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10-Q
GRAHAM HOLDINGS CO filed this Form 10-Q on 05/03/2017
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 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 April 28, 2017:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,626,753 Shares
 




GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
c. Condensed Consolidated Balance Sheets at March 31, 2017 (Unaudited) and December 31, 2016
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 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 1A.
Risk Factors
 
 
 
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 
 March 31
  
(in thousands, except per share amounts)
2017
 
2016
Operating Revenues
  
 
  

Education
$
372,975

 
$
401,006

Advertising
64,116

 
68,158

Other
145,626

 
132,576

  
582,717

 
601,740

Operating Costs and Expenses
 
 
  
Operating
300,666

 
291,632

Selling, general and administrative
231,509

 
235,213

Depreciation of property, plant and equipment
14,652

 
16,761

Amortization of intangible assets
6,836

 
6,262

  
553,663

 
549,868

Income from Operations
29,054

 
51,872

Equity in earnings of affiliates, net
649

 
1,004

Interest income
1,363

 
591

Interest expense
(8,129
)
 
(7,948
)
Other income, net
849

 
15,096

Income Before Income Taxes
23,786

 
60,615

Provision for Income Taxes
2,700

 
22,400

Net Income
21,086

 
38,215

Net Income Attributable to Noncontrolling Interests

 
(435
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
21,086

 
$
37,780

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

Basic net income per common share
$
3.77

 
$
6.63

Basic average number of common shares outstanding
5,535

 
5,623

Diluted net income per common share
$
3.75

 
$
6.59

Diluted average number of common shares outstanding
5,569

 
5,652


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
Three Months Ended 
 March 31
(in thousands)
2017
 
2016
Net Income
$
21,086

 
$
38,215

Other Comprehensive Income, Before Tax
 
 
  
Foreign currency translation adjustments:
 
 
  
Translation adjustments arising during the period
13,668

 
3,845

Unrealized gains (losses) on available-for-sale securities:
 
 
 
Unrealized gains for the period, net
9,558

 
343

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

 
(1,754
)
  
9,558

 
(1,411
)
Pension and other postretirement plans:
  
 
  
Amortization of net prior service cost included in net income
120

 
104

Amortization of net actuarial (gain) loss included in net income
(1,823
)
 
290

  
(1,703
)
 
394

Cash flow hedge loss
(124
)
 

Other Comprehensive Income, Before Tax
21,399

 
2,828

Income tax (expense) benefit related to items of other comprehensive income
(3,117
)
 
407

Other Comprehensive Income, Net of Tax
18,282

 
3,235

Comprehensive Income
39,368

 
41,450

Comprehensive income attributable to noncontrolling interests

 
(435
)
Total Comprehensive Income Attributable to Graham Holdings Company
$
39,368

 
$
41,015


See accompanying Notes to Condensed Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
March 31,
2017
 
December 31,
2016
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
632,787

 
$
648,885

Restricted cash
24,555

 
21,931

Investments in marketable equity securities and other investments
456,558

 
448,241

Accounts receivable, net
493,804

 
615,101

Income taxes receivable
47,734

 
41,635

Inventories and contracts in progress
35,736

 
34,818

Other current assets
68,717

 
60,735

Total Current Assets
1,759,891

 
1,871,346

Property, Plant and Equipment, Net
243,330

 
233,664

Investments in Affiliates
60,287

 
58,806

Goodwill, Net
1,179,431

 
1,122,954

Indefinite-Lived Intangible Assets, Net
93,203

 
66,026

Amortized Intangible Assets, Net
153,924

 
107,939

Prepaid Pension Cost
836,430

 
881,593

Deferred Income Taxes
15,818

 
17,246

Deferred Charges and Other Assets
73,791

 
73,096

Total Assets
$
4,416,105

 
$
4,432,670

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
444,677

 
$
500,726

Deferred revenue
321,058

 
312,107

Current portion of long-term debt
6,158

 
6,128

Dividends declared
7,100

 

Total Current Liabilities
778,993

 
818,961

Postretirement Benefits Other Than Pensions
22,270

 
21,859

Accrued Compensation and Related Benefits
193,060

 
195,910

Other Liabilities
67,850

 
65,554

Deferred Income Taxes
373,534

 
379,092

Mandatorily Redeemable Noncontrolling Interest
12,584

 
12,584

Long-Term Debt
487,186

 
485,719

Total Liabilities
1,935,477

 
1,979,679

Redeemable Noncontrolling Interest
50

 
50

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
363,361

 
364,363

Retained earnings
5,595,826

 
5,588,942

Accumulated other comprehensive income (loss), net of tax
 
 
  

