $ 25,655 $ 28,099 $ 32,906 Television broadcasting 12,817 13,204 12,179 Manufacturing 10,036 9,515 9,173 Healthcare 2,314 2,577 4,583 SocialCode 1,017 797 1,004 Other businesses 6,539 1,523 1,546 Corporate office 875 1,007 1,118 $ 59,253 $ 56,722 $ 62,509 Amortization of Intangible Assets and Impairment ofGoodwill and Other Long-Lived Assets Education $ 15,608 $ 9,362 $ 5,162 Television broadcasting 13,408 5,632 6,349 Manufacturing 26,342 24,746 31,052 Healthcare 6,411 14,855 7,905 SocialCode 626 928 333 Other businesses - - - Corporate office - - - $ 62,395 $ 55,523 $ 50,801 Pension Service Cost Education $ 10,385 $ 8,753 $ 9,720 Television broadcasting 3,025 2,188 1,942 Manufacturing 80 72 79 Healthcare 492 573 665 SocialCode 877 723 593 Other businesses 763 578 453 Corporate office 4,800 5,334 5,235 $ 20,422 $ 18,221 $ 18,687 Capital Expenditures Education $ 57,246 $ 54,159 $ 27,520 Television broadcasting 19,362 27,013 16,802 Manufacturing 11,218 14,806 8,012 Healthcare 2,303 1,741 2,987 SocialCode 643 113 756 Other businesses 3,060 235 1,003 Corporate office 115 - - $ 93,947 $ 98,067 $ 57,080 112
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Asset information for the Company's business segments is as follows:
As of December 31
(in thousands) 2019 2018
Identifiable Assets
Education $ 2,032,425 $ 1,568,747
Television broadcasting 463,689 452,853
Manufacturing 564,251 593,111
Healthcare 160,033 108,596
SocialCode 221,746 213,394
Other businesses 345,649 20,608
Corporate office 103,764 162,971
$ 3,891,557 $ 3,120,280
Investments in Marketable Equity Securities 585,080 496,390
Investments in Affiliates 162,249 143,813
Prepaid Pension Cost 1,292,350 1,003,558
Total Assets $ 5,931,236 $ 4,764,041
The Company's education division comprises the following operating segments:
Year Ended December 31
(in thousands) 2019 2018 2017
Operating Revenues
Kaplan international $ 750,245 $ 719,982 $ 697,999
Higher education 305,672 342,085 431,425
Test preparation 243,917 256,102 273,298
Professional (U.S.) 144,897 134,187 115,839
Kaplan corporate and other 9,480 1,142 294
Intersegment elimination (2,461 ) (2,483 ) (2,079 )
$ 1,451,750 $ 1,451,015 $ 1,516,776
Income (Loss) from Operations
Kaplan international $ 42,129 $ 70,315 $ 51,623
Higher education 13,960 15,217 16,719
Test preparation 7,399 19,096 11,507
Professional (U.S.) 27,088 28,608 27,558
Kaplan corporate and other (42,499 ) (36,064 ) (29,863 )
Intersegment elimination (5 ) (36 ) 143
$ 48,072 $ 97,136 $ 77,687
Depreciation of Property, Plant and Equipment
Kaplan international $ 15,394 $ 15,755 $ 14,892
Higher education 2,883 4,826 9,117
Test preparation 3,284 3,941 5,286
Professional (U.S.) 3,848 3,096 3,041
Kaplan corporate and other 246 481 570
$ 25,655 $ 28,099 $ 32,906
Amortization of Intangible Assets $ 14,915 $ 9,362 $ 5,162
Impairment of Long-Lived Assets $ 693 $ - $ -
Pension Service Cost
