Document


 
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 March 31, 2019
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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
ý
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller reporting
company
¨
Emerging growth
company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 April 26, 2019:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,350,929 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 Months Ended March 31, 2019 and 2018
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018
 
 
 
 
c. Condensed Consolidated Balance Sheets at March 31, 2019 (Unaudited) and December 31, 2018
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018
 
 
 
 
e. Condensed Consolidated Statements of Changes in Common Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018
 
 
 
 
f. 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 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 March 31
  
(in thousands, except per share amounts)
2019
 
2018
Operating Revenues
$
692,199

 
$
659,436

Operating Costs and Expenses
 
 
  
Operating
477,230

 
365,151

Selling, general and administrative
148,383

 
225,045

Depreciation of property, plant and equipment
13,523

 
14,642

Amortization of intangible assets
13,060

 
10,384

  
652,196

 
615,222

Income from Operations
40,003

 
44,214

Equity in earnings of affiliates, net
1,679

 
2,579

Interest income
1,700

 
1,372

Interest expense
(7,425
)
 
(8,071
)
Non-operating pension and postretirement benefit income, net
19,928

 
21,386

Gain (loss) on marketable equity securities, net
24,066

 
(14,102
)
Other income, net
29,351

 
9,187

Income Before Income Taxes
109,302

 
56,565

Provision for Income Taxes
27,600

 
13,600

Net Income
81,702

 
42,965

Net Loss (Income) Attributable to Noncontrolling Interests
46

 
(74
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
81,748

 
$
42,891

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

Basic net income per common share
$
15.38

 
$
7.84

Basic average number of common shares outstanding
5,284

 
5,436

Diluted net income per common share
$
15.26

 
$
7.78

Diluted average number of common shares outstanding
5,326

 
5,473


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Net Income
$
81,702

 
$
42,965

Other Comprehensive Income, Before Tax
 
 
  
Foreign currency translation adjustments:
 
 
  
Translation adjustments arising during the period
10,033

 
11,564

Pension and other postretirement plans:
  
 
  
Amortization of net prior service (credit) cost included in net income
(1,347
)
 
76

Amortization of net actuarial gain included in net income
(548
)
 
(1,367
)
  
(1,895
)
 
(1,291
)
Cash flow hedges (loss) gain
(467
)
 
236

Other Comprehensive Income, Before Tax
7,671

 
10,509

Income tax benefit related to items of other comprehensive income
619

 
303

Other Comprehensive Income, Net of Tax
8,290

 
10,812

Comprehensive Income
89,992

 
53,777

Comprehensive loss (income) attributable to noncontrolling interests
46

 
(74
)
Total Comprehensive Income Attributable to Graham Holdings Company
$
90,038

 
$
53,703


See accompanying Notes to Condensed Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
March 31,
2019
 
December 31,
2018
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
170,882

 
$
253,256

Restricted cash
20,243

 
10,859

Investments in marketable equity securities and other investments
527,942

 
514,581

Accounts receivable, net
551,617

 
582,280

Income taxes receivable
2,591

 
19,166

Inventories and contracts in progress
107,344

 
69,477

Other current assets
96,916

 
82,723

Total Current Assets
1,477,535

 
1,532,342

Property, Plant and Equipment, Net
319,408

 
293,085

Lease Right-of-Use Assets
382,050

 

Investments in Affiliates
140,127

 
143,813

Goodwill, Net
1,339,822

 
1,297,712

Indefinite-Lived Intangible Assets
128,557

 
99,052

Amortized Intangible Assets, Net
250,256

 
263,261

Prepaid Pension Cost
1,017,584

 
1,003,558

Deferred Income Taxes
12,605

 
13,388

Deferred Charges and Other Assets
129,290

 
117,830

Total Assets
$
5,197,234

 
$
4,764,041

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
422,380

 
$
486,578

Deferred revenue
295,966

 
308,728

Income taxes payable
12,025

 
10,496

Current portion of lease liabilities
82,429

 

Current portion of long-term debt
9,568

 
6,360

Dividends declared
7,388

 

Total Current Liabilities
829,756

 
812,162

Accrued Compensation and Related Benefits
176,319

 
179,652

Other Liabilities
22,747

 
57,901

Deferred Income Taxes
327,124

 
322,421

Lease Liabilities
337,648

 

Long-Term Debt
500,238

 
470,777

Total Liabilities
2,193,832

 
1,842,913

Redeemable Noncontrolling Interest
3,866

 
4,346

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
376,639

 
378,837

Retained earnings
6,303,094

 
6,236,125

Accumulated other comprehensive income, net of tax
 
 
  

Cumulative foreign currency translation adjustment
(19,237
)
 
(29,270
)
Unrealized gain on pensions and other postretirement plans
231,452

 
232,836

Cash flow hedges
(96
)
 
263

Cost of Class B common stock held in treasury
(3,918,254
)
 
(3,922,009
)
Total Common Stockholders’ Equity
2,993,598

 
2,916,782

Noncontrolling Interest
5,938

 

Total Equity
2,999,536

 
2,916,782

Total Liabilities and Equity
$
5,197,234

 
$
4,764,041


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Cash Flows from Operating Activities
  
 
  
Net Income
$
81,702

 
$
42,965

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
  
 
  
Depreciation and amortization
26,583

 
25,026

Amortization of lease right-of-use asset
20,353

 

Net pension benefit
(13,653
)
 
(17,295
)
(Gain) loss on marketable equity securities and cost method investments, net
(25,357
)
 
14,102

Stock-based compensation expense, net
1,611

 
2,111

Gain on disposition of businesses, property, plant and equipment and investments, net
(29,204
)
 
(8,739
)
Foreign exchange gain
(514
)
 
(177
)
Equity in earnings of affiliates, net of distributions
1,021

 
(2,115
)
Provision (benefit) for deferred income taxes
5,892

 
(7,436
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
30,556

 
87,311

Inventories
(8,807
)
 
(5,429
)
Accounts payable and accrued liabilities
(84,663
)
 
(85,955
)
Deferred revenue
(16,459
)
 
(8,783
)
Income taxes receivable
17,964

 
18,718

Other assets and other liabilities, net
(45,327
)
 
(35,757
)
Other
380

 
404

Net Cash (Used in) Provided by Operating Activities
(37,922
)
 
18,951

Cash Flows from Investing Activities
  
 
  
Investments in certain businesses, net of cash acquired
(83,721
)
 
(2,619
)
Net proceeds (payments) from disposition of businesses, property, plant and equipment and investments
34,718

 
(17,890
)
Purchases of property, plant and equipment
(28,252
)
 
(17,506
)
Proceeds from sales of marketable equity securities
17,162

 
49,635

Purchases of marketable equity securities
(7,499
)
 

Investments in equity affiliates, cost method and other investments
(3,401
)
 
(4,552
)
Loan to related party and advance related to Kaplan University transaction
(3,500
)
 
(20,000
)
Return of investment in equity affiliates
615

 
1,402

Net Cash Used in Investing Activities
(73,878
)
 
(11,530
)
Cash Flows from Financing Activities
  
 
  
Common shares repurchased

 
(79,001
)
Issuance of borrowings
30,000

 

Net proceeds from vehicle floor plan payable
9,529

 

Dividends paid
(7,391
)
 
(7,319
)
Issuance of noncontrolling interest
6,000

 

Other
(1,104
)
 
(4,653
)
Net Cash Provided by (Used in) Financing Activities
37,034

 
(90,973
)
Effect of Currency Exchange Rate Change
1,776

 
4,171

Net Decrease in Cash and Cash Equivalents and Restricted Cash
(72,990
)
 
(79,381
)
Beginning Cash and Cash Equivalents and Restricted Cash
264,115

 
407,566

Ending Cash and Cash Equivalents and Restricted Cash
$
191,125

 
$
328,185



See accompanying Notes to Condensed Consolidated Financial Statements.