Cumulative foreign currency translation adjustment
(13,330
)
 
(26,998
)
Unrealized gain on available-for-sale securities
98,666

 
92,931

Unrealized gain on pensions and other postretirement plans
169,808

 
170,830

Cash flow hedge
(376
)
 
(277
)
Cost of Class B common stock held in treasury
(3,753,377
)
 
(3,756,850
)
Total Equity
2,480,578

 
2,452,941

Total Liabilities and Equity
$
4,416,105

 
$
4,432,670


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Three Months Ended 
 March 31
(in thousands)
2017
 
2016
Cash Flows from Operating Activities
  
 
  
Net Income
$
21,086

 
$
38,215

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation and amortization
21,488

 
23,023

Net pension benefit
(14,688
)
 
(12,059
)
Stock-based compensation expense, net
2,866

 
3,254

Loss (gain) on disposition of businesses, property, plant and equipment, investments and other assets, net
335

 
(20,449
)
Foreign exchange (gain) loss
(1,728
)
 
5,443

Equity in earnings of affiliates, net of distributions
(649
)
 
(1,004
)
Provision for deferred income taxes
7,443

 
2,037

Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
122,605

 
41,749

Accounts payable and accrued liabilities
(55,584
)
 
(45,930
)
Deferred revenue
4,603

 
17,695

Income taxes receivable
(6,490
)
 
17,926

Other assets and other liabilities, net
(9,489
)
 
(9,187
)
Other
103

 
169

Net Cash Provided by Operating Activities
91,901

 
60,882

Cash Flows from Investing Activities
  
 
  
Investments in certain businesses, net of cash acquired
(85,415
)
 
(198,179
)
Purchases of property, plant and equipment
(15,664
)
 
(10,690
)
Net proceeds from disposition of businesses, property, plant and equipment, investments and other assets
1,748

 
21,285

Proceeds from sales of marketable equity securities

 
4,392

Purchases of marketable equity securities

 
(13,271
)
Investments in equity affiliates and cost method investments
(865
)
 
(389
)
Return of investment in equity affiliate
200

 

Net Cash Used in Investing Activities
(99,996
)
 
(196,852
)
Cash Flows from Financing Activities
  
 
  
Dividends paid
(7,102
)
 
(6,938
)
Common shares repurchased
(395
)
 
(81,346
)
Other
(2,092
)
 
13,427

Net Cash Used in Financing Activities
(9,589
)
 
(74,857
)
Effect of Currency Exchange Rate Change
4,210

 
1,095

Net Decrease in Cash and Cash Equivalents and Restricted Cash
(13,474
)
 
(209,732
)
Beginning Cash and Cash Equivalents and Restricted Cash
670,816

 
774,952

Ending Cash and Cash Equivalents and Restricted Cash
$
657,342

 
$
565,220


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. The Company's other business operations include home health and hospice services and manufacturing.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three months ended March 31, 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.
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 anticipates adopting the standard using the modified retrospective approach. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements and believes such evaluation will extend over several future periods because of the significance of the changes to the Company’s policies and business processes.
In 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

5



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 this election to have a material impact on its financial statements.
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:
 
Three Months Ended March 31, 2016
 
As
 
 
 
 
 
Previously
 
 
 
As
(in thousands)
Reported
 
Adjustment
 
Adopted
Cash Flows from Operating Activities
  
 
  
 
  
Decrease in Restricted Cash
$
(13,888
)
 
$
13,888

 
$

Net Cash Provided by Operating Activities
46,994

 
13,888

 
60,882

 
 
 
 
 
 
Net Decrease in Cash and Cash Equivalents and Restricted Cash
(223,620
)
 
13,888

 
(209,732
)
Cash and Cash Equivalents and Restricted Cash at Beginning of Year
754,207

 
20,745

 
774,952

Cash and Cash Equivalents and Restricted Cash at End of Year
530,587

 
34,633

 
565,220

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 unit's fair value. The guidance is effective for interim and fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its Consolidated Financial Statements.