Kaplan international $ 454 $ 298 $ 264
Higher education 4,535 4,310 5,269
Test preparation 3,378 2,611 2,755
Professional (U.S.) 1,356 1,162 913
Kaplan corporate and other 662 372 519
$ 10,385 $ 8,753 $ 9,720
Capital Expenditures
Kaplan international $ 48,362 $ 44,469 $ 21,667
Higher education 3,463 4,045 2,158
Test preparation 1,527 681 1,038
Professional (U.S.) 3,835 4,845 2,475
Kaplan corporate and other 59 119 182
$ 57,246 $ 54,159 $ 27,520
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Asset information for the Company's education division is as follows:
As of December 31
(in thousands) 2019 2018
Identifiable Assets
Kaplan international $ 1,455,122 $ 1,101,040
Higher education 196,761 126,752
Test preparation 151,655 145,308
Professional (U.S.) 160,799 166,916Kaplan corporate and other 68,088 28,731
$ 2,032,425 $ 1,568,747
20. SUMMARY OF QUARTERLY OPERATING RESULTS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Quarterly results of operations and comprehensive income for the year ended December 31, 2019, is as follows:
First Third Fourth
(in thousands, except per share amounts) Quarter Second Quarter Quarter Quarter
Operating Revenues $ 692,199 $ 737,602 $ 738,820 $ 763,478
Operating Costs and Expenses
Operating 477,230 503,763 517,935 524,277
Selling, general and administrative 148,383 148,419 175,322 170,576
Depreciation of property, plant and equipment 13,523 13,884 15,351 16,495
Amortization of intangible assets 13,060 12,880 13,572 13,731
Impairment of long-lived assets - 693 372 8,087
652,196 679,639 722,552 733,166
Income from Operations 40,003 57,963 16,268 30,312
Equity in earnings of affiliates, net 1,679 1,467 4,683 3,835
Interest income 1,700 1,579 1,474 1,398
Interest expense (7,425 ) (8,386 ) (6,776 ) (7,192 )
Non-operating pension and postretirement benefit
income, net 19,928 12,253 19,556 111,061
Gain on marketable equity securities, net 24,066 7,791 17,404 49,407
Other income (expense), net 29,351 1,228 5,556 (3,704 )
Income Before Income Taxes 109,302 73,895 58,165 185,117
Provision for Income Taxes 27,600 16,700 15,200 39,100
Net Income 81,702 57,195 42,965 146,017
Net Loss (Income) Attributable to Noncontrolling
Interests 46 (114 ) 180 (136 )
Net Income Attributable to Graham Holdings
Company Common Stockholders $ 81,748 $ 57,081 $ 43,145 $ 145,881
Quarterly Comprehensive Income $ 90,038 $
44,986 $ 25,059 $ 267,238
Per Share Information Attributable to Graham Holdings Company Common Stockholders Basic net income per common share $ 15.38 $ 10.74 $ 8.12 $ 27.45 Basic average number of common shares outstanding 5,284 5,285 5,285 5,284 Diluted net income per common share $ 15.26 $ 10.65 $ 8.05 $ 27.25 Diluted average number of common shares outstanding 5,326 5,329 5,329 5,324
The sum of the four quarters may not necessarily be equal to the annual amounts reported in the Consolidated Statements of Operations due to rounding.
