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
.
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
Acquisitions
.
On 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.
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)
.
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.
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
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
.
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
|
|
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
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.
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.
|
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
.
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.
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
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
|
|
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
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.
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
|
|
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
|
|
|
642
|
|
|
Kaplan corporate and other
|
52
|
|
|
154
|
|
|
|
$
|
6,201
|
|
|
$
|
7,606
|
|
|
Amortization of Intangible Assets
|
$
|
3,567
|
|
|
$
|
1,149
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
Kaplan international
|
$
|
117
|
|
|
$
|
83
|
|
|
Higher education
|
1,163
|
|
|
1,406
|
|
|
Test preparation
|
866
|
|
|
729
|
|
|
Professional (U.S.)
|
348
|
|
|
290
|
|
|
Kaplan corporate and other
|
170
|
|
|
156
|
|
|
|
$
|
2,664
|
|
|
$
|
2,664
|
|
Asset information for the Company’s education division is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
|
Identifiable assets
|
|
|
|
|
Kaplan international
|
$
|
1,273,080
|
|
|
$
|
1,101,040
|
|
|
Higher education
|
182,909
|
|
|
126,752
|
|
|
Test preparation
|
159,620
|
|
|
145,308
|
|
|
Professional (U.S.)
|
170,395
|
|
|
166,916
|
|
|
Kaplan corporate and other
|
67,204
|
|
|
28,731
|
|
|
|
$
|
1,853,208
|
|
|
$
|
1,568,747
|
|
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company
reported net income attributable to common shares of
$81.7 million
(
$15.26
per share) for the
first
quarter of
2019
, compared to
$42.9 million
(
$7.78
per share) for the
first
quarter of
2018
.
Items included in the Company’s net income for the
first
quarter of
2019
:
|
|
|
|
•
|
a
$1.8 million
reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of
$1.4 million
, or
$0.26
per share);
|
|
|
|
|
•
|
$24.1 million
in net gains on marketable equity securities (after-tax impact of
$18.0 million
, or
$3.37
per share);
|
|
|
|
|
•
|
$29.0 million
gain from the sale of Gimlet Media (after-tax impact of
$21.7 million
, or
$4.06
per share);
|
|
|
|
|
•
|
$0.5 million
in non-operating foreign currency gains (after-tax impact of
$0.4 million
, or
$0.07
per share); and
|
|
|
|
|
•
|
$1.7 million
in income tax benefits related to stock compensation (
$0.32
per share).
|
Items included in the Company’s net income for the
first
quarter of
2018
:
|
|
|
|
•
|
a
$0.3 million
reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of
$0.2 million
, or
$0.04
per share);
|
|
|
|
|
•
|
$14.1 million
in net losses on marketable equity securities (after-tax impact of
$10.7 million
, or
$1.94
per share);
|
|
|
|
|
•
|
non-operating gain, net, of
$4.4 million
from sales of a cost method investment and a business (after-tax impact of
$3.6 million
, or
$0.65
per share);
|
|
|
|
|
•
|
a
$4.3 million
gain on the Kaplan University Transaction (after-tax impact of
$1.8 million
, or
$0.33
per share);
|
|
|
|
|
•
|
$0.2 million
in non-operating foreign currency gains (after-tax impact of
$0.1 million
, or
$0.02
per share); and
|
|
|
|
|
•
|
$1.8 million
in income tax benefits related to stock compensation (
$0.33
per share).
|
Revenue for the
first
quarter of
2019
was
$692.2 million
, up
5%
from
$659.4 million
in the
first
quarter of
2018
. Revenues grew at
other businesses
, partially offset by declines at the education, television broadcasting, and manufacturing divisions.
The Company reported operating income of
$40.0 million
for the
first
quarter of
2019
, compared to
$44.2 million
for the
first
quarter of
2018
. The operating income decline is driven by lower earnings in the television broadcasting and manufacturing divisions, partially offset by improvements in education and healthcare division results.
