10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2015
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-671
GRAHAM HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1300 North 17th Street, Arlington, Virginia
22209
(Address of principal executive offices)
(Zip Code)
(703) 345-6300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý.    No  ¨.  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý.    No  ¨.  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨.    No  ý.  
Shares outstanding at October 30, 2015:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,876,353 Shares
 




GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
c. Condensed Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
  
 
(in thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
Operating Revenues
  
 
  
 
  
 
  

Education
$
481,687

 
$
543,918

 
$
1,505,914

 
1,609,036

Advertising
68,898

 
72,951

 
205,489

 
216,653

Other
90,847

 
86,336

 
258,344

 
183,718

  
641,432

 
703,205

 
1,969,747

 
2,009,407

Operating Costs and Expenses
 
 
  
 
 
 
  
Operating
302,029

 
326,395

 
922,373

 
944,066

Selling, general and administrative
285,563

 
309,583

 
864,380

 
862,379

Depreciation of property, plant and equipment
14,460

 
18,664

 
62,266

 
56,295

Amortization of intangible assets
4,512

 
7,354

 
13,897

 
12,972

Impairment of goodwill and other long-lived assets
248,591

 

 
255,467

 

  
855,155

 
661,996

 
2,118,383

 
1,875,712

(Loss) Income from Operations
(213,723
)
 
41,209

 
(148,636
)
 
133,695

Equity in earnings (losses) of affiliates, net
95

 
4,613

 
(662
)
 
100,168

Interest income
481

 
529

 
1,363

 
1,769

Interest expense
(7,830
)
 
(9,298
)
 
(24,679
)
 
(26,610
)
Other (expense) income, net
(40,458
)
 
(10,723
)
 
(29,885
)
 
390,664

(Loss) Income from Continuing Operations Before Income Taxes
(261,435
)
 
26,330

 
(202,499
)
 
599,686

(Benefit) Provision for Income Taxes
(30,500
)
 
16,100

 
(10,000
)
 
140,300

(Loss) Income from Continuing Operations
(230,935
)
 
10,230

 
(192,499
)
 
459,386

Income from Discontinued Operations, Net of Tax
379

 
66,209

 
42,170

 
499,208

Net (Loss) Income
(230,556
)
 
76,439

 
(150,329
)
 
958,594

Net (Income) Loss Attributable to Noncontrolling Interests
(287
)
 
121

 
(1,495
)
 
839

Net (Loss) Income Attributable to Graham Holdings Company
(230,843
)
 
76,560

 
(151,824
)
 
959,433

Redeemable Preferred Stock Dividends

 
(209
)
 
(631
)
 
(847
)
Net (Loss) Income Attributable to Graham Holdings Company Common Stockholders
$
(230,843
)
 
$
76,351

 
$
(152,455
)
 
$
958,586

Amounts Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

(Loss) income from continuing operations
$
(231,222
)
 
$
10,142

 
$
(194,625
)
 
$
459,378

Income from discontinued operations, net of tax
379

 
66,209

 
42,170

 
499,208

Net (loss) income attributable to Graham Holdings Company common stockholders
$
(230,843
)
 
$
76,351

 
$
(152,455
)
 
$
958,586

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Basic (loss) income per common share from continuing operations
$
(40.32
)
 
$
1.73

 
$
(34.18
)
 
$
66.77

Basic income per common share from discontinued operations
0.07

 
11.45

 
7.99

 
72.53

Basic net (loss) income per common share
$
(40.25
)
 
$
13.18

 
$
(26.19
)
 
$
139.30

Basic average number of common shares outstanding
5,738

 
5,671

 
5,721

 
6,737

Diluted (loss) income per common share from continuing operations
$
(40.32
)
 
$
1.73

 
$
(34.18
)
 
$
66.52

Diluted income per common share from discontinued operations
0.07

 
11.39

 
7.99

 
72.27

Diluted net (loss) income per common share
$
(40.25
)
 
$
13.12

 
$
(26.19
)
 
$
138.79

Diluted average number of common shares outstanding
5,837

 
5,757

 
5,811

 
6,823


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2015
 
2014
 
2015
 
2014
Net (Loss) Income
$
(230,556
)
 
$
76,439

 
$
(150,329
)
 
$
958,594

Other Comprehensive Loss, Before Tax
  
 
  
 
 
 
  
Foreign currency translation adjustments:
  
 
  
 
 
 
  
Translation adjustments arising during the period
(10,548
)
 
(9,777
)
 
(17,387
)
 
(7,111
)
Adjustment for sales of businesses with foreign operations
6,026

 

 
5,501

 

  
(4,522
)
 
(9,777
)
 
(11,886
)
 
(7,111
)
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses) for the period, net
3,836

 
9,734

 
(16,497
)
 
46,139

Reclassification adjustment for realization of (gain) loss on exchange, sale or write-down of available-for-sale securities included in net income

 

 

 
(265,274
)
  
3,836

 
9,734

 
(16,497
)
 
(219,135
)
Pension and other postretirement plans:
  
 
  
 
  
 
  
Amortization of net prior service cost (credit) included in net income
68

 
(101
)
 
207

 
(305
)
Amortization of net actuarial gain included in net income
(5,676
)
 
(7,425
)
 
(4,419
)
 
(22,032
)
Curtailment gains included in net income
51

 

 
51

 

Curtailment and settlement included in distribution to Cable ONE
1,403

 

 
1,403

 

  
(4,154
)
 
(7,526
)
 
(2,758
)
 
(22,337
)
Cash flow hedge gain

 
230

 
179

 
641

Other Comprehensive Loss, Before Tax
(4,840
)
 
(7,339
)
 
(30,962
)
 
(247,942
)
Income tax benefit (expense) related to items of other comprehensive loss
127

 
(975
)
 
7,632

 
96,333

Other Comprehensive Loss, Net of Tax
(4,713
)
 
(8,314
)
 
(23,330
)
 
(151,609
)
Comprehensive (Loss) Income
(235,269
)
 
68,125

 
(173,659
)
 
806,985

Comprehensive (income) loss attributable to noncontrolling interests
(287
)
 
121

 
(1,495
)
 
839

Total Comprehensive (Loss) Income Attributable to Graham Holdings Company
$
(235,556
)
 
$
68,246

 
$
(175,154
)
 
$
807,824


See accompanying Notes to Condensed Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
September 30,
2015
 
December 31,
2014
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
977,991

 
$
772,751

Restricted cash
25,347

 
24,898

Investments in marketable equity securities and other investments
343,076

 
226,752

Accounts receivable, net
498,710

 
571,357

Income taxes receivable
41,035

 

Deferred income taxes
4,595

 
934

Inventories and contracts in progress
12,206

 
11,309

Other current assets
53,171

 
81,462

Current assets held for sale ($1,235 of cash)