4



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated Other Comprehensive Income
Treasury
Stock
Noncontrolling
Interest
Total Equity
 
Redeemable Noncontrolling Interest
As of December 31, 2018
$
20,000

$
378,837

$
6,236,125

$
203,829

$
(3,922,009
)
$

$
2,916,782

 
$
4,346

Net income for the period
 
 
81,702

 
 
 
81,702

 
 
Issuance of noncontrolling interest
 
 
 
 
 
6,000

6,000

 
 
Net loss attributable to noncontrolling interest
 
 
62

 
 
(62
)

 
 
Net income attributable to redeemable noncontrolling interests
 
 
(16
)
 
 
 
(16
)
 
16

Change in redemption value of redeemable noncontrolling interests
 
(54
)
 
 
 
 
(54
)
 
54

Dividends on common stock
 
 
(14,779
)
 
 
 
(14,779
)
 
 
Issuance of Class B common stock, net of restricted stock award forfeitures
 
(3,783
)
 
 
3,755

 
(28
)
 
 
Amortization of unearned stock compensation and stock option expense
 
1,639

 
 
 
 
1,639

 
 
Other comprehensive income, net of income taxes
 
 
 
8,290

 
 
8,290

 
 
Purchase of redeemable noncontrolling interest
 
 
 
 
 
 

 
(550
)
As of March 31, 2019
$
20,000

$
376,639

$
6,303,094

$
212,119

$
(3,918,254
)
$
5,938

$
2,999,536

 
$
3,866

 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
$
20,000

$
370,700

$
5,791,724

$
535,555

$
(3,802,834
)
$

$
2,915,145

 
$
4,607

Net income for the period
 
 
42,965

 
 
 
42,965

 
 
Net income attributable to redeemable noncontrolling interests
 
 
(73
)
 
 
 
(73
)
 
73

Dividends on common stock
  
 
(14,638
)
 
 
 
(14,638
)
 
 
Repurchase of Class B common stock
  
  
 
 
(79,001
)
 
(79,001
)
 
 
Issuance of Class B common stock, net of restricted stock award forfeitures
 
(189
)
 
 
119

 
(70
)
 
 
Amortization of unearned stock compensation and stock option expense
 
2,325

 
 
 
 
2,325

 
 
Other comprehensive income, net of income taxes
 
 
 
10,812

 
 
10,812

 
 
Cumulative effect of accounting change
 
 
201,812

(194,889
)
 
 
6,923

 
 
As of March 31, 2018
$
20,000

$
372,836

$
6,021,790

$
351,478

$
(3,881,716
)
$

$
2,884,388

 
$
4,680

See accompanying Notes to Condensed Consolidated Financial Statements.


5



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 seven television broadcasting stations, several websites and print publications, and a marketing solutions provider. The Company’s other business operations include manufacturing, automotive dealerships and home health and hospice services.
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 months ended March 31, 2019 and 2018 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, 2018.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
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.
Recently Adopted and Issued Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance that requires, among other things, a lessee to recognize a right-of-use asset representing an entity’s right to use the underlying asset for the lease term and a liability for lease payments on its balance sheet, regardless of classification of a lease as operating or financing. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and account for the lease similar to existing guidance for operating leases today. This new guidance supersedes all prior guidance. The guidance is effective for interim and fiscal years beginning after December 15, 2018. The standard provides two methods of adoption under the modified retrospective approach. Under the comparative date method, lessees and lessors are required to recognize and measure leases as of the beginning of the earliest period presented. Under the effective date method, lessees and lessors are required to recognize and measure leases as of the period of adoption. The Company adopted the new guidance on January 1, 2019 using the effective date method.
The Company elected the available package of transition practical expedients, which allowed the Company to use its historical assessments of whether contracts are or contain leases, lease classification and initial direct costs. Additionally, the Company elected the transition practical expedient to use hindsight to determine the lease term. Upon adoption of the new guidance, the Company recognized right-of-use assets of $369.3 million and lease liabilities of $418.3 million.

6



The cumulative effect of the changes to the Company’s Condensed Consolidated Balance Sheets as a result of adopting the new guidance was as follows:
 
Balance as of December 31, 2018
Adjustments
Balance as of January 1, 2019
Assets
 
 
 
Other current assets
$
82,723

$
(5,595
)
$
77,128

Lease Right-of-Use Assets

369,333

369,333

Liabilities
 
 
 
Accounts payable and accrued liabilities
$
486,578

$
(14,029
)
$
472,549

Current portion of lease liabilities

86,747

86,747

Other Liabilities
57,901

(40,500
)
17,401

Lease Liabilities

331,520

331,520

2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
AcquisitionsOn January 31, 2019, the Company acquired an interest in two automotive dealerships for cash and the assumption of floor plan payables (see Note 5). In connection with the acquisition, the automotive subsidiary of the Company borrowed $30 million to finance the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum (see Note 8). The Company has a 90% interest in the automotive subsidiary. The Company also entered into a management services agreement with an entity affiliated with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and his team will operate and manage the dealerships. In addition, the Company advanced $3.5 million to the minority shareholder, an entity controlled by Mr. Ourisman, at an interest rate of 6% per annum. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
During 2018, the Company acquired eight businesses, five in its education division, one in its healthcare division and two in other businesses for $121.1 million in cash and contingent consideration. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of acquisition.
In January and February 2018, Kaplan acquired the assets of i-Human Patients, Inc., a provider of cloud-based, interactive patient encounter simulations for medical and nursing professionals and educators, and another small business in test preparation and international, respectively. These acquisitions are expected to provide strategic benefits in the future.
In May 2018, Kaplan acquired a 100% interest in Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials and engineering, surveying, architecture, and interior design licensure exam review, by purchasing all of its issued and outstanding shares. This acquisition is expected to provide certain strategic benefits in the future. This acquisition is included in Professional (U.S.).
On July 12, 2018, Kaplan acquired 100% of the issued and outstanding shares of the College for Financial Planning (CFFP), a provider of financial education and training to individuals pursuing the Certified Financial Planner certification, a Master of Science in Personal Financial Planning, or a Master of Science in Finance. The acquisition is expected to expand Kaplan’s financial education product offerings and is included in Professional (U.S.).
On July 31, 2018, Dekko acquired 100% of the issued and outstanding shares of Furnlite, Inc., a Fallston, NC-based manufacturer of power and data solutions for the hospitality and residential furniture industries. Dekko’s primary reasons for the acquisition are to complement existing product offerings and to provide potential synergies across the businesses. The acquisition is included in other businesses.
In August 2018, SocialCode acquired 100% of the membership interests of Marketplace Strategy (MPS), a Cleveland-based digital marketing agency that provides strategy consulting, optimization services, advertising management and creative solutions on online marketplaces including Amazon. SocialCode’s primary reason for the acquisition is to expand its platform offerings. The acquisition is included in other businesses.
In September 2018, Graham Healthcare Group (GHG) acquired the assets of a small business and Kaplan acquired the test preparation and study guide assets of Barron’s Educational Series, a New York-based education publishing company. The acquisitions are expected to complement the healthcare and test preparation services currently offered by GHG and Kaplan, respectively. GHG is included in the healthcare division. The Barron’s Educational Series acquisition is included in test preparation.