6



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 March 31, 2017
  
 
  
 
  
As Reported
$
29,054

 
$

 
$
23,786

Adjustment
(18,801
)
 
18,801

 

Upon Adoption
10,253

 
18,801

 
23,786

 
 
 
 
 
 
Three Months Ended March 31, 2016
 
 
 
 
 
As Reported
$
51,872

 
$

 
$
60,615

Adjustment
(15,677
)
 
15,677

 

Upon Adoption
36,195

 
15,677

 
60,615

 
 
 
 
 
 
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 March 31, 2017 and December 31, 2016, the Company had commercial paper and money market investments of $442.9 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
  
March 31,
2017
 
December 31,
2016
(in thousands)
 
Total cost
$
269,343

 
$
269,343

Gross unrealized gains
164,444

 
154,886

Total Fair Value
$
433,787

 
$
424,229

There were no purchases of marketable equity securities during the first three months of 2017. The Company settled on $13.3 million of marketable equity securities during the first three months of 2016, of which $12.9 million were purchased in the first quarter.
There were no sales of marketable equity securities for the first three months of 2017. During the first three months of 2016, the net realized gains from the sales of marketable equity securities were $1.8 million. The total proceeds from such sales were $6.0 million, of which $1.6 million settled in April 2016.
As of March 31, 2017, the Company held interests in several affiliates; Residential Healthcare (Residential) held a 40% interest in Residential Home 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 months ended March 31, 2017, the Company recorded $4.6 million 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. The loan will be repayable over 25 years at an interest rate of 7% and the loan is guaranteed by the University of York.


7



3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
AcquisitionsIn April 2017, the Company acquired 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 approximately $205 million, net of cash acquired.
In the first three months of 2017, the Company acquired four businesses, two in its television broadcasting division and two in its education division for $86.5 million in cash and contingent consideration, and the assumption of $59.1 million in certain pension and postretirement obligations.
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.
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.
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 reason for these acquisitions is 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.
Acquisition-related costs of $1.1 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)
 
March 31, 2017
December 31, 2016
Accounts receivable
 
$
386

$
8,538

Other current assets
 
130

2,298

Property, plant and equipment
 
8,960

3,940

Goodwill
 
42,632

184,118

Indefinite-lived intangible assets
 
26,600

53,110

Amortized intangible assets
 
53,307

28,267

Pension and other postretirement benefits liabilities
 
(59,116
)

Other liabilities
 
(1,217
)
(21,892
)
Deferred income taxes
 
13,733

(11,009
)
Aggregate purchase price, net of cash acquired
 
$
85,415

$
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. No goodwill is expected to be deducted for the acquisitions completed in 2017. The Company expects to deduct $22.2 million of goodwill for income tax purposes for the acquisitions completed in 2016.

8



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 loss for the companies acquired in 2017 of $5.5 million and $0.2 million, respectively, for the first three 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 
 March 31
(in thousands)
2017
 
2016
Operating revenues
$
584,152

 
$
614,753

Net income
21,099

 
39,567

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, Graham Healthcare Group (GHG) completed the sale of Celtic Healthcare of Maryland. The results of GHG are included in other businesses.
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.
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 March 31, 2017.

9



4. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended March 31, 2017 and 2016 was $6.8 million and $6.3 million, respectively. Amortization of intangible assets is estimated to be approximately $22 million for the remainder of 2017, $26 million in 2018, $23 million in 2019, $21 million in 2020, $15 million in 2021 and $47 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
20,851

 
21,781

 

 
42,632

Dispositions

 

 
(412
)
 
(412
)
Foreign currency exchange rate changes
14,257

 

 

 
14,257

Balance as of March 31, 2017
  

 
  

 
  

 
  

Goodwill
1,146,111

 
190,126

 
201,729

 
1,537,966

Accumulated impairment losses
(350,850
)
 

 
(7,685
)
 
(358,535
)
 
$
795,261

 
$
190,126

 
$
194,044

 
$
1,179,431

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

 

 
20,851

 
20,851

Foreign currency exchange rate changes
28

 

 
14,229

 
14,257

Balance as of March 31, 2017
  

 
  

 
  

 
  

Goodwill
389,748

 
166,098

 
590,265

 
1,146,111

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

 
(350,850
)
 
$
141,157

 
$
63,839

 
$
590,265

 
$
795,261

Other intangible assets consist of the following:
 
 
 
As of March 31, 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)
 
$
131,975

 
$
60,389

 
$
71,586

 
$
129,616

 
$
55,863

 
$
73,753

Trade names and trademarks
2–10 years
 
56,270

 
30,654

 
25,616

 
55,240

 
29,670

 
25,570

Network affiliation agreements
15 years
 
45,900

 
638

 
45,262

 

 

 

Databases and technology
3–5 years
 
9,051

 
4,565

 
4,486

 
5,601

 
4,368

 
1,233

Noncompete agreements
2–5 years
 
1,730

 
1,464

 
266

 
1,730

 
1,404

 
326

Other
1–8 years
 
12,030

 
5,322

 
6,708

 
12,030

 
4,973

 
7,057

  
  
 
$
256,956

 
$
103,032

 
$
153,924

 
$
204,217

 
$
96,278

 
$
107,939

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Trade names and trademarks
  
 
$
65,953

 
  

 
  

 
$
65,192

 
  

 
  

FCC licenses
 
 
26,600

 
 
 
 
 

 
 
 
 
Licensure and accreditation
  
 
650

 
  

 
  

 
834

 
  

 
  

 
  
 
$
93,203

 
 
 
 
 
$
66,026

 
 
 
 
____________
(1)
The Company's student and customer relationships’ minimum useful life was 2 years as of December 31, 2016.

