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, restaurants and entertainment venues, custom framing services 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 and six months ended June 30, 2020 and 2019 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, 2019.
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.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information, in context with the information reasonably available to the Company and the unknown future impacts of the novel coronavirus (COVID-19) pandemic as of June 30, 2020 and through the date of this filing. The accounting matters assessed included, but were not limited to, the Company’s carrying value of goodwill and other long-lived assets, allowance for doubtful accounts, inventory valuation and related reserves, fair value of financial assets, valuation allowances for tax assets and revenue recognition. Other than the goodwill, indefinite-lived asset and other long-lived asset impairment charges (see Notes 6, 8 and 16), there were no other impacts to the Company’s condensed consolidated financial statements as of and for the six months ended June 30, 2020 resulting from our assessments. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s condensed consolidated financial statements in future reporting periods.
Reclassifications – Certain amounts in previously issued condensed consolidated financial statements have been reclassified to conform with the presentation for the period ended June 30, 2020. This includes the reclassification of $22.6 million and $48.5 million from operating to selling, general and administrative in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019, respectively.
Recently Adopted and Issued Accounting Pronouncements – In June 2016, the FASB issued new guidance that requires financial assets measured at amortized cost, including accounts receivable, to be measured using the current expected credit losses model (CECL). CECL requires current expected credit losses to be measured upon the initial recognition of a financial asset by considering all available relevant information, including information about past events, current conditions and reasonable and supportable forecasts of future economic conditions. The standard was adopted by the Company in the first quarter of 2020 and did not have a significant impact on its Condensed Consolidated Financial Statements.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Acquisitions. During 2020, the Company acquired three businesses: two in education, and one in other businesses for $96.8 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 the first three months of 2020, Kaplan acquired two small businesses; one in its professional (U.S.) division and one in its international division.
In May 2020, the Company acquired an additional interest in Framebridge, Inc. for cash and contingent consideration that resulted in the Company obtaining control of the investee. Following the acquisition, the Company owns 93.4% of Framebridge. The Company previously accounted for Framebridge under the equity method, and included it in Investments in Affiliates on the Condensed Consolidated Balance Sheet (see Note 3). The contingent consideration is primarily based on Framebridge achieving revenue milestones within a specific time period. The fair value of the contingent consideration at the acquisition date was $50.6 million, determined using a monte carlo simulation. The fair value of the redeemable noncontrolling interest in Framebridge was $6.0 million as of the acquisition date, determined using a market approach. The minority shareholder has an option to put 20% of the minority shares annually starting in 2024. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
During 2019, the Company acquired eight businesses, one in education, three in healthcare, one in manufacturing, and three in other businesses for $211.8 million in cash and contingent consideration and the assumption of $25.8 million in floor plan payables. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of acquisition.
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 7). 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 operate and manage the dealerships. The Company paid a fee of $2.3 million for the year ended December 31, 2019 in connection with the management services provided under this agreement. 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 minority shareholder has the option to acquire up to an additional 10% interest in the automotive subsidiary. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In July 2019, Graham Healthcare Group (GHG) acquired a 100% interest in a small business which is expected to provide certain strategic benefits in the future and is included in healthcare. On July 11, 2019, Kaplan acquired a 100% interest in Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. The acquisition is expected to provide synergies within Kaplan’s International English business and is included in Kaplan’s international division.
On July 31, 2019, the Company announced the closing of its acquisition of Clyde’s Restaurant Group (CRG). CRG owns and operates 12 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton. In connection with the acquisition, the Company entered into several leases with an entity affiliated with some of CRG’s senior managers. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In September 2019, Joyce/Dayton Corp. acquired the assets of a small business. The acquisition is expected to complement current product offerings and is included in manufacturing.
On December 1, 2019, GHG acquired 75% of the preferred shares of CSI Pharmacy Holding Company, LLC, (CSI). In connection with the acquisition, CSI entered into an $11.25 million Term Loan (see Note 7) to finance the acquisition. CSI is a specialty and home infusion pharmacy which provides intravenous immunoglobulin therapies to patients. The minority shareholders may put up to 50% of their preferred shares to GHG and the first put period begins in 2022. A second put period for another tranche of preferred shares begins in 2024. The fair value of the redeemable noncontrolling interest in CSI was $1.7 million at the acquisition date, determined using an income approach. The acquisition is expected to expand the product offerings of the healthcare division.
Acquisition-related costs for acquisitions that closed during the first six months of 2020 were $1.1 million and were expensed as incurred. The aggregate purchase price of the 2020 and 2019 acquisitions was allocated as follows (2020 on a preliminary basis), based on acquisition date fair values to the following assets and liabilities:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
|
Six Months Ended
|
Year Ended
|
|
(in thousands)
|
|
June 30, 2020
|
December 31, 2019
|
|
Accounts receivable
|
|
$
|
745
|
|
$
|
6,762
|
|
|
Inventory
|
|
3,496
|
|
34,134
|
|
|
Property, plant and equipment
|
|
3,346
|
|
56,391
|
|
|
Lease right-of-use assets
|
|
6,556
|
|
98,505
|
|
|
Goodwill
|
|
76,920
|
|
84,669
|
|
|
Indefinite-lived intangible assets
|
|
—
|
|
46,900
|
|
|
Amortized intangible assets
|
|
14,589
|
|
21,291
|
|
|
Other assets
|
|
1,054
|
|
8,308
|
|
|
Deferred income taxes
|
|
13,476
|
|
(2,703)
|
|
|
Floor plan payables
|
|
—
|
|
(25,755)
|
|
|
|
|
|
|
|
Other liabilities
|
|
(15,451)
|
|
(42,555)
|
|
|
|
|
|
|
|
Current and noncurrent lease liabilities
|
|
(6,601)
|
|
(99,131)
|
|
|
Redeemable noncontrolling interest
|
|
(6,005)
|
|
(1,715)
|
|
|
Noncontrolling interest
|
|
—
|
|
(1,154)
|
|
|
Aggregate purchase price, net of cash acquired
|
|
$
|
92,125
|
|
$
|
183,947
|
|
The 2020 fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change within the measurement period (up to one year from the acquisition date). The 2019 values above reflect a measurement period adjustment related to the lease right-of-use assets, current and noncurrent lease liabilities and the finalization of working capital. The recording of deferred tax assets or liabilities, working capital and the final amount of residual goodwill and other intangibles are not yet finalized. 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 $3.2 million and $70.7 million of goodwill for income tax purposes for the acquisitions completed in 2020 and 2019, respectively.
The acquired companies were consolidated into the Company’s financial statements starting on their respective acquisition dates. The Company’s Condensed Consolidated Statements of Operations for the second quarter of 2020 include aggregate revenues and operating losses for the companies acquired in 2020 of $4.3 million and $2.1 million, respectively. The Company’s Condensed Consolidated Statements of Operations include aggregate revenues and operating losses of $5.0 million and $2.0 million, respectively, for the first six months of 2020. The following unaudited pro forma financial information presents the Company’s results as if the current year acquisitions had occurred at the beginning of 2019. The unaudited pro forma information also includes the 2019 acquisitions as if they occurred at the beginning of 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating revenues
|
$
|
654,001
|
|
|
$
|
790,145
|
|
|
$
|
1,392,331
|
|
|
$
|
1,548,156
|
|
|
Net income (loss)
|
18,246
|
|
|
49,653
|
|
|
(21,648)
|
|
|
123,822
|
|
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.
Sale of Businesses. In November 2019, Kaplan UK completed the sale of a small business which was included in Kaplan International.
Other Transactions. During 2019, the Company established GHC One as a vehicle to invest in a portfolio of healthcare businesses together with a group of senior managers of GHG. As a holder of preferred units, the Company is obligated to contribute 95% of the capital required for the acquisition of portfolio investments with the remaining 5% of the capital coming from the group of senior managers. The operating agreement of GHC One requires the dissolution of the entity on March 31, 2026, at which time the net assets will be distributed to its members. As a preferred unit holder, the Company will receive an amount up to its contributed capital plus a preferred annual return of 8% (guaranteed return) after the group of senior managers has received a redemption of their 5% interest in net assets (manager return). All distributions in excess of the manager and guaranteed return will be paid to common unit holders, which currently comprise the group of senior managers of GHG. The Company may convert its preferred units to common units at any time after which it will receive 80% of all distributions in excess of the manager return, with the remaining 20% of excess distributions going to the group of senior managers as holders of the other common units.