7



Acquisition-related costs for acquisitions that closed during the first three months of 2018 were $0.1 million and were expensed as incurred. The aggregate purchase price of the 2018 acquisitions was allocated as follows, based on acquisition date fair values to the following assets and liabilities:
 
 
Purchase Price Allocation
 
 
Year Ended
(in thousands)
 
December 31, 2018
Accounts receivable
 
$
2,344

Inventory
 
1,268

Property, plant and equipment
 
1,518

Goodwill
 
41,840

Amortized intangible assets
 
78,427

Other assets
 
5,198

Other liabilities
 
(7,678
)
Deferred income taxes
 
(4,900
)
Aggregate purchase price, net of cash acquired
 
$
118,017

The fair values recorded were based upon valuations. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded due to these acquisitions is attributable to the assembled workforces of the acquired companies and expected synergies. The Company expects to deduct $32.3 million of goodwill for income tax purposes for the acquisitions completed in 2018.
The acquired companies were consolidated into the Company’s financial statements starting on their respective acquisition dates. The following unaudited pro forma financial information presents the Company’s results as if the current year acquisitions had occurred at the beginning of 2018. The unaudited pro forma information also includes the 2018 acquisitions as if they occurred at the beginning of 2017:
 
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Operating revenues
$
705,393

 
$
728,632

Net income
82,127

 
44,854

These pro forma results were based on estimates and assumptions, which the Company believes are reasonable, and include the historical results of operations of the acquired companies and adjustments for depreciation and amortization of identified assets and the effect of pre-acquisition transaction related expenses incurred by the Company and the acquired entities. The pro forma information does not include efficiencies, cost reductions and synergies expected to result from the acquisitions. They are not the results that would have been realized had these entities been part of the Company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.
Kaplan University Transaction. On March 22, 2018, the Company closed on the Kaplan University (KU) transaction and recorded a pre-tax gain of $4.3 million in the first quarter of 2018. For financial reporting purposes, Kaplan may receive payment of additional consideration related to the sale of the institutional assets as part of its fee to the extent there are sufficient revenues available after paying all amounts required by the Transition and Operations Support Agreement (TOSA). The Company did not recognize any contingent consideration as part of the initial disposition. In the first quarter of 2019, the Company recorded a $0.2 million contingent consideration gain related to the disposition.
The revenue and operating income related to the KU business disposed of are as follows:
(in thousands)
Three Months Ended March 31, 2018
Revenue
$
91,526

Operating income
213

Sale of Businesses. In February 2018, Kaplan completed the sale of a small business which was included in Test Preparation. In September 2018, Kaplan Australia completed the sale of a small business which was included in Kaplan International. As a result of these sales, the Company reported gains in other non-operating income (see Note 13).

8



Other Transactions. In March 2019, a Hoover minority shareholder put some of his shares to the Company, which had a redemption value of $0.6 million. Following the redemption, the Company owns 98.01% of Hoover. In June 2018, the Company incurred $6.2 million of interest expense related to the mandatorily redeemable noncontrolling interest redemption settlement at GHG. The mandatorily redeemable noncontrolling interest was redeemed and paid in July 2018.
3. INVESTMENTS
Money Market Investments. As of March 31, 2019 and December 31, 2018, the Company had money market investments of $65.0 million and $75.5 million, respectively, that are classified as cash and cash equivalents in the Company’s Condensed Consolidated Balance Sheets.
Investments in Marketable Equity Securities. Investments in marketable equity securities consist of the following:
  
As of
  
March 31,
2019
 
December 31,
2018
(in thousands)
 
Total cost
$
282,349

 
$
282,563

Gross unrealized gains
227,958

 
216,111

Gross unrealized losses

 
(2,284
)
Total Fair Value
$
510,307

 
$
496,390

The Company purchased $7.5 million of marketable equity securities during the first three months of 2019. There were no purchases of marketable equity securities during the first three months of 2018.
During the first three months of 2019, the gross cumulative realized gains from the sales of marketable equity securities were $9.7 million. The total proceeds from such sales were $17.2 million. During the first three months of 2018, the gross cumulative realized gains from the sales of marketable equity securities were $28.5 million. The total proceeds from such sales were $50.5 million, of which $0.9 million settled in April 2018.
The gain (loss) on marketable equity securities comprised the following:
 
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Gain (loss) on marketable equity securities, net
$
24,066

 
$
(14,102
)
Less: Net (gains) losses in earnings from marketable equity securities sold and donated
(2,982
)
 
2,611

Net unrealized gains (losses) in earnings from marketable equity securities still held at the end of the period
$
21,084

 
$
(11,491
)
Investments in Affiliates. As of March 31, 2019, the Company held an approximate 11% interest in Intersection Holdings, LLC, and in several other affiliates; GHG held a 40% interest in Residential Home Health Illinois, a 42.5% interest in Residential Hospice Illinois, a 40% interest in the joint venture formed between GHG and a Michigan hospital, and a 40% interest in the joint venture formed between GHG and Allegheny Health Network (AHN). For the three months ended March 31, 2019, and 2018, the Company recorded $2.3 million and $3.7 million, respectively, in revenue for services provided to the affiliates of GHG.
In February 2019, the Company sold its interest in Gimlet Media. In connection with this sale, the Company recorded a gain of $29.0 million in the first quarter of 2019. The total proceeds from the sale were $33.5 million.
Additionally, Kaplan International Holdings Limited (KIHL) held a 45% interest in a joint venture formed with York University. KIHL agreed to loan the joint venture £25 million, of which £16 million was advanced as of December 31, 2017. In the second quarter of 2018, KIHL advanced a final amount of £6 million in additional funding to the joint venture under this agreement, bringing the total amount advanced to £22 million. The loan is repayable over 25 years at an interest rate of 7% and the loan is guaranteed by the University of York.
Cost Method Investments. The Company held investments without readily determinable fair values in a number of equity securities that are accounted for as cost method investments, which are recorded at cost, less impairment, and adjusted for observable price changes for identical or similar investments of the same issuer. The carrying value of these investments was $34.4 million and $30.6 million as of March 31, 2019 and December 31, 2018, respectively.

9



4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
 
As of
 
March 31,
2019
 
December 31,
2018
(in thousands)
 
Receivables from contracts with customers, less doubtful accounts of $14,152 and $14,775
$
503,753

 
$
538,021

Other receivables
47,864

 
44,259

 
$
551,617

 
$
582,280

Bad debt expense was $0.2 million and $5.8 million for the three months ended March 31, 2019 and 2018, respectively.
5.
INVENTORIES, CONTRACTS IN PROGRESS AND VEHICLE FLOOR PLAN PAYABLE
Inventories and contracts in progress consist of the following:
 
As of
 
March 31,
2019
 
December 31,
2018
(in thousands)
 