 
1,240

Total Current Assets
1,956,131

 
1,690,703

Property, Plant and Equipment, Net
203,113

 
860,829

Investments in Affiliates
53,198

 
19,811

Goodwill, Net
947,356

 
1,348,710

Indefinite-Lived Intangible Assets, Net
14,645

 
516,753

Amortized Intangible Assets, Net
81,814

 
96,947

Prepaid Pension Cost
1,189,181

 
1,152,488

Deferred Charges and Other Assets
78,891

 
65,258

Noncurrent Assets Held for Sale

 
820

Total Assets
$
4,524,329

 
$
5,752,319

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
410,192

 
$
464,342

Income taxes payable

 
128,895

Deferred revenue
334,328

 
410,146

Dividends declared
6,715

 

Short-term borrowings
3,000

 
46,375

Redeemable preferred stock
10,510

 

Current liabilities held for sale

 
1,034

Total Current Liabilities
764,745

 
1,050,792

Postretirement Benefits Other Than Pensions
38,507

 
37,962

Accrued Compensation and Related Benefits
215,077

 
244,082

Other Liabilities
73,182

 
91,789

Deferred Income Taxes
447,158

 
754,960

Long-Term Debt
399,822

 
399,545

Total Liabilities
1,938,491

 
2,579,130

Redeemable Noncontrolling Interest
23,415

 
21,904

Redeemable Preferred Stock

 
10,510

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
345,074

 
303,789

Retained earnings
5,396,508

 
6,008,506

Accumulated other comprehensive income, net of tax
 
 
  

Cumulative foreign currency translation adjustment
(3,338
)
 
8,548

Unrealized gain on available-for-sale securities
42,232

 
52,130

Unrealized gain on pensions and other postretirement plans
391,256

 
392,910

Cash flow hedge

 
(108
)
Cost of Class B common stock held in treasury
(3,629,309
)
 
(3,645,476
)
Total Common Stockholders’ Equity
2,562,423

 
3,140,299

Noncontrolling Interests

 
476

Total Equity
2,562,423

 
3,140,775

Total Liabilities and Equity
$
4,524,329

 
$
5,752,319


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Nine Months Ended 
 September 30
(in thousands)
2015
 
2014
Cash Flows from Operating Activities
  
 
  
Net (Loss) Income
$
(150,329
)
 
$
958,594

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation of property, plant and equipment
134,019

 
159,917

Amortization of intangible assets
13,958

 
13,847

Goodwill and other long-lived assets impairment charges
255,467

 
7,774

Net pension benefit
(45,081
)
 
(51,637
)
Early retirement program expense
3,734

 
8,374

Stock-based compensation expense, net
38,423

 
13,123

Foreign exchange loss
16,191

 
2,618

Net loss (gain) on sales and disposition of businesses
18,095

 
(354,612
)
Net loss (gain) on disposition or write-downs of marketable equity securities and cost method investments
1,364

 
(266,173
)
Gain on sale of equity affiliate
(4,827
)
 

Equity in losses (earnings) of affiliates, net of certain distributions
853

 
(96,315
)
(Benefit) provision for deferred income taxes
(29,152
)
 
8,329

Net loss (gain) on sales or write-downs of property, plant and equipment
1,539

 
(119,158
)
Net gain on sale of intangible assets

 
(75,249
)
Change in assets and liabilities:
 
 
 
(Increase) decrease in restricted cash
(449
)
 
45,174

Increase in accounts receivable, net
(20,480
)
 
(12,867
)
Increase (decrease) in accounts payable and accrued liabilities
74,112

 
(46,673
)
(Decrease) increase in deferred revenue
(11,880
)
 
70,011

(Decrease) increase in income taxes payable
(159,490
)
 
68,081

(Increase) decrease in other assets and other liabilities, net
(21,061
)
 
15,300

Other
1,101

 
(1,588
)
Net Cash Provided by Operating Activities
116,107

 
346,870

Cash Flows from Investing Activities
  
 
  
Purchases of marketable equity securities
(135,124
)
 
(57
)
Purchases of property, plant and equipment
(120,018
)
 
(172,434
)
Investments in equity affiliates and cost method investments
(19,038
)
 
(8,388
)
Net proceeds from sales of businesses, property, plant and equipment and other assets
(807
)
 
248,938

Investments in commercial paper

 
(399,758
)
Proceeds from maturities of commercial paper

 
349,793

Investments in certain businesses, net of cash acquired

 
(200,793
)
Net distribution from equity affiliate

 
93,481

Other
60

 
(5,040
)
Net Cash Used in Investing Activities
(274,927
)
 
(94,258
)
Cash Flows from Financing Activities
  
 
  
Issuance of borrowings
550,000

 
405

Cash distributed to Cable ONE in spin-off
(94,115
)
 

Dividends paid
(47,006
)
 
(53,131
)
Repayments of borrowings
(41,815
)
 
(1,315
)
Proceeds from exercise of stock options
11,308

 
5,056

Payments of financing costs
(9,944
)
 

Common shares repurchased, including the Berkshire Exchange transaction

 
(327,718
)
Other
5,334

 
567

Net Cash Provided by (Used in) Financing Activities
373,762

 
(376,136
)
Effect of Currency Exchange Rate Change
(10,937
)
 
(2,936
)
Net Increase (Decrease) in Cash and Cash Equivalents
204,005

 
(126,460
)
Beginning Cash and Cash Equivalents
773,986

 
569,719

Ending Cash and Cash Equivalents
$
977,991

 
$
443,259


See accompanying Notes to Condensed Consolidated Financial Statements.

4



GRAHAM HOLDINGS COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of five television broadcasting stations. The Company's other business operations include home health and hospice services and manufacturing.
On July 1, 2015, the Company completed the spin-off of its wholly owned subsidiary, Cable One, Inc. (Cable ONE), by way of a distribution of all the issued and outstanding shares of Cable ONE common stock, on a pro rata basis, to the Company's stockholders. The operating results of Cable ONE have been presented in income from discontinued operations, net of tax, for all periods presented.
On September 3, 2015, Kaplan completed the sale of substantially all of the assets of its Kaplan Higher Education (KHE) Campuses business, consisting of 38 nationally accredited ground campuses and certain related assets, to Education Corporation of America (ECA) in exchange for a preferred equity interest in ECA. The loss on the sale of the KHE Campuses business is included in other (expense) income, net, in the Condensed Consolidated Statement of Operations.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and nine months ended September 30, 2015 and 2014 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation, which includes the reclassification of the results of operations of certain businesses as discontinued operations for all periods presented.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Revision of Prior Period Amounts During the preparation of the 2014 financial statements, the Company concluded that its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014, that was previously included in the Company's quarterly reports, should be revised to correct the impact of accounts payable and accrued expenses related to capital expenditures. The Company revised its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 to properly eliminate noncash capital expenditures. The result of this correction for the nine months ended September 30, 2014, was an increase in net cash used in investing activities of $10.0 million, with an offsetting increase recorded to net cash provided by operating activities during the same period.
Management has concluded that this error is not material to the previously issued Condensed Consolidated Financial Statements, and, as a result, the Company has revised the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014. There was no impact on the previously reported total cash