Division Results
Education
Education division revenue totaled
$372.5 million
for the
first
quarter of
2019
, down
1%
from
$375.5 million
for the same period of
2018
. Kaplan reported operating income of
$25.6 million
for the
first
quarter of
2019
, up
13%
from
$22.7 million
for the
first
quarter of
2018
.
A summary of Kaplan’s operating results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31
|
|
|
|
(in thousands)
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
|
Kaplan international
|
|
$
|
185,756
|
|
|
$
|
183,582
|
|
|
1
|
|
|
Higher education
|
|
82,780
|
|
|
99,830
|
|
|
(17
|
)
|
|
Test preparation
|
|
61,150
|
|
|
59,151
|
|
|
3
|
|
|
Professional (U.S.)
|
|
41,214
|
|
|
33,356
|
|
|
24
|
|
|
Kaplan corporate and other
|
|
2,302
|
|
|
285
|
|
|
—
|
|
|
Intersegment elimination
|
|
(748
|
)
|
|
(705
|
)
|
|
—
|
|
|
|
|
$
|
372,454
|
|
|
$
|
375,499
|
|
|
(1
|
)
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
|
$
|
24,285
|
|
|
$
|
20,404
|
|
|
19
|
|
|
Higher education
|
|
1,915
|
|
|
1,355
|
|
|
41
|
|
|
Test preparation
|
|
(454
|
)
|
|
521
|
|
|
—
|
|
|
Professional (U.S.)
|
|
11,259
|
|
|
9,315
|
|
|
21
|
|
|
Kaplan corporate and other
|
|
(7,837
|
)
|
|
(7,746
|
)
|
|
(1
|
)
|
|
Amortization of intangible assets
|
|
(3,567
|
)
|
|
(1,149
|
)
|
|
—
|
|
|
Intersegment elimination
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
|
|
$
|
25,595
|
|
|
$
|
22,700
|
|
|
13
|
|
Kaplan International includes English-language programs, and postsecondary education and professional training businesses largely outside the United States.
Kaplan International revenue increased
1%
for the
first
quarter
of
2019
.
On a constant currency basis, revenue increased 7% for the
first
quarter
of 2019.
Operating income increased to
$24.3 million
in the
first
quarter of
2019
, compared to
$20.4 million
in the
first
quarter of
2018
. Revenue and operating income increased
due to improved results at Pathways and UK Professional, offset by declines in Singapore.
Prior to the KU Transaction closing on March 22, 2018, Higher Education included Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs.
Following the KU Transaction closing, the Higher Education division includes the results as a service provider to higher education institutions.
In the
first
quarter
of
2019
, Higher Education revenue was down
17%
due to the KU Transaction.
In the first quarter of 2019, the Company recorded a portion of the service fee with Purdue Global based on an assessment of its collectability under the TOSA.
The Company will continue to assess the collectability of the service fee with Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the service fee in the future and whether to make adjustments to service fee amounts recognized in earlier periods.
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. In September 2018, KTP acquired the test preparation and study guide assets of Barron’s Educational Series, a New York-based education publishing company. KTP revenue
increased
3%
for the
first
quarter of
2019
due to the Barron’s acquisition. Excluding revenue from the Barron’s acquisition, revenues were down 5% for the first quarter of 2019, due to declines in demand for classroom-based offerings, offset in part by growth in online-based programs.
KTP operating results declined in the
first
quarter
of
2019
, due partly to increased losses from the new economy skills training programs.
Operating losses for the new economy skills training programs were
$1.1 million
and
$0.5 million
for the
first
quarter of
2019
and
2018
, respectively.
Excluding losses from the new economy skills training programs, KTP operating results were down in the first quarter of 2019, due primarily to revenue declines for classroom-based offerings.
Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. In the
first
quarter of
2019
, Kaplan Professional (U.S.) revenue was up
24%
due mostly to the May 2018 acquisition of Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials that provides engineering, surveying, architecture, and interior design licensure exam review products, and the July 2018 acquisition of College for Financial Planning (CFFP), a provider of financial education and training to individuals through programs of study for professionals pursuing a career in Financial Planning
.
Kaplan Professional (U.S) operating results increased
21%
for the
first
quarter of
2019
due mostly to earnings from PPI and CFFP.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities.
Television Broadcasting
Revenue at the television broadcasting division decreased
1%
to
$108.2 million
in the
first
quarter of
2019
, from
$108.8 million
in the same period of
2018
. The revenue decline is due to $8.6 million in first quarter 2018 incremental winter Olympics-related advertising revenue at the Company’s NBC affiliates and a
$1.6 million decrease in political advertising revenue, offset by $9.7 million in higher retransmission revenues.
Operating income for the
first
quarter of
2019
declined
12%
to
$35.5 million
, from
$40.5 million
in the same period of
2018
, due to lower revenues and increased network fees.
In the
first
quarter of
2019
and 2018, the television broadcasting division recorded
$1.8 million
and
$0.3 million
, respectively, in reductions to operating expenses related to non-cash property, plant and equipment gains due to new equipment received at no cost in connection with the spectrum repacking mandate of the FCC.
In March 2019, the Company’s television station in Orlando (WKMG) entered into a new network affiliation agreement with CBS that covers the period April 7, 2019 through June 30, 2022.
Healthcare
The Graham Healthcare Group (GHG) provides home health and hospice services in three states.
Healthcare revenues were flat
in the
first
quarter of
2019
.
The improvement in GHG operating results in 2019 is due to the absence of integration costs and other overall cost reduction in the
first
quarter of
2019
.
Other Businesses
A summary of Other Businesses’ operating results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
%
|
|
(in thousands)
|
2019
|
|
2018
|
|
Change
|
|
Operating Revenues
|
|
|
|
|
|
|
Manufacturing
|
$
|
115,157
|
|
|
$
|
117,406
|
|
|
(2
|
)
|
|
SocialCode
|
13,447
|
|
|
13,299
|
|
|
1
|
|
|
Other
|
45,230
|
|
|
6,833
|
|
|
—
|
|
|
|
$
|
173,834
|
|
|
$
|
137,538
|
|
|
26
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
111,883
|
|
|
$
|
108,778
|
|
|
3
|
|
|
SocialCode
|
17,465
|
|
|
17,080
|
|
|
2
|
|
|
Other
|
53,723
|
|
|
15,375
|
|
|
—
|
|
|
|
$
|
183,071
|
|
|
$
|
141,233
|
|
|
30
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
3,274
|
|
|
$
|
8,628
|
|
|
(62
|
)
|
|
SocialCode
|
(4,018
|
)
|
|
(3,781
|
)
|
|
(6
|
)
|
|
Other
|
(8,493
|
)
|
|
(8,542
|
)
|
|
1
|
|
|
|
$
|
(9,237
|
)
|
|
$
|
(3,695
|
)
|
|
—
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
2,433
|
|
|
$
|
2,451
|
|
|
(1
|
)
|
|
SocialCode
|
152
|
|
|
233
|
|
|
(35
|
)
|
|
Other
|
648
|
|
|
375
|
|
|
73
|
|
|
|
$
|
3,233
|
|
|
$
|
3,059
|
|
|
6
|
|
|
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
6,530
|
|
|
$
|
5,936
|
|
|
10
|
|
|
SocialCode
|
157
|
|
|
83
|
|
|
89
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
6,687
|
|
|
$
|
6,019
|
|
|
11
|
|
|
Pension Expense
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
25
|
|
|
$
|
17
|
|
|
47
|
|
|
SocialCode
|
248
|
|
|
156
|
|
|
59
|
|
|
Other
|
201
|
|
|
116
|
|
|
73
|
|
|
|
$
|
474
|
|
|
$
|
289
|
|
|
64
|
|
Manufacturing includes four businesses: Hoover, a supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications; Dekko, a manufacturer of electrical workspace solutions, architectural lighting and electrical components and assemblies; Joyce/Dayton, a manufacturer of screw jacks and other linear motion systems; and Forney, a global supplier of products and systems that control and monitor
combustion processes in electric utility and industrial applications.