As of June 30, 2020, the Company held a controlling financial interest in GHC One and therefore includes the assets, liabilities, results of operations and cash flows in its consolidated financial statements. GHC One acquired CSI and another small business during 2019. The Company accounts for the minority ownership of the group of senior managers as a mandatorily redeemable noncontrolling interest.
In March 2019, a Hoover minority shareholder put some shares to the Company, which had a redemption value of $0.6 million. Following the redemption, the Company owns 98% of Hoover.
3. INVESTMENTS
Money Market Investments. As of June 30, 2020 and December 31, 2019, the Company had money market investments of $178.5 million and $45.2 million, respectively, that are 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
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
|
|
|
|
Total cost
|
$
|
212,843
|
|
|
$
|
282,349
|
|
|
Gross unrealized gains
|
218,965
|
|
|
302,731
|
|
|
|
|
|
|
|
Total Fair Value
|
$
|
431,808
|
|
|
$
|
585,080
|
|
There were no purchases of marketable equity securities during the first six months of 2020. The Company purchased $7.5 million of marketable equity securities during the first six months of 2019.
During the first six months of 2020, the gross cumulative realized gains from the sales of marketable equity securities were $23.0 million. The total proceeds from such sales were $93.8 million. During the first six 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.
The net gain (loss) on marketable equity securities comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gain (loss) on marketable equity securities, net
|
$
|
39,890
|
|
|
$
|
7,791
|
|
|
$
|
(60,503)
|
|
|
$
|
31,857
|
|
|
Less: Net losses (gains) in earnings from marketable equity securities sold and donated
|
4,608
|
|
|
2
|
|
|
13,382
|
|
|
(2,980)
|
|
|
Net unrealized gains (losses) in earnings from marketable equity securities still held at the end of the period
|
$
|
44,498
|
|
|
$
|
7,793
|
|
|
$
|
(47,121)
|
|
|
$
|
28,877
|
|
Investments in Affiliates. As of June 30, 2020, the Company held an approximate 12% 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 and six months ended June 30, 2020, the Company recorded $2.2 million and $4.7 million, respectively, in revenue for services provided to the affiliates of GHG. For the three and six months ended June 30, 2019, the Company recorded $2.3 million and $4.6 million, respectively, in revenue for services provided to the affiliates of GHG.
In the first quarter of 2020, the Company recorded impairment charges of $3.6 million on two of its investments in affiliates as a result of the challenging economic environment for these businesses, of which $2.7 million related to the Company’s investment in Framebridge. The Company records its share of the earnings or losses of its affiliates from their most recent available financial statements. In some instances, the reporting period of the affiliates’ financial statements lags the Company’s financial reporting period, but such lag is never more than three months. It is possible that the Company’s results of operations for the six months ended June 30, 2020 does not capture the impact of the COVID-19 pandemic on the earnings or losses of the affiliates whose financial results are recorded on a lag basis.
The Company had $27.8 million and $25.6 million in its investment account that represents cumulative undistributed income in its investments in affiliates as of June 30, 2020 and December 31, 2019, respectively.
In the second quarter of 2019, the Company made an investment in Framebridge, a custom framing service company based in Washington, DC. The Company accounted for this investment under the equity method, and included it in Investments in Affiliates on the Condensed Consolidated Balance Sheet. In May 2020, the Company made an additional investment in Framebridge (see Note 2) that resulted in the Company obtaining control of the investee. The results of operations, cash flows, assets and liabilities of Framebridge are included in the condensed consolidated financial statements of the Company from the date of the acquisition. Timothy J. O’Shaughnessy, President and Chief Executive Officer of Graham Holdings Company, was a personal investor in Framebridge and served as Chairman of the Board prior to the acquisition of the additional interest. The Company acquired Mr. O’Shaughnessy’s interest under the same terms as the other Framebridge investors.
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 loaned the joint venture £22 million, which loan is repayable over 25 years at an interest rate of 7% and guaranteed by the University of York. The loan is repayable by December 2041.
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 $38.5 million as of June 30, 2020 and December 31, 2019. During the first six months of 2020, the Company recorded impairment losses of $2.6 million to those equity securities. During the three and six months ended June 30, 2020, the Company recorded gains of $2.6 million to those equity securities based on observable transactions. During the first six months of 2019, the Company recorded gains of $1.4 million to those equity securities based on observable transactions.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
|
|
|
|
Receivables from contracts with customers, less estimated credit losses of $19,424 and $14,276
|
$
|
430,642
|
|
|
$
|
595,321
|
|
|
Other receivables
|
21,589
|
|
|
28,895
|
|
|
|
$
|
452,231
|
|
|
$
|
624,216
|
|
Credit loss expense was $4.8 million for the three months ended June 30, 2020, and credit loss recovery was $0.1 million for the three months ended June 30, 2019. Credit loss expense was $7.2 million and $0.1 million for the six months ended June 30, 2020 and 2019, respectively.
5. INVENTORIES, CONTRACTS IN PROGRESS AND VEHICLE FLOOR PLAN PAYABLE
Inventories and contracts in progress consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
|
|
|
|
Raw materials
|
$
|
40,287
|
|
|
$
|
35,119
|
|
|
Work-in-process
|
9,815
|
|
|
10,775
|
|
|
Finished goods
|
65,799
|
|
|
70,602
|
|
|
Contracts in progress
|
5,589
|
|
|
4,338
|
|
|
|
$
|
121,490
|
|
|
$
|
120,834
|
|
The Company finances new and used vehicle inventory through a standardized floor plan facility (the “floor plan facility”) with Truist Bank. The 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 1.6% and 3.4% for the three months ended June 30, 2020 and 2019, respectively. The weighted average interest rate for the floor plan facility was 2.2% and 3.5% for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the aggregate capacity under the floor plan facility was $50 million, of which $29.1 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 June 30, 2020.
The floor plan interest expense related to the 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 June 30, 2020 and 2019, the Company recognized a reduction in operating expense of $0.5 million and $0.8 million, respectively, related to manufacturer floor plan assistance. For the six months ended June 30, 2020 and 2019, the Company recognized a reduction in operating expense of $0.9 million and $1.2 million, respectively, related to manufacturer floor plan assistance.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
In the first quarter of 2020, as a result of the uncertainty and challenging operating environment created by the COVID-19 pandemic, the Company performed an interim review of the goodwill, indefinite-lived intangibles and other long-lived assets of the CRG and automotive dealership reporting units and asset groups. As a result of the impairment reviews, the Company recorded a $9.7 million goodwill and indefinite-lived intangible asset impairment charge at CRG and a $6.7 million indefinite-lived intangible asset impairment charge at the auto dealerships. The Company estimated the fair value of the reporting units and indefinite-lived intangible assets by utilizing a discounted cash flow model. The carrying value of the CRG reporting unit and the indefinite-lived intangible assets exceeded the estimated fair value, resulting in a goodwill and indefinite-lived intangible asset impairment charge for the amount by which the carrying value exceeded the estimated fair value. CRG and the automotive dealerships are included in other businesses. Additional COVID-19 disruptions could result in future adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with fair value estimates and could lead to additional future impairments, which could be material.