Raw materials
$
35,178

 
$
37,248

Work-in-process
11,901

 
11,633

Finished goods
58,520

 
17,861

Contracts in progress
1,745

 
2,735

 
$
107,344

 
$
69,477

The Company finances all new vehicle inventory through a standardized floor plan facility (the “floor plan facility”) with SunTrust Bank. The new vehicle floor plan facility bears interest at variable rates that are based on LIBOR plus 1.15% per annum. The weighted average interest rate for the floor plan facility was 3.5% for the three months ended March 31, 2019. As of March 31, 2019, the aggregate capacity under the floor plan facility was $40 million, of which $35.3 million had been utilized, and is included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet. Changes in the vehicle floor plan payable are reported as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
The floor plan facility is collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with respect to the creation of liens and changes in ownership, officers and key management personnel. The Company was in compliance with all of these restrictive covenants as of March 31, 2019.
The floor plan interest expense related to the new vehicle floor plan arrangements is offset by amounts received from manufacturers in the form of floor plan assistance capitalized in inventory and recorded against operating expense in the Condensed Consolidated Statements of Operations when the associated inventory is sold. For the three months ended March 31, 2019, the Company recognized a reduction in operating expense of $0.4 million related to manufacturer floor plan assistance.
6. LEASES
The Company has operating leases for substantially all of its educational facilities, corporate offices and other facilities used in conducting its business, as well as certain equipment. The Company determines if an arrangement is a lease at inception.
Operating leases are included in lease right-of-use (“ROU”) assets, current portion of lease liabilities, and lease liabilities on the Company’s Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. ROU assets also include any initial direct costs, prepaid lease payments and lease incentives received, when applicable. As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on December 31, 2018 for operating leases that commenced prior to that date.
The Company’s lease terms may include options to extend or terminate the lease by one to ten years or more when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less are not recorded on the balance sheet; however, lease expense for these leases is recognized on a straight-line basis. The Company has elected the practical expedient to not separate lease components from nonlease components. As such, lease

10



expense includes these nonlease components, when applicable. Fixed lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized when incurred. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants. In some instances, the Company subleases its leased real estate facilities to third parties. The Company does not have significant financing leases.
The components of lease expense were as follows:
(in thousands)
Three Months Ended March 31, 2019
Operating lease cost
$
25,010

Short-term and month-to-month lease cost
4,813

Variable lease cost
4,356

Sublease income
(4,652
)
Total net lease cost
$
29,527

In connection with the sale of the KHE Campuses business, the Company is the guarantor of several leases for which it has established ROU assets and lease liabilities (see Note 15). Any lease cost or sublease income related to these leases is recorded in other non-operating income. The total net lease cost related to these leases was $0.3 million for the three months ended March 31, 2019.
Supplemental information related to leases was as follows:
(in thousands)
Three Months Ended March 31, 2019
Cash Flow Information:
 
Operating cash flows from operating leases (payments)
$
25,840

Right-of-use assets obtained in exchange for new operating lease liabilities (noncash)
30,410

 
 
 
As of March 31, 2019

Balance Sheet Information:
 
Lease right-of-use assets
$
382,050

 
 
Current lease liabilities
$
82,429

Noncurrent lease liabilities
337,648

Total lease liabilities
$
420,077

 
 
Weighted average remaining lease term (years)
6.8

Weighted average discount rate
3.9
%
Maturities of lease liabilities were as follows:
(in thousands)
March 31, 2019
2019
$
73,800

2020
89,643

2021
72,055

2022
57,865

2023
49,787

Thereafter
137,671

Total payments
480,821

Less: Imputed interest
(60,744
)
Total
$
420,077

As of March 31, 2019, the Company has entered into operating leases, including educational and other facilities, that have not yet commenced that have minimum lease payments of $27.4 million. These operating leases will commence in fiscal years 2019 and 2020 with lease terms of 2 to 20 years.

11



Disclosure related to periods prior to the adoption of new lease accounting guidance
At December 31, 2018, future minimum rental payments under noncancelable operating leases approximate the following:
(in thousands)
December 31, 2018
2019
$
101,009

2020
84,945

2021
72,031

2022
53,709

2023
47,091

Thereafter
115,948

 
$
474,733

Minimum payments have not been reduced by minimum sublease rentals of $66.0 million due in the future under noncancelable subleases.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended March 31, 2019 and 2018 was $13.1 million and $10.4 million, respectively. Amortization of intangible assets is estimated to be approximately $38 million for the remainder of 2019, $48 million in 2020, $43 million in 2021, $37 million in 2022, $30 million in 2023 and $54 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Television
Broadcasting
 
Healthcare
 
Other
Businesses
 
Total
Balance as of December 31, 2018
  
 
  
 
 
 
  
 
  
Goodwill
$
1,128,699

 
$
190,815

 
$
69,626

 
$
255,024

 
$
1,644,164

Accumulated impairment losses
(331,151
)
 

 

 
(15,301
)
 
(346,452
)
 
797,548

 
190,815

 
69,626

 
239,723

 
1,297,712

Acquisitions

 

 

 
33,062

 
33,062

Foreign currency exchange rate changes
9,048

 

 

 

 
9,048

Balance as of March 31, 2019
  

 
  

 
 
 
  

 
  

Goodwill
1,137,747

 
190,815

 
69,626

 
288,086

 
1,686,274

Accumulated impairment losses
(331,151
)
 

 

 
(15,301
)
 
(346,452
)
 
$
806,596

 
$
190,815

 
$
69,626

 
$
272,785

 
$
1,339,822

The changes in carrying amount of goodwill at the Company’s education division were as follows:
(in thousands)
Kaplan
International
 
Higher
Education
 
Test
Preparation
 
Professional (U.S.)
 
Total
Balance as of December 31, 2018
  
 
  
 
  
 
 
 
  
Goodwill
$
583,424

 
$
174,564

 
$
166,920

 
$
203,791

 
$
1,128,699

Accumulated impairment losses

 
(111,324
)
 
(102,259
)
 
(117,568
)
 
(331,151
)
 
583,424

 
63,240

 
64,661

 
86,223

 
797,548

Foreign currency exchange rate changes
9,019

 

 

 
29

 
9,048

Balance as of March 31, 2019
  

 
  

 
  

 
 
 
  

Goodwill
592,443

 
174,564

 
166,920

 
203,820

 
1,137,747

Accumulated impairment losses

 
(111,324
)
 
(102,259
)
 
(117,568
)
 
(331,151
)
 
$
592,443

 
$
63,240

 
$
64,661

 
$
86,252

 
$
806,596


12



Other intangible assets consist of the following:
 
 
 
As of March 31, 2019
 
As of December 31, 2018
(in thousands)
Useful Life
Range
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Student and customer relationships
2–10 years
 
$
283,114

 
$
123,154

 
$
159,960

 
$
282,761

 
$
114,429

 
$
168,332

Trade names and trademarks
2–10 years
 
87,464

 
42,136

 
45,328

 
87,285

 
39,825

 
47,460

Network affiliation agreements
10 years
 
17,400

 
3,843

 
13,557

 
17,400

 
3,408

 
13,992

Databases and technology
3–6 years
 
27,059

 
9,702

 
17,357

 
27,041

 
8,471

 
18,570

Noncompete agreements
2–5 years
 
1,094

 
869

 
225

 
1,088

 
838

 
250

Other
1–8 years
 
24,530

 
10,701

 
13,829

 
24,530

 
9,873

 
14,657

  
  
 
$
440,661

 
$
190,405

 
$
250,256

 
$
440,105

 
$
176,844

 
$
263,261

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Trade names and trademarks
  
 
$
81,607

 
  

 
  

 
$
80,102

 
  

 
  

Franchise agreements
 
 
28,000

 
 
 
 
 

 
 
 
 
FCC licenses
 
 
18,800

 
 
 
 
 
18,800

 
 
 
 
Licensure and accreditation
  
 
150

 
  

 
  

 
150

 
  

 
  

 
  
 
$
128,557

 
 
 
 
 
$
99,052

 
 
 
 
8. DEBT
The Company’s borrowings consist of the following:
  
As of
  
March 31,
2019
 
December 31,
2018
(in thousands)
 
5.75% unsecured notes due June 1, 2026 (1)
$
394,852

 
$
394,675

U.K. Credit facility (2)
85,111

 
82,366

Commerical note
29,750

 

Other indebtedness
93

 
96

Total Debt
$
509,806

 
$
477,137

Less: current portion
(9,568
)
 
(6,360
)
Total Long-Term Debt
$
500,238

 
$
470,777

____________
(1)
The carrying value is net of $5.1 million and $5.3 million of unamortized debt issuance costs as of March 31, 2019 and December 31, 2018, respectively.
(2)
The carrying value is net of $0.2 million of unamortized debt issuance costs as of March 31, 2019 and December 31, 2018, respectively.