5



and cash equivalents, Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations.
As detailed below, these revisions impacted the following consolidated cash flow items:
 
Nine Months Ended September 30, 2014
 
As
 
 
 
 
 
Previously
 
 
 
As
(in thousands)
Reported
 
Revision
 
Revised
Cash Flows from Operating Activities
  
 
  
 
  
Increase (decrease) in Accounts Payable and Accrued Liabilities
$
(56,666
)
 
$
9,993

 
$
(46,673
)
Net Cash Provided by Operating Activities
336,877

 
9,993

 
346,870

 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
Purchases of Property, Plant and Equipment
$
(162,441
)
 
$
(9,993
)
 
$
(172,434
)
Net Cash Used in Investing Activities
(84,265
)
 
(9,993
)
 
(94,258
)
Recently Adopted and Issued Accounting Pronouncements In September 2015, the Financial Accounting Standards Board (FASB) issued new guidance that simplifies the accounting for measurement period adjustments for an acquirer in a business combination. The new guidance requires an acquirer to recognize any adjustments to the provisional purchase accounting in the reporting period the adjustment amounts are determined, by eliminating the requirement to retrospectively account for those adjustments. The guidance requires that the acquirer records, in the financial statements of the same period the adjustment is determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change in the provisional amounts. The amount of the change is calculated as if the accounting has been completed at the acquisition date. The guidance is effective for interim and fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company does not expect this guidance to have an impact on its Consolidated Financial Statements.
In May 2014, the FASB issued comprehensive new guidance that supersedes all existing revenue recognition guidance. In August 2015, the FASB issued an amendment to the guidance that defers the effective date by one year. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. The guidance is effective for interim and fiscal years beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The standard permits two implementation approaches, one requiring retrospective application of the new guidance with a restatement of prior years and one requiring prospective application of the new guidance with disclosure of results under the old guidance. The Company is in the process of evaluating the impact of this new guidance on its Consolidated Financial Statements and believes such evaluation will extend over several future periods because of the significance of the changes to the Company’s policies and business processes.
In August 2014, the FASB issued new guidance that requires management to assess the Company’s ability to continue as a going concern and to provide related disclosures in certain circumstances. This guidance is effective for interim and fiscal years ending after December 15, 2016, with early adoption permitted. The Company does not expect this guidance to have an impact on its Consolidated Financial Statements.
2. DISCONTINUED OPERATIONS
Cable ONE Spin-Off. On July 1, 2015 (the “Distribution Date”), the Company completed the spin-off of Cable ONE as an independent, publicly traded company. The transaction was structured as a tax-free spin-off of Cable ONE to the stockholders of the Company as one share of Cable ONE common stock was distributed for every share of Class A and Class B common stock of Graham Holdings outstanding on the June 15, 2015, record date. Cable ONE is now an independent public company trading on the New York Stock Exchange under the symbol “CABO”. After the spin, the Company does not beneficially own any shares of Cable ONE common stock.
The results of operations of Cable ONE are included in the Company’s Condensed Consolidated Statements of Operations as Income from Discontinued Operations, Net of Tax, for all periods presented. The Company did not reclassify its Statements of Cash Flows or prior Condensed Consolidated Balance Sheets to reflect the various discontinued operations.
In order to implement the Spin-Off, the Company entered into certain agreements with Cable ONE to give effect to the legal and structural separation and to allocate various assets, liabilities and obligations between the Company and Cable ONE. In addition to executing the Spin-Off in the manner provided in the agreements, in June 2015, Cable ONE distributed $450 million in cash to the Company using the proceeds from their issuance of unsecured notes of $450 million in June 2015.  Also, in connection with the spin-off, the Company modified the terms

6



of 10,830 restricted stock awards in the second quarter of 2015 affecting 21 Cable ONE employees. The modification resulted in the acceleration of the vesting period of 6,324 restricted stock awards and the forfeiture of 4,506 restricted stock awards. The Company recorded incremental stock compensation expense, net of forfeitures, in the second quarter of 2015 amounting to $3.7 million, which is reflected as discontinued operations in the Company’s condensed consolidated financial statements.
The spin-off resulted in a modification of some of the Company’s outstanding restricted stock awards and stock options due to the equity restructuring on July 1, 2015. The holders of restricted stock awards received Cable ONE restricted common stock, on a pro rata basis, as part of the distribution, while the stock options were modified to add an antidilution provision. The modification of the restricted stock awards resulted in an estimated incremental stock compensation expense of $3.0 million that will be recognized over the remaining service periods of the unvested restricted stock awards through the end of 2018. The modification of some of the stock options resulted in an incremental stock compensation expense of $23.5 million, of which $18.8 million related to fully vested stock options was recognized as a one-time expense in the third quarter of 2015, with the remaining $4.7 million to be recognized over the remaining service periods of the unvested stock options through the end of 2018. The $18.8 million expense is included in the Company's corporate office segment results and in selling, general and administrative in the Condensed Consolidated Statements of Operations.
As a result of the spin-off, Cable ONE assumed the liability related to their employees participating in the Company’s SERP, and the Company eliminated the accrual of pension benefits for all Cable ONE employees related to their future service. As a result, the Company remeasured the accumulated and projected benefit obligation of the pension and SERP as of July 1, 2015. A pension curtailment gain of $2.2 million was recorded in the third quarter of 2015 in discontinued operations, net of tax.
On July 1, 2015, the Company divested the following assets and liabilities which net to $406.5 million, or $312.3 million net of cash retained by Cable ONE on the Distribution Date:
 
 
As of
(in thousands)
 
July 1, 2015
Cash and cash equivalents
 
$
94,115

Accounts receivable, net
 
29,778

Other current assets
 
14,182

Total current assets
 
138,075

Property, plant and equipments, net
 
612,812

Goodwill, net
 
85,488

Indefinite-lived intangible assets, net
 
496,321

Amortized intangible assets, net
 
510

Deferred charges and other assets
 
22,541

Total Assets
 
$
1,355,747

 
 
 
Accounts payable and accrued liabilities
 
$
70,920

Income taxes payable
 
2,962

Deferred revenue
 
21,883

Short-term borrowings
 
2,500

Total current liabilities
 
98,265

Accrued compensation and related benefits
 
24,227

Other liabilities
 
57

Deferred income taxes
 
279,245

Long-term debt
 
547,500

Total Liabilities
 
$
949,294

 
 