10



5. DEBT
The Company’s borrowings consist of the following:
  
As of
  
March 31,
2017
 
December 31,
2016
(in thousands)
 
7.25% unsecured notes due February 1, 2019 (1)
$
399,166

 
$
399,052

UK Credit facility (2)
92,856

 
91,316

Other indebtedness
1,322

 
1,479

Total Debt
$
493,344

 
$
491,847

Less: current portion
(6,158
)
 
(6,128
)
Total Long-Term Debt
$
487,186

 
$
485,719

____________
(1)
The carrying value is net of $0.1 million of unamortized debt issuance costs as of March 31, 2017 and December 31, 2016, respectively.
(2)
The carrying value is net of $0.5 million of unamortized debt issuance costs as of March 31, 2017 and December 31, 2016, respectively.
The Company’s other indebtedness at March 31, 2017 is at interest rates from 2% and 6% and matures from 2019 to 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 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 March 31, 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 March 31, 2017 and 2016, the Company had average borrowings outstanding of approximately $493.0 million and $399.9 million, respectively, at average annual interest rates of approximately 6.3% and 7.2%, respectively. During the three months ended March 31, 2017 and 2016, the Company incurred net interest expense of $6.8 million and $7.4 million, respectively.
At March 31, 2017, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $431.8 million, compared with the carrying amount of $399.2 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 March 31, 2017 approximates fair value.

11



6. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of March 31, 2017
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
  
 
  
 
 
 
  
Money market investments (1) 
$

 
$
442,864

 
$

 
$
442,864

Marketable equity securities (3) 
433,787

 

 

 
433,787

Other current investments (4) 
5,702

 
17,069

 

 
22,771

Total Financial Assets
$
439,489

 
$
459,933

 
$

 
$
899,422

Liabilities
  
 
  
 
 
 
  
Deferred compensation plan liabilities (5) 
$

 
$
43,949

 
$

 
$
43,949

Interest rate swap (6) 

 
488

 

 
488

Mandatorily redeemable noncontrolling interest (7)

 

 
12,584

 
12,584

Total Financial Liabilities
$

 
$
44,437

 
$
12,584

 
$
57,021

 
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.
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.

12



The following reflects the Company's net income and share data used in the basic and diluted earnings per share computations using the two-class method:
 
Three Months Ended 
 March 31
(in thousands, except per share amounts)
2017
 
2016
Numerator:
 
 
 
Numerator for basic earnings per share:
  
 
  
Net income attributable to Graham Holdings Company common stockholders
$
21,086

 
$
37,780

Less: Dividends paid-common stock outstanding and unvested restricted shares
(14,202
)
 
(13,758
)
Undistributed earnings
6,884

 
24,022

Percent allocated to common stockholders
99.04
%
 
98.64
%
 
6,818

 
23,695

Add: Dividends paid-common stock outstanding
14,066

 
13,574

Numerator for basic earnings per share
$
20,884

 
$
37,269

Add: Additional undistributed earnings due to dilutive stock options

 
2

Numerator for diluted earnings per share
$
20,884

 
$
37,271

Denominator:
 
 
 
Denominator for basic earnings per share:


 


Weighted average shares outstanding
5,535

 
5,623

Add: Effect of dilutive stock options
34

 
29

Denominator for diluted earnings per share
5,569

 
5,652

Graham Holdings Company Common Stockholders:
  
 
  
Basic earnings per share
$
3.77

 
$
6.63

Diluted earnings per share
$
3.75

 
$
6.59

Diluted earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:
 
Three Months Ended 
 March 31
(in thousands)
2017
 
2016
Weighted average restricted stock
28

 
38

The diluted earnings per share amounts for the three months ended March 31, 2017 and March 31, 2016 exclude the effects of 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 months ended March 31, 2017 and March 31, 2016 exclude the effects of 5,450 and 6,100 restricted stock awards, respectively, as their inclusion would have been antidilutive due to a performance condition.
In the three months ended March 31, 2017, and March 31, 2016, the Company declared regular dividends totaling $2.54, and $2.42 respectively.
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 March 31
(in thousands)
2017
 