The Company’s other indebtedness at March 31, 2019 and December 31, 2018 is at an interest rate of 2% and matures in 2026.
On January 31, 2019, the Company’s automotive subsidiary entered into a Commercial Note with SunTrust Bank in an aggregate principal amount of $30 million. The Commercial Note is payable over a 10-year period in monthly installments of $0.25 million, plus accrued and unpaid interest, due on the first of each month, with a final payment on January 31, 2029. The Commercial Note bears interest at LIBOR plus an applicable interest rate of 1.75% or 2% per annum, in each case determined on a quarterly basis based upon the automotive subsidiary’s Adjusted Leverage Ratio. The Commercial Note contains terms and conditions, including remedies in the event of a default by the automotive subsidiary. On the same date, the Company’s automotive subsidiary entered into an interest rate swap agreement with a total notional value of $30 million and a maturity date of January 31, 2029. The interest rate swap agreement will pay the automotive subsidiary variable interest on the $30 million notional amount at the one-month LIBOR, and the automotive subsidiary will pay counterparties a fixed rate of 2.7%, effectively resulting in a total fixed interest rate of 4.7% on the outstanding borrowings at the current applicable margin of 2.0%. The interest rate swap agreement was entered into to convert the variable rate borrowing under the Commercial Note into a fixed rate borrowing. Based on the terms of the interest rate swap agreement and the underlying borrowing, the interest rate swap was determined to be effective and thus qualifies as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows.
On May 30, 2018, the Company issued $400 million senior unsecured fixed-rate notes due June 1, 2026 (the Notes). The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s existing and future domestic subsidiaries, as described in the terms of the indenture, dated as of May 30, 2018 (the

13



Indenture). The Notes have a coupon rate of 5.75% per annum, payable semi-annually on June 1 and December 1. The Company may redeem the Notes in whole or in part at any time at the respective redemption prices described in the Indenture.
On June 29, 2018, the Company used the net proceeds from the sale of the Notes, together with cash on hand, to redeem the $400 million of 7.25% notes due February 1, 2019. The Company incurred $11.4 million in debt extinguishment costs in relation to the early termination of the 7.25% notes.
In combination with the issuance of the Notes, the Company and certain of the Company’s domestic subsidiaries named therein as guarantors entered into an amended and restated credit agreement providing for a U.S. $300 million five-year revolving credit facility (the Revolving Credit Facility) with each of the lenders party thereto, certain of the Company’s foreign subsidiaries from time to time party thereto as foreign borrowers, Wells Fargo Bank, N.A., as Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, N.A. and Bank of America, N.A. as Documentation Agents (the Amended and Restated Credit Agreement), which amends and restates the Company’s existing Five Year Credit Agreement, dated as of June 29, 2015, among the Company, certain of its domestic subsidiaries as guarantors, the several lenders from time to time party thereto, Wells Fargo Bank, N.A., as Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (the Existing Credit Agreement). The Amended and Restated Credit Agreement amends the Existing Credit Agreement to (i) extend the maturity of the Revolving Credit Facility to May 30, 2023, unless the Company and the lenders agree to further extend the term, (ii) increase the aggregate principal amount of the Revolving Credit Facility to U.S. $300 million, consisting of a U.S. Dollar tranche of U.S. $200 million for borrowings in U.S. Dollars and a multicurrency tranche equivalent to U.S. $100 million for borrowings in U.S. Dollars and certain foreign currencies, (iii) provide for borrowings under the Revolving Credit Facility in U.S. Dollars and certain other foreign currencies specified in the Amended and Restated Credit Agreement, (iv) permit certain foreign subsidiaries of the Company to be added to the Amended and Restated Credit Agreement as foreign borrowers thereunder and (v) effect certain other modifications to the Existing Credit Agreement.
Under the Amended and Restated Credit Agreement, the Company is required to pay a commitment fee on a quarterly basis, based on the Company’s leverage ratio, of between 0.15% and 0.25% of the amount of the average daily unused portion of the Revolving Credit Facility. Any borrowings under the Amended and Restated Credit Agreement are made on an unsecured basis and bear interest at the Company’s option, either at (a) a fluctuating interest rate equal to the highest of Wells Fargo’s prime rate, 0.5 percent above the Federal funds rate or the one-month Eurodollar rate plus 1%, or (b) the Eurodollar rate for the applicable currency and interest period as defined in the Amended and Restated Credit Agreement, which is generally a periodic rate equal to LIBOR, CDOR, BBSY or SOR, as applicable, in the case of each of clauses (a) and (b) plus an applicable margin that depends on the Company’s consolidated debt to consolidated adjusted EBITDA (as determined pursuant to the Amended and Restated Credit Agreement, Total Net Leverage Ratio). The Company and its foreign subsidiaries may draw on the Revolving Credit Facility for general corporate purposes. Any outstanding borrowings must be repaid on or prior to the final termination date. The Amended and Restated Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and requires the Company to maintain a Total Net Leverage Ratio of not greater than 3.5 to 1.0 and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the ratio of consolidated adjusted EBITDA to consolidated interest expense as determined pursuant to the Amended and Restated Credit Agreement. The Company is in compliance with all financial covenants as of March 31, 2019.
During the three months ended March 31, 2019 and 2018, the Company had average borrowings outstanding of approximately $494.4 million and $496.5 million, respectively, at average annual interest rates of approximately 5.1% and 6.2%, respectively. During the three months ended March 31, 2019 and 2018, the Company incurred net interest expense of $5.7 million and $6.7 million, respectively.
At March 31, 2019, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $421.0 million, compared with the carrying amount of $394.9 million. At December 31, 2018, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $406.7 million, compared with the carrying amount of $394.7 million. The carrying value of the Company’s other unsecured debt at March 31, 2019 and December 31, 2018 approximates fair value.

14



9. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of March 31, 2019
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
65,000

 
$
65,000

Marketable equity securities (2)
510,307

 

 
510,307

Other current investments (3)
10,608

 
7,027

 
17,635

Interest rate swap (4)

 
190

 
190

Total Financial Assets
$
520,915

 
$
72,217

 
$
593,132

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
31,738

 
$
31,738

Interest rate swap (6) 

 
275

 
275

Total Financial Liabilities
$

 
$
32,013

 
$
32,013

 
As of December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
75,500

 
$
75,500

Marketable equity securities (2)
496,390

 

 
496,390

Other current investments (3)
11,203

 
6,988

 
18,191

Interest rate swap (4)

 
369

 
369

Total Financial Assets
$
507,593

 
$
82,857

 
$
590,450

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
36,080

 
$
36,080

____________
(1)
The Company’s money market investments are included in Cash and Cash Equivalents and the value considers the liquidity of the counterparty.
(2)
The Company’s investments in marketable equity securities are held in common shares of U.S. corporations that are actively traded on U.S. stock exchanges. Price quotes for these shares are readily available.
(3)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits. These investments are valued using a market approach based on the quoted market prices of the security or inputs that include quoted market prices for similar instruments and are classified as either Level 1 or Level 2 in the fair value hierarchy.
(4)
Included in Deferred Charges and Other Assets. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
(5)
Includes Graham Holdings Company’s Deferred Compensation Plan and supplemental savings plan benefits under the 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.

