GRAHAM HOLDINGS COMPANY This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto. Results of Operations The Company reported net income attributable to common shares of$18.9 million ($3.60 per share) for the second quarter of 2020, compared to$57.1 million ($10.65 per share) for the second quarter of 2019. The novel coronavirus (COVID-19) pandemic and measures taken to prevent its spread, such as travel restrictions, shelter in place orders and mandatory closures, significantly impacted the Company's results for the first six months of 2020, largely from reduced demand for the Company's products and services. This significant adverse impact is expected to continue in the second half of 2020. The Company's management is taking a variety of measures to reduce costs and capital expenditures. The Company cannot predict the severity or duration of the pandemic, the extent to which demand for the Company's products and services will be adversely affected or the degree to which financial and operating results will be negatively impacted. Items included in the Company's income before income taxes for the second quarter of 2020: •$9.3 million in long-lived asset impairment charges; •$10.2 million in restructuring charges at the education division; •$2.8 million in accelerated depreciation at other businesses; •a$1.1 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of theFCC ; •$4.6 million in expenses related to non-operating Separation Incentive Programs at the education division and SocialCode; •$39.9 million in net gains on marketable equity securities; •non-operating gains of$7.8 million from write-ups and sales of cost and equity method investments; and •$1.1 million in non-operating foreign currency losses. Items included in the Company's income before income taxes for the second quarter of 2019: •a$7.8 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of theFCC ; •$6.6 million in expenses related to a non-operating Separation Incentive Program at the education division; •$7.8 million in net gains on marketable equity securities; and •$0.1 million in non-operating foreign currency gains. Revenue for the second quarter of 2020 was$652.9 million , down 11% from$737.6 million in the second quarter of 2019, largely due to the impact of COVID-19. Revenues declined at education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an increase at healthcare. The Company reported operating income of$5.9 million for the second quarter of 2020, compared to$58.0 million for the second quarter of 2019. The operating income decline is driven by lower earnings in education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an improvement at healthcare. 26 -------------------------------------------------------------------------------- For the first six months of 2020, the Company reported a net loss attributable to common shares of$14.4 million ($2.77 per share) compared to net income attributable to common shares of$138.8 million ($25.91 per share) for the first six months of 2019. Items included in the Company's loss before income taxes for the six months of 2020: •$25.7 million in goodwill and other long-lived asset impairment charges; •$10.2 million in restructuring charges at the education division; •$2.8 million in accelerated depreciation at other businesses; •a$1.4 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of theFCC ; •$4.6 million in expenses related to non-operating Separation Incentive Programs at the education division and SocialCode; •$60.5 million in net losses on marketable equity securities; •non-operating gain, net, of$1.6 million from write-ups, sales and impairments of cost and equity method investments; and •$3.2 million in non-operating foreign currency gains. Items included in the Company's income before income taxes for the six months of 2019: •a$9.6 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of theFCC ; •$6.6 million in expenses related to a non-operating Separation Incentive Program at the education division; •$31.9 million in net gains on marketable equity securities; •$29.0 million gain from the sale of Gimlet Media; •non-operating gain of$1.4 million from the write-up of cost method investments; and •$0.6 million in non-operating foreign currency gains. Revenue for the first six months of 2020 was$1,385.1 million , down 3% from$1,429.8 million in the first six months of 2019, largely due to the impact of COVID-19. Revenues declined at education, television broadcasting, manufacturing and SocialCode, partially offset by increases at healthcare and other businesses. The Company reported operating income of$14.0 million for the first six months of 2020, compared to$98.0 million for the first six months of 2019. Operating results declined in education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by an improvement at healthcare. Division Results Education The COVID-19 pandemic adversely impacted Kaplan's operating results in the second quarter and first six months of 2020. The impact began in February and continued through the first half of 2020. Kaplan serves a significant number of students who travel to other countries to study a second language, prepare for licensure, or pursue a higher education degree. Government-imposed travel restrictions and school closures arising from COVID-19 had a negative impact on the ability of international students to travel and attend Kaplan's programs, particularlyKaplan International's Language programs. In addition, most licensing bodies and administrators of standardized exams postponed or canceled scheduled examinations due to COVID-19, resulting in a significant number of students deciding to defer their studies. In these instances, Kaplan extended the life of its courses to be responsive to the changes in study needs of its students. These program modifications resulted in longer revenue recognition periods, adversely affecting the timing of revenue recognition at Kaplan's Test Preparation and Professional education divisions. Overall, this is expected to continue to adversely impact Kaplan's revenues and operating results for the remainder of 2020, particularly at Kaplan International Languages. Most of Kaplan Higher Education's (KHE) services are delivered online by staff who have historically worked both virtually and in office locations. In response to COVID-19 necessitated "stay-at-home" protocols, KHE transitioned 27 -------------------------------------------------------------------------------- its