2016
Service cost
$
4,914

 
$
5,342

Interest cost
11,986

 
13,073

Expected return on assets
(30,337
)
 
(30,548
)
Amortization of prior service cost
43

 
74

Recognized actuarial gain
(1,294
)
 

Net Periodic Benefit
$
(14,688
)
 
$
(12,059
)

13



The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) consists of the following components:
  
Three Months Ended March 31
(in thousands)
2017
 
2016
Service cost
$
214

 
$
246

Interest cost
1,058

 
1,096

Amortization of prior service cost
114

 
114

Recognized actuarial loss
444

 
665

Net Periodic Cost
$
1,830

 
$
2,121

Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a U.S. stock index fund, a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. The assets of the Company’s pension plan were allocated as follows:
  
As of
  
March 31,
2017
 
December 31,
2016
  
 
U.S. equities
50
%
 
53
%
U.S. stock index fund
31
%
 
30
%
U.S. fixed income
13
%
 
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 still 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 March 31, 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 March 31, 2017. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At March 31, 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 $990.9 million and $978.8 million at March 31, 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 March 31
(in thousands)
2017
 
2016
Service cost
$
257

 
$
346

Interest cost
195

 
308

Amortization of prior service credit
(37
)
 
(84
)
Recognized actuarial gain
(973
)
 
(375
)
Net Periodic (Benefit) Cost
$
(558
)
 
$
195


14



9. OTHER NON-OPERATING INCOME
A summary of non-operating income is as follows:
 
 
Three Months Ended 
 March 31
(in thousands)
 
2017
 
2016
Foreign currency gain (loss), net
 
1,728

 
(5,443
)
(Loss) gain on sales of businesses
 
(342
)
 
18,931

Gain on sales of marketable equity securities
 

 
1,754

Other, net
 
(537
)
 
(146
)
Total Other Non-Operating Income
 
$
849

 
$
15,096

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.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income consists of the following components:
 
  
Three Months Ended March 31
  
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
$
13,668

 
$

 
$
13,668

 
$
3,845

 
$

 
$
3,845

Unrealized gains (losses) on available-for-sale securities:
 
 
  
 
  
 
 
 
  
 
  
Unrealized gains for the period, net
9,558

 
(3,823
)
 
5,735

 
343

 
(137
)
 
206

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

 

 

 
(1,754
)
 
701

 
(1,053
)
  
9,558

 
(3,823
)
 
5,735

 
(1,411
)
 
564

 
(847
)
Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
120

 
(48
)
 
72

 
104

 
(41
)
 
63

Amortization of net actuarial (gain) loss included in net income
(1,823
)
 
729

 
(1,094
)
 
290

 
(116
)
 
174

  
(1,703
)
 
681

 
(1,022
)
 
394

 
(157
)
 
237

Cash flow hedge:
 
 
  
 
  
 
  
 
  
 
  
Loss for the period
(124
)
 
25

 
(99
)
 

 

 

Other Comprehensive Income
$
21,399

 
$
(3,117
)
 
$
18,282

 
$
2,828

 
$
407

 
$
3,235

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
13,668

 
5,735

 

 
(124
)
 
19,279

Net amount reclassified from accumulated other comprehensive income (loss)

 

 
(1,022
)
 
25

 
(997
)
Other comprehensive income (loss), net of tax
13,668

 
5,735

 
(1,022
)
 
(99
)
 
18,282

Balance as of March 31, 2017
$
(13,330
)
 
$
98,666

 
$
169,808

 
$
(376
)
 
$
254,768


15



The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
  
Three Months Ended 
 March 31
 
Affected Line Item in the Condensed Consolidated Statement of Operations
  
 
(in thousands)
2017
 
2016
 
Unrealized Gains on Available-for-sale Securities:
  
 
  
 
  
Realized gain for the period
$

 
$
(1,754
)
 
Other income, net
  

 
701

 
Provision for Income Taxes
  

 
(1,053
)
 
Net of Tax
Pension and Other Postretirement Plans:
 
 
  
 
  
Amortization of net prior service cost
120

 
104

 
(1)
Amortization of net actuarial (gain) loss
(1,823
)
 
290

 
(1)
  
(1,703
)
 
394

 
Before tax
  
681

 
(157
)
 
Provision for Income Taxes
  
(1,022
)
 
237

 
Net of Tax
Cash Flow Hedge
 
 
  
 
  
  
31

 