In July 2018, Dekko acquired Furnlite, Inc., a Fallston, NC-based manufacturer of power and data solutions for the hospitality and residential furniture industry.
Manufacturing revenues declined
2%
in the
first
quarter of
2019
due to a decline at Hoover from lower wood prices.
Manufacturing operating income declined in the
first
quarter of
2019
due largely to increased labor and other operating costs at Hoover and Dekko, along with gains on inventory sales at Hoover in the first quarter of 2018.
SocialCode is a provider of marketing solutions on social, mobile and video platforms. In the third quarter of 2018, SocialCode acquired Marketplace Strategy, a Cleveland-based
Amazon sales acceleration agency.
SocialCode’s revenue increased
1%
in the
first
quarter of
2019
.
SocialCode reported operating losses of
$4.0 million
in the
first
quarter of
2019
,
compared to
$3.8 million
in the
first
quarter of
2018
.
On January 31, 2019, the Company acquired two automotive dealerships, Lexus of Rockville and Honda of Tysons Corner, from Sonic Automotive. The Company also announced it had entered into an agreement with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships.
Mr. Ourisman and his team of industry professionals will operate and manage the dealerships. Graham Holdings Company holds a 90% stake. Revenues from other businesses increased due mostly to the automotive dealership acquisition.
Other businesses also includes Slate and Foreign Policy, which publish online and print magazines and websites; and three investment stage businesses, Megaphone, Pinna and CyberVista.
Megaphone, Slate and CyberVista reported revenue increases in the first quarter of 2019.
Losses from each of these five businesses in the first
three
months of
2019
adversely affected operating results.
Corporate Office
Corporate office includes the expenses of the Company’s corporate office and certain continuing obligations related to prior business dispositions.
Equity in Earnings of Affiliates
At
March 31, 2019
, the Company held an 11% interest in Intersection Holdings, LLC, a company that provides digital marketing and advertising services and products for cities, transit systems, airports, and other public and private spaces. The Company also holds interests in a number of home health and hospice joint ventures, and several other affiliates.
The Company recorded equity in earnings of affiliates of
$1.7 million
for the
first
quarter of
2019
, compared to
$2.6 million
for the
first
quarter of
2018
.
Net Interest Expense and Related Balances
In connection with the auto dealership acquisition that closed on January 31, 2019, a subsidiary of the Company borrowed $30 million to finance a portion of the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum.
The subsidiary is required to repay the loan over a 10-year period by making monthly installment payments.
On May 30, 2018, the Company issued 5.75% unsecured eight-year fixed-rate notes due June 1, 2026. Interest is payable semi-annually on June 1 and December 1.
On June 29, 2018, the Company used the net proceeds from the sale of the notes and other cash to repay $400 million of 7.25% notes that were due February 1, 2019
.
The Company incurred net interest expense of
$5.7 million
for the
first
quarter of
2019
, compared to
$6.7 million
for the
first
quarter of
2018
.
At
March 31, 2019
, the Company had
$509.8 million
in borrowings outstanding at an average interest rate of
5.1%
and cash, marketable equity securities and other investments of
$719.1 million
.
Non-operating Pension and Postretirement Benefit Income, net
The Company recorded net non-operating pension and postretirement benefit income of
$19.9 million
for the
first
quarter of
2019
, compared to
$21.4 million
for the
first
quarter of
2018
.