Amortization of intangible assets for the three months ended June 30, 2020 and 2019, was $14.3 million and $12.9 million, respectively. Amortization of intangible assets for the six months ended June 30, 2020 and 2019, was $28.5 million and $25.9 million, respectively. Amortization of intangible assets is estimated to be approximately $28 million for the remainder of 2020, $52 million in 2021, $46 million in 2022, $37 million in 2023, $28 million in 2024 and $41 million thereafter. The changes in the carrying amount of goodwill, by segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Education
|
|
Television
Broadcasting
|
|
Manufacturing
|
|
Healthcare
|
|
SocialCode
|
|
Other
Businesses
|
|
Total
|
|
Balance as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,140,958
|
|
|
$
|
190,815
|
|
|
$
|
234,993
|
|
|
$
|
98,421
|
|
|
$
|
15,860
|
|
|
$
|
53,684
|
|
|
$
|
1,734,731
|
|
|
Accumulated impairment losses
|
(331,151)
|
|
|
—
|
|
|
(7,616)
|
|
|
—
|
|
|
—
|
|
|
(7,685)
|
|
|
(346,452)
|
|
|
|
809,807
|
|
|
190,815
|
|
|
227,377
|
|
|
98,421
|
|
|
15,860
|
|
|
45,999
|
|
|
1,388,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement period adjustments
|
154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
Acquisitions
|
13,022
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,898
|
|
|
76,920
|
|
|
Impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,878)
|
|
|
(6,878)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
(18,096)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,096)
|
|
|
Balance as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,136,038
|
|
|
190,815
|
|
|
234,993
|
|
|
98,421
|
|
|
15,860
|
|
|
117,582
|
|
|
1,793,709
|
|
|
Accumulated impairment losses
|
(331,151)
|
|
|
—
|
|
|
(7,616)
|
|
|
—
|
|
|
—
|
|
|
(14,563)
|
|
|
(353,330)
|
|
|
|
$
|
804,887
|
|
|
$
|
190,815
|
|
|
$
|
227,377
|
|
|
$
|
98,421
|
|
|
$
|
15,860
|
|
|
$
|
103,019
|
|
|
$
|
1,440,379
|
|
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, 2019
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
595,604
|
|
|
$
|
174,564
|
|
|
$
|
166,920
|
|
|
$
|
203,870
|
|
|
$
|
1,140,958
|
|
|
Accumulated impairment losses
|
—
|
|
|
(111,324)
|
|
|
(102,259)
|
|
|
(117,568)
|
|
|
(331,151)
|
|
|
|
595,604
|
|
|
63,240
|
|
|
64,661
|
|
|
86,302
|
|
|
809,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement period adjustments
|
154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
Acquisitions
|
9,788
|
|
|
—
|
|
|
—
|
|
|
3,234
|
|
|
13,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
(18,013)
|
|
|
—
|
|
|
—
|
|
|
(83)
|
|
|
(18,096)
|
|
|
Balance as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
587,533
|
|
|
174,564
|
|
|
166,920
|
|
|
207,021
|
|
|
1,136,038
|
|
|
Accumulated impairment losses
|
—
|
|
|
(111,324)
|
|
|
(102,259)
|
|
|
(117,568)
|
|
|
(331,151)
|
|
|
|
$
|
587,533
|
|
|
$
|
63,240
|
|
|
$
|
64,661
|
|
|
$
|
89,453
|
|
|
$
|
804,887
|
|
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
(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
|
|
$
|
292,300
|
|
|
$
|
161,020
|
|
|
$
|
131,280
|
|
|
$
|
291,626
|
|
|
$
|
144,625
|
|
|
$
|
147,001
|
|
|
Trade names and trademarks
|
2–10 years
|
|
108,854
|
|
|
47,929
|
|
|
60,925
|
|
|
87,190
|
|
|
42,770
|
|
|
44,420
|
|
|
Network affiliation agreements
|
10 years
|
|
17,400
|
|
|
6,019
|
|
|
11,381
|
|
|
17,400
|
|
|
5,148
|
|
|
12,252
|
|
|
Databases and technology
|
3–6 years
|
|
34,210
|
|
|
16,010
|
|
|
18,200
|
|
|
30,623
|
|
|
12,850
|
|
|
17,773
|
|
|
Noncompete agreements
|
2–5 years
|
|
1,150
|
|
|
843
|
|
|
307
|
|
|
1,313
|
|
|
929
|
|
|
384
|
|
|
Other
|
1–8 years
|
|
24,800
|
|
|
15,006
|
|
|
9,794
|
|
|
24,800
|
|
|
13,149
|
|
|
11,651
|
|
|
|
|
|
$
|
478,714
|
|
|
$
|
246,827
|
|
|
$
|
231,887
|
|
|
$
|
452,952
|
|
|
$
|
219,471
|
|
|
$
|
233,481
|
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
$
|
82,905
|
|
|
|
|
|
|
$
|
100,491
|
|
|
|
|
|
|
Franchise agreements
|
|
|
21,858
|
|
|
|
|
|
|
28,556
|
|
|
|
|
|
|
FCC licenses
|
|
|
11,000
|
|
|
|
|
|
|
11,000
|
|
|
|
|
|
|
Licensure and accreditation
|
|
|
150
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
$
|
115,913
|
|
|
|
|
|
|
$
|
140,197
|
|
|
|
|
|
7. DEBT
The Company’s borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
(in thousands)
|
|
|
|
|
5.75% unsecured notes due June 1, 2026 (1)
|
$
|
395,751
|
|
|
$
|
395,393
|
|
|
Revolving credit facility
|
73,946
|
|
|
—
|
|
|
U.K. credit facility (2)
|
—
|
|
|
78,650
|
|
|
Commercial note
|
26,500
|
|
|
27,500
|
|
|
Pinnacle Bank term loan
|
10,969
|
|
|
11,203
|
|
|
Pinnacle Bank line of credit
|
2,000
|
|
|
—
|
|
|
Other indebtedness
|
2,364
|
|
|
83
|
|
|
Total Debt
|
$
|
511,530
|
|
|
$
|
512,829
|
|
|
Less: current portion
|
(5,858)
|
|
|
(82,179)
|
|
|
Total Long-Term Debt
|
$
|
505,672
|
|
|
$
|
430,650
|
|
____________
(1) The carrying value is net of $4.2 million and $4.6 million of unamortized debt issuance costs as of June 30, 2020 and December 31, 2019, respectively.
(2) The carrying value is net of $0.1 million of unamortized debt issuance costs as of December 31, 2019.
On June 29, 2020, Kaplan borrowed £60 million under the Company’s revolving credit facility at an interest rate of 3 month GBP LIBOR plus 1.50%. Kaplan used the proceeds from the borrowing to repay the outstanding balance on the U.K credit facility upon its maturity on June 30, 2020. The interest rate swap related to this U.K. credit facility matured on July 1, 2020.
The Company’s GHG subsidiary had $2.0 million outstanding under its line of credit as of June 30, 2020 at an interest rate of monthly LIBOR plus 2.75%. The Company’s other indebtedness at June 30, 2020 is at interest rates of 0% to 16% and matures between 2023 and 2026. The Company’s other indebtedness at December 31, 2019 is at an interest rate of 2% and matures in 2026.
On December 2, 2019, a subsidiary of GHG entered into a Loan & Security Agreement with Pinnacle Bank for a Term Loan of $11.25 million and a two-year Line of Credit for $2.25 million. The Term Loan is payable over a five-year period in monthly installments, plus accrued and unpaid interest, due on the second day of each month, with the remaining balance due on December 2, 2024. The Term Loan bears interest at 4.35% per annum. The Term Loan can be redeemed at any time, in whole or in part, without any premium or penalty. Borrowings on the Line of Credit bear interest at a rate per annum of LIBOR plus an applicable interest rate of 2.75%, determined on a monthly basis. Under the credit agreement, the borrower is required to pay a commitment fee on a quarterly basis, at the rate per annum equal to 0.25% on the average daily unused portion of the credit facility. The borrower may use the proceeds of the facility for working capital and general corporate purposes. Any outstanding borrowings must be repaid on or prior to the final termination date. The agreement contains terms and conditions, including remedies in the event of a default. The Company is in compliance with all financial covenants as of June 30, 2020.
On January 31, 2019, the Company’s automotive subsidiary entered into a Commercial Note with Truist 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. In the second quarter of 2020, Truist Bank provided temporary relief to the automotive subsidiary in response to COVID-19 by deferring the principal and interest payments on the Commercial Note for three months until the final payment due on maturity of the note. The interest rate swap continues to be highly effective following this change in payment terms. 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.
During the three months ended June 30, 2020 and 2019, the Company had average borrowings outstanding of approximately $510.5 million and $507.7 million, respectively, at average annual interest rates of approximately 5.1%. During the three months ended June 30, 2020 and 2019, the Company incurred net interest expense of $6.4 million and $6.8 million, respectively.
During the six months ended June 30, 2020 and 2019, the Company had average borrowings outstanding of approximately $511.2 million and $499.8 million, respectively, at an average annual interest rate of approximately 5.1%. During the six months ended June 30, 2020 and 2019, the Company incurred net interest expense of $13.0 million and $12.5 million, respectively.
At June 30, 2020, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $416.8 million, compared with the carrying amount of $395.8 million. At December 31, 2019, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $427.7 million, compared with the carrying amount of $395.4 million. The carrying value of the Company’s other unsecured debt at June 30, 2020 and December 31, 2019 approximates fair value.
8. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Money market investments (1)
|
$
|
—
|
|
|
$
|
178,536
|
|
|
$
|
—
|
|
|
$
|
178,536
|
|
|
Marketable equity securities (2)
|
431,808
|
|
|
—
|
|
|
—
|
|
|
431,808
|
|
|
Other current investments (3)
|
11,709
|
|
|
1,225
|
|
|
—
|
|
|
12,934
|
|
|
Total Financial Assets
|
$
|
443,517
|
|
|
$
|
179,761
|
|
|
$
|
—
|
|
|
$
|
623,278
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities (4)
|
$
|
—
|
|
|
$
|
26,907
|
|
|
$
|
—
|
|
|
$
|
26,907
|
|
|
Interest rate swap (5)
|
—
|
|
|
2,782
|
|
|
—
|
|
|
2,782
|
|
|
Mandatorily redeemable noncontrolling interest (6)
|
—
|
|
|
—
|
|
|
829
|
|
|
829
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
29,689
|
|
|
$
|
829
|
|
|
$
|
30,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Money market investments (1)
|
$
|
—
|
|
|
$
|
45,150
|
|
|
$
|
—
|
|
|
$
|
45,150
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities (2)
|
585,080
|
|
|
—
|
|
|
—
|
|
|
585,080
|
|
|
Other current investments (3)
|
8,843
|
|
|
6,044
|
|
|
—
|
|
|
14,887
|
|
|
Interest rate swap (7)
|
—
|
|
|
131
|
|
|
—
|
|
|
131
|
|
|
Total Financial Assets
|
$
|
593,923
|
|
|
$
|
51,325
|
|
|
$
|
—
|
|
|
$
|
645,248
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities (4)
|
$
|
—
|
|
|
$
|
34,674
|
|
|
$
|
—
|
|
|
$
|
34,674
|
|
|
Interest rate swap (5)
|
—
|
|
|
1,119
|
|
|
—
|
|
|
1,119
|
|
|
Foreign exchange swap (8)
|
—
|
|
|
273
|
|
|
—
|
|
|
273
|
|
|
Mandatorily redeemable noncontrolling interest (6)
|
—
|
|
|
—
|
|
|
829
|
|
|
829
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
36,066
|
|
|
$
|
829
|
|
|
$
|
36,895
|
|
____________
(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. and Canadian corporations that are actively traded on U.S. and Canadian 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) 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.
(5) 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.
(6) The fair value of the mandatorily redeemable noncontrolling interest is based on the fair value of the underlying subsidiaries owned by GHC One (see Note 2), after taking into account any debt and other noncontrolling interests of its subsidiary investments. The fair value of the owned subsidiaries is determined by reference to either a discounted cash flow or EBITDA multiple, which approximates fair value.
(7) Included in Other current 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.
(8) Included in Accounts payable and accrued liabilities, and valued based on a valuation model that calculates the differential between the contract price and the market-based forward rate.
In the second quarter of 2020, the Company recorded other long-lived asset impairment charges of $11.5 million (see Note 16). In the second quarter of 2019, the Company recorded an other long-lived asset impairment charge of $0.7 million. The remeasurement of the other long-lived assets is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value. The Company used a discounted cash flow model to determine the estimated fair value of the other long-lived assets and made estimates and assumptions regarding future cash flows and discount rates.
During first quarter of 2020, the Company recorded goodwill and indefinite-lived intangible asset impairment charges of $16.4 million. The remeasurement of the goodwill and indefinite-lived intangible assets is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value. The Company used a discounted cash flow model to determine the estimated fair value of the reporting
unit and indefinite-lived intangible assets and made estimates and assumptions regarding future cash flows, royalty rates, discount rates, and long-term growth rates.
During the six months ended June 30, 2020, the Company recorded impairment losses of $2.6 million to equity securities that are accounted for as cost method investments. During the three and six months ended June 30, 2020, the Company recorded a gain of $2.6 million to an equity security that is accounted for as a cost method investment based on observable transactions for identical or similar investments of the same issuer. During the six months ended June 30, 2019, the Company recorded gains of $1.4 million to equity securities that are accounted for as cost method investments based on observable transactions for identical or similar investments of the same issuer.
In the first quarter of 2020, the Company recorded impairment charges of $3.6 million on two of its investments in affiliates.
9. INCOME TAXES
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted, which included several technical corrections to the 2017 Tax Cuts and Jobs Act and provisions allowing certain net operating losses generated by businesses in 2018, 2019 and 2020 to be carried back five prior tax years. Overall, the CARES Act had limited impact on the Company’s tax provision for the first six months of 2020.
On July 1, 2015 (the Distribution Date), the Company completed the spin-off of Cable ONE as an independent, publicly traded company. The transaction was structured as a tax-free spin-off of Cable ONE to the stockholders of the Company. Since July 1, 2015, Cable One has been an independent public company trading on the New York Stock Exchange under the symbol “CABO”. In connection with the CARES Act, Cable One now has the ability to carryback its 2019 taxable losses to the tax period from January 1, 2015 to June 30, 2015, the period in which Cable One was included in the Company’s 2015 tax return. As a result, the Company plans to amend its 2015 tax returns in order to accommodate Cable One's request to carryback its 2019 taxable losses. The Company expects that this action will have no impact on the results or the financial position of the Company. To reflect the expected refund due to Cable One, the Company has included an estimated $20.7 million current income tax receivable and a corresponding current liability to Cable One on its balance sheet as of June 30, 2020.
The Company’s effective tax rate for the six months ended June 30, 2020 was 18.9%. The effective tax rate for the first quarter of 2020 was 57.3% and the effective tax rate for the second quarter of 2020 was 69.0%. The effective tax rate for interim periods is generally based on the Company’s estimated effective tax rate for fiscal year 2020. The Company’s estimated effective tax rate for 2020 includes the adverse impacts of the COVID-19 pandemic, the CARES Act, and losses on marketable equity securities on the Company’s estimated pre-tax income for 2020, resulting in a higher overall estimated tax rate, as permanent differences and increased valuation allowances in certain jurisdictions have an impact on the overall estimated effective tax rate.
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company generated 75% of its revenue from U.S. domestic sales for the three and six months ended June 30, 2020. The remaining 25% of revenue was generated from non-U.S. sales for the three and six months ended June 30, 2020. For the three and six months ended June 30, 2019, 76% of revenue was from U.S. domestic sales, and the remaining 24% of revenue was generated from non-U.S. sales.
For the three and six months ended June 30, 2020, the Company recognized 76% and 74% of its revenue over time as control of the services and goods transferred to the customer, and the remaining 24% and 26% at a point in time, when the customer obtained control of the promised goods. For the three and six months ended June 30, 2019, the Company recognized 76% of its revenue over time, and the remaining 24% at a point in time.
In the second quarter of 2020, GHG received $7.4 million under the CARES Act as a general distribution from the Provider Relief Fund to provide relief for lost revenues and expenses incurred in connection with COVID-19. The healthcare revenues for the three and six months ended June 30, 2020 includes $5.5 million for lost revenues related to COVID-19 (see Note 16).
Contract Assets. As of June 30, 2020, the Company recognized a contract asset of $6.4 million related to a contract at a Kaplan International business, which is included in Deferred Charges and Other Assets. The Company expects to recognize an additional $8.9 million related to this performance obligation over the next 2 years. As of December 31, 2019, the contract asset was $5.3 million.