entire staff to virtual work arrangements. KHE did not experience any disruption in its service delivery and Purdue Global has experienced an increase in program demand in the first half of 2020. To help mitigate the negative revenue impact arising from the COVID-19 disruption, and to re-align its program offerings to better pursue opportunities arising from the disruption, Kaplan management developed and implemented a number of initiatives across its businesses, including: employee salary and work-hour reductions; temporary furlough and other employee reductions; reduced discretionary spending; facility restructuring; reduced capital expenditures; and accelerated development and promotion of various online programs and solutions. The facility restructuring plan undertaken by Kaplan was developed to align classroom and office space at International Languages and Higher Education with future business requirements, and was premised on the decision atKaplan Test Prep and Kaplan Professional (U.S. ) to substantially reduce location-based in person course offerings in step with shifting consumer preferences for online programs. In the second quarter and first six months of 2020, Kaplan recorded$10.5 million and$12.5 million in lease restructuring costs, respectively; and$1.2 million in second quarter 2020 severance restructuring costs. The lease restructuring costs included$3.4 million in accelerated depreciation expense in the second quarter and first six months of 2020. Kaplan also recorded a$10.0 million lease impairment charge in connection with these restructuring plans in the second quarter of 2020; this impairment charge included$2.0 million in property, plant and equipment write-downs. Also in the second quarter of 2020, the Company approved a Separation Incentive Program (SIP) that reduced the number of employees atKaplan International , Higher Education, Kaplan Professional (U.S. ) and Kaplan corporate, resulting in$5.0 million in non-operating pension expense in the second quarter of 2020. Additional restructuring and cost reduction plans are under development at Kaplan to be implemented in the second half of 2020. InJune 2020 , Kaplan announced a plan to combine its three primary divisions based inthe United States (Kaplan Test Prep , Kaplan Professional, and Kaplan Higher Education) into one business known asKaplan North America (KNA). The plan for this combination is under development and is designed to create and reinforce Kaplan's competitiveness in each market and new markets into which Kaplan extends. Education division revenue totaled$333.2 million for the second quarter of 2020, down 9% from$367.8 million for the same period of 2019. Kaplan reported operating income of$12.3 million for the second quarter of 2020, a 53% decline from$26.3 million for the second quarter of 2019. For the first six months of 2020, education division revenue totaled$689.6 million , down 7% from revenue of$740.2 million for the same period of 2019. Kaplan reported operating income of$16.9 million for the first six months of 2020, a 67% decline from$51.9 million for the first six months of 2019. A summary of Kaplan's operating results is as follows: Three Months Ended Six Months Ended June 30 June 30 (in thousands) 2020 2019 % Change 2020 2019 % Change Revenue Kaplan international$ 164,713 $ 188,580
(13)$ 364,328 $ 374,336 (3) Higher education 86,453 76,288 13 159,990 159,068 1 Test preparation 51,111 65,673 (22) 93,950 126,823 (26) Professional (U.S.) 28,674 35,147 (18) 67,123 76,361
(12)
Kaplan corporate and other 3,039 2,369 28 6,244 4,671 34
Intersegment elimination (815) (294) - (2,082) (1,042) -
$ 333,175 $ 367,763 (9) $ 689,553 $ 740,217 (7)
Operating Income (Loss) Kaplan international$ 16,035 $ 25,537 (37)$ 35,015 $ 49,822 (30) Higher education 17,050 2,721 - 15,030 4,636 - Test preparation (1,048) 4,289 - (13,724) 3,835 - Professional (U.S.) 1,378 4,745 (71) 7,504 16,004
(53)
Kaplan corporate and other (6,870) (6,920) 1 (8,392) (14,757) 43 Amortization of intangible assets (4,271) (3,377) (26) (8,472) (6,944)
(22)
Impairment of long-lived assets (10,020) (693) - (10,020) (693) -
Intersegment elimination - 3 - 5 (3) -
$ 12,254 $ 26,305 (53) $ 16,946 $ 51,900 (67)
Kaplan International includes English-language programs, and postsecondary
education and professional training businesses largely outside the United
States . 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
decreased 13% and 3% for the second quarter and first six months of 2020,
respectively. Excluding acquisitions, Kaplan International revenue decreased 13%
and 4% in the second quarter and first six months of 2020, respectively. On a
constant currency basis, revenue decreased 9% and
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remained flat for the second quarter and first six months of 2020, respectively.
The revenue decreases were due to declines at Languages, Singapore , and UK
Professional, partially offset by growth at UK Pathways and Australia and the
Heverald acquisition. Kaplan International reported operating income of $16.0
million in the second quarter of 2020, compared to $25.5 million in the second
quarter of 2019. Operating income decreased to $35.0 million in the first six
months of 2020, compared to $49.8 million in the first six months of 2019. The
decline in operating results in the second quarter and first six months of 2020
is due to declines at Languages, UK Professional and Singapore , partially offset
by improved results in UK Pathways and Australia . Kaplan International Languages
2020 results were negatively impacted by COVID-19 travel restrictions and UK
Professional results were negatively impacted by postponements of standardized
exam dates. In addition, Kaplan International recorded $3.9 million of lease
restructuring costs and $1.2 million of severance restructuring costs at
Languages in the second quarter of 2020; the lease restructuring costs included
$1.5 million in accelerated depreciation expense. Due to travel restrictions
imposed as a result of COVID-19, management expects significant challenges in
Languages' operating environment for at least the remainder of 2020. In June
2020 , UK Visas and Immigration announced that a mixed mode of online and face to
face teaching would be permitted to continue for the duration of the entire
academic year from July 1, 2020 to June 30, 2021 ; this will provide flexibility
and confidence for students enrolling in UK Pathways programs.
