NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of seven television broadcasting stations, several websites and print publications, and a marketing solutions provider. The Company’s other business operations include manufacturing, automotive dealerships, restaurants and entertainment venues 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, 2019 and 2018 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Recently Adopted and Issued Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance that requires, among other things, a lessee to recognize a right-of-use asset representing an entity’s right to use the underlying asset for the lease term and a liability for lease payments on its balance sheet, regardless of classification of a lease as operating or financing. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and account for the lease similar to previous guidance for operating leases. This new guidance supersedes all prior guidance. The guidance is effective for interim and fiscal years beginning after December 15, 2018. The standard provides two methods of adoption under the modified retrospective approach. Under the comparative date method, lessees and lessors are required to recognize and measure leases as of the beginning of the earliest period presented. Under the effective date method, lessees and lessors are required to recognize and measure leases as of the period of adoption. The Company adopted the new guidance on January 1, 2019 using the effective date method.
The Company elected the available package of transition practical expedients, which allowed the Company to use its historical assessments of whether contracts are or contain leases, lease classification and initial direct costs. Additionally, the Company elected the transition practical expedient to use hindsight to determine the lease term. Upon adoption of the new guidance, the Company recognized right-of-use assets of $369.3 million and lease liabilities of $418.3 million.
The cumulative effect of the changes to the Company’s Condensed Consolidated Balance Sheets as a result of adopting the new guidance was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
Adjustments
|
Balance as of January 1, 2019
|
|
Assets
|
|
|
|
|
Other current assets
|
$
|
82,723
|
|
$
|
(5,595
|
)
|
$
|
77,128
|
|
|
Lease Right-of-Use Assets
|
—
|
|
369,333
|
|
369,333
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
486,578
|
|
$
|
(14,029
|
)
|
$
|
472,549
|
|
|
Current portion of lease liabilities
|
—
|
|
86,747
|
|
86,747
|
|
|
Other Liabilities
|
57,901
|
|
(40,500
|
)
|
17,401
|
|
|
Lease Liabilities
|
—
|
|
331,520
|
|
331,520
|
|
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Acquisitions. In the first nine months of 2019, the Company acquired seven businesses; one in education, two in healthcare, one in manufacturing, and three in other businesses for $191.6 million in cash and contingent consideration and the assumption of $25.8 million in floor plan payables.
On January 31, 2019, the Company acquired an interest in two automotive dealerships for cash and the assumption of floor plan payables (see Note 5). In connection with the acquisition, the automotive subsidiary of the Company borrowed $30 million to finance the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum (see Note 8). The Company has a 90% interest in the automotive subsidiary. The Company also entered into a management services agreement with an entity affiliated with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and his team will operate and manage the dealerships. In addition, the Company advanced $3.5 million to the minority shareholder, an entity controlled by Mr. Ourisman, at an interest rate of 6% per annum. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In July 2019, Graham Healthcare Group (GHG) acquired an interest in a small business which is expected to provide certain strategic benefits in the future and is included in healthcare. On July 11, 2019, Kaplan acquired Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. The acquisition is expected to provide synergies within Kaplan’s International English business and is included in its international division.
On July 31, 2019, the Company announced the closing of its acquisition of Clyde’s Restaurant Group (CRG). CRG owns and operates 13 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton, two of the top 20 highest grossing independent restaurants in the United States. CRG is managed by its existing management team as a wholly-owned subsidiary of the Company. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In September 2019, Joyce/Dayton Corp. acquired the assets of a small business. The acquisition is expected to complement current product offerings and is included in manufacturing.
During 2018, the Company acquired eight businesses, five in education, one in manufacturing, one in healthcare, and one in SocialCode for $121.1 million in cash and contingent consideration. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of acquisition.
In January and February 2018, Kaplan acquired the assets of i-Human Patients, Inc., a provider of cloud-based, interactive patient encounter simulations for medical and nursing professionals and educators, and another small business in test preparation and international, respectively. These acquisitions are expected to provide strategic benefits in the future.
In May 2018, Kaplan acquired a 100% interest in Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials and engineering, surveying, architecture, and interior design licensure exam review, by purchasing all of its issued and outstanding shares. This acquisition is expected to provide certain strategic benefits in the future. This acquisition is included in Professional (U.S.).
On July 12, 2018, Kaplan acquired 100% of the issued and outstanding shares of the College for Financial Planning (CFFP), a provider of financial education and training to individuals pursuing the Certified Financial Planner
certification, a Master of Science in Personal Financial Planning, or a Master of Science in Finance. The acquisition is expected to expand Kaplan’s financial education product offerings and is included in Professional (U.S.).
On July 31, 2018, Dekko acquired 100% of the issued and outstanding shares of Furnlite, Inc., a Fallston, NC-based manufacturer of power and data solutions for the hospitality and residential furniture industries. Dekko’s primary reasons for the acquisition are to complement existing product offerings and to provide potential synergies across the businesses. The acquisition is included in manufacturing.
In August 2018, SocialCode acquired 100% of the membership interests of Marketplace Strategy (MPS), a Cleveland-based digital marketing agency that provides strategy consulting, optimization services, advertising management and creative solutions on online marketplaces including Amazon. SocialCode’s primary reason for the acquisition is to expand its platform offerings.
In September 2018, GHG acquired the assets of a small business and Kaplan acquired the test preparation and study guide assets of Barron’s Educational Series, a New York-based education publishing company. The acquisitions are expected to complement the healthcare and test preparation services currently offered by GHG and Kaplan, respectively. GHG is included in the healthcare division. The Barron’s Educational Series acquisition is included in test preparation.
Acquisition-related costs for acquisitions that closed during the first nine months of 2019 were $2.3 million and were expensed as incurred. Acquisition-related costs for acquisitions that closed during the first nine months of 2018 were $1.2 million and were expensed as incurred. The aggregate purchase price of the 2019 and 2018 acquisitions was allocated as follows (2019 on a preliminary basis), based on acquisition date fair values to the following assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
Nine Months Ended
|
Year Ended
|
|
(in thousands)
|
|
September 30, 2019
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
4,697
|
|
$
|
2,344
|
|
|
Inventory
|
|
31,750
|
|
1,268
|
|
|
Property, plant and equipment
|
|
52,577
|
|
1,518
|
|
|
Lease Right-of-Use Assets
|
|
100,933
|
|
—
|
|
|
Goodwill
|
|
63,387
|
|
41,840
|
|
|
Indefinite-lived intangible assets
|
|
46,900
|
|
—
|
|
|
Amortized intangible assets
|
|
21,291
|
|
78,427
|
|
|
Other assets
|
|
8,352
|
|
5,198
|
|
|
Floor plan payables
|
|
(25,755
|
)
|
—
|
|
|
Other liabilities
|
|
(38,828
|
)
|
(7,678
|
)
|
|
Deferred income taxes
|
|
(2,191
|
)
|
(4,900
|
)
|
|
Current and noncurrent lease liabilities
|
|
(97,996
|
)
|
—
|
|
|
Noncontrolling interest
|
|
(530
|
)
|
—
|
|
|
Aggregate purchase price, net of cash acquired
|
|
$
|
164,587
|
|
$
|
118,017
|
|
The 2019 fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change within the measurement period (up to one year from the acquisition date). The 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 $49.0 million and $32.3 million of goodwill for income tax purposes for the acquisitions completed in 2019, and 2018, 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 losses for the companies acquired in 2019 of $96.2 million and $2.0 million, respectively, for the third quarter of 2019. The Company’s Condensed Consolidated Statements of Operations include aggregate revenues and operating losses of $199.6 million and $0.5 million, respectively, for the first nine months of 2019. The following unaudited pro forma financial information presents the Company’s results as if the current year acquisitions had occurred at the beginning of 2018. The unaudited pro forma information also includes the 2018 acquisitions as if they occurred at the beginning of 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating revenues
|
$
|
750,076
|
|
|
$
|
787,808
|
|
|
$
|
2,267,502
|
|
|
$
|
2,349,342
|
|
|
Net income
|
43,849
|
|
|
125,761
|
|
|
178,551
|
|
|
217,589
|
|
These pro forma results were based on estimates and assumptions, which the Company believes are reasonable, and include the historical results of operations of the acquired companies and adjustments for depreciation and amortization of identified assets and the effect of pre-acquisition transaction related expenses incurred by the Company and the acquired entities. The pro forma information does not include efficiencies, cost reductions and synergies expected to result from the acquisitions. They are not the results that would have been realized had these entities been part of the Company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.