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
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
%
|
|
(in thousands)
|
|
|
|
Change
|
|
Deferred revenue
|
$
|
284,825
|
|
|
$
|
359,048
|
|
(21)
|
In April 2020, GHG received $31.5 million under the expanded Medicare Accelerated and Advanced Payment Program modified by the CARES Act as a result of COVID-19. The amount is included in deferred revenue on the Condensed Consolidated Balance Sheet as of June 30, 2020. The Department of Health and Human Services will recoup this advance beginning 120 days after the payment was issued, and the deferred revenue will be reduced by the amount of revenue recognized for claims submitted for services provided after the recoupment period begins.
The majority of the change in the deferred revenue balance is related to the cyclical nature of services at the Kaplan international division and currency translation adjustments, partially offset by an increase at GHG. During the six months ended June 30, 2020, the Company recognized $264.2 million related to the Company’s deferred revenue balance as of December 31, 2019.
Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of June 30, 2020, Kaplan Test Preparation’s (KTP) deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $8.9 million. KTP expects to recognize 73% 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
|
|
2020
|
$
|
31,020
|
|
|
$
|
17,815
|
|
|
$
|
(31,856)
|
|
|
$
|
(1,386)
|
|
|
$
|
15,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of other activity is related to currency translation adjustments during the six months ended June 30, 2020.
11. EARNINGS (LOSS) 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 (loss) and share data used in the basic and diluted earnings (loss) per share computations using the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands, except per share amounts)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Graham Holdings Company common stockholders
|
$
|
18,854
|
|
|
$
|
57,081
|
|
|
$
|
(14,391)
|
|
|
$
|
138,829
|
|
|
Less: Dividends paid-common stock outstanding and unvested restricted shares
|
(7,581)
|
|
|
(7,388)
|
|
|
(22,870)
|
|
|
(22,167)
|
|
|
Undistributed earnings (loss)
|
11,273
|
|
|
49,693
|
|
|
(37,261)
|
|
|
116,662
|
|
|
Percent allocated to common stockholders (1)
|
99.44
|
%
|
|
99.43
|
%
|
|
100.00
|
%
|
|
99.43
|
%
|
|
|
11,210
|
|
|
49,410
|
|
|
(37,261)
|
|
|
115,997
|
|
|
Add: Dividends paid-common stock outstanding
|
7,539
|
|
|
7,346
|
|
|
22,745
|
|
|
22,041
|
|
|
Numerator for basic earnings (loss) per share
|
$
|
18,749
|
|
|
$
|
56,756
|
|
|
$
|
(14,516)
|
|
|
$
|
138,038
|
|
|
Add: Additional undistributed earnings due to dilutive stock options
|
—
|
|
|
2
|
|
|
—
|
|
|
5
|
|
|
Numerator for diluted earnings (loss) per share
|
$
|
18,749
|
|
|
$
|
56,758
|
|
|
$
|
(14,516)
|
|
|
$
|
138,043
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
5,196
|
|
|
5,285
|
|
|
5,235
|
|
|
5,285
|
|
|
Add: Effect of dilutive stock options
|
5
|
|
|
44
|
|
|
—
|
|
|
43
|
|
|
Denominator for diluted earnings (loss) per share
|
5,201
|
|
|
5,329
|
|
|
5,235
|
|
|
5,328
|
|
|
Graham Holdings Company Common Stockholders:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
3.61
|
|
|
$
|
10.74
|
|
|
$
|
(2.77)
|
|
|
$
|
26.12
|
|
|
Diluted earnings (loss) per share
|
$
|
3.60
|
|
|
$
|
10.65
|
|
|
$
|
(2.77)
|
|
|
$
|
25.91
|
|
____________
(1) Percent of undistributed losses allocated to common stockholders is 100% in the first six months of 2020 as participating securities are not contractually obligated to share in losses.
Diluted earnings (loss) 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
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Weighted average restricted stock
|
10
|
|
|
12
|
|
|
10
|
|
|
11
|
|
|
Weighted average stock options
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
The diluted earnings (loss) per share amounts for the three and six months ended June 30, 2020 and June 30, 2019 exclude the effects of 104,000 stock options outstanding, as their inclusion would have been antidilutive due to a market condition.
In the three and six months ended June 30, 2020, the Company declared regular dividends totaling $1.45 and $4.35 per common share, respectively. In the three and six months ended June 30, 2019, the Company declared regular dividends totaling $1.39 and $4.17 per common share, respectively.
12. PENSION AND POSTRETIREMENT PLANS
Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
5,804
|
|
|
$
|
4,963
|
|
|
$
|
11,587
|
|
|
$
|
10,184
|
|
|
Interest cost
|
8,140
|
|
|
11,743
|
|
|
16,309
|
|
|
23,335
|
|
|
Expected return on assets
|
(28,290)
|
|
|
(30,285)
|
|
|
(56,734)
|
|
|
(61,123)
|
|
|
Amortization of prior service cost
|
707
|
|
|
825
|
|
|
1,415
|
|
|
1,234
|
|
|
Recognized actuarial gain
|
—
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
Net Periodic Benefit
|
(13,639)
|
|
|
(12,717)
|
|
|
(27,423)
|
|
|
(26,370)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special separation benefit expense
|
6,014
|
|
|
6,607
|
|
|
6,014
|
|
|
6,607
|
|
|
Total Benefit
|
$
|
(7,625)
|
|
|
$
|
(6,110)
|
|
|
$
|
(21,409)
|
|
|
$
|
(19,763)
|
|
In the second quarter of 2020, the Company recorded $6.0 million in expenses related to a Separation Incentive Program for certain Kaplan and SocialCode employees, which is being funded from the assets of the Company’s pension plan.
In the second quarter of 2019, the Company recorded $6.6 million in expenses related to a Separation Incentive Program for certain Kaplan employees, which was funded from the assets of the Company’s pension plan.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
239
|
|
|
$
|
215
|
|
|
$
|
477
|
|
|
$
|
429
|
|
|
Interest cost
|
920
|
|
|
1,079
|
|
|
1,839
|
|
|
2,157
|
|
|
Amortization of prior service cost
|
82
|
|
|
84
|
|
|
165
|
|
|
169
|
|
|
Recognized actuarial loss
|
1,317
|
|
|
578
|
|
|
2,634
|
|
|
1,157
|
|
|
Net Periodic Cost
|
$
|
2,558
|
|
|
$
|
1,956
|
|
|
$
|
5,115
|
|
|
$
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a private investment fund, a U.S. stock index fund, and 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
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
|
U.S. equities
|
58
|
%
|
|
62
|
%
|
|
Private investment fund
|
16
|
%
|
|
7
|
%
|
|
U.S. fixed income
|
9
|
%
|
|
10
|
%
|
|
U.S. stock index fund
|
9
|
%
|
|
14
|
%
|
|
International equities
|
8
|
%
|
|
7
|
%
|
|
|
100
|
%
|
|
100
|
%
|
The Company manages approximately 39% of the pension assets internally, of which the majority is invested in a private investment fund with the remaining investments in Berkshire Hathaway stock, a U.S. stock index fund and short-term fixed-income securities. The remaining 61% of plan assets are managed by two investment companies. The goal of the investment managers 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 30% of the assets it manages in specified international exchanges at the time the investment is made. 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 June 30, 2020. 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 June 30, 2020, the pension plan held investments in one common stock and one private investment fund that exceeded 10% of total plan assets, valued at $624.5 million, or approximately 28% of total plan assets. At December 31, 2019, the pension plan held investments in one common stock and one U.S. stock index fund that exceeded 10% of total plan assets, valued at $704.8 million, or approximately 30% 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
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
22
|
|
|
$
|
72
|
|
|
$
|
84
|
|
|
$
|
144
|
|
|
Amortization of prior service credit
|
(121)
|
|
|
(1,840)
|
|
|
(241)
|
|
|
(3,681)
|
|
|
Recognized actuarial gain
|
(927)
|
|
|
(1,090)
|
|
|
(2,024)
|
|
|
(2,180)
|
|
|
Net Periodic Benefit
|
$
|
(1,026)
|
|
|
$
|
(2,858)
|
|
|
$
|
(2,181)
|
|
|
$
|
(5,717)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. OTHER NON-OPERATING INCOME
A summary of non-operating income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gain on acquiring a controlling interest in an equity affiliate
|
$
|
3,708
|
|
|
$
|
—
|
|
|
$
|
3,708
|
|
|
$
|
—
|
|
|
Foreign currency (loss) gain, net
|
(1,070)
|
|
|
109
|
|
|
3,220
|
|
|
623
|
|
|
Impairment of cost method investments
|
—
|
|
|
—
|
|
|
(2,577)
|
|
|
—
|
|
|
Gain on cost method investments
|
2,571
|
|
|
—
|
|
|
2,571
|
|
|
1,411
|
|
|
Gain on sale of a business
|
1,653
|
|
|
232
|
|
|
1,760
|
|
|
421
|
|
|
Gain on sale of equity affiliates
|
1,473
|
|
|
—
|
|
|
1,370
|
|
|
28,994
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of a cost method investment
|
—
|
|
|
—
|
|
|
518
|
|
|
—
|
|
|
Other (loss) gain, net
|
(235)
|
|
|
887
|
|
|
218
|
|
|
(870)
|
|
|
Total Other Non-Operating Income
|
$
|
8,100
|
|
|
$
|
1,228
|
|
|
$
|
10,788
|
|
|
$
|
30,579
|
|
In the second quarter of 2020, the Company made an additional investment in Framebridge (see Notes 2 and 3) that resulted in the Company obtaining control of the investee. The Company remeasured its previously held equity interest in Framebridge at the acquisition-date fair value and recorded a gain of $3.7 million. The fair value was determined using a market approach by using the share value indicated in the transaction.