The Higher Education division primarily includes the results of Kaplan as a
service provider to higher education institutions. In the second quarter and
first six months of 2020, Higher Education revenue was up 13% and 1%,
respectively, due primarily to an increase in the Purdue University Global fee,
offset by a reduction in expenses incurred by Kaplan Higher Education as service
provider to Purdue Global. In the first quarter of 2020, the Company did not
record an additional fee with Purdue Global based on an assessment of its
collectability under the TOSA. In the second quarter of 2020, the Company
recorded a portion of the fee with Purdue Global based on an assessment of its
collectability under the TOSA. Purdue Global experienced increased enrollments
and higher retention rates in the first half of 2020, which resulted in improved
Higher Education results for the second quarter and first six months of 2020.
The Company will continue to assess the collectability of the fee with Purdue
Global on a quarterly basis to make a determination as to whether to record all
or part of the fee in the future. For the second quarter and first six months of
2020, Kaplan Higher Education recorded $1.5 million and $3.5 million ,
respectively, in lease restructuring costs, of which $0.1 million was
accelerated depreciation expense.
As of June 30, 2020 , Kaplan had a total outstanding accounts receivable balance
of $89.6 million from Purdue Global related to amounts due for reimbursements
for services, fees earned and a deferred fee. In addition, Kaplan has an $19.1
million long-term receivable balance due from Purdue Global at June 30, 2020 ,
related to the advance of $20 million during the initial KU Transaction.
Kaplan Test Preparation includes Kaplan's standardized test preparation
programs. KTP revenue decreased 22% and 26% for the second quarter and first six
months of 2020, respectively, due to reduced demand for KTP's retail
comprehensive test preparation programs and product-life extensions related to
the postponement of various standardized test dates due to the COVID-19
pandemic. Overall, product-life extensions have resulted in lower revenue being
recognized in the first half of 2020; however, substantially all of this will be
recognized over the remainder of 2020. KTP operating results declined in the
second quarter and first six months of 2020 due to these revenue declines and
$4.5 million of lease restructuring costs, of which $1.8 million was accelerated
depreciation expense.
Kaplan Professional (U.S. ) includes the domestic professional and other
continuing education businesses. Kaplan Professional (U.S. ) revenue in the
second quarter and first six months of 2020 declined 18% and 12%, respectively,
due to declines in CFA, real estate and accountancy programs, partly due to the
postponement of certification exams. Kaplan Professional (U.S. ) operating
results declined in the second quarter and first six months of 2020, primarily
due to the revenue declines and $0.6 million in lease restructuring costs.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.'s
corporate office, other minor businesses and certain shared activities. Overall,
Kaplan corporate and other expenses declined in the first six months of 2020 due
to lower compensation costs.
In the second quarter of 2020, the Company approved a Separation Incentive
Program (SIP) that reduced the number of employees at Kaplan International ,
Higher Education, Kaplan Professional (U.S. ) and Kaplan corporate, resulting in
$5.0 million in non-operating pension expense in the second quarter of 2020. In
the second quarter of 2019, the Company approved a SIP that reduced the number
of employees at KTP and Higher Education, resulting in $6.6 million in
non-operating pension expense in the second quarter of 2019.
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Three Months Ended Six Months Ended
June 30 June 30
(in thousands) 2020 2019 % Change 2020 2019 % Change
Revenue $ 100,762 $ 116,628 (14) $ 216,210 $ 224,851 (4)
Operating Income 23,627 44,494 (47) 59,403 80,034 (26)
Revenue at the television broadcasting division decreased 14% to $100.8 million
in the second quarter of 2020, from $116.6 million in the same period of 2019.
The revenue decline is due to reduced advertising demand related to the COVID-19
pandemic, partially offset by a $3.7 million increase in political advertising
revenue and a $3.5 million increase in retransmission revenues. In the second
quarter of 2020 and 2019, the television broadcasting division recorded $1.1
million and $7.8 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 . Operating
income for the second quarter of 2020 decreased 47% to $23.6 million , from $44.5
million in the same period of 2019, due to revenue declines, higher network fees
and a reduction in property, plant and equipment gains. While revenue and
operating results were adversely impacted by the COVID-19 pandemic in the second
quarter of 2020, both revenue and operating results improved steadily throughout
the quarter.
Revenue at the television broadcasting division decreased 4% to $216.2 million
in the first six months of 2020, from $224.9 million in the same period of 2019.