114
--------------------------------------------------------------------------------Quarterly results of operations and comprehensive income (loss) for the year ended December 31, 2018, is as follows:
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
Operating Revenues $ 659,436 $ 672,677 $ 674,766 $ 689,087
Operating Costs and Expenses
Operating 365,151 440,655 448,920 432,706
Selling, general and administrative 225,045 141,378 131,081 152,624
Depreciation of property, plant and equipment 14,642 13,619 13,648 14,813
Amortization of intangible assets 10,384 11,399 12,269 13,362
Impairment of long-lived assets - - 8,109 -
615,222 607,051 614,027 613,505
Income from Operations 44,214 65,626 60,739 75,582
Equity in earnings of affiliates, net 2,579 931 9,537 1,426
Interest income 1,372 1,901 611 1,469
Interest expense (8,071 ) (17,165 ) (6,135 ) (6,531 )
Debt extinguishment costs - (11,378 ) - -
Non-operating pension and postretirement benefit
income, net 21,386 23,041 22,214 53,900
(Loss) gain on marketable equity securities, net (14,102 ) (2,554 ) 44,962 (44,149 )
Other income (expense), net 9,187 2,333 3,142 (12,559 )
Income Before Income Taxes 56,565 62,735 135,070 69,138
Provision for Income Taxes 13,600 16,100 10,000 12,400
Net Income 42,965 46,635 125,070 56,738
Net Income Attributable to Noncontrolling
Interests (74 ) (69 ) (6 ) (53 )
Net Income Attributable to Graham Holdings
Company Common Stockholders $ 42,891 $ 46,566 $ 125,064 $ 56,685
Quarterly Comprehensive Income (Loss) $ 53,703 $ 13,345
$ 119,862 $ (52,541 )
Per Share Information Attributable to Graham Holdings Company Common Stockholders Basic net income per common share $ 7.84 $ 8.69 $ 23.43 $ 10.69 Basic average number of common shares outstanding 5,436 5,325 5,302 5,270 Diluted net income per common share $ 7.78 $ 8.63 $ 23.28 $ 10.61 Diluted average number of common shares outstanding 5,473 5,362 5,337 5,309
The sum of the four quarters may not necessarily be equal to the annual amounts reported in the Consolidated Statements of Operations due to rounding.
115
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Quarterly impact from certain items in 2019 and 2018 (after-tax and diluted EPS
amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
2019
Ÿ A $13.9 million provision recorded at Kaplan
International related to a VAT receivable at
Pathways $ (2.59 ) Ÿ A $9.1 million reduction to operating expenses from property, plant, and equipment gains in connection with the spectrum repacking mandate of theFCC ($1.4 million, $6.0 million, $0.9 million and $0.8 million in the first, second, third and fourth quarters, respectively) $ 0.26 $ 1.13 $ 0.16 $ 0.15 Ÿ Intangible asset impairment charge of $6.0 million at the television broadcasting division $ (1.12 )
Ÿ A $66.9 million settlement gain related to retiree
annuity pension purchase $ 12.50
Ÿ $5.1 million in expenses related to non-operating
Separation Incentive Program at the education
division $ (0.95 ) Ÿ Gains, net, of $74.0 million on marketable equity
securities ($18.0 million, $5.8 million, $13.1
million, and $37.1 million for the first, second,
third and fourth quarters, respectively) $ 3.37 $ 1.09 $ 2.44 $ 6.92 Ÿ Non-operating gain, net, of $3.9 million from the
write-ups of cost method investments ($1.1 million
and $2.8 million in the first and third quarters,
respectively) $ 0.22
$ 0.51 Ÿ A $21.7 million gain from the sale of Gimlet Media $ 4.06 Ÿ Losses, net, of $0.8 million for non-operating
foreign currency gains (losses) ($0.4 million gain,
$0.1 million gain, $0.5 million gain, and $1.8
million loss in the first, second, third and fourth
quarters, respectively) $ 0.07 $ 0.02 $ 0.09 $ (0.33 ) Ÿ Income tax benefit of $1.7 million related to stock compensation $ 0.32 2018
Ÿ Intangible asset impairment charge of $5.8 million
at the healthcare business $ (1.08 ) Ÿ A $3.0 million reduction to operating expenses from property, plant, and equipment gains in connection with the spectrum repacking mandate of theFCC ($0.2 million, $0.6 million, $0.8 million and $1.4 million in the first, second, third and fourth quarters, respectively) $ 0.04 $ 0.11 $ 0.14 $ 0.26 Ÿ Interest expense of $6.2 million related to the
