Print Page  |  Close Window

Investor Relations

SEC Filings

10-Q
GRAHAM HOLDINGS CO filed this Form 10-Q on 11/01/2017
Entire Document
 
Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2017
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-671
GRAHAM HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1300 North 17th Street, Arlington, Virginia
22209
(Address of principal executive offices)
(Zip Code)
(703) 345-6300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý.    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý.    No  ¨.  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
ý
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller reporting
company
¨
Emerging growth
company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨.    No  ý.  
Shares outstanding at October 27, 2017:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,567,815 Shares
 




GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
c. Condensed Consolidated Balance Sheets at September 30, 2017 (Unaudited) and December 31, 2016
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017 and 2016
 
 
 
 
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
  
 
(in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Operating Revenues
  
 
  
 
  
 
  

Education
$
377,033

 
$
386,936

 
$
1,136,706

 
$
1,207,086

Advertising
69,495

 
86,531

 
207,143

 
225,590

Other
210,697

 
148,171

 
572,180

 
419,635

  
657,225

 
621,638

 
1,916,029

 
1,852,311

Operating Costs and Expenses
 
 
  
 
 
 
  
Operating
352,635

 
293,194

 
1,011,553

 
880,859

Selling, general and administrative
232,782

 
237,694

 
678,139

 
709,344

Depreciation of property, plant and equipment
16,002

 
16,097

 
46,525

 
48,903

Amortization of intangible assets
10,923

 
6,620

 
28,290

 
19,160

Impairment of goodwill and other long-lived assets
312

 

 
9,536

 

  
612,654

 
553,605

 
1,774,043

 
1,658,266

Income from Operations
44,571

 
68,033

 
141,986

 
194,045

Equity in (losses) earnings of affiliates, net
(532
)
 
(1,008
)
 
1,448

 
(895
)
Interest income
861

 
740

 
3,397

 
2,052

Interest expense
(8,619
)
 
(8,614
)
 
(25,783
)
 
(24,533
)
Other income (expense), net
1,963

 
(18,225
)
 
6,881

 
15,871

Income Before Income Taxes
38,244

 
40,926

 
127,929

 
186,540

Provision for Income Taxes
13,400

 
7,800

 
40,000

 
54,000

Net Income
24,844

 
33,126

 
87,929

 
132,540

Net Income Attributable to Noncontrolling Interests
(60
)
 

 
(63
)
 
(868
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
24,784

 
$
33,126

 
$
87,866

 
$
131,672

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Basic net income per common share
$
4.45

 
$
5.90

 
$
15.74

 
$
23.33

Basic average number of common shares outstanding
5,518

 
5,544

 
5,530

 
5,570

Diluted net income per common share
$
4.42

 
$
5.87

 
$
15.64

 
$
23.21

Diluted average number of common shares outstanding
5,554

 
5,574

 
5,567

 
5,600


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Net Income
$
24,844

 
$
33,126

 
$
87,929

 
$
132,540

Other Comprehensive Income, Before Tax
  
 
  
 
 
 
  
Foreign currency translation adjustments:
  
 
  
 
 
 
  
Translation adjustments arising during the period
11,470

 
(353
)
 
34,776

 
(1,629
)
Unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains for the period, net
47,836

 
12,154

 
71,370

 
7,190

Reclassification of realized gain on sale of available-for-sale securities included in net income

 

 

 
(6,256
)
  
47,836

 
12,154

 
71,370

 
934

Pension and other postretirement plans:
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
118

 
105

 
358

 
314

Amortization of net actuarial (gain) loss included in net income
(1,567
)
 
289

 
(4,958
)
 
868

  
(1,449
)
 
394

 
(4,600
)
 
1,182

Cash flow hedge (loss) gain
(72
)
 
49

 
(215
)
 
49

Other Comprehensive Income, Before Tax
57,785

 
12,244

 
101,331

 
536

Income tax expense related to items of other comprehensive income
(18,540
)
 
(5,039
)
 
(26,665
)
 
(866
)
Other Comprehensive Income (Loss), Net of Tax
39,245

 
7,205

 
74,666

 
(330
)
Comprehensive Income
64,089

 
40,331

 
162,595

 
132,210

Comprehensive income attributable to noncontrolling interests
(60
)
 

 
(63
)
 
(868
)
Total Comprehensive Income Attributable to Graham Holdings Company
$
64,029

 
$
40,331

 
$
162,532

 
$
131,342


See accompanying Notes to Condensed Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
September 30,
2017
 
December 31,
2016
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
395,009

 
$
648,885

Restricted cash
21,403

 
21,931

Investments in marketable equity securities and other investments
519,586

 
448,241

Accounts receivable, net
525,779

 
615,101

Income taxes receivable
28,108

 
41,635

Inventories and contracts in progress
62,531

 
34,818

Other current assets
65,443

 
60,735

Total Current Assets
1,617,859

 
1,871,346

Property, Plant and Equipment, Net
259,809

 
233,664

Investments in Affiliates
122,166

 
58,806

Goodwill, Net
1,299,226

 
1,122,954

Indefinite-Lived Intangible Assets, Net
109,901

 
66,026

Amortized Intangible Assets, Net
239,152

 
107,939

Prepaid Pension Cost
863,098

 
881,593

Deferred Income Taxes
15,820

 
17,246

Deferred Charges and Other Assets
92,884

 
73,096

Total Assets
$
4,619,915

 
$
4,432,670

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
446,076

 
$
500,726

Deferred revenue
353,367

 
312,107

Current portion of long-term debt
6,713

 
6,128

Dividends declared
7,025

 

Total Current Liabilities
813,181

 
818,961

Postretirement Benefits Other Than Pensions
22,929

 
21,859

Accrued Compensation and Related Benefits
198,907

 
195,910

Other Liabilities
67,589

 
65,554

Deferred Income Taxes
454,027

 
379,092

Mandatorily Redeemable Noncontrolling Interest
12,584

 
12,584

Long-Term Debt
486,242

 
485,719

Total Liabilities
2,055,459

 
1,979,679

Redeemable Noncontrolling Interest
3,779

 
50

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
368,505

 
364,363

Retained earnings
5,648,479

 
5,588,942

Accumulated other comprehensive income (loss), net of tax
 
 
  