The revenue decline is due to reduced advertising demand related to the COVID-19
pandemic, partially offset by a $13.5 million increase in political advertising
revenue and $4.1 million in higher retransmission revenues. In the first six
months of 2020 and 2019, the television broadcasting division recorded $1.4
million and $9.6 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 . Operating
income for the first six months of 2020 decreased 26% to $59.4 million , from
$80.0 million in the same period of 2019, due to revenue declines, higher
network fees and a reduction in property, plant and equipment gains.
The postponement of the 2020 summer Olympics , the reduction and uncertainty
surrounding broadcast sporting events, and overall reduced advertising demand
related to the COVID-19 pandemic are expected to negatively impact advertising
revenue and the operating results at the television broadcasting division for
the remainder of 2020.
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) have entered into a new three-year NBC Affiliation
Agreement effective January 1, 2020 through December 31, 2022 .
Manufacturing
Three Months Ended Six Months Ended
June 30 June 30
(in thousands) 2020 2019 % Change 2020 2019 % Change
Revenue $ 83,239 $ 114,873 (28) $ 196,697 $ 230,030 (14)
Operating (Loss) Income (1,482) 4,692 - 5,019 7,966 (37)
Manufacturing includes four businesses: Hoover, 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 , 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.
Manufacturing revenues declined 28% and 14% in the second quarter and first six
months of 2020, respectively. The revenue declines are due primarily to a
significant reduction in product demand at Dekko, particularly in the
hospitality, household appliance and transportation sectors, as well as lower
product demand at Hoover, partially offset by higher wood prices at Hoover in
the second quarter of 2020. Manufacturing operating results declined in the
second quarter and first six months of 2020, due to a significant decline in
Dekko results for the second quarter of 2020 from lower revenues, partially
offset by improved results at Hoover from reduced operating costs and gains on
inventory sales.
Starting in the second half of March 2020 , certain of Dekko, Joyce/Dayton and
Hoover's manufacturing plants began operating at reduced levels due to lower
product demand and other jurisdictional factors related to the COVID-19
pandemic. The manufacturing businesses are tightly managing expenses and
continuing with cost
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reduction plans to mitigate the impact of lower product demand. Overall, this is
expected to continue to adversely impact manufacturing revenues and operating
results for the remainder of 2020.
Healthcare
Three Months Ended Six Months Ended
June 30 June 30
(in thousands) 2020 2019 % Change 2020 2019 % Change
Revenue $ 49,181 $ 40,641 21 $ 95,175 $ 78,369 21
Operating Income 8,818 2,598 - 11,987 4,927 -
The Graham Healthcare Group (GHG) provides home health and hospice services in
three states. 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. Healthcare revenues increased 21% for the second quarter and first
six months of 2020, due to the CSI acquisition, offset by revenue declines from
home health services due to lower patient volumes.
In the second quarter of 2020, GHG received $7.4 million from the Federal CARES
Act Provider Relief Fund . GHG did not apply for these funds; they were disbursed
to GHG as a Medicare provider under the CARES Act. Under the Department of
Health and Human Services guidelines, these funds may be used to offset revenue
reductions and expenses incurred in connection with the COVID-19 pandemic. Of
this amount, GHG recorded $5.5 million in revenue in the second quarter to
partially offset the impact of revenue reductions due to the COVID-19 pandemic
from the curtailment of elective procedures by health systems and other factors.
GHG recorded $1.7 million as a credit to operating costs to partially offset the
impact of costs incurred to procure personal protective equipment for GHG
employees and other COVID-19 related costs. The improvement in GHG operating
results in the second quarter and first six months of 2020 is due to improved
results from home health and hospice services and operating income from the CSI
acquisition. The Company expects home health care revenues for the remainder of
2020 to continue to be down from 2019, due to the effects of COVID-19.
SocialCode
Three Months Ended Six Months Ended
June 30 June 30
(in thousands) 2020 2019 % Change 2020 2019 % Change
Revenue $ 10,483 $ 16,382 (36) $ 22,506 $ 29,829 (25)
Operating Loss (3,004) (975) - (6,793) (4,993) (36)
SocialCode is a provider of marketing solutions managing data, creative, media
and marketplaces to accelerate client growth. SocialCode's revenue decreased 36%
and 25% in the second quarter and first six months of 2020, respectively, due to
reduced marketing spending by advertising clients as a result of the
recessionary environment from the COVID-19 pandemic. SocialCode also has some
significant CPG industry clients and has experienced the adverse impact of brand
boycotts. SocialCode reported operating losses of $3.0 million and $6.8 million
in the second quarter and first six months of 2020, respectively, compared to
$1.0 million and $5.0 million in the second quarter and first six months of
2019, respectively. In July 2020 , SocialCode announced it will be splitting into
two separate companies. SocialCode's agency business will continue as a leading
digital marketing agency and the Audience Intelligence Platform (AIP) will be a
separate software company, operating under the new name, Decile. Decile uses
first party customer data to deliver business intelligence and customer insights
to its customers. In the second quarter of 2020, SocialCode recorded a $1.5
million lease impairment charge (including $0.1 million in property, plant and
equipment write-downs) in connection with a restructuring plan that included
other cost reduction initiatives to mitigate the adverse impact of COVID-19 on
advertising demand, which is expected to continue for the remainder of 2020.