 
Interest expense
  
(6
)
 

 
Provision for Income Taxes
  
25

 

 
Net of Tax
Total reclassification for the period
$
(997
)
 
$
(816
)
 
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 8).
11. CONTINGENCIES
Litigation, Legal and Other Matters.  The Company and its subsidiaries are involved in various legal, regulatory and other proceedings that arise in the ordinary course of its business. Although the outcomes of these 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 legal, regulatory and other proceedings in excess of the amounts accrued could reach approximately $20 million.
ED Program Reviews.  ED has undertaken program reviews at various KHE locations. Currently, there are five open program reviews, four of which are at campuses that were formerly a part of the KHE Campuses business, including the ED’s final reports on the program reviews at former KHE Hammond, IN, San Antonio, TX, Broomall, PA, and Pittsburgh, PA, locations. Kaplan retains responsibility for any financial obligation resulting from the ED program reviews at the KHE Campuses business that were open at the time of sale.
On February 23, 2015, the ED began a review of Kaplan University. The review will assess Kaplan’s administration of its Title IV, HEA programs and will initially focus on the 2013 to 2014 and 2014 to 2015 award years. On December 17, 2015, Kaplan University received a notice from the ED that it had been placed on provisional certification status until September 30, 2018, in connection with the open and ongoing ED program review. The ED has not notified Kaplan University of any negative findings. However, at this time, Kaplan cannot predict the outcome of this review, when it will be completed or any liability or other limitations that the ED may place on Kaplan University as a result of this review. During the period of provisional certification, Kaplan University must obtain prior ED approval to open a new location, add an educational program, acquire another school or make any other significant change.
The Company does not expect the open program reviews to have a material impact on KHE; however, the results of open program reviews and their impact on Kaplan’s operations are uncertain.


16



12. BUSINESS SEGMENTS
The Company has four reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International and television broadcasting.
The following table summarizes financial information related to each of the Company's business segments:
  
Three Months Ended March 31
(in thousands)
2017
 
2016
Operating Revenues
  
 
  
Education
$
372,897

 
$
401,076

Television broadcasting
91,496

 
92,018

Other businesses
118,324

 
108,716

Corporate office

 

Intersegment elimination

 
(70
)
  
$
582,717

 
$
601,740

Income (Loss) from Operations
 
 
 
Education
$
9,031

 
$
14,488

Television broadcasting
25,969

 
41,220

Other businesses
(10,564
)
 
(5,730
)
Corporate office
4,618

 
1,894

  
$
29,054

 
$
51,872

Equity in Earnings of Affiliates, Net
649

 
1,004

Interest Expense, Net
(6,766
)
 
(7,357
)
Other Income, Net
849

 
15,096

Income Before Income Taxes
$
23,786

 
$
60,615

Depreciation of Property, Plant and Equipment
 
 
 
Education
$
8,584

 
$
11,103

Television broadcasting
2,594

 
2,377

Other businesses
3,184

 
3,027

Corporate office
290

 
254

  
$
14,652

 
$
16,761

Amortization of Intangible Assets
  

 
  

Education
$
1,120

 
$
1,681

Television broadcasting
902

 
63

Other businesses
4,814

 
4,518

Corporate office

 

  
$
6,836

 
$
6,262

Net Pension (Credit) Expense
  

 
  

Education
$
2,706

 
$
3,109

Television broadcasting
493

 
439

Other businesses
483

 
254

Corporate office
(18,370
)
 
(15,861
)
  
$
(14,688
)
 
$
(12,059
)

Asset information for the Company’s business segments are as follows:
  
As of
(in thousands)
March 31,
2017
 
December 31,
2016
Identifiable Assets
  
 
  
Education
$
1,475,285

 
$
1,479,267

Television broadcasting
445,278

 
336,631

Other businesses
698,908

 
796,935

Corporate office
466,130

 
455,209

  
$
3,085,601

 
$
3,068,042

Investments in Marketable Equity Securities
433,787

 
424,229

Investments in Affiliates
60,287

 
58,806

Prepaid Pension Cost
836,430

 
881,593

Total Assets
$
4,416,105

 
$
4,432,670

  

17



The Company’s education division comprises the following operating segments:
  
Three Months Ended
  
March 31
(in thousands)
2017
 
2016
Operating Revenues
  
 
  
Higher education
$
144,310

 
$
165,549

Test preparation
64,568

 
66,462

Kaplan international
164,562

 
169,287

Kaplan corporate and other
14

 
125

Intersegment elimination
(557
)
 
(347
)
  
$
372,897

 
$
401,076

Income (Loss) from Operations
  

 
  