The Company recorded contingent consideration gains of $1.7 million and $1.8 million, respectively, for the three and six months ended June 30, 2020, related to the disposition of Kaplan University in 2018.
In the second quarter of 2020, the Company recorded a $2.6 million gain resulting from observable price changes in the fair value of an equity security accounted for under the cost method.
In the first quarter of 2020, the Company recorded impairment losses of $2.6 million to equity securities that are accounted for as cost method investments.
In the first quarter of 2019, the Company recorded a $1.4 million gain resulting from observable price changes in the fair value of equity securities accounted for under the cost method.
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.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income (loss) consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
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
|
$
|
16,405
|
|
|
$
|
—
|
|
|
$
|
16,405
|
|
|
$
|
(11,104)
|
|
|
$
|
—
|
|
|
$
|
(11,104)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost (credit) included in net income
|
668
|
|
|
(181)
|
|
|
487
|
|
|
(931)
|
|
|
251
|
|
|
(680)
|
|
|
Amortization of net actuarial loss (gain) included in net income
|
390
|
|
|
(104)
|
|
|
286
|
|
|
(475)
|
|
|
129
|
|
|
(346)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,058
|
|
|
(285)
|
|
|
773
|
|
|
(1,406)
|
|
|
380
|
|
|
(1,026)
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain for the period
|
(143)
|
|
|
33
|
|
|
(110)
|
|
|
40
|
|
|
(5)
|
|
|
35
|
|
|
Other Comprehensive Income (Loss)
|
$
|
17,320
|
|
|
$
|
(252)
|
|
|
$
|
17,068
|
|
|
$
|
(12,470)
|
|
|
$
|
375
|
|
|
$
|
(12,095)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
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
|
$
|
(20,971)
|
|
|
$
|
—
|
|
|
$
|
(20,971)
|
|
|
$
|
(1,071)
|
|
|
$
|
—
|
|
|
$
|
(1,071)
|
|
|
Pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost (credit) included in net (loss) income
|
1,339
|
|
|
(362)
|
|
|
977
|
|
|
(2,278)
|
|
|
615
|
|
|
(1,663)
|
|
|
Amortization of net actuarial loss (gain) included in net (loss) income
|
610
|
|
|
(164)
|
|
|
446
|
|
|
(1,023)
|
|
|
276
|
|
|
(747)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,949
|
|
|
(526)
|
|
|
1,423
|
|
|
(3,301)
|
|
|
891
|
|
|
(2,410)
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
(1,721)
|
|
|
394
|
|
|
(1,327)
|
|
|
(427)
|
|
|
103
|
|
|
(324)
|
|
|
Other Comprehensive Loss
|
$
|
(20,743)
|
|
|
$
|
(132)
|
|
|
$
|
(20,875)
|
|
|
$
|
(4,799)
|
|
|
$
|
994
|
|
|
$
|
(3,805)
|
|
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, 2019
|
$
|
(21,888)
|
|
|
|
|
$
|
325,921
|
|
|
$
|
(738)
|
|
|
$
|
303,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
(20,971)
|
|
|
|
|
—
|
|
|
(1,487)
|
|
|
(22,458)
|
|
|
Net amount reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
|
|
1,423
|
|
|
160
|
|
|
1,583
|
|
|
Other comprehensive (loss) income, net of tax
|
(20,971)
|
|
|
|
|
1,423
|
|
|
(1,327)
|
|
|
(20,875)
|
|
|
Balance as of June 30, 2020
|
$
|
(42,859)
|
|
|
|
|
$
|
327,344
|
|
|
$
|
(2,065)
|
|
|
$
|
282,420
|
|
The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Six Months Ended
June 30
|
|
|
|
Affected Line Item in the Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Plans:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service cost (credit)
|
$
|
668
|
|
|
$
|
(931)
|
|
|
$
|
1,339
|
|
|
$
|
(2,278)
|
|
|
(1)
|
|
Amortization of net actuarial loss (gain)
|
390
|
|
|
(475)
|
|
|
610
|
|
|
(1,023)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,058
|
|
|
(1,406)
|
|
|
1,949
|
|
|
(3,301)
|
|
|
Before tax
|
|
|
(285)
|
|
|
380
|
|
|
(526)
|
|
|
891
|
|
|
Provision for (Benefit from) Income Taxes
|
|
|
773
|
|
|
(1,026)
|
|
|
1,423
|
|
|
(2,410)
|
|
|
Net of Tax
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
(58)
|
|
|
147
|
|
|
(127)
|
|
|
Interest expense
|
|
|
6
|
|
|
14
|
|
|
13
|
|
|
29
|
|
|
Provision for (Benefit from) Income Taxes
|
|
|
124
|
|
|
(44)
|
|
|
160
|
|
|
(98)
|
|
|
Net of Tax
|
|
Total reclassification for the period
|
$
|
897
|
|
|
$
|
(1,070)
|
|
|
$
|
1,583
|
|
|
$
|
(2,508)
|
|
|
Net of Tax
|
____________
(1) These accumulated other comprehensive income components are included in the computation 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 and invasion of privacy; trademark, copyright and patent infringement; violations of employment laws and 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 $15 million.
On January 10, 2020, Kaplan Bournemouth Limited received an improvement notice from Bournemouth, Christchurch and Poole Council, a local government authority, under section 11 of the U.K. Housing Act 2004 in relation to its leased student residence in Bournemouth, U.K. This notice follows the Council’s assessment that a category 1 fire hazard exists at the property and requires certain remedial work to be undertaken at the property within a specified timetable. This work comprises a number of items, including the removal of aluminum composite material (ACM) cladding and high pressure laminate (HPL) cladding from the facade of the building. Kaplan Bournemouth Limited appealed the notice on January 31, 2020, to contest certain remedial requirements, although it will not contest the requirement for the removal of the ACM and HPL cladding. Following the appeal, a mediation hearing was initially scheduled for April 2020 but was postponed due to the COVID-19 pandemic. The tribunal appeal proceedings are stayed until August 31, 2020. During this time, Kaplan have entered into discussions with the Council with a view to reaching an agreement on the remedial works required. If these discussions are unsuccessful, Kaplan will continue its appeal to the tribunal. If Kaplan is not successful in its appeal, additional substantial work may be required in connection with the building.