These initiatives included the approval of a Separation Incentive Program (SIP)
that reduced the number of employees at SocialCode, resulting in $1.0 million in
non-operating pension expense in the second quarter of 2020.
Other Businesses
On May 15, 2020 , the Company acquired Framebridge, Inc. , a custom framing
service company, headquartered in Washington, DC , with two retail locations in
the metropolitan area and a manufacturing facility in Richmond, KY . The Company
previously disclosed a minority investment interest in Framebridge .
On July 31, 2019 , the Company acquired Clyde's Restaurant Group (CRG). CRG owns
and operates twelve 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 United States . As a
result of the COVID-19 pandemic, CRG temporarily closed all of its restaurants
and venues in the second half of March 2020 , pursuant to government orders,
maintaining limited operations for delivery and pickup. At the time, CRG had
temporarily laid off many of its employees due to the uncertainty as to the
timing, safety and other details regarding
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reopening. Given the uncertain and challenging operating environment for the
restaurant industry, the Company completed a goodwill and other long-lived
assets impairment review of CRG in the first quarter of 2020, resulting in a
$9.7 million goodwill and intangible assets impairment charge.
In the second half of May 2020 , CRG began limited outdoor dining services at
most of its restaurants, and in the second half of June 2020 , CRG began limited
indoor dining services at most of its restaurants. While many of CRG's laid-off
employees were rehired, CRG is uncertain as to the timing and other details
regarding a full reopening. In June 2020 , CRG made the decision to close its
restaurant and entertainment venue in Columbia, MD effective July 19, 2020 ,
resulting in accelerated depreciation of property, plant and equipment totaling
$2.8 million in the second quarter of 2020; an additional $2.8 million in
accelerated depreciation will be recorded in the third quarter of 2020. CRG
incurred a significant loss in the second quarter of 2020 due to limited
revenues and costs incurred to support its employees and to reopen the
restaurants for limited outdoor and indoor services. CRG continues to develop
cost reduction plans to mitigate the impact of COVID-19. The pandemic is
expected to continue to adversely impact CRG revenues and operating results for
the remainder of 2020.
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. 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 of industry professionals operate
and manage the dealerships. Graham Holdings Company holds a 90% stake in all
three dealerships. As a result of the COVID-19 pandemic and the related
recessionary conditions, the Company's automotive dealerships experienced
reduced demand for sales and service beginning in March 2020 . Given the
uncertain and challenging operating environment for automotive dealerships, the
Company completed a goodwill and other long-lived assets impairment review of
its automotive dealerships in the first quarter of 2020, resulting in a $6.7
million intangible assets impairment charge. Revenue and operating results at
the automotive dealerships continued to be adversely impacted in the second
quarter of 2020; however, results improved steadily throughout the quarter.
While the impact of the pandemic is uncertain, the Company expects improved
operating results in the second half of 2020, compared to the first half of
2020.
Other businesses include an investment stage business, Megaphone, which provides
podcast technology for publishers and advertisers through the Megaphone platform
and Megaphone Targeted Marketplace (MTM). Megaphone's revenues increased
significantly in the first six months of 2020, as both advertising and platform
sales experienced rapid growth during the period.
Overall, for the first half of 2020, operating revenues for other businesses
increased due largely to the CRG, Framebridge and automotive dealership
acquisitions and growth at Megaphone. Revenues from other businesses decreased
in the second quarter of 2020, due largely to declines at the automotive
dealerships, offset by revenues from the CRG and Framebridge acquisitions and
growth at Megaphone. CRG and the automotive dealerships incurred losses in the
second quarter and first six months of 2020 due to the challenging operating
conditions that began in March 2020 and the goodwill and other long-lived asset
impairment charges. As investment stage businesses, Megaphone and Framebridge
also reported operating losses in the second quarter and first six months of
2020.
Other businesses also include Slate and Foreign Policy , which publish online and
print magazines and websites; and two investment stage businesses, Pinna and
CyberVista. Foreign Policy , CyberVista and Pinna also reported revenue increases
in the first six months of 2020. Losses from each of these four businesses in
the first six months of 2020 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. Corporate
office expenses declined in the first six months of 2020 due primarily to lower
incentive compensation costs.
Equity in (Losses) Earnings of Affiliates
At June 30, 2020 , 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 $1.2 million for the second quarter of 2020,
compared to $1.5 million for the second quarter of 2019. The Company recorded
equity in losses of affiliates of $0.4 million for the first six months of 2020,
compared to earnings of $3.1 million for the first six months of 2019. The
Company recorded $3.6 million in write-downs in equity in earnings of affiliates
related to two of its investments in the first quarter of 2020.
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Net Interest Expense and Related Balances
On June 30, 2020 , the Company repaid the £60 million borrowings due under the
Kaplan Credit Agreement, financed by a £60 million drawdown on the Company's
$300 million revolving credit facility.
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.