15



10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition. The Company’s revenue disaggregated by revenue source was as follows:
 
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Education Revenue
 
 
 
Kaplan international
$
185,756

 
$
183,582

Higher education
82,780

 
99,830

Test preparation
61,150

 
59,151

Professional (U.S.)
41,214

 
33,356

Kaplan corporate and other
2,302

 
285

Intersegment elimination
(748
)
 
(705
)
 
372,454

 
375,499

Television broadcasting
108,223

 
108,802

Manufacturing
115,157

 
117,406

Healthcare
37,728

 
37,621

SocialCode
13,447

 
13,299

Other
45,230

 
6,833

Intersegment elimination
(40
)
 
(24
)
Total Revenue
$
692,199

 
$
659,436

The Company generated 75% and 74% of its revenue from U.S. domestic sales for the three months ended March 31, 2019 and March 31, 2018, respectively. The remaining 25% and 26% of revenue for the three months ended March 31, 2019 and March 31, 2018, respectively, was generated from non-U.S. sales.
For the three months ended March 31, 2019 and March 31, 2018, the Company recognized 76% and 81%, respectively, of its revenue over time as control of the services and goods transferred to the customer. The remaining 24% and 19%, respectively, of revenue was recognized at a point in time, when the customer obtained control of the promised goods.
Deferred Revenue. The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance, including amounts which are refundable. The following table presents the change in the Company’s deferred revenue balance:
 
As of
 
 
March 31,
2019
 
December 31,
2018
%
(in thousands)
 
Change
Deferred revenue
$
299,068

 
$
311,214

(4)
During the three months ended March 31, 2019, the Company recognized $163.7 million related to the Company’s deferred revenue balance as of December 31, 2018.
Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of March 31, 2019, KTP’s deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $5.7 million. KTP expects to recognize 78% of this revenue over the next twelve months and the remainder thereafter.
Costs to Obtain a Contract. The following table presents changes in the Company’s costs to obtain a contract asset:
(in thousands)
Balance at
Beginning
of Period
 
Costs associated with new contracts
 
Less: Costs amortized during the period
 
Other
 
Balance
at
End of
Period
2019
$
21,311

 
$
11,071

 
$
(11,936
)
 
$
466

 
$
20,912

The majority of other activity is related to currency translation adjustments during the three months ended March 31, 2019.

16



11. EARNINGS PER SHARE
The Company’s unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of 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.
The following reflects the Company’s net income and share data used in the basic and diluted earnings per share computations using the two-class method:
 
Three Months Ended 
 March 31
(in thousands, except per share amounts)
2019
 
2018
Numerator:
 
 
 
Numerator for basic earnings per share:
  
 
  
Net income attributable to Graham Holdings Company common stockholders
$
81,748

 
$
42,891

Less: Dividends paid-common stock outstanding and unvested restricted shares
(14,779
)
 
(14,638
)
Undistributed earnings
66,969

 
28,253

Percent allocated to common stockholders
99.43
%
 
99.30
%
 
66,588

 
28,057

Add: Dividends paid-common stock outstanding
14,695

 
14,539

Numerator for basic earnings per share
$
81,283

 
$
42,596

Add: Additional undistributed earnings due to dilutive stock options
3

 
1

Numerator for diluted earnings per share
$
81,286

 
$
42,597

Denominator:
 
 
 
Denominator for basic earnings per share:


 


Weighted average shares outstanding
5,284

 
5,436

Add: Effect of dilutive stock options
42

 
37

Denominator for diluted earnings per share
5,326

 
5,473

Graham Holdings Company Common Stockholders:
  
 
  
Basic earnings per share
$
15.38

 
$
7.84

Diluted earnings per share
$
15.26

 
$
7.78

Diluted earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:
 
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Weighted average restricted stock
10

 
28

The diluted earnings per share amounts for the three months ended March 31, 2019 and March 31, 2018 exclude the effects of 104,000 stock options outstanding, as their inclusion would have been antidilutive due to a market condition. The diluted earnings per share amounts for the three months ended March 31, 2018 exclude the effects of 5,250 restricted stock awards as their inclusion would have been antidilutive due to a performance condition.
In the three months ended March 31, 2019 and March 31, 2018, the Company declared regular dividends totaling $2.78 and $2.66 per common share, respectively.
12. PENSION AND POSTRETIREMENT PLANS
On March 22, 2018, the Company eliminated the accrual of pension benefits for certain Kaplan University employees related to their future service. As a result, the Company remeasured the accumulated and projected benefit obligation of the pension plan as of March 22, 2018, and the Company recorded a curtailment gain in the first quarter of 2018. The new measurement basis was used for the recognition of the Company’s pension benefit following the remeasurement. The curtailment gain on the Kaplan University transaction is included in the gain on the Kaplan University transaction and reported in Other income, net on the Condensed Consolidated Statement of Operations.

17



Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans consists of the following components:
  
Three Months Ended March 31
(in thousands)
2019
 
2018
Service cost
$
5,221

 
$
4,940

Interest cost
11,592

 
11,255

Expected return on assets
(30,838
)
 
(32,486
)
Amortization of prior service cost
409

 
42

Recognized actuarial gain
(37
)
 
(1,046
)
Net Periodic Benefit
(13,653
)
 
(17,295
)
Curtailment gain

 
(806
)
Total Benefit
$
(13,653
)
 
$
(18,101
)
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) consists of the following components:
  
Three Months Ended March 31
(in thousands)
2019
 
2018
Service cost
$
214

 
$
205

Interest cost
1,078

 
966

Amortization of prior service cost
85

 
78

Recognized actuarial loss
579

 
601

Net Periodic Cost
$
1,956

 
$
1,850

Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a U.S. stock index fund, a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. The assets of the Company’s pension plan were allocated as follows:
  
As of
  
March 31,
2019
 
December 31,
2018
  
 
U.S. equities
53
%
 
53
%
U.S. stock index fund
28
%
 
28
%
U.S. fixed income
13
%
 
13
%
International equities
6
%
 
6
%
  
100
%
 
100
%
The Company manages approximately 45% of the pension assets internally, of which the majority is invested in a U.S. stock index fund with the remaining investments in Berkshire Hathaway stock and short-term fixed income securities. The remaining 55% of plan assets are managed by two investment companies. The goal for the investments is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both investment managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. One investment manager cannot invest more than 15% of the assets at the time of purchase in the stock of Alphabet and Berkshire Hathaway, no more than 25% of the assets it manages in specified international exchanges at the time the investment is made, and no less than 5% of the assets could be invested in fixed-income securities. The other investment manager cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway, no more than 15% of the assets it manages in specified international exchanges, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. Excluding the exceptions noted above, the investment managers cannot invest more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval from the Plan administrator.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of March 31, 2019. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At March 31, 2019 and December 31, 2018, the pension plan held investments in one common stock and one U.S. stock index fund that exceeded 10% of total plan assets. These

18



investments were valued at $1,001.3 million and $945.6 million at March 31, 2019 and December 31, 2018, respectively, or approximately 43% and 45%, respectively, of total plan assets.
Other Postretirement Plans. The total cost arising from the Company’s other postretirement plans consists of the following components:
  
Three Months Ended March 31
(in thousands)
2019
 
2018
Service cost
$

 
$
268

Interest cost
72

 
170

Amortization of prior service credit
(1,841
)
 
(44
)
Recognized actuarial gain
(1,090
)
 
(922
)
Net Periodic Benefit
$
(2,859
)
 
$
(528
)
13. OTHER NON-OPERATING INCOME
A summary of non-operating income is as follows:
 
Three Months Ended 
 March 31
(in thousands)
2019
 
2018
Gain on sale of an equity affiliate
$
28,994

 
$

Foreign currency gain, net
514

 
177

Gain on sales of businesses
189

 
5,907

Gain on sale of a cost method investment

 
2,845

Other, net
(346
)
 
258

Total Other Non-Operating Income
$
29,351

 
$
9,187

In the first quarter of 2019, the Company recorded a $29.0 million gain on the sale of the Company’s interest in Gimlet Media.
In the first quarter of 2018, the Company recorded a $5.9 million gain on the sale of two businesses in the education division, including a gain of $4.3 million on the Kaplan University transaction (see Note 2).
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income consists of the following components:
 
  
Three Months Ended March 31
  
2019
 
2018
  
Before-Tax
 
Income
 
After-Tax
 
Before-Tax
 
Income
 
After-Tax
(in thousands)
Amount
 
Tax
 
Amount
 
Amount
 
Tax
 
Amount
Foreign currency translation adjustments:
  
 
  
 
  
 
  
 
  
 
  
Translation adjustments arising during the period
$
10,033

 
$

 
$
10,033

 
$
11,564

 
$

 
$
11,564

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service (credit) cost included in net income
(1,347
)
 
364

 
(983
)
 
76

 
(21
)
 
55

Amortization of net actuarial gain included in net income
(548
)
 
147

 
(401
)
 
(1,367
)
 
369

 
(998
)
  
(1,895
)
 
511

 
(1,384
)
 
(1,291
)
 
348

 
(943
)
Cash flow hedges:
 
 
  
 
  
 
  
 
  
 
  
(Loss) gain for the period
(467
)
 
108

 
(359
)
 
236

 
(45
)
 
191

Other Comprehensive Income
$
7,671

 
$
619

 
$
8,290

 
$
10,509

 
$
303

 
$
10,812


19



The accumulated balances related to each component of other comprehensive income (loss) are as follows:
(in thousands, net of taxes)
Cumulative
Foreign
Currency
Translation
Adjustment
 
Unrealized Gain
on Pensions
and Other
Postretirement
Plans
 
Cash Flow
Hedges
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2018
$
(29,270
)
 
$
232,836

 
$
263

 
$
203,829

Other comprehensive income (loss) before reclassifications
10,033

 

 
(305
)
 
9,728

Net amount reclassified from accumulated other comprehensive income (loss)

 
(1,384
)
 
(54
)
 
(1,438
)
Other comprehensive income (loss), net of tax
10,033

 
(1,384
)
 
(359
)
 
8,290

Balance as of March 31, 2019
$
(19,237
)
 
$
231,452

 
$
(96
)
 
$
212,119

The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
  
Three Months Ended 
 March 31
 
Affected Line Item in the Condensed Consolidated Statements of Operations
  
 
(in thousands)
2019
 
2018
 
Pension and Other Postretirement Plans:
 
 
  
 
  
Amortization of net prior service (credit) cost
$
(1,347
)
 
$
76

 
(1)
Amortization of net actuarial gain
(548
)
 
(1,367
)
 
(1)
  
(1,895
)
 
(1,291
)
 
Before tax
  
511

 
348

 
Provision for Income Taxes
  
(1,384
)
 
(943
)
 
Net of Tax
Cash Flow Hedges
 
 
  
 
  
  
(69
)
 
3

 
Interest expense
  
15

 
(1
)
 
Provision for Income Taxes
  
(54
)
 
2

 
Net of Tax
Total reclassification for the period
$
(1,438
)
 
$
(941
)
 
Net of Tax
____________
(1)
These accumulated other comprehensive income components are components of net periodic pension and postretirement plan cost (see Note 12) and are included in non-operating pension and postretirement benefit income in the Company’s Condensed Consolidated Statements of Operations.
15. CONTINGENCIES
Litigation, Legal and Other Matters.  The Company and its subsidiaries are subject to complaints and administrative proceedings and are defendants in various civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, defamation, invasion of privacy; trademark, copyright and patent infringement; U.S. False Claims Act (False Claims Act) violations; violations of applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. However, based on currently available information, management believes it is reasonably possible that future losses from existing and threatened legal, regulatory and other proceedings in excess of the amounts recorded could reach approximately $45 million.
During 2014, certain Kaplan subsidiaries were subject to unsealed cases filed by former employees that include, among other allegations, claims under the False Claims Act relating to eligibility for Title IV funding. The U.S. government declined to intervene in all cases, and, as previously reported, court decisions either dismissed the cases in their entirety or narrowed the scope of their allegations. The remaining case is captioned United States of America ex rel. Carlos Urquilla-Diaz et al. v. Kaplan University et al. (unsealed March 25, 2008). On August 17, 2011, the U.S. District Court for the Southern District of Florida issued a series of rulings in the Diaz case, which included three separate complaints: Diaz, Wilcox and Gillespie. The court dismissed the Wilcox complaint in its entirety; dismissed all False Claims Act allegations in the Diaz complaint, leaving only an individual employment claim; and dismissed in part the Gillespie complaint, thereby limiting the scope and time frame of its False Claims Act allegations regarding compliance with the U.S. Federal Rehabilitation Act. On October 31, 2012, the court entered summary judgment in favor of the Company as to the sole remaining employment claim in the Diaz complaint. On July 16, 2013, the court likewise entered summary judgment in favor of the Company on all remaining claims in the Gillespie complaint. Diaz and Gillespie each appealed to the U.S. Court of Appeals for the Eleventh Judicial Circuit. Arguments on both appeals were heard on February 3, 2015. On March 11, 2015, the appellate court issued a decision affirming the lower court’s dismissal of all of Gillespie’s claims. The appellate court

20



also dismissed three of the four Diaz claims, but reversed and remanded on Diaz’s claim that incentive compensation for admissions representatives was improperly based solely on enrollment counts. Kaplan filed an answer to Diaz’s amended complaint on September 11, 2015. Kaplan filed a motion to dismiss Diaz’s claims, and a hearing was held on December 17, 2015. On March 24, 2016, the Court denied the motion to dismiss. Discovery in the case closed in January 2017. Kaplan filed a motion for summary judgment on February 21, 2017. Summary judgment was granted in full and entered on July 13, 2017. Diaz filed a notice of appeal in September 2017 and filed his initial brief. Kaplan filed a response brief in the third quarter of 2018. In April 2019, the Circuit Court of Appeals affirmed the District Court’s summary judgment in full.
On September 3, 2015, Kaplan sold to ECA substantially all of the assets of KHE nationally accredited on-ground Title IV eligible schools (KHE Campuses). The transaction included the transfer of certain real estate leases that were guaranteed by Kaplan. As part of the transaction, Kaplan retained liability for, among other things, obligations arising under certain lease guarantees. ECA is currently in receivership and has terminated all of its higher education operations other than the New England College of Business (NECB). The receiver has repudiated all of ECA’s real estate leases not connected to NECB. Although ECA is required to indemnify Kaplan for any amounts Kaplan must pay due to ECA’s failure to fulfill its obligations under real estate leases guaranteed by Kaplan, ECA’s financial situation and the existence of secured and unsecured creditors make it unlikely that Kaplan will recover from ECA. In the second half of 2018, the Company recorded an estimated $17.5 million in losses on guarantor lease obligations in connection with this transaction in other non-operating expense. The Company continues to monitor the status of these obligations and there was no significant change to estimated losses in the first quarter of 2019.
Her Majesty’s Revenue and Customs (HMRC), a department of the U.K. government responsible for the collection of taxes, has raised assessments against the Kaplan U.K. Pathways business for Value Added Tax (VAT) relating to 2017 and earlier years, which have been paid by Kaplan. In September 2017, in a case captioned Kaplan International Colleges UK Limited v. The Commissioners for Her Majesty’s Revenue and Customs, Kaplan challenged these assessments. The Company believes it has met all requirements under U.K. VAT law and expects to recover the £16.1 million receivable related to the assessments and subsequent payments that have been paid. Following a hearing held in January 2019, before the First Tier Tax Tribunal, all issues related to EU law in the case were referred to the Court of Justice of the European Union. If the Company does not prevail in this case, a pre-tax charge of £16.1 million will be recorded to operating expense in the Company’s condensed consolidated statement of operations.
In March 2018, HMRC issued new VAT guidance indicating a change of policy in relation to certain aspects of a cost sharing exemption that could impact the U.K. Pathways business adversely if this guidance were to become law. As of March 31, 2019, this guidance had not been incorporated into U.K. law. If Kaplan is not successful in preserving a valid exemption under U.K. VAT law, the U.K. Pathways business would incur additional VAT expense in the future.
Department of Education (ED) Program Reviews.  The ED has undertaken program reviews at various KHE locations.
On February 23, 2015, the ED began a program review assessing KU’s administration of its Title IV and Higher Education Act programs during the 2013-2014 and 2014-2015 award years. In 2018, Kaplan contributed the institutional assets and operations of KU to Purdue Global, and the university became Purdue Global, under the ownership and control of Purdue University. However, Kaplan retains liability for any financial obligations the ED might impose under this program review and that are the result of actions taken during the time that Kaplan owned the institution. On September 28, 2018, the ED issued a Preliminary Program Report (Preliminary Report). This Preliminary Report is not final, and the ED may change the findings in the final report. None of the initial findings in the Preliminary Report carries material financial liability. Although the program review technically covers only the 2013–2015 award years, the ED included a review of the treatment of student financial aid refunds for students who withdrew from a program prior to completion in 2017–2018. KHE cannot predict the outcome of this review, when it will be completed, whether any final findings of non-compliance with financial aid program or other requirements will impact KHE’s operations, or what liability or other limitations the ED might place on KHE or Purdue Global as a result of this review.
There are also two open program reviews at campuses that were part of the KHE Campuses business prior to its sale in 2015 to ECA. The ED’s final reports on the program reviews at former KHE Broomall, PA, and Pittsburgh, PA, locations are pending. KHE retains responsibility for any financial obligations resulting from these program reviews.
The Company does not expect the open program reviews to have a material impact on KHE; however, the results of open program reviews and their impact on Kaplan’s operations are uncertain.


21



16. BUSINESS SEGMENTS
The Company has six reportable segments: Kaplan International, Kaplan Higher Education, Kaplan Test Preparation, Kaplan Professional (U.S.), Television Broadcasting and Healthcare.
The following table summarizes the financial information related to each of the Company’s business segments:
  
 
Three months ended
 
 
March 31
(in thousands)
 
2019
 
2018
Operating Revenues
 
  
 
  
Education
 
$
372,454

 
$
375,499

Television broadcasting
 
108,223

 
108,802

Healthcare
 
37,728

 
37,621

Other businesses
 
173,834

 
137,538

Corporate office
 

 

Intersegment elimination
 
(40
)
 
(24
)
  
 
$
692,199

 
$
659,436

Income (Loss) from Operations
 
 
 
 
Education
 
$
25,595

 
$
22,700

Television broadcasting
 
35,540

 
40,542

Healthcare
 
2,329

 
(1,391
)
Other businesses
 
(9,237
)
 
(3,695
)
Corporate office
 
(14,224
)
 
(13,942
)
  
 
$
40,003

 
$
44,214

Equity in Earnings of Affiliates, Net
 
1,679

 
2,579

Interest Expense, Net
 
(5,725
)
 
(6,699
)
Non-Operating Pension and Postretirement Benefit Income, Net
 
19,928

 
21,386

Gain (Loss) on Marketable Equity Securities, Net
 
24,066

 
(14,102
)
Other Income, Net
 
29,351

 
9,187

Income Before Income Taxes
 
$
109,302

 
$
56,565

Depreciation of Property, Plant and Equipment
 
 
 
 
Education
 
$
6,201

 
$
7,606

Television broadcasting
 
3,239

 
3,071

Healthcare
 
610

 
653

Other businesses
 
3,233

 
3,059

Corporate office
 
240

 
253

  
 
$
13,523

 
$
14,642

Amortization of Intangible Assets
 
  

 
 
Education
 
$
3,567

 
$
1,149

Television broadcasting
 
1,408

 
1,408

Healthcare
 
1,398

 
1,808

Other businesses
 
6,687

 
6,019

Corporate office
 

 

  
 
$
13,060

 
$
10,384

Pension Service Cost
 
  

 
 
Education
 
$
2,664

 
$
2,664

Television broadcasting
 
731

 
493

Healthcare
 
183

 
122

Other businesses
 
474

 
289

Corporate office
 
1,169

 
1,372

  
 
$
5,221

 
$
4,940


22



Asset information for the Company’s business segments are as follows:
  
As of
(in thousands)
March 31, 2019
 
December 31, 2018
Identifiable Assets
  
 
  
Education
$
1,853,208

 
$
1,568,747

Television broadcasting
467,270

 
452,853

Healthcare
115,622

 
108,596

Other businesses
951,773

 
827,113

Corporate office
141,343

 
162,971

  
$
3,529,216

 
$
3,120,280

Investments in Marketable Equity Securities
510,307

 
496,390

Investments in Affiliates
140,127

 
143,813

Prepaid Pension Cost
1,017,584

 
1,003,558

Total Assets
$
5,197,234

 
$
4,764,041

  
The Company’s education division comprises the following operating segments:
  
Three months ended
  
March 31
(in thousands)
2019
 
2018
Operating Revenues
  
 
 
Kaplan international
$
185,756

 
$
183,582

Higher education
82,780

 
99,830

Test preparation
61,150

 
59,151

Professional (U.S.)
41,214

 
33,356

Kaplan corporate and other
2,302

 
285

Intersegment elimination
(748
)
 
(705
)
  
$
372,454

 
$
375,499

Income (Loss) from Operations
  

 
  

Kaplan international
$
24,285

 
$
20,404

Higher education
1,915

 
1,355

Test preparation
(454
)
 
521

Professional (U.S.)
11,259

 
9,315

Kaplan corporate and other
(11,404
)
 
(8,895
)
Intersegment elimination
(6
)
 

  
$
25,595

 
$
22,700

Depreciation of Property, Plant and Equipment
  

 
  

Kaplan international
$
3,882

 
$
3,974

Higher education
597

 
1,858

Test preparation
805

 
978

Professional (U.S.)
865