Gain (Loss) on Marketable Equity Securities, net
Overall, the Company recognized
$24.1 million
in net gains on marketable equity securities in
first
quarter of
2019
, compared to
$14.1 million
in net losses on marketable equity securities in the
first
quarter of
2018
.
Other Non-Operating Income
The Company recorded total other non-operating income, net, of
$29.4 million
for the
first
quarter of
2019
, compared to
$9.2 million
for the
first
quarter of
2018
. The
2019
amounts included a
$29.0 million
gain on the sale of the Company’s interest in Gimlet Media and
$0.5 million
in foreign currency gains, offset by other items.
The
2018
amounts included a
$5.9 million
gain on sales of businesses; a $2.8 million gain on the sale of a cost method investment;
$0.2 million
in foreign currency gains; and other items.
Provision for Income Taxes
The Company’s effective tax rate for the first
three
months of
2019
and
2018
was
25.3%
and
24.0%
, respectively. In the first quarter of 2019 and 2018, the Company recorded income tax benefits related to stock compensation of
$1.7 million
and
$1.8 million
, respectively.
Earnings Per Share
The calculation of diluted earnings per share for the
first
quarter of
2019
was based on
5,326,448
weighted average shares outstanding, compared to
5,472,643
for the
first
quarter of
2018
. At
March 31, 2019
, there were
5,314,930
shares outstanding. On November 9, 2017, the Board of Directors authorized the Company to acquire up to
500,000
shares of its Class B common stock; the Company has remaining authorization for
273,655
shares as of
March 31, 2019
.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions of Businesses and Other Transactions
Acquisitions
.
On January 31, 2019, the Company acquired an interest in
two
automotive dealerships for cash and the assumption of floor plan payables
. 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
. 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.
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.
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
.
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.
Capital Expenditures
During the first
three
months of
2019
, the Company’s capital expenditures totaled
$26.1 million
. This amount includes assets acquired during the year, whereas the amounts reflected in the Company’s Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods. The Company estimates that its capital expenditures will be in the range of
$95
million to
$105
million in
2019
. This includes amounts for constructing an academic and student residential facility in connection with Kaplan’s Pathways program in Liverpool, U.K. This also includes capital expenditures in connection with spectrum repacking at the Company’s television stations in Detroit, MI, Jacksonville, FL, and Roanoke, VA, as mandated by the FCC; these expenditures are expected to be largely reimbursed to the Company by the FCC.
Liquidity
The Company’s borrowings were
$509.8 million
and
$477.1 million
, at
March 31, 2019
and
December 31, 2018
, respectively.
At
March 31, 2019
, the Company had cash and cash equivalents, restricted cash and investments in marketable securities and other investments totaling
$719.1 million
, compared with
$778.7 million
at
December 31, 2018
. At
March 31, 2019
, the Company held approximately $92 million in cash and cash equivalents in businesses domiciled outside the U.S., of which approximately $8 million is not available for immediate use in operations or for distribution. Additionally, Kaplan’s business operations outside the U.S. retain cash balances to support ongoing working capital requirements, capital expenditures, and regulatory requirements. As a result, the Company considers a significant portion of the cash and cash equivalents balance held outside the U.S. as not readily available for use in U.S. operations.
The Company’s net cash used by operating activities, as reported in the Company’s Condensed Consolidated Statements of Cash Flows, was
$37.9 million
for the first
three
months of
2019
, compared to net cash provided by operating activities of
$19.0 million
for the first
three
months of
2018
. The decrease is due to changes in working capital, payroll timing and an increase in incentive compensation payments.
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
2.00%
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.
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.
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.
On May 30, 2018, the Company issued
$400 million
senior unsecured fixed-rate notes due June 1, 2026 (the Notes). The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s existing and future domestic subsidiaries, as described in the terms of the indenture, dated as of May 30, 2018 (the Indenture). The Notes have a coupon rate of
5.75%
per annum, payable semi-annually on June 1 and December 1.
The Company may redeem the Notes in whole or in part at any time at the respective redemption prices described in the Indenture.