The Company incurred net interest expense of $6.4 million and $13.0 million for
the second quarter and first six months of 2020, respectively; compared to $6.8
million and $12.5 million for the second quarter and first six months of 2019,
respectively.
At June 30, 2020 , the Company had $511.5 million in borrowings outstanding at an
average interest rate of 5.1% and cash, marketable equity securities and other
investments of $723.8 million . At June 30, 2020 , the Company had £60 million
($73.9 million ) outstanding on its $300 million revolving credit facility, in
connection with the refinancing of the debt repaid under the Kaplan Credit
Agreement. In management's opinion, the Company will have sufficient financial
resources to meet its business requirements in the next twelve months, including
working capital requirements, capital expenditures, interest payments and
dividends.
Non-operating Pension and Postretirement Benefit Income, net
The Company recorded net non-operating pension and postretirement benefit income
of $12.1 million and $30.5 million for the second quarter and first six months
of 2020, respectively; compared to $12.3 million and $32.2 million for the
second quarter and first six months of 2019, respectively.
In the second quarter of 2020, the Company recorded $6.0 million in expenses
related to non-operating Separation Incentive Programs at the education division
and SocialCode. In the second quarter of 2019, the Company recorded $6.6 million
in expenses related to a non-operating Separation Incentive Program at the
education division.
Gain (Loss) on Marketable Equity Securities , net
Overall, the Company recognized $39.9 million in net gains and $60.5 million in
net losses on marketable equity securities in the second quarter and first six
months of 2020, respectively; compared to $7.8 million and $31.9 million in net
gains on marketable equity securities in the second quarter and first six months
of 2019, respectively.
Other Non-Operating Income
The Company recorded total other non-operating income, net, of $8.1 million for
the second quarter of 2020, compared to $1.2 million for the second quarter of
2019. The 2020 amounts included a $3.7 million gain on acquiring a controlling
interest in an equity affiliate; a $2.6 million gain on a cost method
investment; a $1.5 million gain on sale of an equity affiliate, and other items;
offset by $1.1 million in foreign currency losses. The 2019 amounts included
$0.1 million in foreign currency gains and other items.
The Company recorded total other non-operating income, net, of $10.8 million for
the first six months of 2020, compared to $30.6 million for the first six months
of 2019. The 2020 amounts included a $3.7 million gain on acquiring a
controlling interest in an equity affiliate; $3.2 million in foreign currency
gains; a $2.6 million gain on a cost method investment; a $1.4 million net gain
on sales of equity affiliates, and other items; partially offset by $2.6 million
in impairments on cost method investments. The 2019 amounts included a $29.0
million gain on the sale of the Company's interest in Gimlet Media; a $1.4
million gain on sale of cost method investments; $0.6 million in foreign
currency gains and other items.
(Benefit from) Provision for Income Taxes
The Company's effective tax rate for the first six months of 2020 was 18.9%.
The Company's effective tax rate for the first six months of 2019 was 24.2%. In
the first quarter of 2019, the Company recorded income tax benefits related to
stock compensation of $1.7 million .
Earnings (Losses) Per Share
The calculation of diluted earnings (losses) per share for the second quarter
and first six months of 2020 was based on 5,201,101 and 5,234,809 weighted
average shares outstanding, compared to 5,328,252 and 5,327,369 for the second
quarter and first six months of 2019. At June 30, 2020 , there were 5,159,370
shares outstanding. On
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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 has remaining
authorization for 100,996 shares as of June 30, 2020 .
Other
The Company performed an interim impairment review at CRG and the automotive
dealerships given the uncertain and challenging operating environment and
recorded $16.4 million in goodwill and intangible asset impairment charges in
the first quarter of 2020. Following the impairments, the remaining goodwill
balance at these two reporting units as of June 30, 2020 was $39.1 million , or
3% of the total goodwill of the Company.
In connection with the Company's annual impairment testing in 2019, the Company
performed a quantitative goodwill impairment process at all of its reporting
units. At the time, the estimated fair value of the Hoover reporting unit at the
manufacturing businesses exceeded its carrying values by a margin less than 25%.
The total goodwill at this reporting unit was $91.3 million as of June 30, 2020 ,
or 6% of the total goodwill of the Company. 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%. Given the
uncertain impact of the COVID-19 pandemic, 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.
Financial Condition: Capital Resources and Liquidity
The Company considers the following when assessing its liquidity and capital
resources:
As of
December 31,
(In thousands) June 30, 2020 2019
Cash and cash equivalents $ 260,247 $ 200,165
Restricted cash $ 18,827 $ 13,879
Investments in marketable equity securities and other investments $ 444,742 $ 599,967
Total debt $ 511,530 $ 512,829
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 undrawn portion of the Company's
$300 million revolving credit facility, amounting to $226.1 million at June 30,
2020 .
In March 2020 , the U.S. government enacted legislation, including the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") to provide
stimulus in the form of financial aid to businesses affected by the COVID-19
pandemic. Under the CARES Act, employers may defer the payment of the employer
share of FICA taxes due for the period beginning on March 27, 2020 , and ending
December 31, 2020 . As of June 30, 2020 , the Company has deferred $6.3 million of
FICA payments under this program, of which 50% is due by December 31, 2021 and
the remaining balance due by December 31, 2022 .