Cumulative foreign currency translation adjustment
7,778

 
(26,998
)
Unrealized gain on available-for-sale securities
135,753

 
92,931

Unrealized gain on pensions and other postretirement plans
168,070

 
170,830

Cash flow hedge
(449
)
 
(277
)
Cost of Class B common stock held in treasury
(3,787,459
)
 
(3,756,850
)
Total Equity
2,560,677

 
2,452,941

Total Liabilities and Equity
$
4,619,915

 
$
4,432,670


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Nine Months Ended 
 September 30
(in thousands)
2017
 
2016
Cash Flows from Operating Activities
  
 
  
Net Income
$
87,929

 
$
132,540

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation, amortization and goodwill and other long-lived asset impairment
84,351

 
68,063

Net pension benefit
(44,281
)
 
(36,714
)
Early retirement program expense
932

 

Stock-based compensation expense, net
7,528

 
10,319

Loss (gain) on disposition of businesses, property, plant and equipment, investments and other assets, net
504

 
(62,132
)
Foreign exchange (gain) loss
(6,608
)
 
33,324

Write-down of cost method investments
200

 
15,161

Equity in (earnings) losses of affiliates, net of distributions
(1,434
)
 
895

Provision (benefit) for deferred income taxes
16,306

 
(17,281
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
106,230

 
5,980

Accounts payable and accrued liabilities
(63,255
)
 
(38,099
)
Deferred revenue
27,254

 
28,014

Income taxes receivable
14,477

 
27,206

Other assets and other liabilities, net
(9,795
)
 
(16,492
)
Other
519

 
671

Net Cash Provided by Operating Activities
220,857

 
151,455

Cash Flows from Investing Activities
  
 
  
Investments in certain businesses, net of cash acquired
(299,938
)
 
(242,472
)
Investments in equity affiliates, cost method and other investments
(66,097
)
 
(4,550
)
Purchases of property, plant and equipment
(43,863
)
 
(41,373
)
Disbursement of loan to affiliate
(6,771
)
 
(7,730
)
Return of investment in equity affiliate
3,527

 

Net proceeds from disposition of businesses, property, plant and equipment, investments and other assets
2,672

 
36,777

Proceeds from sales of marketable equity securities

 
22,837

Purchases of marketable equity securities

 
(48,265
)
Net Cash Used in Investing Activities
(410,470
)
 
(284,776
)
Cash Flows from Financing Activities
  
 
  
Common shares repurchased
(35,394
)
 
(90,328
)
Dividends paid
(21,304
)
 
(20,532
)
Repayments of borrowings
(7,712
)
 

Deferred payments of acquisition and noncontrolling interest
(5,187
)
 

Issuance of borrowings

 
98,610

Purchase of noncontrolling interest

 
(21,000
)
Payments of financing costs

 
(648
)
Other
(4,962
)
 
16,608

Net Cash Used in Financing Activities
(74,559
)
 
(17,290
)
Effect of Currency Exchange Rate Change
9,768

 
(3,147
)
Net Decrease in Cash and Cash Equivalents and Restricted Cash
(254,404
)
 
(153,758
)
Beginning Cash and Cash Equivalents and Restricted Cash
670,816

 
774,952

Ending Cash and Cash Equivalents and Restricted Cash
$
416,412

 
$
621,194


See accompanying Notes to Condensed Consolidated Financial Statements.

4



GRAHAM HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of seven television broadcasting stations, several websites and print publications, and a marketing solutions provider. The Company’s other business operations include manufacturing 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 nine months ended September 30, 2017 and 2016 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, 2016.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Out of Period Adjustment – In the second quarter of 2016, the Company benefited from a favorable $5.6 million out of period adjustment to the provision for deferred income taxes related to the $248.6 million goodwill impairment at the KHE reporting unit in the third quarter of 2015. With respect to this error, the Company has concluded that it was not material to the Company’s financial position or results of operations for 2016 and the related interim periods, based on its consideration of quantitative and qualitative factors.
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 May 2014, the Financial Accounting Standards Board (FASB) issued comprehensive new guidance that supersedes all existing revenue recognition guidance. In August 2015, the FASB issued an amendment to the guidance that defers the effective date by one year. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. The guidance is effective for interim and fiscal years beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The standard permits two implementation approaches, full retrospective, requiring retrospective application of the new guidance with a restatement of prior years, or modified retrospective, requiring prospective application of the new guidance with disclosure of results under the old guidance in the first year of adoption. The Company will adopt the new guidance on January 1, 2018 using the modified retrospective approach.
The Company is in the process of completing the evaluation of the impact of adopting the new guidance, as well as assessing the need for any potential changes to the Company’s accounting policies and internal control structure. The evaluation of contracts at the Company’s television broadcasting and other businesses is substantially complete, and based upon the results of the work performed to date, the Company does not expect the application of the new guidance to have a material impact to the Company’s Consolidated Statement of Operations or Balance Sheet, either at initial implementation or on an ongoing basis. The Company is continuing its evaluation of contracts at the education division and is not yet able to estimate the anticipated impact of these arrangements to the Company’s Consolidated Financial Statements. The Company expects adoption of the new guidance will result in a