On June 29, 2018, the Company used the net proceeds from the sale of the Notes, together with cash on hand, to
redeem the
$400 million
of
7.25%
notes due February 1, 2019.
The Company incurred
$11.4 million
in debt extinguishment costs in relation to the early termination of the 7.25% notes.
In combination with the issuance of the Notes, the Company and certain of the Company’s domestic subsidiaries named therein as guarantors entered into an amended and restated credit agreement providing for a U.S.
$300 million
five
-year revolving credit facility (the Revolving Credit Facility) with each of the lenders party thereto, certain of the Company’s foreign subsidiaries from time to time party thereto as foreign borrowers, Wells Fargo Bank, N.A., as Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, N.A. and Bank of America, N.A. as Documentation Agents (the Amended and Restated Credit Agreement), which amends and restates the Company’s existing Five Year Credit Agreement, dated as of June 29, 2015, among the Company, certain of its domestic subsidiaries as guarantors, the several lenders from time to time party thereto, Wells Fargo Bank, N.A., as Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (the Existing Credit Agreement). The Amended and Restated Credit Agreement amends the Existing Credit Agreement to (i) extend the maturity of the Revolving Credit Facility to May 30, 2023, unless the Company and the lenders agree to further extend the term, (ii) increase the aggregate principal amount of the Revolving Credit Facility to U.S.
$300 million
, consisting of a U.S. Dollar tranche of U.S.
$200 million
for borrowings in U.S. Dollars and a multicurrency tranche equivalent to U.S.
$100 million
for borrowings in U.S. Dollars and certain foreign currencies, (iii) provide for borrowings under the Revolving Credit Facility in U.S. Dollars and certain other foreign currencies specified in the Amended and Restated Credit Agreement, (iv) permit certain foreign subsidiaries of the Company to be added to the Amended and Restated Credit Agreement as foreign borrowers thereunder and (v) effect certain other modifications to the Existing Credit Agreement.
Under the Amended and Restated Credit Agreement, the Company is required to pay a commitment fee on a quarterly basis, based on the Company’s leverage ratio, of between
0.15%
and
0.25%
of the amount of the average daily unused portion of the Revolving Credit Facility. Any borrowings under the Amended and Restated Credit Agreement are made on an unsecured basis and bear interest at the Company’s option, either at (a) a fluctuating interest rate equal to the highest of Wells Fargo’s prime rate,
0.5
percent above the Federal funds rate or the one-month Eurodollar rate plus
1%
, or (b) the Eurodollar rate for the applicable currency and interest period as defined in the Amended and Restated Credit Agreement, which is generally a periodic rate equal to LIBOR, CDOR, BBSY or SOR, as applicable, in the case of each of clauses (a) and (b) plus an applicable margin that depends on the 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.
On May 21, 2018, Moody’s affirmed the Company’s credit ratings, but revised the outlook from Negative to Stable.
The Company’s current credit ratings are as follows:
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Standard
& Poor’s
|
|
Long-term
|
Ba1
|
|
BB+
|
At
March 31, 2019
and
December 31, 2018
, the Company had working capital of
$647.8 million
and
$720.2 million
, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds. In management’s opinion, the Company will have sufficient liquidity to meet its various cash needs within the next 12 months.
The Company adopted the new lease accounting guidance on January 1, 2019 and recognized right-of-use assets of
$369.3 million
and lease liabilities of
$418.3 million
. Please refer to Note 1 - Organization, Basis of Presentation and Recent Accounting Pronouncements and Note 6 - Leases for further discussion of the new lease accounting guidance.
There were no other significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Forward-Looking Statements
This report contains certain forward-looking statements that are based largely on the Company’s current expectations.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements.
For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its
2018
Annual Report filed on Form 10-K have not otherwise changed significantly.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Chief Financial Officer (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of
March 31, 2019
. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended
March 31, 2019
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION