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 outsidethe United States . InJuly 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 28 -------------------------------------------------------------------------------- remained flat for the second quarter and first six months of 2020, respectively. The revenue decreases were due to declines at Languages,Singapore , andUK Professional, partially offset by growth atUK Pathways andAustralia 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 andSingapore , partially offset by improved results inUK Pathways andAustralia . Kaplan International Languages 2020 results were negatively impacted by COVID-19 travel restrictions andUK 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. InJune 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 fromJuly 1, 2020 toJune 30, 2021 ; this will provide flexibility and confidence for students enrolling inUK 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 ofJune 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 atJune 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 ofKaplan, 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 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. In the second quarter of 2019, the Company approved a SIP that reduced the number of employees at KTP and Higher Education, resulting in$6.6 million in non-operating pension expense in the second quarter of 2019. 29 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30 June 30 (in thousands) 2020 2019 % Change 2020 2019 % Change Revenue$ 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 theFCC . 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 theFCC . Operating income for the first six months of 2020 decreased 26% to$59.4 million , from$80.0 million in the same period of 2019, due to revenue declines, higher network fees and a reduction in property, plant and equipment gains. The postponement of the 2020 summerOlympics , the reduction and uncertainty surrounding broadcast sporting events, and overall reduced advertising demand related to the COVID-19 pandemic are expected to negatively impact advertising revenue and the operating results at the television broadcasting division for the remainder of 2020. InMarch 2019 , the Company's television station inOrlando (WKMG) entered into a new network affiliation agreement withCBS that covers the periodApril 7, 2019 throughJune 30, 2022 . InOctober 2019 , the Company's television stations inHouston (KPRC),Detroit (WDIV) andRoanoke (WSLS) have entered into a new three-year NBC Affiliation Agreement effectiveJanuary 1, 2020 throughDecember 31, 2022 . Manufacturing Three Months Ended Six Months Ended June 30 June 30 (in thousands) 2020 2019 % Change 2020 2019 % Change Revenue$ 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; andForney , 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 ofMarch 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 30 -------------------------------------------------------------------------------- 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. InDecember 2019 , GHG acquired a 75% interest inCSI Pharmacy Holding Company, LLC (CSI), aWake 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 theFederal 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 theDepartment 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. InJuly 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 OnMay 15, 2020 , the Company acquiredFramebridge, Inc. , a custom framing service company, headquartered inWashington, DC , with two retail locations in the metropolitan area and a manufacturing facility inRichmond, KY . The Company previously disclosed a minority investment interest inFramebridge . OnJuly 31, 2019 , the Company acquired Clyde's Restaurant Group (CRG). CRG owns and operates twelve restaurants and entertainment venues in theWashington, DC metropolitan area, includingOld Ebbitt Grill and TheHamilton , two of the top twenty highest grossing independent restaurants inthe United States . As a result of the COVID-19 pandemic, CRG temporarily closed all of its restaurants and venues in the second half ofMarch 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 31 -------------------------------------------------------------------------------- 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 ofMay 2020 , CRG began limited outdoor dining services at most of its restaurants, and in the second half ofJune 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. InJune 2020 , CRG made the decision to close its restaurant and entertainment venue inColumbia, MD effectiveJuly 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. OnJanuary 31, 2019 , the Company acquired two automotive dealerships, Lexus ofRockville and Honda ofTysons Corner , from Sonic Automotive. The Company also announced it had entered into an agreement withChristopher J. Ourisman , a member of theOurisman Automotive Group family of dealerships. In the fourth quarter of 2019, the Company andMr. Ourisman commenced operations at a newJeep automotive dealership, which began generating sales inJanuary 2020 as OurismanJeep ofBethesda .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 inMarch 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 andMegaphone 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 andFramebridge 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 inMarch 2020 and the goodwill and other long-lived asset impairment charges. As investment stage businesses, Megaphone andFramebridge also reported operating losses in the second quarter and first six months of 2020. Other businesses also include Slate andForeign 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 AtJune 30, 2020 , the Company held an approximate 12% interest inIntersection 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. 32 -------------------------------------------------------------------------------- Net Interest Expense and Related Balances OnJune 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 onJanuary 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 inDecember 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. AtJune 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 . AtJune 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) onMarketable 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 TaxesThe 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. AtJune 30, 2020 , there were 5,159,370 shares outstanding. On 33 --------------------------------------------------------------------------------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 ofJune 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 ofJune 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$91.3 million as ofJune 30, 2020 , or 6% of the total goodwill of the Company. The estimated fair value of the Company's other reporting units with significant goodwill balances exceeded their respective carrying values by a margin in excess of 25%. Given the uncertain impact of the COVID-19 pandemic, it is possible that impairment charges could occur in the future, given changes in market conditions and the inherent variability in projecting future operating performance. Financial Condition: Capital Resources and LiquidityThe Company considers the following when assessing its liquidity and capital resources: As of December 31, (In thousands) June 30, 2020 2019 Cash and cash equivalents$ 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 atJune 30, 2020 . InMarch 2020 , theU.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 onMarch 27, 2020 , and endingDecember 31, 2020 . As ofJune 30, 2020 , the Company has deferred$6.3 million of FICA payments under this program, of which 50% is due byDecember 31, 2021 and the remaining balance due byDecember 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 theProvider Relief Fund to provide relief for lost revenues and expenses incurred in connection with COVID-19. In addition to the above distribution, inApril 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 ofJune 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 theU.K. andIreland amounting to$2.6 million as ofJune 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 ofJune 30, 2020 andDecember 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. AtJune 30, 2020 , the Company held 34 -------------------------------------------------------------------------------- approximately$65 million in cash and cash equivalents in businesses domiciled outside theU.S. , of which approximately$7 million is not available for immediate use in operations or for distribution. Additionally, Kaplan's business operations outside theU.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 theU.S. as not readily available for use inU.S. operations. AtJune 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 . AtJune 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 atJune 30, 2020 andDecember 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. AtJune 30, 2020 andDecember 31, 2019 , the Company had borrowings outstanding of$511.5 million and$512.8 million , respectively. The Company's borrowings atJune 30, 2020 were mostly from$400.0 million of 5.75% unsecured notes dueJune 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 atDecember 31, 2019 were mostly from$400.0 million of 5.75% unsecured notes dueJune 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 onJune 1 andDecember 1 . During the six months endedJune 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 endedJune 30, 2020 and 2019, the Company incurred net interest expense of$13.0 million and$12.5 million , respectively. OnApril 10, 2020 , Moody's affirmed the Company's credit ratings, but revised the outlook from Stable to Negative. OnApril 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 ofJune 30, 2020 , the Company had$73.9 million outstanding under the$300 million revolving credit facility, which borrowing was used to repay the £60 million KaplanU.K. credit facility that matured at the end ofJune 2020 . In management's opinion, the Company will have sufficient financial resources to meet its business requirements in the next 12 months, including working capital requirements, capital expenditures, interest payments, potential acquisitions and strategic investments, dividends and stock repurchases. In summary, the Company's cash flows for each period were as follows: Six Months Ended June 30 (In thousands) 2020 2019 Net cash provided by (used in) operating activities$ 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
35 -------------------------------------------------------------------------------- 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
--------------------------------------------------------------------------------
© Edgar Online, source