 
Net assets divested in the Spin-Off
 
$
406,453

Cash flows from Cable ONE for the three and nine months ended September 30, 2015 and 2014 are combined with the cash flows from operations within each of the categories presented. Cash flows from Cable ONE are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(in thousands)
 
2015
 
2014
 
2015
 
2014
Net Cash (Used in) Provided by Operating Activities
 
$
(4,468
)
 
$
59,863

 
$
111,665

 
$
187,153

Net Cash Provided by (Used in) Investing Activities
 

 
51,283

 
(74,416
)
 
(35,705
)

7



Spin-Off Costs: One-time Spin-Off transaction and financing and related costs of $7.4 million and $3.5 million in 2015 and 2014, respectively, are included in discontinued operations, net of tax.
Other Discontinued Operations: In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously included as part of Kaplan International that resulted in a pre-tax loss of $4.4 million. An additional school in China was sold by Kaplan in January of 2015 that resulted in a pre-tax loss of $0.7 million.
On June 30, 2014, the Company and Berkshire Hathaway Inc. completed a transaction, as described in Note 4, in which Berkshire acquired a wholly-owned subsidiary of the Company that included, among other things, WPLG, a Miami-based television station; a $375.0 million gain from the WPLG sale was recorded in the second quarter of 2014.
The results of operations of the schools in China and WPLG are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax, for all periods presented. The Company did not reclassify its Statements of Cash Flows or prior Condensed Consolidated Balance Sheets to reflect the various discontinued operations.In the first quarter of 2014, an after-tax adjustment of $3.0 million was made to reduce the $100.0 million after-tax gain on the sale of the Publishing Subsidiaries previously reported in the fourth quarter of 2013, as a result of changes in estimates related to liabilities retained as part of the sale.
The summarized income (loss) from discontinued operations, net of tax, is presented below:
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
  
 
(in thousands)
2015
 
2014
 
2015
 
2014
Operating revenues
$

 
$
196,960

 
$
397,404

 
$
647,128

Operating costs and expenses
1,662

 
(157,819
)
 
(325,379
)
 
(511,981
)
Operating income
1,662

 
39,141

 
72,025

 
135,147

Non-operating income (expense)

 
75,217

 
(1,288
)
 
75,153

Income from discontinued operations
1,662

 
114,358

 
70,737

 
210,300

Provision for income taxes
1,283

 
42,331

 
27,783

 
77,271

Net Income from Discontinued Operations
379

 
72,027

 
42,954

 
133,029

(Loss) gain on sales of discontinued operations

 
(4,352
)
 
(732
)
 
349,875

Expense (benefit) from income taxes on sales of discontinued operations

 
1,466

 
52

 
(16,304
)
Income from Discontinued Operations, Net of Tax
$
379

 
$
66,209

 
$
42,170

 
$
499,208


8



The following table summarizes the 2015 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
 
March 31,
 
June 30,
(in thousands, except per share amounts)
2015
 
2015
Operating Revenues
  
 
  
Education
$
500,602

 
$
523,625

Advertising
66,454

 
70,137

Other
80,369

 
87,128

  
647,425

 
680,890

Operating Costs and Expenses
  

 
  

Operating
309,223

 
311,121

Selling, general and administrative
302,405

 
276,412

Depreciation of property, plant and equipment
22,197

 
25,609

Amortization of intangible assets
4,738

 
4,647

Impairment of long-lived assets

 
6,876

  
638,563

 
624,665

Income from Operations
8,862

 
56,225

Equity in losses of affiliates, net
(404
)
 
(353
)
Interest income
559

 
323

Interest expense
(8,501
)
 
(8,348
)
Other (expense) income, net
(1,105
)
 
11,678

(Loss) Income from Continuing Operations before Income Taxes
(589
)
 
59,525

Provision for Income Taxes
900

 
19,600

(Loss) Income from Continuing Operations
(1,489
)
 
39,925

Income from Discontinued Operations, Net of Tax
23,289

 
18,502

Net Income
21,800

 
58,427

Net Income Attributable to Noncontrolling Interests
(774
)
 
(434
)
Net Income Attributable to Graham Holdings Company
21,026

 
57,993

Redeemable Preferred Stock Dividends
(420
)
 
(211
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
20,606

 
$
57,782

Amounts Attributable to Graham Holdings Company Common Stockholders
 
 
 
(Loss) income from continuing operations
$
(2,683
)
 
$
39,280

Income from discontinued operations, net of tax
23,289

 
18,502

Net income attributable to Graham Holdings Company common stockholders
$
20,606

 
$
57,782

Per Share Information Attributable to Graham Holdings Company Common Stockholders
 
 
  

Basic (loss) income per common share from continuing operations
$
(0.58
)
 
$
6.74

Basic income per common share from discontinued operations
4.09

 
3.18

Basic net income per common share
$
3.51

 
$
9.92

Diluted (loss) income per common share from continuing operations
$
(0.58
)
 
$
6.71

Diluted income per common share from discontinued operations
4.06

 
3.16

Diluted net income per common share
$
3.48

 
$
9.87


9



The following table summarizes the 2014 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
  
March 31,
 
June 30,
 
September 30,
 
December 31,
(in thousands, except per share amounts)
2014
 
2014
 
2014
 
2014
Operating Revenues
  
 
  
 
  
 
  
Education
$
522,154

 
$
542,964

 
$
543,918

 
$
551,381

Advertising
70,115

 
73,587

 
72,951

 
91,561

Other
40,351

 
57,031

 
86,336

 
84,683

  
632,620

 
673,582

 
703,205

 
727,625

Operating Costs and Expenses
  

 
  

 
  

 
  

Operating
296,507

 
321,163

 
326,395

 
317,687

Selling, general and administrative
276,294

 
276,502

 
309,583

 
269,779

Depreciation of property, plant and equipment
19,430

 
18,201

 
18,664

 
18,618

Amortization of intangible assets
2,682

 
2,936

 
7,354

 
5,215

Impairment of intangible and other long-lived assets

 

 

 
17,302

  
594,913

 
618,802

 
661,996

 
628,601

Income from Operations
37,707

 
54,780

 
41,209

 
99,024

Equity in earnings of affiliates, net
4,052

 
91,503

 
4,613

 
202

Interest income
599

 
641

 
529

 
367

Interest expense
(8,788
)
 
(8,525
)
 
(9,298
)
 
(8,922
)
Other (expense) income, net
133,273

 
268,114

 
(10,723
)
 
387,346

Income from Continuing Operations before Income Taxes
166,843

 
406,513

 
26,330

 
478,017

Provision for Income Taxes
62,300

 
61,900

 
16,100

 
172,000

Income from Continuing Operations
104,543

 
344,613

 
10,230

 
306,017

Income from Discontinued Operations, Net of Tax
27,762

 
405,237

 
66,209

 
28,649

Net Income
132,305

 
749,850

 
76,439

 
334,666

Net Loss (Income) Attributable to Noncontrolling Interests
219

 
499

 
121

 
(256
)
Net Income Attributable to Graham Holdings Company
132,524

 
750,349

 
76,560

 
334,410

Redeemable Preferred Stock Dividends
(426
)
 
(212
)
 
(209
)
 

Net Income Attributable to Graham Holdings Company Common Stockholders
$
132,098

 
$
750,137

 
$
76,351

 
$
334,410

Amounts Attributable to Graham Holdings Company Common Stockholders
 
 
 
 
 
 
 
Income from continuing operations
$
104,336

 
$
344,900

 
$
10,142

 
$
305,761

Income from discontinued operations, net of tax
27,762

 
405,237

 
66,209

 
28,649

Net income attributable to Graham Holdings Company common stockholders
$
132,098

 
$
750,137

 
$
76,351

 
$
334,410

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Basic income per common share from continuing operations
$
14.10

 
$
46.35

 
$
1.73

 
$
52.76

Basic income per common share from discontinued operations
3.75

 
54.45

 
11.45

 
4.95

Basic net income per common share
$
17.85

 
$
100.80

 
$
13.18

 
$
57.71

Diluted income per common share from continuing operations
$
14.05

 
$
46.20

 
$
1.73

 
$
52.48

Diluted income per common share from discontinued operations
3.74

 
54.28

 
11.39

 
4.93

Diluted net income per common share
$
17.79

 
$
100.48

 
$
13.12

 
$
57.41



10



The following table summarizes the annual operating results of the Company following the reclassification of operations discussed above as discontinued operations:
(in thousands, except per share amounts)
2014
 
2013
Operating Revenues
  
 
  
Education
$
2,160,417

 
$
2,163,734

Advertising
308,214

 
275,024

Other
268,401

 
161,844

  
2,737,032

 
2,600,602

Operating Costs and Expenses
  

 
  

Operating
1,261,753

 
1,210,863

Selling, general and administrative
1,132,157

 
1,123,965

Depreciation of property, plant and equipment
74,913

 
101,171

Amortization of intangible assets
18,187

 
11,919

Impairment of intangible and other long-lived assets
17,302

 
3,250

  
2,504,312

 
2,451,168

Income from Operations
232,720

 
149,434

Equity in earnings of affiliates, net
100,370

 
13,215

Interest income
2,136

 
2,264

Interest expense
(35,533
)
 
(35,931
)
Other income (expense), net
778,010

 
(23,751
)
Income from Continuing Operations before Income Taxes
1,077,703

 
105,231

Provision for Income Taxes
312,300

 
40,500

Income from Continuing Operations
765,403

 
64,731

Income from Discontinued Operations, Net of Tax
527,857

 
172,614

Net Income
1,293,260

 
237,345

Net Loss (Income) Attributable to Noncontrolling Interests
583

 
(480
)
Net Income Attributable to Graham Holdings Company
1,293,843

 
236,865

Redeemable Preferred Stock Dividends
(847
)
 
(855
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
1,292,996

 
$
236,010

Amounts Attributable to Graham Holdings Company Common Stockholders
 
 
 
Income from continuing operations
$
765,139

 
$
63,396

Income from discontinued operations, net of tax
527,857

 
172,614

Net income attributable to Graham Holdings Company common stockholders
$
1,292,996

 
$
236,010

Per Share Information Attributable to Graham Holdings Company Common Stockholders
 
 
  

Basic income per common share from continuing operations
$
115.88

 
$
8.62

Basic income per common share from discontinued operations
79.93

 
23.48

Basic net income per common share
$
195.81

 
$
32.10

Diluted income per common share from continuing operations
$
115.40

 
$
8.61

Diluted income per common share from discontinued operations
79.63

 
23.44

Diluted net income per common share
$
195.03

 
$
32.05

3. INVESTMENTS
As of September 30, 2015 and December 31, 2014, the Company had commercial paper and money market investments of $804.7 million and $594.3 million, respectively, that are classified as cash, cash equivalents and restricted cash in the Company's Condensed Consolidated Balance Sheets.
Investments in marketable equity securities comprised the following:
  
As of
  
September 30,
2015
 
December 31,
2014
(in thousands)
 
Total cost
$
242,505

 
$
106,909

Gross unrealized gains
74,263

 
86,884

Gross unrealized losses
(3,876
)
 

Total Fair Value
$
312,892

 
$
193,793

The Company invested $135.6 million in marketable equity securities during the first nine months of 2015. There were no new investments in marketable equity securities during the first nine months of 2014. There were no sales of marketable equity securities in the first nine months of 2015. In the first quarter of 2014, the Company recorded a $0.5 million write-down of the Company's investment in Corinthian Colleges, Inc., a publicly traded company. In the second quarter of 2014, the Company sold its remaining investment in Corinthian Colleges, Inc. During the first nine

11



months of 2014, the proceeds from sales of these marketable securities were $5.8 million and net realized losses were $2.6 million.
On June 30, 2014, the Company completed a transaction with Berkshire Hathaway, as described in Note 4, that included the exchange of 2,107 Class A Berkshire shares and 1,278 Class B Berkshire shares owned by the Company; a $266.7 million gain was recorded.
In the second quarter of 2015, the Company acquired an approximate 20% in HomeHero, a company that created and manages an online senior home care marketplace, which is accounted for as an investment in affiliate. As of September 30, 2015, the Company also held a 40% interest in Residential Home Health Illinois, a 42.5% interest in Residential Hospice Illinois, a 40% interest in the joint venture formed between Celtic Healthcare and Allegheny Health Network (AHN) and interests in several other affiliates (see Note 4).
On April 1, 2014, the Company received a gross cash distribution of $95.0 million from Classified Ventures' sale of apartments.com. In connection with this sale, the Company recorded a pre-tax gain of $90.9 million in the second quarter of 2014.
4. ACQUISITIONS, DISPOSITIONS, EXCHANGES AND OTHER
Acquisitions.  In the first nine months of 2015, the Company did not make any acquisitions. In the first nine months of 2014, the Company acquired seven businesses totaling $204.9 million, comprised of four businesses in other businesses, two businesses in Kaplan Test Prep, and one business in Kaplan Higher Ed. The purchase price allocation mostly comprised goodwill, other intangible assets, and other current assets.
On April 1, 2014, Celtic Healthcare acquired VNA-TIP Healthcare, a provider of home health and hospice services in Missouri and Illinois. On May 30, 2014, the Company completed its acquisition of Joyce/Dayton Corp., a Dayton, OH-based manufacturer of screw jacks and other linear motion systems. On July 3, 2014, the Company completed its acquisition of an 80% interest in Residential Healthcare Group, Inc., the parent company of Residential Home Health and Residential Hospice, providers of skilled home health care and hospice services in Michigan and Illinois. The operating results of these businesses are included in other businesses. Residential Healthcare Group, Inc. has a 40% ownership interest in Residential Home Health Illinois and a 42.5% ownership interest in Residential Hospice Illinois, which are accounted for as investments in affiliates.
Dispositions. On July 1, 2015, the Company completed the spin-off of Cable ONE, by way of a distribution of all the issued and outstanding shares of Cable ONE common stock, on a pro rata basis, to the Company's stockholders (see Note 2).
On September 3, 2015, Kaplan completed the sale of substantially all of the assets of its KHE Campuses business, consisting of 38 nationally accredited ground campuses and certain related assets, in exchange for a preferred equity interest in Education Corporation of America (ECA). KHE Campuses schools that have been closed or are in the process of closing are not included in the sale transaction. In connection with the sale agreement, if required by the ED in connection with its post-closing review of the transaction, Kaplan will provide a letter of credit or other credit support with the ED of up to approximately $45 million; any such letter of credit or other credit support could be drawn by the ED in the event that ECA defaults on its obligations to students. If issued, such letter of credit or other credit support would have a term of two years, after which Kaplan would have no further obligations.
The revenue and operating losses related to schools that are being sold as part of the ECA transaction are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(in thousands)
 