16. BUSINESS SEGMENTS
The Company has eight reportable segments: Kaplan International, Kaplan Higher Education, Kaplan Test Preparation, Kaplan Professional (U.S.), Television Broadcasting, Manufacturing, Healthcare, and SocialCode.
Kaplan developed and implemented a number of initiatives across its businesses to help mitigate the negative revenue impact arising from COVID-19, and to re-align its program offerings to better pursue opportunities from the disruption. These initiatives include employee salary and work-hour reductions; temporary furlough and other employee reductions; reduced discretionary spending; facility restructuring to reduce its classroom and office facilities; reduced capital expenditures; and accelerated development and promotion of various online programs and solutions.
In June 2020, Kaplan announced a plan to combine its three primary divisions based in the United States (Kaplan Test Prep, Kaplan Professional, and Kaplan Higher Education) into one business known as Kaplan North America. The plan for this combination is under development and is designed to create and reinforce Kaplan’s competitiveness in each market, and new markets into which Kaplan extends.
In the first half of 2020, Kaplan recorded restructuring costs related to severance, the exit of classroom and office facilities, and an approved Separation Incentive Program that reduced the number of employees at Kaplan International, Kaplan Higher Education, Kaplan Professional (U.S.) and Kaplan Corporate. Kaplan is in the process of developing additional cost reduction plans to be implemented in the second half of 2020.
In the second quarter of 2020, SocialCode recorded restructuring costs in connection with a restructuring plan that included the exit of an office facility, an approved Separation Incentive Program to reduce the number of employees, and other cost reduction initiatives to mitigate the adverse impact of COVID-19 on advertising demand. In July 2020, SocialCode announced it will be splitting into two separate companies.
Across all businesses, restructuring related costs of $29.2 million and $31.3 million, respectively, were recorded for the three and six months ended June 30, 2020. Kaplan Higher Education recorded $2.0 million in facility related restructuring costs in the first quarter of 2020. Restructuring related costs across all businesses in 2020 were recorded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Kaplan International
|
Higher Education
|
Test Preparation
|
Professional (U.S)
|
Kaplan Corporate
|
Total Education
|
SocialCode
|
Total
|
|
Severance
|
$
|
1,224
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,224
|
|
$
|
—
|
|
$
|
1,224
|
|
|
Facility related costs:
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
2,418
|
|
3,442
|
|
2,740
|
|
556
|
|
—
|
|
9,156
|
|
—
|
|
9,156
|
|
|
Accelerated depreciation of property, plant and equipment
|
1,472
|
|
95
|
|
1,792
|
|
9
|
|
—
|
|
3,368
|
|
—
|
|
3,368
|
|
|
Total Restructuring Costs Included in Segment Income (Loss) from Operations
|
$
|
5,114
|
|
$
|
3,537
|
|
$
|
4,532
|
|
$
|
565
|
|
$
|
—
|
|
$
|
13,748
|
|
$
|
—
|
|
$
|
13,748
|
|
|
Impairment of other long-lived assets:
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets
|
3,790
|
|
2,062
|
|
243
|
|
1,955
|
|
—
|
|
8,050
|
|
1,405
|
|
9,455
|
|
|
Property, plant and equipment
|
1,199
|
|
174
|
|
—
|
|
597
|
|
—
|
|
1,970
|
|
86
|
|
2,056
|
|
|
Non-operating pension and postretirement benefit income, net
|
1,100
|
|
1,431
|
|
—
|
|
2,295
|
|
189
|
|
5,015
|
|
999
|
|
6,014
|
|
|
Total Restructuring Related Costs
|
$
|
11,203
|
|
$
|
7,204
|
|
$
|
4,775
|
|
$
|
5,412
|
|
$
|
189
|
|
$
|
28,783
|
|
$
|
2,490
|
|
$
|
31,273
|
|
In June 2020, CRG made the decision to close its restaurant and entertainment venue in Columbia, MD effective July 19, 2020 and recorded accelerated depreciation of property, plant and equipment totaling $2.8 million.
The following tables summarize the financial information related to each of the Company’s business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
|
June 30
|
|
|
|
(in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
|
$
|
333,175
|
|
|
$
|
367,763
|
|
|
$
|
689,553
|
|
|
$
|
740,217
|
|
|
Television broadcasting
|
|
|
|
|
|
100,762
|
|
|
116,628
|
|
|
216,210
|
|
|
224,851
|
|
|
Manufacturing
|
|
|
|
|
|
83,239
|
|
|
114,873
|
|
|
196,697
|
|
|
230,030
|
|
|
Healthcare
|
|
|
|
|
|
49,181
|
|
|
40,641
|
|
|
95,175
|
|
|
78,369
|
|
|
SocialCode
|
|
|
|
|
|
10,483
|
|
|
16,382
|
|
|
22,506
|
|
|
29,829
|
|
|
Other businesses
|
|
|
|
|
|
76,380
|
|
|
81,359
|
|
|
165,648
|
|
|
126,589
|
|
|
Corporate office
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment elimination
|
|
|
|
|
|
(349)
|
|
|
(44)
|
|
|
(661)
|
|
|
(84)
|
|
|
|
|
|
|
|
|
$
|
652,871
|
|
|
$
|
737,602
|
|
|
$
|
1,385,128
|
|
|
$
|
1,429,801
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
|
$
|
12,254
|
|
|
$
|
26,305
|
|
|
$
|
16,946
|
|
|
$
|
51,900
|
|
|
Television broadcasting
|
|
|
|
|
|
23,627
|
|
|
44,494
|
|
|
59,403
|
|
|
80,034
|
|
|
Manufacturing
|
|
|
|
|
|
(1,482)
|
|
|
4,692
|
|
|
5,019
|
|
|
7,966
|
|
|
Healthcare
|
|
|
|
|
|
8,818
|
|
|
2,598
|
|
|
11,987
|
|
|
4,927
|
|
|
SocialCode
|
|
|
|
|
|
(3,004)
|
|
|
(975)
|
|
|
(6,793)
|
|
|
(4,993)
|
|
|
Other businesses
|
|
|
|
|
|
(21,316)
|
|
|
(5,913)
|
|
|
(51,008)
|
|
|
(14,406)
|
|
|
Corporate office
|
|
|
|
|
|
(13,020)
|
|
|
(13,238)
|
|
|
(21,592)
|
|
|
(27,462)
|
|
|
|
|
|
|
|
|
$
|
5,877
|
|
|
$
|
57,963
|
|
|
$
|
13,962
|
|
|
$
|
97,966
|
|
|
Equity in Earnings (Losses) of Affiliates, Net
|
|
|
|
|
|
1,182
|
|
|
1,467
|
|
|
(365)
|
|
|
3,146
|
|
|
Interest Expense, Net
|
|
|
|
|
|
(6,423)
|
|
|
(6,807)
|
|
|
(12,950)
|
|
|
(12,532)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Pension and Postretirement Benefit Income, Net
|
|
|
|
|
|
12,136
|
|
|
12,253
|
|
|
30,539
|
|
|