settlement of a mandatorily redeemable
noncontrolling interest $ (1.14 ) Ÿ Debt extinguishment costs of $8.6 million $ (1.60 )
Ÿ A $22.2 million settlement gain related to a bulk
lump sum pension offering and curtailment gain
related to changes in the Company's postretirement
healthcare benefit plan $ 4.11
Ÿ Losses, net, of $12.6 million on marketable equity
securities ($10.7 million loss, $1.9 million loss,
$33.6 million gain, and $33.6 million loss in the
first, second, third and fourth quarters,
respectively) $ (1.94 ) $ (0.36 ) $ 6.26 $ (6.28 ) Ÿ Non-operating gain, net, of $5.7 million from sales, write-ups and impairments of cost method and equity method investments, and related to sales of land and businesses, including losses on guarantor lease obligations ($3.6 million gain, $1.8 million gain, $8.0 million gain, and $7.7 million loss in the first, second, third and fourth quarters, respectively) $ 0.65 $ 0.34 $ 1.48 $ (1.43 ) Ÿ Gain of $1.8 million on the Kaplan University Transaction $ 0.33
Ÿ Losses, net, of $2.9 million for non-operating
foreign currency (losses) gains ($0.1 million gain,
$1.7 million loss, $0.1 million loss, and $1.2
million loss in the first, second, third and fourth
quarters, respectively) $ 0.02 $ (0.32 ) $ (0.02 ) $ (0.23 ) Ÿ A nonrecurring discrete $17.8 million deferred state
tax benefit related to the release of valuation
allowances $ 3.31
Ÿ Income tax benefit of $1.8 million related to stock
compensation $ 0.33
116
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GRAHAM HOLDINGS COMPANY
FIVE-YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
See Notes to Consolidated Financial Statements for the summary of significant
accounting policies and additional information relative to the years 2017-2019.
(in thousands, except per share
amounts) 2019 2018 2017 2016 2015
Results of Operations
Operating revenues $ 2,932,099 $ 2,695,966 $ 2,591,846 $ 2,481,890 $ 2,586,114
Income (loss) from operations 144,546 246,161 136,403 222,869 (158,140 )
Income (loss) from continuing
operations 327,879 271,408 302,489 169,458 (141,390 )
Net income (loss) attributable to
Graham Holdings Company
common stockholders 327,855 271,206 302,044 168,590 (101,286 )
Per Share Amounts
Basic earnings (loss) per common
share attributable to Graham
Holdings Company common stockholders
Income (loss) from continuing
operations $ 61.70 $ 50.55 $ 54.24 $ 29.95 $ (25.23 )
Net income (loss) 61.70 50.55 54.24 29.95 (17.87 )
Diluted earnings (loss) per common
share attributable to Graham
Holdings Company common stockholders
Income (loss) from continuing
operations $ 61.21 $ 50.20 $ 53.89 $ 29.80 $ (25.23 )
Net income (loss) 61.21 50.20 53.89 29.80 (17.87 )
Weighted average shares outstanding:
Basic 5,285 5,333 5,516 5,559 5,727
Diluted 5,327 5,370 5,552 5,589 5,727
Cash dividends per common share $ 5.56 $ 5.32 $ 5.08 $ 4.84 $ 9.10
Graham Holdings Company common
stockholders' equity per common
share $ 624.83 $ 550.24 $ 529.59 $ 439.88 $ 429.15
Financial Position
Working capital $ 621,614 $ 720,180 $ 857,192 $ 1,052,385 $ 1,135,573
Total assets 5,931,236 4,764,041 4,937,823 4,432,670 4,352,825
Long-term debt 430,650 470,777 486,561 485,719 399,800
Graham Holdings Company common
stockholders' equity 3,319,239 2,916,782 2,915,145 2,452,941 2,490,698
Impact from certain items included in income from continuing operations (after-tax and diluted EPS amounts): 2019 • Provision of $13.9 million ($2.59 per share) recorded atKaplan International related to a VAT receivable atUK Pathways
• Reduction to operating expenses of $9.1 million ($1.70 per share) from
property, plant, and equipment gains in connection with the spectrum repacking
mandate of the
• Intangible asset impairment charge of $6.0 million ($1.12 per share) at the
television broadcasting division
• Settlement gain of $66.9 million ($12.50 per share) related to a retiree
annuity pension purchase