Kaplan University Transaction. On March 22, 2018, the Company closed on the Kaplan University (KU) transaction and recorded a pre-tax gain of $4.3 million in the first quarter of 2018. For financial reporting purposes, Kaplan may receive payment of additional consideration related to the sale of the institutional assets as part of its fee to the extent there are sufficient revenues available after paying all amounts required by the Transition and Operations Support Agreement (TOSA). The Company did not recognize any contingent consideration as part of the initial disposition. The Company recorded a $0.5 million contingent consideration gain in each of the three months ended September 30, 2019 and September 30, 2018. In the nine months ended September 30, 2019 and September 30, 2018, the Company recorded a $0.9 million and $1.9 million contingent consideration gain, respectively.
The revenue and operating income related to the KU business disposed of are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
Revenue
|
$
|
—
|
|
|
$
|
91,526
|
|
|
Operating income
|
—
|
|
|
213
|
|
Sale of Businesses. In February 2018, Kaplan completed the sale of a small business which was included in Test Preparation. In September 2018, Kaplan Australia completed the sale of a small business which was included in Kaplan International. As a result of these sales, the Company reported gains in other non-operating income (see Note 13).
Other Transactions. In March 2019, a Hoover minority shareholder put some of his shares to the Company, which had a redemption value of $0.6 million. Following the redemption, the Company owns 98.01% of Hoover. In June 2018, the Company incurred $6.2 million of interest expense related to the mandatorily redeemable noncontrolling interest redemption settlement at GHG. The mandatorily redeemable noncontrolling interest was redeemed and paid in July 2018.
3. INVESTMENTS
Money Market Investments. As of September 30, 2019, the Company had no money market investments, compared to $75.5 million at December 31, 2018, that are classified as cash and cash equivalents in the Company’s Condensed Consolidated Balance Sheets.
Investments in Marketable Equity Securities. Investments in marketable equity securities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
|
|
Total cost
|
$
|
282,349
|
|
|
$
|
282,563
|
|
|
Gross unrealized gains
|
253,215
|
|
|
216,111
|
|
|
Gross unrealized losses
|
—
|
|
|
(2,284
|
)
|
|
Total Fair Value
|
$
|
535,564
|
|
|
$
|
496,390
|
|
The Company purchased $7.5 million of marketable equity securities during the first nine months of 2019. There were no purchases of marketable equity securities during the first nine months of 2018.
During the first nine months of 2019, the gross cumulative realized gains from the sales of marketable equity securities were $9.6 million. The total proceeds from such sales were $17.6 million. During the first nine months of 2018, the gross cumulative realized gains from the sales of marketable equity securities were $37.3 million. The total proceeds from such sales were $66.7 million.
The gain on marketable equity securities comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Gain on marketable equity securities, net
|
$
|
17,404
|
|
|
$
|
44,962
|
|
|
$
|
49,261
|
|
|
$
|
28,306
|
|
|
Less: Net losses (gains) in earnings from marketable equity securities sold and donated
|
61
|
|
|
—
|
|
|
(2,919
|
)
|
|
4,271
|
|
|
Net unrealized gains in earnings from marketable equity securities still held at the end of the period
|
$
|
17,465
|
|
|
$
|
44,962
|
|
|
$
|
46,342
|
|
|
$
|
32,577
|
|
Investments in Affiliates. As of September 30, 2019, the Company held an approximate 11% interest in Intersection Holdings, LLC, and in several other affiliates; GHG held a 40% interest in Residential Home Health Illinois, a 42.5% interest in Residential Hospice Illinois, a 40% interest in the joint venture formed between GHG and a Michigan hospital, and a 40% interest in the joint venture formed between GHG and Allegheny Health Network (AHN). For the three and nine months ended September 30, 2019, the Company recorded $2.4 million and $7.0 million, respectively in revenue for services provided to the affiliates of GHG. For the three and nine months ended September 30, 2018, the Company recorded $2.5 million and $9.5 million, respectively, in revenue for services provided to the affiliates of GHG. In the third quarter of 2018, the Company recorded $7.9 million in gains in equity in earnings of affiliates related to two of its investments.
In the second quarter of 2019, the Company made an investment in Framebridge, a custom framing service company based in Washington, DC. The Company accounts for this investment under the equity method, and included it in Investments in Affiliates on the Condensed Consolidated Balance Sheet. Timothy J. O’Shaughnessy, President and Chief Executive Officer of Graham Holdings Company, is a personal investor in Framebridge and serves as Chairman of the Board.
In February 2019, the Company sold its interest in Gimlet Media. In connection with this sale, the Company recorded a gain of $29.0 million in the first quarter of 2019. The total proceeds from the sale were $33.5 million.
Additionally, Kaplan International Holdings Limited (KIHL) held a 45% interest in a joint venture formed with York University. KIHL agreed to loan the joint venture £25 million, of which £16 million was advanced as of December 31, 2017. In the second quarter of 2018, KIHL advanced a final amount of £6 million in additional funding to the joint venture under this agreement, bringing the total amount advanced to £22 million. The loan is repayable over 25 years at an interest rate of 7% and the loan is guaranteed by the University of York.
Cost Method Investments. The Company held investments without readily determinable fair values in a number of equity securities that are accounted for as cost method investments, which are recorded at cost, less impairment, and adjusted for observable price changes for identical or similar investments of the same issuer. The carrying value of these investments was $38.5 million and $30.6 million as of September 30, 2019 and December 31, 2018, respectively. During the three and nine months ended September 30, 2019, the Company recorded gains of $3.7 million and $5.1 million, respectively, to those equity securities based on observable transactions. During the three and nine months ended September 30, 2018, the Company recorded gains of $8.5 million to those equity securities based on observable transactions and an impairment loss of $2.5 million .
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
|
|
Receivables from contracts with customers, less doubtful accounts of $13,060 and $14,775
|
$
|
582,944
|
|
|
$
|
538,021
|
|
|
Other receivables
|
29,197
|
|
|
44,259
|
|
|
|
$
|
612,141
|
|
|
$
|
582,280
|
|
Bad debt expense was $0.4 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively; and $0.5 million and $7.9 million for the nine months ended September 30, 2019 and 2018, respectively.
5. INVENTORIES, CONTRACTS IN PROGRESS AND VEHICLE FLOOR PLAN PAYABLE
Inventories and contracts in progress consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
|
|
Raw materials
|
$
|
35,776
|
|
|
$
|
37,248
|
|
|
Work-in-process
|
11,176
|
|
|
11,633
|
|
|
Finished goods
|
62,451
|
|
|
17,861
|
|
|
Contracts in progress
|
3,793
|
|
|
2,735
|
|
|
|
$
|
113,196
|
|
|
$
|
69,477
|
|
The Company finances all new vehicle inventory through a standardized floor plan facility (the “floor plan facility”) with SunTrust Bank. The new vehicle floor plan facility bears interest at variable rates that are based on LIBOR plus 1.15% per annum. The weighted average interest rate for the floor plan facility was 3.4% for both the three and nine months ended September 30, 2019. As of September 30, 2019, the aggregate capacity under the floor plan facility was $50 million, of which $40.9 million had been utilized, and is included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet. Changes in the vehicle floor plan payable are reported as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
The floor plan facility is collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with respect to the creation of liens and changes in ownership, officers and key management personnel. The Company was in compliance with all of these restrictive covenants as of September 30, 2019.
The floor plan interest expense related to the new vehicle floor plan arrangements is offset by amounts received from manufacturers in the form of floor plan assistance capitalized in inventory and recorded against operating expense in the Condensed Consolidated Statements of Operations when the associated inventory is sold. For the three and nine months ended September 30, 2019, the Company recognized a reduction in operating expense of $0.4 million and $1.6 million, respectively, related to manufacturer floor plan assistance.
6. LEASES
The Company has operating leases for substantially all of its educational facilities, corporate offices and other facilities used in conducting its business, as well as certain equipment. The Company determines if an arrangement is a lease at inception.
Operating leases are included in lease right-of-use (“ROU”) assets, current portion of lease liabilities, and lease liabilities on the Company’s Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. ROU assets also include any initial direct costs, prepaid lease payments and lease incentives received, when applicable. As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on December 31, 2018 for operating leases that commenced prior to that date.
The Company’s lease terms may include options to extend or terminate the lease by one to 10 years or more when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less are not recorded on the balance sheet; however, lease expense for these leases is recognized on a straight-line basis. The Company
has elected the practical expedient to not separate lease components from nonlease components. As such, lease expense includes these nonlease components, when applicable. Fixed lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized when incurred. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants. In some instances, the Company subleases its leased real estate facilities to third parties. The Company does not have significant financing leases.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Operating lease cost
|
$
|
26,242
|
|
|
$
|
75,531
|
|
|
Short-term and month-to-month lease cost
|
4,502
|
|
|
14,275
|
|
|
Variable lease cost
|
5,601
|
|
|
15,563
|
|
|
Sublease income
|
(5,222
|
)
|
|
(14,915
|
)
|
|
Total net lease cost
|
$
|
31,123
|
|
|
$
|
90,454
|
|
In connection with the sale of the KHE Campuses business, the Company is the guarantor of several leases for which it has established ROU assets and lease liabilities (see Note 15). Any net lease cost or sublease income related to these leases is recorded in other non-operating income. Due to an early lease termination, the Company recorded a $0.1 million gain related to these leases for the three months ended September 30, 2019. The total net lease cost related to these leases was $0.5 million for the nine months ended September 30, 2019.
Supplemental information related to leases was as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Nine Months Ended September 30, 2019
|
|
Cash Flow Information:
|
|
|
Operating cash flows from operating leases (payments)
|
$
|
88,369
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities (noncash)
|
205,455
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
Balance Sheet Information:
|
|
|
Lease right-of-use assets
|
$
|
503,830
|
|
|
|
|
|
Current lease liabilities
|
$
|
78,114
|
|
|
Noncurrent lease liabilities
|
462,868
|
|
|
Total lease liabilities
|
$
|
540,982
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
10.8
|
|
|
Weighted average discount rate
|
4.3
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2019
|
|
2019
|
$
|
20,271
|
|
|
2020
|
103,515
|
|
|
2021
|
86,245
|
|
|
2022
|
71,147
|
|
|
2023
|
62,384
|
|
|
Thereafter
|
358,758
|
|
|
Total payments
|
702,320
|
|
|
Less: Imputed interest
|
(161,338
|
)
|
|
Total
|
$
|
540,982
|
|
As of September 30, 2019, the Company has entered into operating leases, including educational and other facilities, that have not yet commenced that have minimum lease payments of $3.9 million. These operating leases will commence in fiscal years 2019 and 2020 with lease terms of one to 12 years.
Disclosure related to periods prior to the adoption of new lease accounting guidance
At December 31, 2018, future minimum rental payments under noncancelable operating leases approximate the following:
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2018
|
|
2019
|
$
|
101,009
|
|
|
2020
|
84,945
|
|
|
2021
|
72,031
|
|
|
2022
|
53,709
|
|
|
2023
|
47,091
|
|
|
Thereafter
|
115,948
|
|
|
|
$
|
474,733
|
|
Minimum payments have not been reduced by minimum sublease rentals of $66.0 million due in the future under noncancelable subleases.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company changed the presentation of its segments in the third quarter of 2019 into the following eight reportable segments: Kaplan International, Higher Education, Test Preparation, Professional (U.S.), Television Broadcasting, Manufacturing, Healthcare and SocialCode (see Note 16).
In the third quarter of 2018, the Healthcare business recorded an intangible asset impairment charge of $7.9 million following the decision to discontinue the use of the Celtic tradename. The fair value of the intangible asset was estimated using an income approach.
Amortization of intangible assets for the three months ended September 30, 2019 and 2018 was $13.6 million and $12.3 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2019 and 2018 was $39.5 million and $34.1 million, respectively. Amortization of intangible assets is estimated to be approximately $14 million for the remainder of 2019, $53 million in 2020, $47 million in 2021, $41 million in 2022, $33 million in 2023 and $57 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Education
|
|
Television
Broadcasting
|
|
Manufacturing
|
|
Healthcare
|
|
SocialCode
|
|
Other
Businesses
|
|
Total
|
|
Balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,128,699
|
|
|
$
|
190,815
|
|
|
$
|
231,479
|
|
|
$
|
69,626
|
|
|
$
|
15,860
|
|
|
$
|
7,685
|
|
|
$
|
1,644,164
|
|
|
Accumulated impairment losses
|
(331,151
|
)
|
|
—
|
|
|
(7,616
|
)
|
|
—
|
|
|
—
|
|
|
(7,685
|
)
|
|
(346,452
|
)
|
|
|
797,548
|
|
|
190,815
|
|
|
223,863
|
|
|
69,626
|
|
|
15,860
|
|
|
—
|
|
|
1,297,712
|
|
|
Acquisitions
|
6,391
|
|
|
—
|
|
|
2,714
|
|
|
8,283
|
|
|
—
|
|
|
45,999
|
|
|
63,387
|
|
|
Foreign currency exchange rate changes
|
(15,706
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,706
|
)
|
|
Balance as of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,119,384
|
|
|
190,815
|
|
|
234,193
|
|
|
77,909
|
|
|
15,860
|
|
|
53,684
|
|
|
1,691,845
|
|
|
Accumulated impairment losses
|
(331,151
|
)
|
|
—
|
|
|
(7,616
|
)
|
|
—
|
|
|
—
|
|
|
(7,685
|
)
|
|
(346,452
|
)
|
|
|
$
|
788,233
|
|
|
$
|
190,815
|
|
|
$
|
226,577
|
|
|
$
|
77,909
|
|
|
$
|
15,860
|
|
|
$
|
45,999
|
|
|
$
|
1,345,393
|
|
The changes in carrying amount of goodwill at the Company’s education division were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Kaplan
International
|
|
Higher
Education
|
|
Test
Preparation
|
|
Professional (U.S.)
|
|
Total
|
|
Balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
583,424
|
|
|
$
|
174,564
|
|
|
$
|
166,920
|
|
|
$
|
203,791
|
|
|
$
|
1,128,699
|
|
|
Accumulated impairment losses
|
—
|
|
|
(111,324
|
)
|
|
(102,259
|
)
|
|
(117,568
|
)
|
|
(331,151
|
)
|
|
|
583,424
|
|
|
63,240
|
|
|
64,661
|
|
|
86,223
|
|
|
797,548
|
|
|
Acquisitions
|
6,391
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,391
|
|
|
Foreign currency exchange rate changes
|
(15,760
|
)
|
|
—
|
|
|
—
|
|
|
54
|
|
|
(15,706
|
)
|
|
Balance as of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
574,055
|
|
|
174,564
|
|
|
166,920
|
|
|
203,845
|
|
|
1,119,384
|
|
|
Accumulated impairment losses
|
—
|
|
|
(111,324
|
)
|
|
(102,259
|
)
|
|
(117,568
|
)
|
|
(331,151
|
)
|
|
|
$
|
574,055
|
|
|
$
|
63,240
|
|
|
$
|
64,661
|
|
|
$
|
86,277
|
|
|
$
|
788,233
|
|
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
As of December 31, 2018
|
|
(in thousands)
|
Useful Life
Range
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student and customer relationships
|
2–10 years
|
|
$
|
291,662
|
|
|
$
|
136,319
|
|
|
$
|
155,343
|
|
|
$
|
282,761
|
|
|
$
|
114,429
|
|
|
$
|
168,332
|
|
|
Trade names and trademarks
|
2–10 years
|
|
92,568
|
|
|
46,204
|
|
|
46,364
|
|
|
87,285
|
|
|
39,825
|
|
|
47,460
|
|
|
Network affiliation agreements
|
10 years
|
|
17,400
|
|
|
4,712
|
|
|
12,688
|
|
|
17,400
|
|
|
3,408
|
|
|
13,992
|
|
|
Databases and technology
|
3–6 years
|
|
30,274
|
|
|
12,221
|
|
|
18,053
|
|
|
27,041
|
|
|
8,471
|
|
|
18,570
|
|
|
Noncompete agreements
|
2–5 years
|
|
1,353
|
|
|
931
|
|
|
422
|
|
|
1,088
|
|
|
838
|
|
|
250
|
|
|
Other
|
1–8 years
|
|
24,890
|
|
|
12,367
|
|
|
12,523
|
|
|
24,530
|
|
|
9,873
|
|
|
14,657
|
|
|
|
|
|
$
|
458,147
|
|
|
$
|
212,754
|
|
|
$
|
245,393
|
|
|
$
|
440,105
|
|
|
$
|
176,844
|
|
|
$
|
263,261
|
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
$
|
97,527
|
|
|
|
|
|
|
|
|
$
|
80,102
|
|
|
|
|
|
|
|
|
Franchise agreements
|
|
|
28,000
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
FCC licenses
|
|
|
18,800
|
|
|
|
|
|
|
18,800
|
|
|
|
|
|
|
Licensure and accreditation
|
|
|
150
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,477
|
|
|
|
|
|
|
$
|
99,052
|
|
|
|
|
|
8. DEBT
The Company’s borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
|
|
5.75% unsecured notes due June 1, 2026 (1)
|
$
|
395,212
|
|
|
$
|
394,675
|
|
|
U.K. credit facility (2)
|
73,683
|
|
|
82,366
|
|
|
Commercial note
|
28,250
|
|
|
—
|
|
|
USD revolving credit facility
|
5,000
|
|
|
—
|
|
|
Other indebtedness
|
87
|
|
|
96
|
|
|
Total Debt
|
$
|
502,232
|
|
|
$
|
477,137
|
|
|
Less: current portion
|
(81,697
|
)
|
|
(6,360
|
)
|
|
Total Long-Term Debt
|
$
|
420,535
|
|
|
$
|
470,777
|
|
____________
|
|
|
|
(1)
|
The carrying value is net of $4.8 million and $5.3 million of unamortized debt issuance costs as of September 30, 2019 and December 31, 2018, respectively.
|
|
|
|
|
(2)
|
The carrying value is net of $0.1 million and $0.2 million of unamortized debt issuance costs as of September 30, 2019 and December 31, 2018, respectively.
|
As of September 30, 2019, there was $5.0 million outstanding under the Company’s revolving credit facility at an interest rate of 5.5%; this was fully repaid on October 1, 2019. The Company’s other indebtedness at September 30, 2019 and December 31, 2018 is at an interest rate of 2% and matures in 2026.