32,181
|
|
|
Gain (Loss) on Marketable Equity Securities, Net
|
|
|
|
|
|
39,890
|
|
|
7,791
|
|
|
(60,503)
|
|
|
31,857
|
|
|
Other Income, Net
|
|
|
|
|
|
8,100
|
|
|
1,228
|
|
|
10,788
|
|
|
30,579
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
$
|
60,762
|
|
|
$
|
73,895
|
|
|
$
|
(18,529)
|
|
|
$
|
183,197
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
|
$
|
10,324
|
|
|
$
|
6,137
|
|
|
$
|
17,653
|
|
|
$
|
12,338
|
|
|
Television broadcasting
|
|
|
|
|
|
3,446
|
|
|
3,293
|
|
|
6,789
|
|
|
6,532
|
|
|
Manufacturing
|
|
|
|
|
|
2,526
|
|
|
2,384
|
|
|
5,053
|
|
|
4,817
|
|
|
Healthcare
|
|
|
|
|
|
493
|
|
|
607
|
|
|
1,033
|
|
|
1,217
|
|
|
SocialCode
|
|
|
|
|
|
121
|
|
|
384
|
|
|
242
|
|
|
536
|
|
|
Other businesses
|
|
|
|
|
|
5,827
|
|
|
837
|
|
|
8,496
|
|
|
1,485
|
|
|
Corporate office
|
|
|
|
|
|
176
|
|
|
242
|
|
|
351
|
|
|
482
|
|
|
|
|
|
|
|
|
$
|
22,913
|
|
|
$
|
13,884
|
|
|
$
|
39,617
|
|
|
$
|
27,407
|
|
|
Amortization of Intangible Assets and Impairment of Goodwill and Other Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
|
$
|
14,291
|
|
|
$
|
4,070
|
|
|
$
|
18,492
|
|
|
$
|
7,637
|
|
|
Television broadcasting
|
|
|
|
|
|
1,361
|
|
|
1,408
|
|
|
2,721
|
|
|
2,816
|
|
|
Manufacturing
|
|
|
|
|
|
6,988
|
|
|
6,528
|
|
|
14,125
|
|
|
13,058
|
|
|
Healthcare
|
|
|
|
|
|
1,307
|
|
|
1,410
|
|
|
2,617
|
|
|
2,808
|
|
|
SocialCode
|
|
|
|
|
|
1,647
|
|
|
157
|
|
|
1,804
|
|
|
314
|
|
|
Other businesses
|
|
|
|
|
|
244
|
|
|
—
|
|
|
16,645
|
|
|
—
|
|
|
Corporate office
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
25,838
|
|
|
$
|
13,573
|
|
|
$
|
56,404
|
|
|
$
|
26,633
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
|
$
|
2,592
|
|
|
$
|
2,522
|
|
|
$
|
5,177
|
|
|
$
|
5,186
|
|
|
Television broadcasting
|
|
|
|
|
|
836
|
|
|
780
|
|
|
1,632
|
|
|
1,511
|
|
|
Manufacturing
|
|
|
|
|
|
395
|
|
|
15
|
|
|
789
|
|
|
40
|
|
|
Healthcare
|
|
|
|
|
|
112
|
|
|
63
|
|
|
271
|
|
|
246
|
|
|
SocialCode
|
|
|
|
|
|
162
|
|
|
191
|
|
|
399
|
|
|
439
|
|
|
Other businesses
|
|
|
|
|
|
241
|
|
|
161
|
|
|
467
|
|
|
362
|
|
|
Corporate office
|
|
|
|
|
|
1,466
|
|
|
1,231
|
|
|
2,852
|
|
|
2,400
|
|
|
|
|
|
|
|
|
$
|
5,804
|
|
|
$
|
4,963
|
|
|
$
|
11,587
|
|
|
$
|
10,184
|
|
Asset information for the Company’s business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
(in thousands)
|
June 30, 2020
|
|
December 31, 2019
|
|
Identifiable Assets
|
|
|
|
|
Education
|
$
|
1,827,258
|
|
|
$
|
2,032,425
|
|
|
Television broadcasting
|
450,134
|
|
|
463,689
|
|
|
Manufacturing
|
557,767
|
|
|
564,251
|
|
|
Healthcare
|
159,045
|
|
|
160,033
|
|
|
SocialCode
|
122,421
|
|
|
221,746
|
|
|
Other businesses
|
391,031
|
|
|
345,649
|
|
|
Corporate office
|
261,002
|
|
|
103,764
|
|
|
|
$
|
3,768,658
|
|
|
$
|
3,891,557
|
|
|
Investments in Marketable Equity Securities
|
431,808
|
|
|
585,080
|
|
|
Investments in Affiliates
|
156,677
|
|
|
162,249
|
|
|
Prepaid Pension Cost
|
1,315,174
|
|
|
1,292,350
|
|
|
Total Assets
|
$
|
5,672,317
|
|
|
$
|
5,931,236
|
|
The Company’s education division comprises the following operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six months ended
|
|
|
|
|
|
June 30
|
|
|
|
June 30
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
164,713
|
|
|
$
|
188,580
|
|
|
$
|
364,328
|
|
|
$
|
374,336
|
|
|
|
Higher education
|
86,453
|
|
|
76,288
|
|
|
159,990
|
|
|
159,068
|
|
|
|
Test preparation
|
51,111
|
|
|
65,673
|
|
|
93,950
|
|
|
126,823
|
|
|
|
Professional (U.S.)
|
28,674
|
|
|
35,147
|
|
|
67,123
|
|
|
76,361
|
|
|
|
Kaplan corporate and other
|
3,039
|
|
|
2,369
|
|
|
6,244
|
|
|
4,671
|
|
|
|
Intersegment elimination
|
(815)
|
|
|
(294)
|
|
|
(2,082)
|
|
|
(1,042)
|
|
|
|
|
$
|
333,175
|
|
|
$
|
367,763
|
|
|
$
|
689,553
|
|
|
$
|
740,217
|
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
16,035
|
|
|
$
|
25,537
|
|
|
$
|
35,015
|
|
|
$
|
49,822
|
|
|
|
Higher education
|
17,050
|
|
|
2,721
|
|
|
15,030
|
|
|
4,636
|
|
|
|
Test preparation
|
(1,048)
|
|
|
4,289
|
|
|
(13,724)
|
|
|
3,835
|
|
|
|
Professional (U.S.)
|
1,378
|
|
|
4,745
|
|
|
7,504
|
|
|
16,004
|
|
|
|
Kaplan corporate and other
|
(21,161)
|
|
|
(10,990)
|
|
|
(26,884)
|
|
|
(22,394)
|
|
|
|
Intersegment elimination
|
—
|
|
|
3
|
|
|
5
|
|
|
(3)
|
|
|
|
|
$
|
12,254
|
|
|
$
|
26,305
|
|
|
$
|
16,946
|
|
|
$
|
51,900
|
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
5,619
|
|
|
$
|
3,716
|
|
|
$
|
10,197
|
|
|
$
|
7,598
|
|
|
|
Higher education
|
832
|
|
|
629
|
|
|
1,555
|
|
|
1,226
|
|
|
|
Test preparation
|
2,607
|
|
|
779
|
|
|
3,433
|
|
|
1,584
|
|
|
|
Professional (U.S.)
|
1,165
|
|
|
959
|
|
|
2,278
|
|
|
1,824
|
|
|
|
Kaplan corporate and other
|
101
|
|
|
54
|
|
|
190
|
|
|
106
|
|
|
|
|
$
|
10,324
|
|
|
$
|
6,137
|
|
|
$
|
17,653
|
|
|
$
|
12,338
|
|
|
|
Amortization of Intangible Assets
|
$
|
4,271
|
|
|
$
|
3,377
|
|
|
$
|
8,472
|
|
|
$
|
6,944
|
|
|
|
Impairment of Long-lived Assets
|
$
|
10,020
|
|
|
$
|
693
|
|
|
$
|
10,020
|
|
|
$
|
693
|
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
120
|
|
|
$
|
110
|
|
|
$
|
232
|
|
|
$
|
227
|
|
|
|
Higher education
|
1,070
|
|
|
1,102
|
|
|
2,140
|
|
|
2,265
|
|
|
|
Test preparation
|
823
|
|
|
821
|
|
|
1,646
|
|
|
1,687
|
|
|
|
Professional (U.S.)
|
261
|
|
|
329
|
|
|
523
|
|
|
677
|
|
|
|
Kaplan corporate and other
|
318
|
|
|
160
|
|
|
636
|
|
|
330
|
|
|
|
|
$
|
2,592
|
|
|
$
|
2,522
|
|
|
$
|
5,177
|
|
|
$
|
5,186
|
|
|
Asset information for the Company’s education division is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2020
|
|
December 31, 2019
|
|
Identifiable assets
|
|
|
|
|
Kaplan international
|
$
|
1,266,671
|
|
|
$
|
1,455,122
|
|
|
Higher education
|
210,789
|
|
|
196,761
|
|
|
Test preparation
|
138,359
|
|
|
151,655
|
|
|
Professional (U.S.)
|
146,295
|
|
|
160,799
|
|
|
Kaplan corporate and other
|
65,144
|
|
|
68,088
|
|
|
|
$
|
1,827,258
|
|
|
$
|
2,032,425
|
|