The CARES Act also included provisions to support healthcare providers in the
form of grants and changes to Medicare and Medicaid payments. In the second
quarter of 2020, GHG received $7.4 million under the CARES Act as a general
distribution from the Provider Relief Fund to provide relief for lost revenues
and expenses incurred in connection with COVID-19. In addition to the above
distribution, in April 2020 , GHG applied for and received $31.5 million under
the expanded Medicare Accelerated and Advanced Payment Program, modified by the
CARES Act. The Department of Health and Human Services will recoup this advance
beginning 120 days after the payment was issued, and the advance will be reduced
by the amount of revenue recognized for claims submitted for services provided
after the recoupment period begins.
Governments in other jurisdictions where the Company operates also provided
relief to businesses affected by the COVID-19 pandemic in the form of job
retention schemes, payroll assistance, deferral of income and other tax
payments, and loans. As of June 30, 2020 , Kaplan has recorded benefits totaling
$6.6 million related to job retention and payroll schemes. Additionally, Kaplan
deferred VAT and other tax payments in the U.K. and Ireland amounting to $2.6
million as of June 30, 2020 .
During the first six months of 2020, the Company's cash and cash equivalents
increased by $60.1 million , due largely to cash generated from operations and
the proceeds from the sale of marketable equity securities. The increase was
offset by the repurchase of common shares, payment of dividends, capital
expenditures and the acquisition of three businesses and other investments. In
the first six months of 2020, the Company's borrowings decreased by $1.3
million , primarily due to foreign currency translation adjustments, partially
offset by additional borrowings.
As of June 30, 2020 and December 31, 2019 , the Company had money market
investments of $178.5 million and $45.2 million , respectively, that are included
in cash and cash equivalents. At June 30, 2020 , the Company held
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approximately $65 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 June 30, 2020 , the fair value of the Company's investments in marketable
equity securities was $431.8 million , which includes investments in the common
stock of five publicly traded companies. During the first six months of 2020,
the Company sold marketable equity securities that generated proceeds of $93.8
million . At June 30, 2020 , the unrealized gain related to the Company's
investments totaled $219.0 million .
The Company had working capital of $590.3 million and $621.6 million at June 30,
2020 and December 31, 2019 , 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 June 30, 2020 and December 31, 2019 , the Company had borrowings outstanding
of $511.5 million and $512.8 million , respectively. The Company's borrowings at
June 30, 2020 were mostly from $400.0 million of 5.75% unsecured notes due June
1, 2026 , £60 million in outstanding borrowings under the Company's revolving
credit facility and a commercial note of $26.5 million at the Automotive
subsidiary. 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 .
During the six months ended June 30, 2020 and 2019, the Company had average
borrowings outstanding of approximately $511.2 million and $499.8 million ,
respectively, at an average annual interest rate of approximately 5.1%. During
the six months ended June 30, 2020 and 2019, the Company incurred net interest
expense of $13.0 million and $12.5 million , respectively.
On April 10, 2020 , Moody's affirmed the Company's credit ratings, but revised
the outlook from Stable to Negative. On April 27, 2020 , Standard & Poor's
downgraded the Company's credit rating to BB and revised the outlook from Stable
to Negative.
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. As of June 30, 2020 , the Company
had $73.9 million outstanding under the $300 million revolving credit facility,
which borrowing was used to repay the £60 million Kaplan U.K. credit facility
that matured at the end of June 2020 . 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, capital expenditures,
interest payments, potential acquisitions and strategic investments, dividends
and stock repurchases.
In summary, the Company's cash flows for each period were as follows:
Six Months Ended
June 30
(In thousands) 2020 2019
Net cash provided by (used in) operating activities $ 121,351 $ (16,675)
Net cash provided by (used in) investing activities 26,651 (100,901)
Net cash (used in) provided by financing activities (78,019) 40,317
Effect of currency exchange rate change (4,953) 778
Net increase (decrease) in cash and cash equivalents and restricted cash
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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 (used in) operating activities were as
follows:
Six Months Ended
June 30
(In thousands) 2020 2019
Net (Loss) Income $ (15,029) $ 138,897
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, amortization and goodwill and intangible asset impairment 96,021 54,040
Amortization of lease right-of-use asset 50,954 40,871
Net pension benefit and special separation benefit expense (21,409) (19,763)
Other non-cash activities 64,776 (45,774)
Change in operating assets and liabilities (53,962) (184,946)
Net Cash Provided by (Used in) Operating Activities
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 the first six months of 2020 compared to the first six months of 2019, the
increase in net cash provided by operating activities is primarily due to
changes in operating assets and liabilities. Changes in operating assets and
liabilities were driven by the collection of accounts receivable, the advance
received by GHG under the expanded Medicare Accelerated and Advanced Payment
Program as modified by the CARES Act, and the deferral of FICA payments under
the CARES Act.