• Non-operating expense of $5.1 million ($0.95 per share) related to a Separation Incentive Program (SIP) at the education division • Gains, net, of $74.0 million ($13.82 per share) on marketable equity securities • Non-operating gain, net, of $3.9 million ($0.73 per share) from the write-ups of cost method investments • Gain of $21.7 million ($4.06 per share) from the sale of Gimlet Media • Losses, net, of $0.8 million ($0.15 per share) from non-operating foreign currency losses • Income tax benefit of $1.7 million ($0.32 per share) related to stock compensation
2018
• Intangible asset impairment charge of $5.8 million ($1.08 per share) at the
healthcare business
• Reduction to operating expenses of $3.0 million ($0.55 per share) from property, plant, and equipment gains in connection with the spectrum repacking mandate of theFCC • Interest expense of $6.2 million ($1.14 per share) related to the settlement of a mandatorily redeemable noncontrolling interest • Debt extinguishment costs of $8.6 million ($1.60 per share) • Non-operating settlement and curtailment gain of $22.2 million ($4.11 per share) related to a bulk lump sum pension offering and changes in the Company's postretirement healthcare benefit plan • Losses, net, of $12.6 million ($2.33 per share) on marketable equity securities • Non-operating gain, net, of $5.7 million ($1.03 per share) from sales, write-ups and impairments of cost method and equity method investments, and related to sales of land and businesses, including losses on guarantor lease obligations • Gain of $1.8 million ($0.33 per share) on the Kaplan University Transaction • Losses, net, of $2.9 million ($0.54 per share) from non-operating foreign currency losses • Nonrecurring discrete deferred state tax benefit of $17.8 million ($3.31 per share) related to the release of valuation allowances • Income tax benefit of $1.8 million ($0.33 per share) related to stock compensation 2017 • Charges of $6.3 million ($1.12 per share) related to restructuring and
non-operating SIP charges at the education division
•
per share) in manufacturing
• Gains, net, of $2.1 million ($0.37 per share) from non-operating foreign
currency gains
• Net deferred tax benefits of $177.5 million ($31.68 per share) related to the
Tax Act
• Income tax benefit of $5.9 million ($1.06 per share) related to stock
compensation
117--------------------------------------------------------------------------------
2016
• Charges of $7.7 million ($1.36 per share) related to restructuring at the
education division
• Non-operating settlement gain of $10.8 million ($1.92 per share) related to a
bulk lump sum pension offering
• $20.0 million ($3.52 per share) net non-operating gain from the sales of land
and marketable equity securities
• $13.6 million ($2.37 per share) non-operating gain arising from the sale of a
business and the formation of a joint venture
• $24.1 million ($4.27 per share) non-operating expense from the write-down of
cost method investments and investments in affiliates
• Losses, net, of $25.5 million ($4.51 per share) from non-operating foreign
currency losses
• Net nonrecurring $8.3 million ($1.47 per share) deferred tax benefit related to
Kaplan's international operations
• Favorable $5.6 million ($1.00 per share) out of period deferred tax adjustment
related to the KHE goodwill impairment from 2015
2015
•
($38.96 per share) at the education division and other business
• Charges of $28.9 million ($4.97 per share) related to restructuring and
non-operating SIP charges at the education division, corporate office and other
businesses
• $15.3 million ($2.64 per share) in expense related to the modification of stock
option awards and restricted stock awards
• Net non-operating losses of $15.7 million ($2.82 per share) arising from the
sales of five businesses and an investment, and on the formation of a joint
venture
• $13.2 million ($2.27 per share) gain on the sale of land
• Losses, net, of $9.7 million ($1.67 per share) from non-operating unrealized
foreign currency losses
118© Edgar Online, source