Higher education
$
12,604

 
$
21,306

Test preparation
(2,864
)
 
(2,310
)
Kaplan international
7,707

 
4,897

Kaplan corporate and other
(8,469
)
 
(9,405
)
Intersegment elimination
53

 

  
$
9,031

 
$
14,488

Depreciation of Property, Plant and Equipment
  

 
  

Higher education
$
3,431

 
$
4,175

Test preparation
1,341

 
1,781

Kaplan international
3,682

 
5,060

Kaplan corporate and other
130

 
87

  
$
8,584

 
$
11,103

Amortization of Intangible Assets
$
1,120

 
$
1,681

Pension Expense
  

 
  

Higher education
$
2,044

 
$
1,905

Test preparation
911

 
768

Kaplan international
87

 
67

Kaplan corporate and other
(336
)
 
369

  
$
2,706

 
$
3,109

Asset information for the Company's education division is as follows:
  
As of
(in thousands)
March 31,
2017
 
December 31,
2016
Identifiable assets
  
 
  
Higher education
$
321,573

 
$
373,127

Test preparation
133,061

 
133,709

Kaplan international
1,000,432

 
950,922

Kaplan corporate and other
20,219

 
21,509

  
$
1,475,285

 
$
1,479,267


18



Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company reported net income attributable to common shares of $21.1 million ($3.75 per share) for the first quarter of 2017, compared to $37.8 million ($6.59 per share) for the first quarter of 2016.
Items included in the Company’s net income for the first quarter of 2017:
$1.7 million in non-operating foreign currency gains (after-tax impact of $1.1 million, or $0.19 per share); and
$5.9 million in income tax benefits related to stock compensation ($1.06 per share).
Items included in the Company’s net income for the first quarter of 2016:
an $18.9 million non-operating gain arising from the sale of a business (after-tax impact of $11.9 million, or $2.08 per share);
a $1.8 million gain on sale of marketable equity securities (after-tax impact of $1.1 million, or $0.19 per share); and
$5.4 million in non-operating foreign currency losses (after-tax impact of $3.4 million, or $0.60 per share).
Revenue for the first quarter of 2017 was $582.7 million, down 3% from $601.7 million in the first quarter of 2016. Revenues declined at the education and television broadcasting divisions, offset by an increase in other businesses. The Company reported operating income of $29.1 million for the first quarter of 2017, compared to $51.9 million for the first quarter of 2016. The operating income decline is driven by lower earnings at the television broadcasting division largely due to a new NBC contract for the Company's NBC affiliates in Houston and Detroit, and a decrease in earnings at Kaplan Higher Education (KHE) due to lower enrollments at Kaplan University. Operating results for other businesses were also down for the quarter.
Division Results
Education  
Education division revenue totaled $372.9 million for the first quarter of 2017, down 7% from revenue of $401.1 million for the same period of 2016. Kaplan reported operating income of $9.0 million for the first quarter of 2017, compared to $14.5 million for the first quarter of 2016.
A summary of Kaplan’s operating results for the first quarter of 2017 compared to 2016 is as follows:
 
Three Months Ended
 
 
  
March 31
 
  
(in thousands)
2017
 
2016
 
% Change
Revenue
  
 
  
 
  
Higher education
$
144,310

 
$
165,549

 
(13
)
Test preparation
64,568

 
66,462

 
(3
)
Kaplan international
164,562

 
169,287

 
(3
)
Kaplan corporate and other
14

 
125

 
(89
)
Intersegment elimination
(557
)
 
(347
)
 

  
$
372,897

 
$
401,076

 
(7
)
Operating Income (Loss)
  

 
  

 
  

Higher education
$
12,604

 
$
21,306

 
(41
)
Test preparation
(2,864
)
 
(2,310
)
 
(24
)
Kaplan international
7,707

 
4,897

 
57

Kaplan corporate and other
(7,349
)
 
(7,724
)
 
5

Amortization of intangible assets
(1,120
)
 
(1,681
)
 
33

Intersegment elimination
53

 

 

  
$
9,031

 
$
14,488

 
(38
)
KHE includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the domestic professional and other continuing education businesses.