2015
 
2014
 
2015
 
2014
Revenue
 
$
43,121

 
$
66,314

 
$
167,244

 
$
202,577

Operating loss
 
629

 
(2,474
)
 
(6,672
)
 
(9,981
)
In the second quarter of 2015, Kaplan recorded a $6.9 million long-lived assets impairment charge in connection with the KHE Campuses business.
In the third quarter of 2015, Kaplan sold Franklyn Scholar, which was part of Kaplan International. In the second quarter of 2015, the Company sold The Root, a component of Slate, and Kaplan sold two small businesses, Structuralia, which was part of Kaplan International, and Fire and EMS Training, which was part of Kaplan Higher Education. As a result of these sales, the Company reported gains (losses) in other non-operating (expense) income (see Note 10). In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously included as part of Kaplan International. In January 2015, Kaplan completed the sale of an additional school in China.

12



Exchanges. On June 30, 2014, the Company and Berkshire Hathaway Inc. completed a previously announced transaction in which Berkshire acquired a wholly-owned subsidiary of the Company that included, among other things, WPLG, a Miami-based television station, 2,107 Class A Berkshire shares and 1,278 Class B Berkshire shares owned by Graham Holdings and $327.7 million in cash, in exchange for 1,620,190 shares of Graham Holdings Class B common stock owned by Berkshire Hathaway (Berkshire exchange transaction).
Other. In January 2015, Celtic and Allegheny Health Network closed on the formation of a joint venture to combine each other’s home health and hospice assets in the western Pennsylvania region. Although Celtic manages the operations of the joint venture, Celtic holds a 40% interest in the joint venture, so the operating results of the joint venture are not consolidated and the pro rata operating results are included in the Company’s equity in earnings of affiliates. Celtic’s revenues from the western Pennsylvania region that are now part of the joint venture made up 29% of total Celtic revenues in 2014.
The Company’s income from continuing operations excludes Cable ONE, the sold Kaplan China schools and WPLG, which have been reclassified to discontinued operations, net of tax (see Note 2). 
5. GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of continued declines in student enrollments at KHE and the challenging industry operating environment, the Company performed an interim impairment review of its goodwill and long-lived assets at the KHE reporting unit. Due to the complexity and effort required to estimate the fair value of the KHE reporting unit in step one of the impairment test and the fair value of the assets and liabilities of the KHE reporting unit in the step two analysis, the Company derived the fair value estimates based on preliminary assumptions and analysis that are subject to change. The KHE reporting unit failed the preliminary step one goodwill test. As a result of the preliminary step two analysis, the Company recorded an estimated $248.6 million goodwill impairment charge. The Company estimated the fair value of the KHE reporting unit utilizing a discounted cash flow model, supported by a market approach. A substantial portion of the estimated impairment charge is due to the amount of unrecognized intangible assets identified in the preliminary step two analysis. Any adjustment to the estimated impairment charge will be recorded in the fourth quarter of 2015.
In the second quarter of 2014, as a result of regulatory changes impacting Kaplan's operations in China, Kaplan recorded an intangible asset impairment charge of $7.8 million, reported in discontinued operations. The Company estimated the fair value of the student and customer relationships using an income approach.
Amortization of intangible assets for the three months ended September 30, 2015 and 2014 was $4.5 million and $7.4 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2015 and 2014 was $13.9 million and $13.0 million, respectively. Amortization of intangible assets is estimated to be approximately $4 million for the remainder of 2015, $17 million in 2016, $14 million in 2017, $13 million in 2018, $12 million in 2019 and $22 million thereafter.
In July 2014, the cable division sold wireless spectrum licenses that were purchased in 2006; a pre-tax non-operating gain of $75.2 million was recorded in the third quarter of 2014 in connection with these sales. As a result of the Cable spin-off, this amount is now recorded in discontinued operations.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Cable
 
Television
Broadcasting
 
Other
Businesses
 
Total
Balance as of December 31, 2014
  
 
  
 
  
 
  
 
  
Goodwill
$
1,057,226

 
$
85,488

 
$
168,345

 
$
145,992

 
$
1,457,051

Accumulated impairment losses
(102,259
)
 

 

 
(6,082
)
 
(108,341
)
 
954,967

 
85,488

 
168,345

 
139,910

 
1,348,710

Measurement period adjustment

 

 

 
4,570

 
4,570

Impairment
(248,591
)
 

 

 

 
(248,591
)
Dispositions
(33,502
)
 
(85,488
)
 

 
(7,819
)
 
(126,809
)
Foreign currency exchange rate changes
(30,524
)
 

 

 

 
(30,524
)
Balance as of September 30, 2015
  

 
  

 
  

 
  

 
  

Goodwill
993,200

 

 
168,345

 
142,743

 
1,304,288

Accumulated impairment losses
(350,850
)
 

 

 
(6,082
)
 
(356,932
)
 
$
642,350

 
$

 
$
168,345

 
$
136,661

 
$
947,356

The Company recorded a $4.6 million measurement period adjustment in the second quarter of 2015 upon the finalization of the purchase accounting related to deferred income taxes in connection with the acquisition of Residential Healthcare, Inc. The balance sheet as of December 31, 2014 has not been revised for the measurement period adjustment as the Company believes it is not material to the Company's financial position.