5



change to its current treatment of certain commissions paid to employees and agents at the education division. The Company currently expenses such commissions as incurred. Under the new guidance, the Company expects to capitalize certain commission costs as an incremental cost of obtaining a contract and subsequently amortize the cost as the tuition services are delivered to students. The Company expects to complete its evaluation of the impact of the new guidance in the fourth quarter of 2017. The Company is also evaluating the new disclosures required by the guidance to determine additional information that will need to be disclosed.
In January 2016, the FASB issued new guidance that substantially revises the recognition, measurement and presentation of financial assets and financial liabilities. The new guidance, among other things, requires, (i) equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, with some exceptions, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and (v) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for interim and fiscal years beginning after December 15, 2017. Early adoption is not permitted. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements.
In February 2016, the 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. Early adoption is permitted. The standard requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements.
In March 2016, the FASB issued new guidance that simplifies the accounting for stock-based compensation. The new guidance (i) requires all excess tax benefits and tax deficiencies to be recognized in the income statement with the tax effects of vested or exercised awards treated as discrete items. Additionally, excess tax benefits will be recognized regardless of whether the benefit reduces taxes payable in the current period, effectively eliminating the APIC pool, (ii) concludes excess tax benefits should be classified as an operating activity in the statement of cash flows, (iii) requires an entity to make an entity-wide accounting policy election to either estimate a forfeiture rate for awards or account for forfeitures as they occur, (iv) changes the threshold for equity classification for cash settlements of awards for withholding requirements to the maximum statutory tax rate in the applicable jurisdiction and (v) concludes cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity in the statement of cash flows. The guidance is effective for interim and fiscal years beginning after December 15, 2016. The Company adopted the new guidance as of January 1, 2017. As a result of adoption, the Company recognized a $5.9 million excess tax benefit as a discrete item in its tax provision related to the vesting of restricted stock awards in the first quarter of 2017. This tax benefit is classified as an operating activity on the Condensed Consolidated Statement of Cash Flows. Additionally, the Company elected to account for forfeitures of stock awards as they occur and not estimate a forfeiture rate. The Company does not expect the forfeiture rate election to have a material impact on its financial statements.

6



In November 2016, the FASB issued new guidance that clarifies how restricted cash and restricted cash equivalents should be presented in the statement of cash flows. The guidance requires the cash flow statement to show changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents, which eliminates the presentation of transfers between cash and cash equivalents and restricted cash and cash equivalents. The guidance is effective for interim and fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted the new guidance retrospectively as of December 31, 2016. The prior period has been adjusted to reflect this adoption, as detailed below:
 
Nine Months Ended September 30, 2016
 
As
 
 
 
 
 
Previously
 
 
 
As
(in thousands)
Reported
 
Adjustment
 
Adopted
Cash Flows from Operating Activities
  
 
  
 
  
Increase in Restricted Cash
$
(7,266
)
 
$
7,266

 
$

Net Cash Provided by Operating Activities
144,189

 
7,266

 
151,455

 
 
 
 
 
 
Net Decrease in Cash and Cash Equivalents and Restricted Cash
(161,024
)
 
7,266

 
(153,758
)
Cash and Cash Equivalents and Restricted Cash at Beginning of Period
754,207

 
20,745

 
774,952

Cash and Cash Equivalents and Restricted Cash at End of Period
593,183

 
28,011

 
621,194

In January 2017, the FASB issued new guidance which simplifies the subsequent measurement of goodwill. The new guidance eliminates Step 2 from the goodwill impairment test, which required entities to determine the implied fair value of goodwill as of the test date to measure a goodwill impairment charge. Instead, an entity should continue to test goodwill for impairment by comparing the fair value of a reporting unit with its carrying amount (Step 1), and an impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting units fair value. The guidance is effective for interim and fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted this guidance in the second quarter of 2017.

7



In March 2017, the FASB issued new guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost for defined benefit plans. The guidance requires an issuer to disaggregate the service cost component of net periodic pension and postretirement benefit cost from other components. Under the new guidance, service cost will be included in the same line item(s) as other compensation costs arising from services rendered by employees during the period, while the other components will be recognized after income from operations. The guidance is effective for interim and fiscal years beginning after December 15, 2017. The guidance must be applied retrospectively; however, a practical expedient is available which permits an employer to use amounts previously disclosed in its pension and postretirement plans footnote for the prior comparative periods. The Company will adopt the new standard in the first quarter of 2018, and expects the following changes to its financial statements upon adoption, as detailed below:
 
Income from Operations
 
Non-operating pension and postretirement benefit income
 
Income Before Income Taxes
(in thousands)
 
 
Three Months Ended September 30, 2017
  
 
  
 
  
As Reported
$
44,571

 
$

 
$
38,244

Adjustment
(17,621
)
 
17,621

 

Upon Adoption
26,950

 
17,621

 
38,244

 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
As Reported
$
68,033

 
$

 
$
40,926

Adjustment
(15,705
)
 
15,705

 

Upon Adoption
52,328

 
15,705

 
40,926

 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
As Reported
$
141,986

 
$

 
$
127,929

Adjustment
(55,042
)
 
55,042

 

Upon Adoption
86,944

 
55,042

 
127,929

 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
As Reported
$
194,045

 
$

 
$
186,540

Adjustment
(46,966
)
 
46,966

 

Upon Adoption
147,079

 
46,966

 
186,540

 
 
 
 
 
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
As Reported
$
303,534

 
$

 
$
250,658

Adjustment
(80,665
)
 
80,665

 

Upon Adoption
222,869

 
80,665

 
250,658

2. INVESTMENTS
As of September 30, 2017 and December 31, 2016, the Company had commercial paper and money market investments of $205.8 million and $485.1 million, respectively, that are classified as cash, cash equivalents and restricted cash in the Company’s Condensed Consolidated Balance Sheets.
Investments in marketable equity securities comprised the following:
  
As of
  
September 30,
2017
 
December 31,
2016
(in thousands)
 
Total cost
$
269,343

 
$
269,343

Gross unrealized gains
226,256

 
154,886

Total Fair Value
$
495,599

 
$
424,229

There were no purchases of marketable equity securities during the first nine months of 2017. The Company settled on $48.3 million of marketable equity securities purchases during the first nine months of 2016, of which $47.9 million was purchased in the first nine months of 2016.
There were no sales of marketable equity securities for the first nine months of 2017. The total proceeds from the sales of marketable equity securities for the first nine months of 2016 were $22.8 million, with realized gains of $6.3 million.
In September 2017, the Company acquired approximately 10% of 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, which is accounted for as an investment in affiliate. As of September 30, 2017, the Company held interests in several affiliates; Residential Healthcare (Residential) held a 40% interest in Residential Home

8



Health Illinois, a 42.5% interest in Residential Hospice Illinois and a 40% interest in the joint venture formed between Residential and a Michigan hospital; and Celtic Healthcare (Celtic) held a 40% interest in the joint venture formed between Celtic Healthcare and Allegheny Health Network (AHN). For the three and nine months ended September 30, 2017, the Company recorded $4.5 million and $14.1 million, respectively, in revenue for services provided to the affiliates of Celtic and Residential.
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, £11.0 million was advanced in 2016 and £5.0 million was advanced in 2017. The loan will be repayable over 25 years at an interest rate of 7% and the loan is guaranteed by the University of York.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
AcquisitionsIn the first nine months of 2017, the Company acquired six businesses, two in its education division, two in its television broadcasting division and two in other businesses for $318.7 million in cash and contingent consideration, and the assumption of $59.1 million in certain pension and postretirement obligations.
At the end of June 2017, Graham Healthcare Group (GHG) acquired a 100% interest in Hometown Home Health and Hospice, a Lapeer, MI-based healthcare services provider by purchasing all of its issued and outstanding shares. This acquisition expands GHG’s service area in Michigan. GHG is included in other businesses.
In April 2017, the Company acquired 97.72% of the issued and outstanding shares of Hoover Treated Wood Products, Inc., a Thomson, GA-based supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications for $206.8 million, net of cash acquired. The fair value of the redeemable noncontrolling interest in Hoover was $3.7 million at the acquisition date, determined using a market approach. The minority shareholders have an option to put some of their shares to the Company starting in 2019 and the remaining shares starting in 2021. The Company has an option to buy the shares of minority shareholders starting in 2027. This acquisition is consistent with the Company’s ongoing strategy of investing in companies with a history of profitability and strong management. Hoover is included in other businesses.
In February 2017, Kaplan acquired a 100% interest in Genesis Training Institute, a Dubai-based provider of professional development training in the United Arab Emirates, by purchasing all of its issued and outstanding shares. Additionally, Kaplan acquired a 100% interest in Red Marker Pty Ltd, an Australia-based regulatory technology company by purchasing all of its outstanding shares. These acquisitions are expected to provide certain strategic benefits in the future.
On January 17, 2017, the Company closed on its agreement with Nexstar Broadcasting Group, Inc. and Media General, Inc. to acquire the assets of WCWJ, a CW affiliate television station in Jacksonville, FL and WSLS, an NBC affiliate television station in Roanoke, VA for cash and the assumption of certain pension obligations. The acquisition of WCWJ and WSLS will complement the other stations that GMG operates.
During 2016, the Company acquired five businesses, three businesses included in its education division and two businesses in other businesses. In January 2016, Kaplan acquired a 100% interest in Mander Portman Woodward, a leading provider of high-quality, bespoke education to UK and international students in London, Cambridge and Birmingham, by purchasing all of its issued and outstanding shares. In February 2016, Kaplan acquired a 100% interest in Osborne Books, an educational publisher of learning resources for accounting qualifications in the UK, by purchasing all of its issued and outstanding shares. The primary rationale for these acquisitions was based on several strategic benefits expected to be realized in the future. Both of these acquisitions are included in Kaplan International.
In September 2016, Group Dekko, Inc. (Dekko) acquired a 100% interest in Electri-Cable Assemblies (ECA), a Shelton, CT-based manufacturer of power, data and electrical solutions for the office furniture industry, by purchasing all of its issued and outstanding shares. Dekko’s primary reasons for the acquisition were to complement existing product offerings and provide opportunities for synergies across the businesses. Dekko is included in other businesses.

9



Acquisition-related costs of $3.5 million related to these 2017 acquisitions were expensed as incurred. The aggregate purchase price of the 2017 and 2016 acquisitions was allocated as follows (2017 on a preliminary basis):
 
 
Purchase Price Allocation
 
 
As of
(in thousands)
 
September 30, 2017
December 31, 2016
Accounts receivable
 
$
12,502

$
8,538

Inventory
 
25,253

878

Other current assets
 
593

1,420

Property, plant and equipment
 
30,961

3,940

Goodwill
 
143,433

184,118

Indefinite-lived intangible assets
 
41,600

53,110

Amortized intangible assets
 
158,907

28,267

Pension and other postretirement benefits liabilities
 
(59,116
)

Other liabilities
 
(10,822
)
(21,892
)
Deferred income taxes
 
(34,875
)
(11,009
)
Redeemable noncontrolling interest
 
(3,666
)

Aggregate purchase price, net of cash acquired
 
$
304,770

$
247,370

The 2017 fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). 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 $11.0 million and $22.2 million of goodwill for income tax purposes for the acquisitions completed in 2017 and 2016, 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 include aggregate revenues and operating income for the companies acquired in 2017 of $64.9 million and $4.0 million, respectively, for the third quarter of 2017, and aggregate revenues and operating income of $133.8 million and $3.8 million, respectively, for the first nine months of 2017. The following unaudited pro forma financial information presents the Company’s results as if the 2017 acquisitions had occurred at the beginning of 2016. The unaudited pro forma information also includes the 2016 acquisitions as if they occurred at the beginning of 2015:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Operating revenues
$
657,225

 
$
696,767

 
$
1,979,784

 
$
2,058,571

Net income
24,735

 
36,250

 
96,065

 
137,967

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 February 2017, GHG completed the sale of Celtic Healthcare of Maryland.
In January 2016, Kaplan completed the sale of Colloquy, which was included in Kaplan Corporate and Other.
Other. In June 2016, Residential and a Michigan hospital formed a joint venture to provide home health services to patients in western Michigan. In connection with this transaction, Residential contributed its western Michigan home health operations to the joint venture and then sold 60% of the newly formed venture to its Michigan hospital partner. Although Residential manages the operations of the joint venture, Residential holds a 40% interest in the joint venture, so the operating results of the joint venture are not consolidated and the pro rata operating results are included in the Company’s equity in earnings of affiliates.

10



In June 2016, the Company purchased the outstanding 20% redeemable noncontrolling interest in Residential. At that time, the Company recorded an increase to redeemable noncontrolling interest of $3.0 million, with a corresponding decrease to capital in excess of par value, to reflect the redemption value of the redeemable noncontrolling interest at $24.0 million. Following this transaction, Celtic and Residential combined their business operations to form GHG. The redeemable noncontrolling interest shareholders in Celtic exchanged their 20% interest in Celtic for a 10% mandatorily redeemable noncontrolling interest in the combined entity and the Company recorded a $4.1 million net increase to the mandatorily redeemable noncontrolling interest to reflect the estimated fair value of the mandatorily redeemable noncontrolling interest. The minority shareholders have an option to put their shares to the Company starting in 2020, and are required to put a percentage of their shares in 2022 and 2024, with the remaining shares required to be put by the minority shareholders in 2026. The redemption value is based on an EBITDA multiple, adjusted for working capital and other items, computed annually, with no limit on the amount payable. The Company now owns 90% of GHG. Because the noncontrolling interest is now mandatorily redeemable by the Company by 2026, it is reported as a noncurrent liability at September 30, 2017.
Kaplan University Transaction. On April 27, 2017, certain Kaplan subsidiaries entered into a Contribution and Transfer Agreement (Transfer Agreement) to contribute Kaplan University (KU), its institutional assets and operations to a new, nonprofit, public-benefit corporation (New University) affiliated with Purdue University (Purdue) in exchange for a Transition and Operations Support Agreement (TOSA) to provide key non-academic operations support to New University for an initial term of 30 years with a buy-out option after six years. The transfer does not include any of the assets of Kaplan University School of Professional and Continuing Education (KU-PACE), which provides professional training and exam preparation for professional certifications and licensures, nor does it include the transfer of other Kaplan businesses such as Kaplan Test Preparation and Kaplan International.
Consummation of the transactions contemplated by the Transfer Agreement is subject to various closing conditions, including, among others, regulatory approvals from the U.S. Department of Education (ED), the Indiana Commission for Higher Education (ICHE) and Higher Learning Commissions (HLC), which is the regional accreditor of both Purdue and KU, and certain other state educational agencies and accreditors of programs. In the third quarter of 2017, ICHE granted its approval and the ED provided preliminary approval based on its review of a pre-acquisition application, subject to certain conditions. Kaplan is unable to predict with certainty when and if HLC approval will be obtained; however, such approval is not expected to be received until the first quarter of 2018. If the transaction is not consummated by April 30, 2018, either party may terminate the Transfer Agreement.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In the second quarter of 2017, as a result of a challenging operating environment, the Forney reporting unit recorded a goodwill and other long-lived asset impairment charge of $9.2 million. The Company performed an interim review of the goodwill and other long-lived assets of the reporting unit by utilizing a discounted cash flow model to estimate the fair value. The carrying value of the reporting unit exceeded the estimated fair value, resulting in a goodwill impairment charge for the amount by which the carrying value exceeded the reporting unit’s estimated fair value.
Amortization of intangible assets for the three months ended September 30, 2017 and 2016 was $10.9 million and $6.6 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2017 and 2016 was $28.3 million and $19.2 million, respectively. Amortization of intangible assets is estimated to be approximately $10 million for the remainder of 2017, $38 million in 2018, $37 million in 2019, $33 million in 2020, $28 million in 2021 and $93 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Television
Broadcasting
 
Other
Businesses
 
Total
Balance as of December 31, 2016
  
 
  
 
  
 
  
Goodwill
$
1,111,003

 
$
168,345

 
$
202,141

 
$
1,481,489

Accumulated impairment losses
(350,850
)
 

 
(7,685
)
 
(358,535
)
 
760,153

 
168,345

 
194,456

 
1,122,954

Acquisitions
18,986

 
24,256

 
100,191

 
143,433

Impairment

 

 
(7,616
)
 
(7,616
)
Dispositions

 

 
(412
)
 
(412
)
Foreign currency exchange rate changes
40,867

 

 

 
40,867

Balance as of September 30, 2017
  

 
  

 
  

 
  

Goodwill
1,170,856

 
192,601

 
301,920

 
1,665,377

Accumulated impairment losses
(350,850
)
 

 
(15,301
)
 
(366,151
)
 
$
820,006

 
$
192,601

 
$
286,619

 
$
1,299,226


11



The changes in carrying amount of goodwill at the Company’s education division were as follows:
(in thousands)
Higher
Education
 
Test
Preparation
 
Kaplan
International
 
Total
Balance as of December 31, 2016
  
 
  
 
  
 
  
Goodwill
$
389,720

 
$
166,098

 
$
555,185

 
$
1,111,003

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

 
(350,850
)
 
141,129

 
63,839

 
555,185

 
760,153

Acquisitions

 

 
18,986

 
18,986

Foreign currency exchange rate changes
154

 

 
40,713

 
40,867

Balance as of September 30, 2017
  

 
  

 
  

 
  

Goodwill
389,874

 
166,098

 
614,884

 
1,170,856

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

 
(350,850
)
 
$
141,283

 
$
63,839

 
$
614,884

 
$
820,006

Other intangible assets consist of the following:
 
 
 
As of September 30, 2017
 
As of December 31, 2016
(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
1–10 years (1)
 
$
224,872

 
$
74,304

 
$
150,568

 
$
129,616

 
$
55,863

 
$
73,753

Trade names and trademarks
2–10 years
 
58,917

 
33,143

 
25,774

 
55,240

 
29,670

 
25,570

Network affiliation agreements
15 years
 
42,600

 
2,067

 
40,533

 

 

 

Databases and technology
3–6 years (1)
 
19,583

 
4,173

 
15,410

 
5,601

 
4,368

 
1,233

Noncompete agreements
2–5 years
 
2,080

 
1,549

 
531

 
1,730

 
1,404

 
326

Other
1–8 years
 
13,430

 
7,094

 
6,336

 
12,030

 
4,973

 
7,057

  
  
 
$
361,482

 
$
122,330

 
$
239,152

 
$
204,217

 
$
96,278

 
$
107,939

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Trade names and trademarks
  
 
$
82,651

 
  

 
  

 
$
65,192

 
  

 
  

FCC licenses
 
 
26,600

 
 
 
 
 

 
 
 
 
Licensure and accreditation
  
 
650

 
  

 
  

 
834

 
  

 
  

 
  
 
$
109,901

 
 
 
 
 
$
66,026

 
 
 
 
____________
(1)
As of December 31, 2016, the student and customer relationships’ minimum useful life was 2 years and the databases and technology’s maximum useful life was 5 years.
5. DEBT
The Company’s borrowings consist of the following:
  
As of
  
September 30,
2017
 
December 31,
2016
(in thousands)
 
7.25% unsecured notes due February 1, 2019 (1)
$
399,393

 
$
399,052

UK Credit facility (2)
93,450

 
91,316

Other indebtedness
112

 
1,479

Total Debt
$
492,955

 
$
491,847

Less: current portion
(6,713
)
 
(6,128
)
Total Long-Term Debt
$
486,242

 
$
485,719

____________
(1)
The carrying value is net of $0.1 million of unamortized debt issuance costs as of September 30, 2017 and December 31, 2016, respectively.
(2)
The carrying value is net of $0.4 million and $0.5 million of unamortized debt issuance costs as of September 30, 2017 and December 31, 2016, respectively.
The Company’s other indebtedness at September 30, 2017 is at an interest rate of 2% and matures in 2025.
On July 14, 2016, Kaplan entered into a Facility Agreement (the Kaplan Credit Agreement) among Kaplan International Holdings Limited, as borrower, the lenders party thereto, HSBC BANK PLC as Facility Agent, and other agents party thereto. The Kaplan Credit Agreement provides for a four-year credit facility in an aggregate principal amount of £75 million. Borrowings bear interest at a rate per annum of LIBOR plus an applicable interest rate margin between 1.25% and 1.75%, in each case determined on a quarterly basis by reference to a pricing grid

12



based upon the Company’s total leverage ratio. The Kaplan Credit Agreement requires that 6.66% of the amount of the loan be repaid on the first three anniversaries of funding, with the remaining balance due on July 1, 2020. The Kaplan Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and requires the Company to maintain a leverage ratio of not greater than 3.5 to 1.0 and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the ratio of consolidated adjusted EBITDA to consolidated interest expense as determined pursuant to the Kaplan Credit Agreement. As of September 30, 2017, the Company is in compliance with all financial covenants.
On July 25, 2016, Kaplan borrowed £75 million under the Kaplan Credit Agreement. On the same date, Kaplan entered into an interest rate swap agreement with a total notional value of £75 million and a maturity date of July 1, 2020. The interest rate swap agreement will pay Kaplan variable interest on the £75 million notional amount at the three-month LIBOR, and Kaplan will pay the counterparties a fixed rate of 0.51%, effectively resulting in a total fixed interest rate of 2.01% on the outstanding borrowings at the current applicable margin of 1.50%. The interest rate swap agreement was entered into to convert the variable rate British pound borrowing under the Kaplan Credit Agreement into a fixed rate borrowing. The Company provided a guarantee on any borrowings under the Kaplan Credit Agreement. Based on the terms of the interest rate swap agreement and the underlying borrowing, the interest rate swap agreement 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.
During the three months ended September 30, 2017 and 2016, the Company had average borrowings outstanding of approximately $492.4 million and $473.7 million, respectively, at average annual interest rates of approximately 6.3% and 6.2%, respectively. During the three months ended September 30, 2017 and 2016, the Company incurred net interest expense of $7.8 million and $7.9 million, respectively.
During the nine months ended September 30, 2017 and 2016, the Company had average borrowings outstanding of approximately $493.5 million and $429.4 million, respectively, at average annual interest rates of approximately 6.3% and 6.9%, respectively. During the nine months ended September 30, 2017 and 2016, the Company incurred net interest expense of $22.4 million and $22.5 million, respectively.
At September 30, 2017, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $424.1 million, compared with the carrying amount of $399.4 million. At December 31, 2016, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $438.7 million, compared with the carrying amount of $399.1 million. The carrying value of the Company’s other unsecured debt at September 30, 2017 approximates fair value.

13



6. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of September 30, 2017
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
  
 
  
 
 
 
  
Money market investments (1) 
$

 
$
205,845

 
$

 
$
205,845

Marketable equity securities (3) 
495,599

 

 

 
495,599

Other current investments (4) 
9,948

 
14,039

 

 
23,987

Total Financial Assets
$
505,547

 
$
219,884

 
$

 
$
725,431

Liabilities
  
 
  
 
 
 
  
Deferred compensation plan liabilities (5) 
$

 
$
43,575

 
$

 
$
43,575

Interest rate swap (6) 

 
595

 

 
595

Mandatorily redeemable noncontrolling interest (7)

 

 
12,584

 
12,584

Total Financial Liabilities
$

 
$
44,170

 
$
12,584

 
$
56,754

 
As of December 31, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
  
 
  
 
 
 
  
Money market investments (1) 
$

 
$
435,258

 
$

 
$
435,258

Commercial paper (2)
49,882

 

 

 
49,882

Marketable equity securities (3) 
424,229

 

 

 
424,229

Other current investments (4) 
6,957

 
17,055

 

 
24,012

Total Financial Assets
$
481,068

 
$
452,313

 
$

 
$
933,381

Liabilities
  
 
  
 
 
 
  
Deferred compensation plan liabilities (5) 
$

 
$
46,300

 
$

 
$
46,300

Interest rate swap (6) 

 
365

 

 
365

Mandatorily redeemable noncontrolling interest (7)

 

 
12,584

 
12,584

Total Financial Liabilities
$

 
$
46,665

 
$
12,584

 
$
59,249

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash and the value considers the liquidity of the counterparty.
(2)
The Company’s commercial paper investments with original maturities of three months or less are included in cash and cash equivalents.
(3)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits. 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 valuation hierarchy.
(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.
(7)
The fair value of the mandatorily redeemable noncontrolling interest is based on an EBITDA multiple, adjusted for working capital and other items, which approximates fair value.
In the second quarter of 2017, the Company recorded a goodwill and other long-lived asset impairment charge of $9.2 million. The remeasurement of the goodwill and 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 reporting unit and made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates.
In the third quarter of 2016, the Company recorded an impairment charge of $15.0 million to its preferred equity interest in a vocational school company due to a decline in business conditions. The measurement of the preferred equity interest 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 preferred equity interest and made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine the estimated fair value.

14



7. 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 
 September 30
 
Nine Months Ended 
 September 30
(in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Numerator for basic earnings per share:
  
 
  
 
  
 
  
Net income attributable to Graham Holdings Company common stockholders
$
24,784

 
$
33,126

 
$
87,866

 
$
131,672

Less: Dividends paid-common stock outstanding and unvested restricted shares
(7,047
)
 
(6,796
)
 
(28,329
)
 
(27,329
)
Undistributed earnings
17,737

 
26,330

 
59,537

 
104,343

Percent allocated to common stockholders
99.07
%
 
98.70
%
 
99.07
%
 
98.70
%
 
17,572

 
25,987

 
58,981

 
102,987

Add: Dividends paid-common stock outstanding
6,981

 
6,708

 
28,066

 
26,976

Numerator for basic earnings per share
$
24,553

 
$
32,695

 
$
87,047

 
$
129,963

Add: Additional undistributed earnings due to dilutive stock options
1

 
2

 
4

 
7

Numerator for diluted earnings per share
$
24,554

 
$
32,697

 
$
87,051

 
$
129,970

Denominator:
  

 
  

 
 
 
 
Denominator for basic earnings per share:


 


 


 


Weighted average shares outstanding
5,518

 
5,544

 
5,530

 
5,570

Add: Effect of dilutive stock options
36

 
30

 
37

 
30

Denominator for diluted earnings per share
5,554

 
5,574

 
5,567

 
5,600

Graham Holdings Company Common Stockholders:
  
 
  
 
  
 
  
Basic earnings per share
$
4.45

 
$
5.90

 
$
15.74

 
$
23.33

Diluted earnings per share
$
4.42

 
$
5.87

 
$
15.64

 
$
23.21

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 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Weighted average restricted stock
30

 
42

 
29

 
40

The diluted earnings per share amounts for the three and nine months ended September 30, 2017 and September 30, 2016 exclude the effects of 104,000 and 102,000 stock options outstanding, as their inclusion would have been antidilutive due to a market condition. The diluted earnings per share amounts for the three and nine months ended September 30, 2017 and September 30, 2016 exclude the effects of 5,250 and 6,100 restricted stock awards, respectively, as their inclusion would have been antidilutive due to a performance condition.
In the three and nine months ended September 30, 2017, the Company declared regular dividends totaling $1.27 and $5.08 per common share, respectively. In the three and nine months ended September 30, 2016, the Company declared regular dividends totaling $1.21 and $4.84 per common share, respectively.

15



8. 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 September 30
 
Nine Months Ended September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Service cost
$
4,591

 
$
5,040

 
$
14,096

 
$
15,422

Interest cost
11,980

 
12,845

 
35,945

 
38,763

Expected return on assets
(30,338
)
 
(30,348
)
 
(91,078
)
 
(91,122
)
Amortization of prior service cost
42

 
74

 
128

 
223

Recognized actuarial gain
(1,039
)
 

 
(3,372
)
 

Net Periodic Benefit
(14,764
)
 
(12,389
)
 
(44,281
)
 
(36,714
)
Special separation benefit expense
932

 

 
932

 

Total Benefit
$
(13,832
)
 
$
(12,389
)
 
$
(43,349
)
 
$
(36,714
)
In the third quarter of 2017, the Company recorded $0.9 million related to a Separation Incentive Program for certain Forney employees, which will be 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 September 30
 
Nine Months Ended September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Service cost
$
214

 
$
246

 
$
643

 
$
738

Interest cost
1,059

 
1,096

 
3,175

 
3,288

Amortization of prior service cost
114

 
114

 
342

 
342

Recognized actuarial loss
444

 
665

 
1,331

 
1,995

Net Periodic Cost
$
1,831

 
$
2,121

 
$
5,491

 
$
6,363

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
  
September 30,
2017
 
December 31,
2016
  
 
U.S. equities
51
%
 
53
%
U.S. stock index fund
32
%
 
30
%
U.S. fixed income
11
%
 
11
%
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. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or 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. As of September 30, 2017, the investment managers can invest no more than 23% of the assets they manage 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.
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 September 30, 2017. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type

16



of industry, foreign country and individual fund. At September 30, 2017 and December 31, 2016, 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 $1,057.5 million and $978.8 million at September 30, 2017 and December 31, 2016, respectively, or approximately 47% and 48%, 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 September 30
 
Nine Months Ended September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Service cost
$
257

 
$
346

 
$
771

 
$
1,039

Interest cost
195

 
308

 
584

 
923

Amortization of prior service credit
(38
)
 
(83
)
 
(112
)
 
(251
)
Recognized actuarial gain
(972
)
 
(376
)
 
(2,917
)
 
(1,127
)
Net Periodic (Benefit) Cost
$
(558
)
 
$
195

 
$
(1,674
)
 