19



In the first quarter of 2017, KHE revenue was down 13%, due to declines in average enrollments at Kaplan University, offset by increased revenues at the domestic professional and other continuing education businesses. KHE operating results declined in the first quarter of 2017 due primarily to lower enrollment at Kaplan University.
New higher education student enrollments at Kaplan University were up 2% in the first quarter of 2017; however, total students at Kaplan University were 32,536 at March 31, 2017, down 13% from March 31, 2016.
Kaplan University enrollments at March 31, 2017 and 2016, by degree and certificate programs, are as follows:
  
As of March 31
  
2017
 
2016
Certificate
8.7
%
 
5.8
%
Associate’s
17.7
%
 
22.1
%
Bachelor’s
51.0
%
 
50.5
%
Master’s
22.6
%
 
21.6
%
  
100.0
%
 
100.0
%
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. KTP revenue declined 3% for the first quarter of 2017. Enrollments, excluding the new economy skills training offerings, were down 3% for the first three months of 2017. In comparison to 2016, KTP operating results were down 24% in the first quarter of 2017 due to lower revenues. Operating losses for the new economy skills training programs were $3.8 million and $4.1 million for the first quarter of 2017 and 2016, respectively.
Kaplan International includes English-language programs, and postsecondary education and professional training businesses largely outside the United States. In January and February 2016, Kaplan acquired Mander Portman Woodward, a leading provider of high-quality, bespoke education to UK and international students in London, Cambridge and Birmingham; and Osborne Books, an education publisher of learning resources for accounting qualifications in the UK.
Kaplan International revenue declined 3% for the first quarter of 2017; on a constant currency basis, revenue increased 4% primarily due to growth in Pathways enrollments. Operating income increased in the first quarter of 2017, due largely to the improved Pathways and English-language results, partially offset by a decline in Singapore.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities.
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 that is included in other non-operating income.
Television Broadcasting
On January 17, 2017, the Company closed on its agreement with Nexstar Broadcasting Group, Inc. and Media General, Inc. to acquire WCWJ, a CW affiliate television station in Jacksonville, FL and WSLS, an NBC affiliate television station in Roanoke, VA for $60 million in cash and the assumption of certain pension obligations. The Company continues to operate both stations under their current network affiliations.
Revenue at the television broadcasting division decreased 1% to $91.5 million in the first quarter of 2017, from $92.0 million in the same period of 2016. Excluding revenue from the two newly acquired stations, revenue declined 6% due to a $4.2 million decrease in political advertising revenue and lower network revenue, offset by $2.9 million in higher retransmission revenues. As previously disclosed, the Company's NBC affiliates in Houston and Detroit are operating under a new contract with NBC effective January 1, 2017 that has resulted in a significant increase in network fees in 2017, compared to 2016. Operating income for the first quarter of 2017 decreased 37% to $26.0 million, from $41.2 million in the same period of 2016 due to the significantly higher network fees and lower revenues. The Company's television broadcasting division stations are operating under a new retransmission contract with Comcast effective April 1, 2017.

20



Other Businesses
A summary of Other Businesses’ operating results for the first quarter of 2017 compared to 2016 is as follows:
  
Three Months Ended
 
  
  
March 31
 
%
(in thousands)
2017
 
2016
 
Change
Operating Revenues
  
 
  
 
  
Manufacturing
$
61,898

 
$
56,675

 
9

Healthcare
36,899

 
35,880

 
3

SocialCode
12,574

 
10,655

 
18

Other
6,953

 
5,506

 
26

  
$
118,324

 
$
108,716

 
9

Operating Expenses
  

 
  

 
  

Manufacturing
$
58,233

 
$
55,538

 
5

Healthcare
37,825

 
33,361

 
13

SocialCode
17,082

 
13,625

 
25

Other
15,748

 
11,922

 
32

  
$
128,888

 
$
114,446

 
13

Operating Income (Loss)
  

 
  

 
  
Manufacturing
$
3,665

 
$
1,137

 

Healthcare
(926
)
 
2,519

 

SocialCode
(4,508
)
 
(2,970
)
 
(52
)
Other
(8,795
)
 
(6,416
)
 
(37
)
  
$
(10,564
)
 
$
(5,730
)
 
(84
)
Depreciation
  

 
  

 
  
Manufacturing
$
1,508

 
$
1,873

 
(19
)
Healthcare
1,069

 
737

 
45

SocialCode
246

 
229

 
7

Other
361

 
188

 
92

  
$
3,184

 
$
3,027

 
5

Amortization of Intangible Assets
  

 
  

 
  
Manufacturing
$
3,077

 
$
2,817

 
9

Healthcare
1,654

 
1,681

 
(2
)
SocialCode
83

 

 

Other

 
20

 

  
$
4,814

 
$
4,518

 
7

Pension Expense
  

 
  

 
  
Manufacturing
$
25

 
$
18

 
39

Healthcare
166

 

 

SocialCode
154

 
124

 
24

Other
138

 
112

 
23

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