13



The changes in carrying amount of goodwill at the Company’s education division were as follows:
(in thousands)
Higher
Education
 
Test
Preparation
 
Kaplan
International
 
Total
Balance as of December 31, 2014
  
 
  
 
  
 
  
Goodwill
$
409,884

 
$
166,098

 
$
481,244

 
$
1,057,226

Accumulated impairment losses

 
(102,259
)
 

 
(102,259
)
 
409,884

 
63,839

 
481,244

 
954,967

Impairment
(248,591
)
 

 

 
(248,591
)
Dispositions
(28,738
)
 

 
(4,764
)
 
(33,502
)
Foreign currency exchange rate changes
(280
)
 

 
(30,244
)
 
(30,524
)
Balance as of September 30, 2015
  

 
  

 
  

 
  

Goodwill
380,866

 
166,098

 
446,236

 
993,200

Accumulated impairment losses
(248,591
)
 
(102,259
)
 

 
(350,850
)
 
$
132,275

 
$
63,839

 
$
446,236

 
$
642,350

Other intangible assets consist of the following:
 
 
 
As of September 30, 2015
 
As of December 31, 2014
(in thousands)
Useful Life
Range
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Noncompete agreements
2–5 years
 
$
1,681

 
$
1,232

 
$
449

 
$
2,500

 
$
1,590

 
$
910

Student and customer relationships
2–10 years
 
86,839

 
37,528

 
49,311

 
104,685

 
47,539

 
57,146

Databases and technology
3–5 years
 
10,518

 
9,367

 
1,151

 
10,501

 
8,827

 
1,674

Trade names and trademarks
2–10 years
 
53,140

 
22,709

 
30,431

 
55,452

 
19,724

 
35,728

Other
1–6 years (1)
 
2,184

 
1,712

 
472

 
8,969

 
7,480

 
1,489

  
  
 
$
154,362

 
$
72,548

 
$
81,814

 
$
182,107

 
$
85,160

 
$
96,947

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Franchise agreements
  
 
$

 
  

 
  

 
$
496,321

 
  

 
  

Licensure and accreditation
  
 
994

 
  

 
  

 
6,781

 
  

 
  

Other
  
 
13,651

 
  

 
  

 
13,651

 
  

 
  

 
  
 
$
14,645

 
 
 
 
 
$
516,753

 
 
 
 
____________
(1)
The Company’s other amortized intangible assets maximum useful life was 25 years as of December 31, 2014.
6. DEBT
The Company’s borrowings consist of the following:
  
As of
  
September 30,
2015
 
December 31,
2014
(in thousands)
 
7.25% unsecured notes due February 1, 2019
$
398,619

 
$
398,308

AUD Revolving credit borrowing

 
40,927

Other indebtedness
4,203

 
6,685

Total Debt
402,822

 
445,920

Less: current portion
(3,000
)
 
(46,375
)
Total Long-Term Debt
$
399,822

 
$
399,545

The Company’s other indebtedness at September 30, 2015 is at an interest rate of 6% and matures from 2015 to 2017. The Company’s other indebtedness at December 31, 2014 is at interest rates from 0% to 6% and matures from 2015 to 2017.
On June 30, 2015, the Company's debt included $550 million related to Cable ONE. With the Cable ONE spin-off effective on July 1, 2015, the Cable ONE debt is no longer an obligation of the Company.
On June 17, 2015, the Company terminated its U.S. $450 million, AUD 50 million four-year revolving credit facility dated June 17, 2011. No borrowings were outstanding under the 2011 Credit Agreement at the time of termination. On June 29, 2015, the Company entered into a credit agreement (the Credit Agreement) providing for a new U.S. $200 million five-year revolving credit facility (the Facility) with each of the lenders party thereto, Wells Fargo Bank, National Association as Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, National Association, as Documentation Agent (the Credit Agreement). The Company is required to pay a commitment fee on a quarterly basis, based on the Company's leverage ratio, of between 0.15% and 0.25% of the amount of the Facility. Any borrowings are made on an unsecured basis and bear interest at the

14



Company’s option, either at (a) a fluctuating interest rate equal to the highest of Wells Fargo’s prime rate, 0.50 percent above the Federal funds rate or the one-month Eurodollar rate plus 1%, or (b) the Eurodollar rate for the applicable interest period as defined in the Credit Agreement which is generally a periodic rate equal to LIBOR, in each case plus an applicable margin that depends on the Company’s consolidated debt to consolidated adjusted EBITDA (as determined pursuant to the Credit Agreement, “leverage ratio”). The Company may draw on the Facility for general corporate purposes. The Facility will expire on July 1, 2020, unless the Company and the banks agree to extend the term. Any outstanding borrowings must be repaid on or prior to the final termination date. The Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and requires the Company to maintain a leverage ratio of not greater than 3.5 to 1.0 and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the ratio of consolidated adjusted EBITDA to consolidated interest expense as determined pursuant to the Credit Agreement. As of September 30, 2015, the Company is in compliance with all financial covenants.
On March 9, 2015, the Company repaid the AUD 50 million borrowed under its revolving credit facility. On the same day, the AUD 50 million interest rate swap agreements matured.
During the three months ended September 30, 2015 and 2014, the Company had average borrowings outstanding of approximately $404.2 million and $450.9 million, respectively, at average annual interest rates of approximately 7.2% and 7.0%, respectively. During the three months ended September 30, 2015 and 2014, the Company incurred net interest expense of $7.3 million and $8.8 million, respectively.
During the nine months ended September 30, 2015 and 2014, the Company had average borrowings outstanding of approximately $436.3 million and $451.4 million, respectively, at average annual interest rates of approximately 7.0%. During the nine months ended September 30, 2015 and 2014, the Company incurred net interest expense of $23.3 million and $24.8 million, respectively.
At September 30, 2015, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $422.0 million, compared with the carrying amount of $398.6 million. At December 31, 2014, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $450.3 million, compared with the carrying amount of $398.3 million. The carrying value of the Company’s other unsecured debt at September 30, 2015 approximates fair value.
7. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of September 30, 2015
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
554,913

 
$
554,913

Commercial paper (2)
249,827

 

 
249,827

Marketable equity securities (3) 
312,892

 

 
312,892

Other current investments (4) 
16,031

 
14,153

 
30,184

Total Financial Assets
$
578,750

 
$
569,066

 
$
1,147,816

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
48,765

 
$
48,765

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2)
The Company's commercial paper investments with original maturities of 90 days or less are included in cash and cash equivalents.
(3)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits.
(5)
Includes Graham Holdings Company's Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company's Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits. These plans measure the market value of a participant's balance in a notional investment account that is comprised primarily of mutual funds, which are based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.