$
584

9. OTHER NON-OPERATING INCOME (EXPENSE)
A summary of non-operating income (expense) is as follows:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2017
 
2016
 
2017
 
2016
Foreign currency gain (loss), net
$
1,414

 
$
(3,797
)
 
$
6,608

 
$
(33,324
)
(Loss) gain on sales of businesses

 

 
(342
)
 
18,931

Loss on write-downs of cost method investments
(200
)
 
(15,000
)
 
(200
)
 
(15,161
)
Gain on sale of land

 

 

 
34,072

Gain on sales of marketable equity securities (see Note 2)

 

 

 
6,256

Gain on the formation of a joint venture

 

 

 
3,232

Other, net
749

 
572

 
815

 
1,865

Total Other Non-Operating Income (Expense)
$
1,963

 
$
(18,225
)
 
$
6,881

 
$
15,871

In the third quarter of 2016, the Company recorded an impairment of $15.0 million to the preferred equity interest in a vocational school company.
In the second quarter of 2016, the Company sold the remaining portion of the Robinson Terminal real estate retained from the sale of the Publishing Subsidiaries, for a gain of $34.1 million.
In June 2016, Residential contributed assets to a joint venture entered into with a Michigan hospital in exchange for a 40% equity interest and other assets, resulting in a $3.2 million gain (see Note 3). The Company used an income and market approach to value the equity interest. The measurement of the equity interest in the joint venture is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value.
In the first quarter of 2016, Kaplan sold Colloquy, which was a part of Kaplan corporate and other, for a gain of $18.9 million.

17



10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income consists of the following components:
 
Three Months Ended September 30
  
2017
 
2016
  
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
$
11,470

 
$

 
$
11,470

 
$
(353
)
 
$

 
$
(353
)
Unrealized gains on available-for-sale securities:
 
 
  
 
  
 
  
 
  
 
  
Unrealized gains for the period, net
47,836

 
(19,134
)
 
28,702

 
12,154

 
(4,862
)
 
7,292

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
118

 
(47
)
 
71

 
105

 
(41
)
 
64

Amortization of net actuarial (gain) loss included in net income
(1,567
)
 
627

 
(940
)
 
289

 
(116
)
 
173

 
(1,449
)
 
580

 
(869
)
 
394

 
(157
)
 
237

Cash flow hedge:
  
 
  
 
  
 
  
 
  
 
  
(Loss) gain for the period
(72
)
 
14

 
(58
)
 
49

 
(20
)
 
29

Other Comprehensive Income
$
57,785

 
$
(18,540
)
 
$
39,245

 
$
12,244

 
$
(5,039
)
 
$
7,205

  
Nine Months Ended September 30
  
2017
 
2016
  
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
$
34,776

 
$

 
$
34,776

 
$
(1,629
)
 
$

 
$
(1,629
)
Unrealized gains on available-for-sale securities:
 
 
  
 
  
 
 
 
  
 
  
Unrealized gains for the period, net
71,370

 
(28,548
)
 
42,822

 
7,190

 
(2,876
)
 
4,314

Reclassification of realized gain on sale of available-for-sale securities included in net income

 

 

 
(6,256
)
 
2,502

 
(3,754
)
  
71,370

 
(28,548
)
 
42,822

 
934

 
(374
)
 
560

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
358

 
(143
)
 
215

 
314

 
(125
)
 
189

Amortization of net actuarial (gain) loss included in net income
(4,958
)
 
1,983

 
(2,975
)
 
868

 
(347
)
 
521

  
(4,600
)
 
1,840

 
(2,760
)
 
1,182

 
(472
)
 
710

Cash flow hedge:
 
 
  
 
  
 
  
 
  
 
  
(Loss) gain for the period
(215
)
 
43

 
(172
)
 
49

 
(20
)
 
29

Other Comprehensive Income
$
101,331

 
$
(26,665
)
 
$
74,666

 
$
536

 
$
(866
)
 
$
(330
)
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 Available-for- Sale Securities
 
Unrealized Gain
on Pensions
and Other
Postretirement
Plans
 
Cash Flow
Hedge
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2016
$
(26,998
)
 
$
92,931

 
$
170,830

 
$
(277
)
 
$
236,486

Other comprehensive income (loss) before reclassifications
34,776

 
42,822

 

 
(270
)
 
77,328

Net amount reclassified from accumulated other comprehensive income (loss)

 

 
(2,760
)
 
98

 
(2,662
)
Other comprehensive income (loss), net of tax
34,776

 
42,822

 
(2,760
)
 
(172
)
 
74,666

Balance as of September 30, 2017
$
7,778

 
$
135,753

 
$
168,070

 
$
(449
)
 
$
311,152


18



The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
Affected Line Item in the Condensed Consolidated Statement of Operations
  
 
 
(in thousands)
2017
 
2016
 
2017
 
2016
 
Unrealized Gains on Available-for-sale Securities:
 
 
  
 
  
 
  
 
  
Realized gain for the period
$

 
$

 
$

 
$
(6,256
)
 
Other income (expense), net
  

 

 

 
2,502

 
Provision for Income Taxes
  

 

 

 
(3,754
)
 
Net of Tax
Pension and Other Postretirement Plans:
  
 
  
 
 
 
  
 
  
Amortization of net prior service cost
118

 
105

 
358

 
314

 
(1)
Amortization of net actuarial (gain) loss
(1,567
)
 
289

 
(4,958
)
 
868

 
(1)
  
(1,449
)
 
394

 
(4,600
)
 
1,182

 
Before tax
  
580

 
(157
)
 
1,840

 
(472
)
 
Provision for Income Taxes
  
(869
)
 
237

 
(2,760
)
 
710

 
Net of Tax
Cash Flow Hedge
 
 
 
 
 
 
  
 
  
  
51

 
(3
)
 
123

 
(3
)
 
Interest expense
  
(11
)
 
1

 
(25
)
 
1

 
Provision for Income Taxes
  
40

 
(2
)
 
98

 
(2
)