Investing Activities. The Company's net cash flow used in investing activities
were as follows:
Six Months Ended
June 30
(In thousands) 2020 2019
Investments in certain businesses, net of cash acquired $ (20,080) $ (84,071)
Purchases of property, plant and equipment (40,209) (52,703)
Net proceeds from sales of marketable equity securities 93,775 9,663
Investments in equity affiliates, cost method and other investments (8,011)
(24,342)
Net proceeds from sales of businesses, property, plant and equipment and investments
862 53,414
Other 314 (2,862)
Net Cash Provided by (Used in) Investing Activities $
26,651
Acquisitions. During the first six months of 2020, the Company acquired three businesses: two small businesses in its education division and an additional interest inFramebridge, Inc. , which is included in other businesses. TheFramebridge purchase price includes$54.3 million in deferred payments and contingent consideration based on the acquiree achieving certain revenue milestones in the future. During the first six months of 2019, the Company acquired an interest in two automotive dealerships for cash and the assumption of floor plan payables. Capital Expenditures. Capital expenditures for the first six months of 2020 were lower than the first six months of 2019 primarily due to the completion of an academic and student residential facility in connection with Kaplan's Pathways program inLiverpool, U.K. Both periods include capital expenditures in connection with spectrum repacking at the Company's television stations inDetroit, MI ,Jacksonville, FL , andRoanoke, VA , as mandated by theFCC ; these expenditures are expected to be largely reimbursed to the Company by theFCC . The amounts reflected in the Company's Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods, whereas the Company's capital expenditures for the first six months of 2020 of$35.6 million include assets acquired during the quarter. The Company is also postponing noncritical capital expenditures originally planned for 2020 to preserve cash resources in response to the COVID-19 pandemic. The Company estimates that its capital expenditures will be in the range of$50 million to$60 million in 2020. Net proceeds from sale of investments and businesses. During the first six months of 2020 and 2019, the Company sold marketable equity securities that generated proceeds of$93.8 million and$17.2 million , respectively. The Company purchased$7.5 million of marketable equity securities during the first six months of 2019. The Company sold its interest in Gimlet Media duringFebruary 2019 ; the total proceeds from the sale were$33.5 million . 36 -------------------------------------------------------------------------------- Financing Activities. The Company's net cash flow used in financing activities were as follows: Six Months Ended June 30 (In thousands) 2020 2019 Issuance of borrowings$ 76,984 $ 30,000 Repayments of borrowings (75,206) (1,006) Net (payments) proceeds from vehicle floor plan payable (11,063) 24,618 Common shares repurchased (62,905) - Dividends paid (15,289) (14,779) Other 9,460 1,484
Borrowings and Vehicle Floor Plan Payable. In the first six months of 2020, the Company borrowed £60 million against the$300 million revolving credit facility and used the proceeds to repay the £60 million outstanding balance under the Kaplan Credit Agreement that matured at the end ofJune 2020 . In the first six months of 2019, the Company had cash inflows from borrowings to fund the acquisition of a business at Automotive and used floor vehicle plan financing to fund the purchase of new vehicles at its Automotive subsidiary. Common Stock Repurchases. During the first six months of 2020, the Company purchased a total of 169,267 shares of its Class B common stock at a cost of approximately$62.9 million . During the first six months of 2019, the Company did not purchase any shares of its Class B common stock. 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. AtJune 30, 2020 , the Company had remaining authorization from the Board of Directors to purchase up to 100,996 shares of Class B common stock. Dividends. The quarterly dividend rate per share was$1.45 and$1.39 for the first six months of 2020 and 2019, respectively. Other. During the first six months of 2020, the Company increased the borrowings under its cash overdraft facilities by$9.1 million and received$5.3 million in proceeds from the exercise of stock options. InMarch 2019 , a Hoover minority shareholder put some shares to the Company, which had a redemption value of$0.6 million . There were no other significant changes to the Company's contractual obligations or other commercial commitments from those disclosed in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Forward-Looking Statements All public statements made by the Company and its representatives that are not statements of historical fact, including certain statements in this report, in the Company's Annual Report on Form 10-K and in the Company's 2019 Annual Report to Stockholders, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the duration and severity of the COVID-19 pandemic and its effects on the Company's operations, financial results, liquidity and cash flows. Other forward-looking statements include comments about expectations related to acquisitions or dispositions or related business activities, including the TOSA, the Company's business strategies and objectives, anticipated results of license renewal applications, the prospects for growth in the Company's various business operations and the Company's future financial performance. As with any projection or forecast, forward-looking statements are subject to various risks and uncertainties, including the risks and uncertainties described in Item 1A of the Company's Annual Report on Form 10-K, that could cause actual results or events to differ materially from those anticipated in such statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by or on behalf of the Company. The Company assumes no obligation to update any forward-looking statement after the date on which such statement is made, even if new information subsequently becomes available. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company's market risk disclosures set forth in its 2019 Annual Report filed on Form 10-K have not otherwise changed significantly. 37
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