15



 
As of December 31, 2014
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
368,131

 
$
368,131

Commercial paper (2)
226,197

 

 
226,197

Marketable equity securities (3) 
193,793

 

 
193,793

Other current investments (4) 
11,788

 
21,171

 
32,959

Total Financial Assets
$
431,778

 
$
389,302

 
$
821,080

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
70,661

 
$
70,661

Interest rate swap (6) 

 
179

 
179

Total Financial Liabilities
$

 
$
70,840

 
$
70,840

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2)
The Company's commercial paper investments with original maturities of 90 days or less are included in cash and cash equivalents.
(3)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits.
(5)
Includes Graham Holdings Company's Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company's Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits. These plans measure the market value of a participant's balance in a notional investment account that is comprised primarily of mutual funds, which are based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.
(6)
Included in Other liabilities. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
In the third quarter of 2015, the Company recorded an estimated preliminary goodwill impairment charge of $248.6 million. In the second quarter of 2015, the Company recorded a long-lived asset impairment charge of $6.9 million. In the second quarter of 2014, the Company recorded an intangible asset impairment charge of $7.8 million, reported in discontinued operations (see Note 5). The remeasurements of the goodwill and other long-lived assets are classified as Level 3 fair value assessments due to the significance of unobservable inputs developed in the determination of the fair values. The Company used a discounted cash flow model to determine the estimated fair value of the reporting unit. A market value approach was also utilized to supplement the discounted cash flow model. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine the reporting unit’s estimated fair value.
8. STOCKHOLDERS' EQUITY
Stock Awards. As a result of the Cable ONE spin-off, the number of Class B common stock authorized for issuance under the 2012 Incentive Compensation Plan (the 2012 Plan) was increased from 500,000 shares to 772,588 shares. The individual award limits under the 2012 Plan was also increased from 50,000 shares to 77,258 shares per calendar year.
Redeemable Preferred Stock. In the third quarter of 2015, the Company notified the holders of the Series A preferred stock of its intention to redeem the shares. On October 1, 2015, the Company redeemed the remaining 10,510 Series A preferred stock, with a par value of $1.00 per share and a liquidation preference of $1,000 per share, for $10.5 million. The Company reclassified the Series A preferred stock to current liabilities in the third quarter of 2015.
(Loss) Earnings Per Share. On June 30, 2014, the Company acquired 1,620,190 of its Class B common stock owned by Berkshire Hathaway, as described in Note 4.
The Company's unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of the earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.

16



The following reflects the Company's income from continuing operations and share data used in the basic and diluted (loss) earnings per share computations using the two-class method:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Numerator for basic (loss) earnings per share:
  
 
  
 
  
 
  
(Loss) income from continuing operations attributable to Graham Holdings Company common stockholders
$
(231,222
)
 
$
10,142

 
$
(194,625
)
 
$
459,378

Less: Dividends-common stock outstanding and unvested restricted shares
(6,736
)
 
(14,773
)
 
(53,090
)
 
(67,267
)
Undistributed (loss) earnings
(237,958
)
 
(4,631
)
 
(247,715
)
 
392,111

Percent allocated to common stockholders(1)
100.00
%
 
100.00
%
 
100.00
%
 
97.89
%
 
(237,958
)
 
(4,631
)
 
(247,715
)
 
383,842

Add: Dividends-common stock outstanding
6,621

 
14,462

 
52,180

 
66,021

Numerator for basic (loss) earnings per share
$
(231,337
)
 
$
9,831

 
$
(195,535
)
 
$
449,863

Add: Additional undistributed earnings due to dilutive stock options

 

 

 
36

Numerator for diluted (loss) earnings per share
$
(231,337
)
 
$
9,831

 
$
(195,535
)
 
$
449,899

Denominator:
  

 
  

 
 
 
 
Denominator for basic (loss) earnings per share:


 


 


 


Weighted average shares outstanding
5,738

 
5,671

 
5,721

 
6,737

Add: Effect of dilutive stock options

 
25

 

 
25

Denominator for diluted (loss) earnings per share
5,738

 
5,696

 
5,721

 
6,762

Graham Holdings Company Common Stockholders:
  
 
  
 
  
 
  
Basic (loss) earnings per share from continuing operations
$
(40.32
)
 
$
1.73

 
$
(34.18
)
 
$
66.77

Diluted (loss) earnings per share from continuing operations
$
(40.32
)
 
$
1.73

 
$
(34.18
)
 
$
66.52

____________
(1)
Percent of undistributed losses allocated to common stockholders is 100% in the third quarter of 2015 and 2014 and first nine months of 2015 as participating securities are not contractually obligated to share in losses.
Diluted (loss) earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2015
 
2014
 
2015
 
2014
Weighted average restricted stock
50

 
61

 
53

 
61

Weighted average stock options
49

 

 
37

 

The diluted loss per share amounts for the three and nine months ended September 30, 2015 exclude the effects of 77,258 stock options outstanding as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2014 exclude the effects of 5,000 stock options outstanding as their inclusion would have been antidilutive. The diluted loss per share amounts for the three and nine months ended September 30, 2015 exclude the effects of 5,050 restricted stock awards as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2014 exclude the effects of 6,075 restricted stock awards, as their inclusion would have been antidilutive.
In the three and nine months ended September 30, 2015 the Company declared regular dividends totaling $1.15 and $9.10, respectively. In the three and nine months ended September 30, 2014, the Company declared regular dividends totaling $2.55 and $10.20, respectively.
9. PENSION AND POSTRETIREMENT PLANS
Cable ONE Spin-Off. On July 1, 2015, as part of the spin-off, Cable ONE assumed the liability related to their employees participating in the Company's Supplemental Executive Retirement Plan (SERP). The Company also eliminated the accrual of pension benefits for all Cable ONE employees related to their future service. As a result of the spin-off of Cable ONE, the Company remeasured the accumulated and projected benefit obligation of the pension plan and SERP as of July 1, 2015, and recorded curtailment and settlement gains. The new measurement basis was used for the recognition of the SERP cost recorded in the third quarter of 2015 and the pension benefit recorded for the first two months of the third quarter of 2015. The curtailment gain on the spin-off of Cable ONE is included in (loss) income from discontinued operations, net of tax. The settlement gain on the spin-off of Cable ONE is included in the SERP liability distributed to Cable ONE (see Note 2).

17



KHE Campuses Sale. On September 3, 2015, the Company eliminated the accrual of pension benefits for almost all of the KHE Campus employees related to their future service. As a result, the Company remeasured the accumulated and projected benefit obligation of the pension plan as of September 3, 2015, and the Company recorded a curtailment gain in the third quarter of 2015. The new measurement basis was used for the recognition of the Company's pension benefit beginning in September 2015. The curtailment gain on the sale of the KHE Campuses is included in the loss on the sale of the KHE Campuses and reported in Other (expense) income, net on the Condensed Consolidated Statement of Operations.
Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended September 30
 
Nine Months Ended September 30
(in thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
6,090

 
$
6,976

&#