On January 31, 2019, the Company’s automotive subsidiary entered into a Commercial Note with SunTrust Bank in an aggregate principal amount of $30 million. The Commercial Note is payable over a 10 year period in monthly
installments of $0.25 million, plus accrued and unpaid interest, due on the first of each month, with a final payment on January 31, 2029. The Commercial Note bears interest at LIBOR plus an applicable interest rate of 1.75% or 2% per annum, in each case determined on a quarterly basis based upon the automotive subsidiary’s Adjusted Leverage Ratio. The Commercial Note contains terms and conditions, including remedies in the event of a default by the automotive subsidiary. On the same date, the Company’s automotive subsidiary entered into an interest rate swap agreement with a total notional value of $30 million and a maturity date of January 31, 2029. The interest rate swap agreement will pay the automotive subsidiary variable interest on the $30 million notional amount at the one-month LIBOR, and the automotive subsidiary will pay counterparties a fixed rate of 2.7%, effectively resulting in a total fixed interest rate of 4.7% on the outstanding borrowings at the current applicable margin of 2.0%. The interest rate swap agreement was entered into to convert the variable rate borrowing under the Commercial Note into a fixed rate borrowing. Based on the terms of the interest rate swap agreement and the underlying borrowing, the interest rate swap was determined to be effective and thus qualifies as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows.
On May 30, 2018, the Company issued $400 million senior unsecured fixed-rate notes due June 1, 2026 (the Notes). The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s existing and future domestic subsidiaries, as described in the terms of the indenture, dated as of May 30, 2018 (the Indenture). The Notes have a coupon rate of 5.75% per annum, payable semi-annually on June 1 and December 1. The Company may redeem the Notes in whole or in part at any time at the respective redemption prices described in the Indenture.
On June 29, 2018, the Company used the net proceeds from the sale of the Notes, together with cash on hand, to redeem the $400 million of 7.25% notes due February 1, 2019. The Company incurred $11.4 million in debt extinguishment costs in relation to the early termination of the 7.25% notes.
In combination with the issuance of the Notes, the Company and certain of the Company’s domestic subsidiaries named therein as guarantors entered into an amended and restated credit agreement providing for a U.S. $300 million five-year revolving credit facility (the Revolving Credit Facility) with each of the lenders party thereto, certain of the Company’s foreign subsidiaries from time to time party thereto as foreign borrowers, Wells Fargo Bank, N.A., as Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, N.A. and Bank of America, N.A. as Documentation Agents (the Amended and Restated Credit Agreement), which amends and restates the Company’s existing Five Year Credit Agreement, dated as of June 29, 2015, among the Company, certain of its domestic subsidiaries as guarantors, the several lenders from time to time party thereto, Wells Fargo Bank, N.A., as Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (the Existing Credit Agreement). The Amended and Restated Credit Agreement amends the Existing Credit Agreement to (i) extend the maturity of the Revolving Credit Facility to May 30, 2023, unless the Company and the lenders agree to further extend the term, (ii) increase the aggregate principal amount of the Revolving Credit Facility to U.S. $300 million, consisting of a U.S. Dollar tranche of U.S. $200 million for borrowings in U.S. Dollars and a multicurrency tranche equivalent to U.S. $100 million for borrowings in U.S. Dollars and certain foreign currencies, (iii) provide for borrowings under the Revolving Credit Facility in U.S. Dollars and certain other foreign currencies specified in the Amended and Restated Credit Agreement, (iv) permit certain foreign subsidiaries of the Company to be added to the Amended and Restated Credit Agreement as foreign borrowers thereunder and (v) effect certain other modifications to the Existing Credit Agreement.
Under the Amended and Restated Credit Agreement, the Company is required to pay a commitment fee on a quarterly basis, based on the Company’s leverage ratio, of between 0.15% and 0.25% of the amount of the average daily unused portion of the Revolving Credit Facility. Any borrowings under the Amended and Restated Credit Agreement are made on an unsecured basis and bear interest at the Company’s option, either at (a) a fluctuating interest rate equal to the highest of Wells Fargo’s prime rate, 0.5 percent above the Federal funds rate or the one-month Eurodollar rate plus 1%, or (b) the Eurodollar rate for the applicable currency and interest period as defined in the Amended and Restated Credit Agreement, which is generally a periodic rate equal to LIBOR, CDOR, BBSY or SOR, as applicable, in the case of each of clauses (a) and (b) plus an applicable margin that depends on the Company’s consolidated debt to consolidated adjusted EBITDA (as determined pursuant to the Amended and Restated Credit Agreement, Total Net Leverage Ratio). The Company and its foreign subsidiaries may draw on the Revolving Credit Facility for general corporate purposes. Any outstanding borrowings must be repaid on or prior to the final termination date. The Amended and Restated Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and requires the Company to maintain a Total Net Leverage Ratio of not greater than 3.5 to 1.0 and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the ratio of consolidated adjusted EBITDA to consolidated interest expense as determined pursuant to the Amended and Restated Credit Agreement. The Company is in compliance with all financial covenants as of September 30, 2019.
During the three months ended September 30, 2019 and 2018, the Company had average borrowings outstanding of approximately $501.1 million and $480.6 million, respectively, at average annual interest rates of approximately
5.1%. During the three months ended September 30, 2019 and 2018, the Company incurred net interest expense of $5.3 million and $5.5 million, respectively.
During the nine months ended September 30, 2019 and 2018, the Company had average borrowings outstanding of approximately $499.7 million and $529.2 million, respectively, at average annual interest rates of approximately 5.1% and 5.7%, respectively. During the nine months ended September 30, 2019 and 2018, the Company incurred net interest expense of $17.8 million and $27.5 million, respectively.
In June 2018, the Company incurred $6.2 million of interest expense related to the mandatorily redeemable noncontrolling interest redemption settlement at GHG (see note 2). The fair value of the mandatorily redeemable noncontrolling interest is based on the redemption value resulting from a negotiated settlement.
At September 30, 2019, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $432.3 million, compared with the carrying amount of $395.2 million. At December 31, 2018, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $406.7 million, compared with the carrying amount of $394.7 million. The carrying value of the Company’s other unsecured debt at September 30, 2019 and December 31, 2018 approximates fair value.
9. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
Marketable equity securities (1)
|
$
|
535,564
|
|
|
$
|
—
|
|
|
$
|
535,564
|
|
|
Other current investments (2)
|
13,601
|
|
|
5,045
|
|
|
18,646
|
|
|
Interest rate swap (3)
|
—
|
|
|
162
|
|
|
162
|
|
|
Total Financial Assets
|
$
|
549,165
|
|
|
$
|
5,207
|
|
|
$
|
554,372
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred compensation plan liabilities (4)
|
$
|
—
|
|
|
$
|
33,195
|
|
|
$
|
33,195
|
|
|
Interest rate swap (5)
|
—
|
|
|
706
|
|
|
706
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
33,901
|
|
|
$
|
33,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
Money market investments (6)
|
$
|
—
|
|
|
$
|
75,500
|
|
|
$
|
75,500
|
|
|
Marketable equity securities (1)
|
496,390
|
|
|
—
|
|
|
496,390
|
|
|
Other current investments (2)
|
11,203
|
|
|
6,988
|
|
|
18,191
|
|
|
Interest rate swap (3)
|
—
|
|
|
369
|
|
|
369
|
|
|
Total Financial Assets
|
$
|
507,593
|
|
|
$
|
82,857
|
|
|
$
|
590,450
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred compensation plan liabilities (4)
|
$
|
—
|
|
|
$
|
36,080
|
|
|
$
|
36,080
|
|
____________
|
|
|
|
(1)
|
The Company’s investments in marketable equity securities are held in common shares of U.S. corporations that are actively traded on U.S. stock exchanges. Price quotes for these shares are readily available.
|
|
|
|
|
(2)
|
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits. These investments are valued using a market approach based on the quoted market prices of the security or inputs that include quoted market prices for similar instruments and are classified as either Level 1 or Level 2 in the fair value hierarchy.
|
|
|
|
|
(3)
|
Included in Other Current Assets. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
|
|
|
|
|
(4)
|
Includes Graham Holdings Company’s Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company’s Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits. These plans measure the market value of a participant’s balance in a notional investment account that is comprised primarily of mutual funds, which are based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.
|
|
|
|
|
(5)
|
Included in Other Liabilities. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
|
|
|
|
|
(6)
|
The Company’s money market investments are included in Cash and Cash Equivalents and the value considers the liquidity of the counterparty.
|
During the three and nine months ended September 30, 2019, the Company recorded other long-lived asset impairment charges of $0.4 million and $1.1 million, respectively. In the third quarter of 2018, the Company recorded an other long-lived asset impairment charges of $8.1 million. The remeasurement of other long-lived
assets is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value. The Company used a discounted cash flow model to determine the estimated fair value of the other long-lived assets and made estimates and assumptions regarding future cash flows and discount rates.
During the three and nine months ended September 30, 2019, the Company recorded gains of $3.7 million and $5.1 million, respectively, to equity securities that are accounted for as cost method investments based on observable transactions.
During the three and nine months ended September 30, 2018, the Company recorded gains of $8.5 million to equity securities that are accounted for as cost method investments based on observable transactions.
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company generated 79% and 77% of its revenue from U.S. domestic sales for the three and nine months ended September 30, 2019, respectively. The remaining 21% and 23% of revenue was generated from non-U.S. sales for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2018, 78% and 76% of revenue was from U.S. domestic sales, respectively. The remaining 22% and 24% was generated from non-U.S. sales in the three and nine months ended September 30, 2018, respectively.
For the three months ended September 30, 2019, the Company recognized 70% of its revenue over time as control of the services and goods transferred to the customer, and 30% at a point in time, when the customer obtained control of the promised goods. For the nine months ended September 30, 2019, the Company recognized 74% of its revenue over time, and 26% at a point in time. For the three and nine months ended September 30, 2018, the Company recognized 80% of its revenue over time, and the remaining 20% at a point in time.
Deferred Revenue. The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance, including amounts which are refundable. The following table presents the change in the Company’s deferred revenue balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
%
|
|
(in thousands)
|
|
Change
|
|
Deferred revenue
|
$
|
341,682
|
|
|
$
|
311,214
|
|
10
|
The majority of the change in the deferred revenue balance is related to the cyclical nature of services at the Kaplan international division. During the nine months ended September 30, 2019, the Company recognized $254.4 million related to the Company’s deferred revenue balance as of December 31, 2018.
Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of September 30, 2019, KTP’s deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $8.9 million. KTP expects to recognize 66% of this revenue over the next twelve months and the remainder thereafter.
Costs to Obtain a Contract. The following table presents changes in the Company’s costs to obtain a contract asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at
Beginning
of Period
|
|
Costs associated with new contracts
|
|
Less: Costs amortized during the period
|
|
Other
|
|
Balance
at
End of
Period
|
|
2019
|
$
|
21,311
|
|
|
$
|
29,381
|
|
|
$
|
(34,729
|
)
|
|
$
|
(312
|
)
|
|
$
|
15,651
|
|
The majority of other activity is related to currency translation adjustments during the nine months ended September 30, 2019. Amortization expense for costs to obtain a contract was $9.2 million for the three months ended September 30, 2019.
11. EARNINGS PER SHARE
The Company’s unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of the earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.
The following reflects the Company’s net income and share data used in the basic and diluted earnings per share computations using the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(in thousands, except per share amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income attributable to Graham Holdings Company common stockholders
|
$
|
43,145
|
|
|
$
|
125,064
|
|
|
$
|
181,974
|
|
|
$
|
214,521
|
|
|
Less: Dividends paid-common stock outstanding and unvested restricted shares
|
(7,386
|
)
|
|
(7,048
|
)
|
|
(29,554
|
)
|
|
(28,635
|
)
|
|
Undistributed earnings
|
35,759
|
|
|
118,016
|
|
|
152,420
|
|
|
185,886
|
|
|
Percent allocated to common stockholders
|
99.44
|
%
|
|
99.34
|
%
|
|
99.44
|
%
|
|
99.34
|
%
|
|
|
35,559
|
|
|
117,235
|
|
|
151,570
|
|
|
184,657
|
|
|
Add: Dividends paid-common stock outstanding
|
7,345
|
|
|
7,001
|
|
|
29,389
|
|
|
28,447
|
|
|
Numerator for basic earnings per share
|
$
|
42,904
|
|
|
$
|
124,236
|
|
|
$
|
180,959
|
|
|
$
|
213,104
|
|
|
Add: Additional undistributed earnings due to dilutive stock options
|
2
|
|
|
5
|
|
|
7
|
|
|
8
|
|
|
Numerator for diluted earnings per share
|
$
|
42,906
|
|
|
$
|
124,241
|
|
|
$
|
180,966
|
|
|
$
|
213,112
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
5,285
|
|
|
5,302
|
|
|
5,285
|
|
|
5,354
|
|
|
Add: Effect of dilutive stock options
|
44
|
|
|
35
|
|
|
43
|
|
|
36
|
|
|
Denominator for diluted earnings per share
|
5,329
|
|
|
5,337
|
|
|
5,328
|
|
|
5,390
|
|
|
Graham Holdings Company Common Stockholders:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
8.12
|
|
|
$
|
23.43
|
|
|
$
|
34.24
|
|
|
$
|
39.81
|
|
|
Diluted earnings per share
|
$
|
8.05
|
|
|
$
|
23.28
|
|
|
$
|
33.96
|
|
|
$
|
39.54
|
|
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)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Weighted average restricted stock
|
14
|
|
|
21
|
|
|
12
|
|
|
23
|
|
The diluted earnings per share amounts for the three and nine months ended September 30, 2019 and September 30, 2018 exclude the effects of 104,000 stock options outstanding, as their inclusion would have been antidilutive due to a market condition. The diluted earnings per share amounts for the three and nine months ended September 30, 2018 exclude the effects of 5,250 restricted stock awards as their inclusion would have been antidilutive due to a performance condition.
In the three and nine months ended September 30, 2019, the Company declared regular dividends totaling $1.39 and $5.56 per common share, respectively. In the three and nine months ended September 30, 2018, the Company declared regular dividends totaling $1.33 and $5.32 per common share, respectively.
12. PENSION AND POSTRETIREMENT PLANS
On March 22, 2018, the Company eliminated the accrual of pension benefits for certain Kaplan University employees related to their future service. As a result, the Company remeasured the accumulated and projected benefit obligation of the pension plan as of March 22, 2018, and the Company recorded a curtailment gain in the first quarter of 2018. The new measurement basis was used for the recognition of the Company’s pension benefit following the remeasurement. The curtailment gain on the Kaplan University transaction is included in the gain on the Kaplan University transaction and reported in Other income, net on the Condensed Consolidated Statement of Operations.
Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
5,142
|
|
|
$
|
4,473
|
|
|
$
|
15,326
|
|
|
$
|
13,730
|
|
|
Interest cost
|
11,743
|
|
|
11,844
|
|
|
35,078
|
|
|
34,943
|
|
|
Expected return on assets
|
(30,832
|
)
|
|
(31,969
|
)
|
|
(91,955
|
)
|
|
(97,251
|
)
|
|
Amortization of prior service cost
|
824
|
|
|
36
|
|
|
2,058
|
|
|
114
|
|
|
Recognized actuarial gain
|
—
|
|
|
(2,974
|
)
|
|
—
|
|
|
(6,994
|
)
|
|
Net Periodic Benefit
|
(13,123
|
)
|
|
(18,590
|
)
|
|
(39,493
|
)
|
|
(55,458
|
)
|
|
Curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(806
|
)
|
|
Special separation benefit expense
|
(175
|
)
|
|
—
|
|
|
6,432
|
|
|
—
|
|
|
Total Benefit
|
$
|
(13,298
|
)
|
|
$
|
(18,590
|
)
|
|
$
|
(33,061
|
)
|
|
$
|
(56,264
|
)
|
In the second quarter of 2019, the Company offered a Separation Incentive Program (SIP) for certain Kaplan employees, which was funded from the assets of the Company’s pension plan. The Company recorded $6.4 million in expense related to the SIP for the nine months ended September 30, 2019.
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)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
214
|
|
|
$
|
205
|
|
|
$
|
643
|
|
|
$
|
614
|
|
|
Interest cost
|
1,079
|
|
|
967
|
|
|
3,236
|
|
|
2,899
|
|
|
Amortization of prior service cost
|
85
|
|
|
77
|
|
|
254
|
|
|
233
|
|
|
Recognized actuarial loss
|
579
|
|
|
600
|
|
|
1,736
|
|
|
1,802
|
|
|
Net Periodic Cost
|
$
|
1,957
|
|
|
$
|
1,849
|
|
|
$
|
5,869
|
|
|
$
|
5,548
|
|
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,
2019
|
|
December 31,
2018
|
|
|
|
|
U.S. equities
|
55
|
%
|
|
53
|
%
|
|
U.S. stock index fund
|
21
|
%
|
|
28
|
%
|
|
U.S. fixed income
|
17
|
%
|
|
13
|
%
|
|
International equities
|
7
|
%
|
|
6
|
%
|
|
|
100
|
%
|
|
100
|
%
|
The Company manages approximately 44% 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 56% of plan assets are managed by two investment companies. The goal for the investments is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both investment managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. One investment manager cannot invest more than 15% of the assets at the time of purchase in the stock of Alphabet and Berkshire Hathaway, no more than 30% of the assets it manages in specified international exchanges at the time the investment is made, and no less than 5% of the assets could be invested in fixed-income securities. The other investment manager cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway, no more than 15% of the assets it manages in specified international exchanges, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. Excluding the exceptions noted above, the investment managers cannot invest more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval from the Plan administrator.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2019. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At September 30, 2019 and December 31, 2018, the pension plan held investments in one common stock and one U.S. stock index fund that exceeded 10% of total plan assets. These investments were valued at $853.3 million and $945.6 million at September 30, 2019 and December 31, 2018, respectively, or approximately 35% and 45%, respectively, of total plan assets.
Other Postretirement Plans. The total cost arising from the Company’s other postretirement plans consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
—
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
Interest cost
|
72
|
|
|
170
|
|
|
216
|
|
|
509
|
|
|
Amortization of prior service credit
|
(1,841
|
)
|
|
(44
|
)
|
|
(5,522
|
)
|
|
(132
|
)
|
|
Recognized actuarial gain
|
(1,090
|
)
|
|
(921
|
)
|
|
(3,270
|
)
|
|
(2,764
|
)
|
|
Net Periodic Benefit
|
$
|
(2,859
|
)
|
|
$
|
(528
|
)
|
|
$
|
(8,576
|
)
|
|
$
|
(1,584
|
)
|
13. OTHER NON-OPERATING INCOME
A summary of non-operating income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Gain on sale of an equity affiliate
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,994
|
|
|
$
|
—
|
|
|
Gain on cost method investments
|
3,669
|
|
|
8,487
|
|
|
5,080
|
|
|
8,487
|
|
|
Foreign currency gain (loss), net
|
661
|
|
|
(116
|
)
|
|
1,284
|
|
|
(2,205
|
)
|
|
Impairment of a cost method investment
|
—
|
|
|
(2,500
|
)
|
|
—
|
|
|
(2,500
|
)
|
|
Gain on sales of businesses
|
486
|
|
|
916
|
|
|
907
|
|
|
8,157
|
|
|
Gain on sale of cost method investments
|
259
|
|
|
—
|
|
|
259
|
|
|
2,845
|
|
|
(Loss) gain on sale of property, plant and equipment
|
(38
|
)
|
|
—
|
|
|
(82
|
)
|
|
2,542
|
|
|
Other gain (loss), net
|
519
|
|
|
(3,645
|
)
|
|
(307
|
)
|
|
(2,664
|
)
|
|
Total Other Non-Operating Income
|
$
|
5,556
|
|
|
$
|
3,142
|
|
|
$
|
36,135
|
|
|
$
|
14,662
|
|
In the third quarter of 2019, the Company recorded a $3.7 million gain resulting from observable price changes in the fair value of equity securities accounted for under the cost method.
In the first quarter of 2019, the Company recorded a $1.3 million gain resulting from observable price changes in the fair value of equity securities accounted for under the cost method.
In the first quarter of 2019, the Company recorded a $29.0 million gain on the sale of the Company’s interest in Gimlet Media.
In the third quarter of 2018, the Company recorded an $8.5 million gain resulting from observable price changes in the fair value of equity securities accounted for under the cost method.
In the first nine months of 2018, the Company recorded an $8.2 million gain on the sale of three businesses in the education division, including a gain of $4.3 million on the Kaplan University transaction and a $1.9 million in contingent consideration gains related to the sale of a business (see Note 2).
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive loss consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
|
2019
|
|
2018
|
|
|
Before-Tax
|
|
Income
|
|
After-Tax
|
|
Before-Tax
|
|
Income
|
|
After-Tax
|
|
(in thousands)
|
Amount
|
|
Tax
|
|
Amount
|
|
Amount
|
|
Tax
|
|
Amount
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments arising during the period
|
$
|
(16,684
|
)
|
|
$
|
—
|
|
|
$
|
(16,684
|
)
|
|
$
|
(2,844
|
)
|
|
$
|
—
|
|
|
$
|
(2,844
|
)
|
|
Pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service (credit) cost included in net income
|
(932
|
)
|
|
252
|
|
|
(680
|
)
|
|
69
|
|
|
(18
|
)
|
|
51
|
|
|
Amortization of net actuarial gain included in net income
|
(511
|
)
|
|
138
|
|
|
(373
|
)
|
|
(3,295
|
)
|
|
891
|
|
|
(2,404
|
)
|
|
|
(1,443
|
)
|
|
390
|
|
|
(1,053
|
)
|
|
(3,226
|
)
|
|
873
|
|
|
(2,353
|
)
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
(477
|
)
|
|
128
|
|
|
(349
|
)
|
|
(6
|
)
|
|
1
|
|
|
(5
|
)
|
|
Other Comprehensive Loss
|
$
|
(18,604
|
)
|
|
$
|
518
|
|
|
$
|
(18,086
|
)
|
|
$
|
(6,076
|
)
|
|
$
|
874
|
|
|
$
|
(5,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
2019
|
|
2018
|
|
|
Before-Tax
|
|
Income
|
|
After-Tax
|
|
Before-Tax
|
|
Income
|
|
After-Tax
|
|
(in thousands)
|
Amount
|
|
Tax
|
|
Amount
|
|
Amount
|
|
Tax
|
|
Amount
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments arising during the period
|
$
|
(17,755
|
)
|
|
$
|
—
|
|
|
$
|
(17,755
|
)
|
|
$
|
(22,447
|
)
|
|
$
|
—
|
|
|
$
|
(22,447
|
)
|
|
Pension and other postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service (credit) cost included in net income
|
(3,210
|
)
|
|
867
|
|
|
(2,343
|
)
|
|
215
|
|
|
(58
|
)
|
|
157
|
|
|
Amortization of net actuarial gain included in net income
|
(1,534
|
)
|
|
414
|
|
|
(1,120
|
)
|
|
(7,956
|
)
|
|
2,148
|
|
|
(5,808
|
)
|
|
|
(4,744
|
)
|
|
1,281
|
|
|
(3,463
|
)
|
|
(7,741
|
)
|
|
2,090
|
|
|
(5,651
|
)
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain for the period
|
(904
|
)
|
|
231
|
|
|
(673
|
)
|
|
601
|
|
|
(114
|
)
|
|
487
|
|
|
Other Comprehensive Loss
|
$
|
(23,403
|
)
|
|
$
|
1,512
|
|
|
$
|
(21,891
|
)
|
|
$
|
(29,587
|
)
|
|
$
|
1,976
|
|
|
$
|
(27,611
|
)
|
The accumulated balances related to each component of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, net of taxes)
|
Cumulative
Foreign
Currency
Translation
Adjustment
|
|
Unrealized Gain
on Pensions
and Other
Postretirement
Plans
|
|
Cash Flow
Hedges
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balance as of December 31, 2018
|
$
|
(29,270
|
)
|
|
$
|
232,836
|
|
|
$
|
263
|
|
|
$
|
203,829
|
|
|
Other comprehensive loss before reclassifications
|
(17,755
|
)
|
|
—
|
|
|
(562
|
)
|
|
(18,317
|
)
|
|
Net amount reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(3,463
|
)
|
|
(111
|
)
|
|
(3,574
|
)
|
|
Other comprehensive loss, net of tax
|
(17,755
|
)
|
|
(3,463
|
)
|
|
(673
|
)
|
|
(21,891
|
)
|
|
Balance as of September 30, 2019
|
$
|
(47,025
|
)
|
|
$
|
229,373
|
|
|
$
|
(410
|
)
|
|
$
|
181,938
|
|
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 Statements of Operations
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Pension and Other Postretirement Plans:
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior service (credit) cost
|
$
|
(932
|
)
|
|
$
|
69
|
|
|
$
|
(3,210
|
)
|
|
$
|
215
|
|
|
(1)
|
|
Amortization of net actuarial gain
|
(511
|
)
|
|
(3,295
|
)
|
|
(1,534
|
)
|
|
(7,956
|
)
|
|
(1)
|
|
|
(1,443
|
)
|
|
(3,226
|
)
|
|
(4,744
|
)
|
|
(7,741
|
)
|
|
Before tax
|
|
|
390
|
|
|
873
|
|
|
1,281
|
|
|
2,090
|
|
|
Provision for Income Taxes
|
|
|
(1,053
|
)
|
|
(2,353
|
)
|
|
(3,463
|
)
|
|
(5,651
|
)
|
|
Net of Tax
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
(59
|
)
|
|
(151
|
)
|
|
(101
|
)
|
|
Interest expense
|
|
|
11
|
|
|
11
|
|
|
40
|
|
|
19
|
|
|
Provision for Income Taxes
|
|
|
(13
|
)
|
|
(48
|
)
|
|
(111
|
)
|
|
(82
|
)
|
|
Net of Tax
|
|
Total reclassification for the period
|
$
|
(1,066
|
)
|
|
$
|
(2,401
|
)
|
|
$
|
(3,574
|
)
|
|
$
|
(5,733
|
)
|
|
Net of Tax
|
____________
|
|
|
|
(1)
|
These accumulated other comprehensive income components are components of net periodic pension and postretirement plan cost (see Note 12) and are included in non-operating pension and postretirement benefit income in the Company’s Condensed Consolidated Statements of Operations.
|
15. CONTINGENCIES AND REGULATORY MATTERS
Litigation, Legal and Other Matters. The Company and its subsidiaries are subject to complaints and administrative proceedings and are defendants in various civil lawsuits that have arisen in the ordinary course of their businesses, including contract disputes; actions alleging negligence, libel, defamation and invasion of privacy; trademark, copyright and patent infringement; violations of applicable wage and hour laws; and statutory or common law claims involving current and former students and employees. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. However, based on currently available information, management believes it is reasonably possible that future losses from existing and threatened legal, regulatory and other proceedings in excess of the amounts recorded could reach approximately $15 million.
On September 3, 2015, Kaplan sold to ECA substantially all of the assets of KHE nationally accredited on-ground Title IV eligible schools (KHE Campuses). The transaction included the transfer of certain real estate leases that were guaranteed by Kaplan. As part of the transaction, Kaplan retained liability for, among other things, obligations arising under certain lease guarantees. ECA is currently in receivership, has terminated all of its higher education operations and has sold the New England College of Business (NECB). The receiver has repudiated all of ECA’s real estate leases. Although ECA is required to indemnify Kaplan for any amounts Kaplan must pay due to ECA’s failure to fulfill its obligations under real estate leases guaranteed by Kaplan, ECA’s financial situation and the existence of secured and unsecured creditors make it unlikely that Kaplan will recover from ECA. In the second half of 2018, the Company recorded an estimated $17.5 million in losses on guarantor lease obligations in connection with this transaction in other non-operating expense. The Company continues to monitor the status of these obligations and there was no significant change to estimated losses in the first nine months of 2019.
Her Majesty’s Revenue and Customs (HMRC), a department of the U.K. government responsible for the collection of taxes, has raised assessments against the Kaplan U.K. Pathways business for Value Added Tax (VAT) relating to years 2014 to 2017, which have been paid by Kaplan. In September 2017, in a case captioned Kaplan International Colleges UK Limited v. The Commissioners for Her Majesty’s Revenue and Customs, Kaplan challenged these assessments. The Company believes it has met all requirements under U.K. VAT law and is entitled to recover the £17.3 million receivable related to the assessments and subsequent payments that have been paid through September 30, 2019. Following a hearing held in January 2019 before the First Tier Tax Tribunal, all issues related to EU law in the case were referred to the Court of Justice of the European Union. In the third quarter of 2019, the Company has recorded a full provision of £17.3 million against this receivable to expense, due to recent developments in the case. Of this amount, £14.1 million relates to years 2014 to 2018. If the Company ultimately prevails in this case, the provision will be reversed and a pre-tax credit will be recorded as a reduction to expense in the Company’s Condensed Consolidated Statement of Operations. The result of the case is expected to be known by the end of 2020.
In a separate matter, there was a legal case awaiting judgment at the Supreme Court in the U.K. as of December 31, 2018 that could have impacted U.K. Pathways’ ability to receive the benefit of an exemption from charging its students VAT on tuition fees. The case could have reversed or amended the law and guidance permitting private
providers to qualify as a “college of a university” and, therefore, receive the benefit of an exemption from charging its students VAT on tuition fees. However the Supreme Court decided the case in the college’s favor. The result was more favorable to private providers working in collaboration with a university than the opposing view. The Supreme Court emphasized five key tests for a private provider to satisfy so that it could exempt its services as a “college of a university”, even if it did not have a constitutional link to the university. Satisfying these tests would generally show that the college had a sufficiently close relationship with the university and its activities were sufficiently integrated with the university, to constitute a “college of a university”. Although the new test has now been incorporated into official HMRC guidance, it is not yet clear how HMRC will apply the Supreme Court judgment and the five key tests in practice.
Department of Education (ED) Program Reviews. The ED has undertaken program reviews at various KHE locations.
In February 2015, the ED began a program review assessing KU’s administration of its Title IV and Higher Education Act programs during the 2013-2014 and 2014-2015 award years. In 2018, Kaplan contributed the institutional assets and operations of KU to Purdue Global, and the university became Purdue Global, under the ownership and control of Purdue University. However, Kaplan retained liability for any financial obligations the ED might impose under this program review and that are the result of actions taken during the time that Kaplan owned the institution. In September 2018, the ED issued a Preliminary Program Report (Preliminary Report) and none of the initial findings in the Preliminary Report carried material financial liability. Although the program review technically covers only the 2013-2015 award years, the ED included a review of the treatment of student financial aid refunds for students who withdrew from a program prior to completion in 2017-2018. In August 2019, the ED issued a Final Program Report, with a nominal financial liability.
There were two other open program reviews at campuses that were part of the KHE Campuses business prior to its sale in 2015 to ECA. The ED’s reports on the program reviews at former KHE Broomall, PA, and Pittsburgh, PA, locations were recently finalized with no additional financial obligation.
Regulatory Matters. In November 2018, Kaplan Learning Institute in Singapore (KLI) was notified by SkillsFuture Singapore (SSG), a statutory board under the Singapore Ministry of Education, that its right to deliver workforce skills qualifications (WSQ) courses under the Leadership & People Management framework would be suspended for six months from December 1, 2018. In June 2019, SSG notified KLI that from July 1, 2019, SSG was suspending KLI’s WSQ Approved Training Organization status for twelve months and terminating its WSQ course accreditation and funding due to findings of non-compliance with WSQ assessment principles. Kaplan Singapore has subsequently begun the process of voluntarily de-registering KLI as a Private Education institution. These actions have and will continue to adversely impact Kaplan Singapore’s revenues and operating results for 2019, as compared to 2018.
16. BUSINESS SEGMENTS
The Company changed the presentation of its segments in the third quarter of 2019 into the following eight reportable segments: Kaplan International, Kaplan Higher Education, Kaplan Test Preparation, Kaplan Professional (U.S.), Television Broadcasting, Manufacturing, Healthcare, and SocialCode.
The following tables summarize the financial information related to each of the Company’s business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
(in thousands)
|
|
2019
|
|
2019
|
|
2019
|
|
Operating Revenues
|
|
|
|
|
|
|
|
Education
|
|
$
|
372,454
|
|
|
$
|
367,763
|
|
|
$
|
357,319
|
|
|
Television broadcasting
|
|
108,223
|
|
|
116,628
|
|
|
115,161
|
|
|
Manufacturing
|
|
115,157
|
|
|
114,873
|
|
|
111,676
|
|
|
Healthcare
|
|
37,728
|
|
|
40,641
|
|
|
40,688
|
|
|
SocialCode
|
|
13,447
|
|
|
16,382
|
|
|
15,975
|
|
|
Other businesses
|
|
45,230
|
|
|
81,359
|
|
|
98,225
|
|
|
Corporate office
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment elimination
|
|
(40
|
)
|
|
(44
|
)
|
|
(224
|
)
|
|
|
|
$
|
692,199
|
|
|
$
|
737,602
|
|
|
$
|
738,820
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
Education
|
|
$
|
25,595
|
|
|
$
|
26,305
|
|
|
$
|
(7,161
|
)
|
|
Television broadcasting
|
|
35,540
|
|
|
44,494
|
|
|
36,813
|
|
|
Manufacturing
|
|
3,274
|
|
|
4,692
|
|
|
6,845
|
|
|
Healthcare
|
|
2,329
|
|
|
2,598
|
|
|
1,208
|
|
|
SocialCode
|
|
(4,018
|
)
|
|
(975
|
)
|
|
(378
|
)
|
|
Other businesses
|
|
(8,493
|
)
|
|
(5,913
|
)
|
|
(9,029
|
)
|
|
Corporate office
|
|
(14,224
|
)
|
|
(13,238
|
)
|
|
(12,030
|
)
|
|
|
|
$
|
40,003
|
|
|
$
|
57,963
|
|
|
$
|
16,268
|
|
|
Equity in Earnings of Affiliates, Net
|
|
1,679
|
|
|
1,467
|
|
|
4,683
|
|
|
Interest Expense, Net
|
|
(5,725
|
)
|
|
(6,807
|
)
|
|
(5,302
|
)
|
|
Non-Operating Pension and Postretirement Benefit Income, Net
|
|
19,928
|
|
|
12,253
|
|
|
19,556
|
|
|
Gain on Marketable Equity Securities, Net
|
|
24,066
|
|
|
7,791
|
|
|
17,404
|
|
|
Other Income, Net
|
|
29,351
|
|
|
1,228
|
|
|
5,556
|
|
|
Income Before Income Taxes
|
|
$
|
109,302
|
|
|
$
|
73,895
|
|
|
$
|
58,165
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
Education
|
|
$
|
6,201
|
|
|
$
|
6,137
|
|
|
$
|
6,258
|
|
|
Television broadcasting
|
|
3,239
|
|
|
3,293
|
|
|
3,307
|
|
|
Manufacturing
|
|
2,433
|
|
|
2,384
|
|
|
2,671
|
|
|
Healthcare
|
|
610
|
|
|
607
|
|
|
566
|
|
|
SocialCode
|
|
152
|
|
|
384
|
|
|
356
|
|
|
Other businesses
|
|
648
|
|
|
837
|
|
|
1,974
|
|
|
Corporate office
|
|
240
|
|
|
242
|
|
|
219
|
|
|
|
|
$
|
13,523
|
|
|
$
|
13,884
|
|
|
$
|
15,351
|
|
|
Amortization of Intangible Assets and Impairment of Long-Lived Assets
|
|
|
|
|
|
|
|
Education
|
|
$
|
3,567
|
|
|
$
|
4,070
|
|
|
$
|
3,944
|
|
|
Television broadcasting
|
|
1,408
|
|
|
1,408
|
|
|
1,408
|
|
|
Manufacturing
|
|
6,530
|
|
|
6,528
|
|
|
6,522
|
|
|
Healthcare
|
|
1,398
|
|
|
1,410
|
|
|
1,914
|
|
|
SocialCode
|
|
157
|
|
|
157
|
|
|
156
|
|
|
Other businesses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate office
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
13,060
|
|
|
$
|
13,573
|
|
|
$
|
13,944
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
Education
|
|
$
|
2,664
|
|
|
$
|
2,522
|
|
|
$
|
2,603
|
|
|
Television broadcasting
|
|
731
|
|
|
780
|
|
|
762
|
|
|
Manufacturing
|
|
25
|
|
|
15
|
|
|
20
|
|
|
Healthcare
|
|
183
|
|
|
63
|
|
|
123
|
|
|
SocialCode
|
|
248
|
|
|
191
|
|
|
219
|
|
|
Other businesses
|
|
201
|
|
|
161
|
|
|
215
|
|
|
Corporate office
|
|
1,169
|
|
|
1,231
|
|
|
1,200
|
|
|
|
|
$
|
5,221
|
|
|
$
|
4,963
|
|
|
$
|
5,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
(in thousands)
|
2018
|
|
2018
|
|
2018
|
|
2018
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
Education
|
$
|
375,499
|
|
|
$
|
370,005
|
|
|
$
|
358,601
|
|
|
$
|
346,910
|
|
|
Television broadcasting
|
108,802
|
|
|
114,086
|
|
|
130,014
|
|
|
152,647
|
|
|
Manufacturing
|
117,406
|
|
|
126,462
|
|
|
126,028
|
|
|
117,723
|
|
|
Healthcare
|
37,621
|
|
|
38,208
|
|
|
35,486
|
|
|
37,960
|
|
|
SocialCode
|
13,299
|
|
|
14,770
|
|
|
13,781
|
|
|
16,878
|
|
|
Other businesses
|
6,833
|
|
|
9,167
|
|
|
10,856
|
|
|
17,024
|
|
|
Corporate office
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment elimination
|
(24
|
)
|
|
(21
|
)
|
|
—
|
|
|
(55
|
)
|
|
|
$
|
659,436
|
|
|
$
|
672,677
|
|
|
$
|
674,766
|
|
|
$
|
689,087
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
Education
|
$
|
22,700
|
|
|
$
|
37,554
|
|
|
$
|
22,262
|
|
|
$
|
14,620
|
|
|
Television broadcasting
|
40,542
|
|
|
41,118
|
|
|
55,453
|
|
|
73,420
|
|
|
Manufacturing
|
8,628
|
|
|
8,665
|
|
|
5,146
|
|
|
6,412
|
|
|
Healthcare
|
(1,391
|
)
|
|
764
|
|
|
(8,702
|
)
|
|
928
|
|
|
SocialCode
|
(3,781
|
)
|
|
(1,742
|
)
|
|
5,124
|
|
|
(682
|
)
|
|
Other businesses
|
(8,542
|
)
|
|
(7,977
|
)
|
|
(5,657
|
)
|
|
(5,840
|
)
|
|
Corporate office
|
(13,942
|
)
|
|
(12,756
|
)
|
|
(12,887
|
)
|
|
(13,276
|
)
|
|
|
$
|
44,214
|
|
|
$
|
65,626
|
|
|
$
|
60,739
|
|
|
$
|
75,582
|
|
|
Equity in Earnings of Affiliates, Net
|
2,579
|
|
|
931
|
|
|
9,537
|
|
|
1,426
|
|
|
Interest Expense, Net
|
(6,699
|
)
|
|
(15,264
|
)
|
|
(5,524
|
)
|
|
(5,062
|
)
|
|
Debt Extinguishment Costs
|
—
|
|
|
(11,378
|
)
|
|
—
|
|
|
—
|
|
|
Non-Operating Pension and Postretirement Benefit Income
|
21,386
|
|
|
23,041
|
|
|
22,214
|
|
|
53,900
|
|
|
(Loss) Gain on Marketable Equity Securities, Net
|
(14,102
|
)
|
|
(2,554
|
)
|
|
44,962
|
|
|
(44,149
|
)
|
|
Other Income (Loss), Net
|
9,187
|
|
|
2,333
|
|
|
3,142
|
|
|
(12,559
|
)
|
|
Income from Continuing Operations Before Income Taxes
|
$
|
56,565
|
|
|
$
|
62,735
|
|
|
$
|
135,070
|
|
|
$
|
69,138
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
Education
|
$
|
7,606
|
|
|
$
|
6,839
|
|
|
$
|
6,685
|
|
|
$
|
6,969
|
|
|
Television broadcasting
|
3,071
|
|
|
2,974
|
|
|
3,198
|
|
|
3,961
|
|
|
Manufacturing
|
2,451
|
|
|
2,331
|
|
|
2,333
|
|
|
2,400
|
|
|
Healthcare
|
653
|
|
|
647
|
|
|
648
|
|
|
629
|
|
|
SocialCode
|
233
|
|
|
200
|
|
|
187
|
|
|
177
|
|
|
Other businesses
|
375
|
|
|
375
|
|
|
345
|
|
|
428
|
|
|
Corporate office
|
253
|
|
|
253
|
|
|
252
|
|
|
249
|
|
|
|
$
|
14,642
|
|
|
$
|
13,619
|
|
|
$
|
13,648
|
|
|
$
|
14,813
|
|
|
Amortization of Intangible Assets and Impairment of Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
$
|
1,149
|
|
|
$
|
1,663
|
|
|
$
|
2,682
|
|
|
$
|
3,868
|
|
|
Television broadcasting
|
1,408
|
|
|
1,408
|
|
|
1,408
|
|
|
1,408
|
|
|
Manufacturing
|
5,936
|
|
|
5,935
|
|
|
6,345
|
|
|
6,530
|
|
|
Healthcare
|
1,808
|
|
|
1,809
|
|
|
9,839
|
|
|
1,399
|
|
|
SocialCode
|
83
|
|
|
584
|
|
|
104
|
|
|
157
|
|
|
Other businesses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate office
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
10,384
|
|
|
$
|
11,399
|
|
|
$
|
20,378
|
|
|
$
|
13,362
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
$
|
2,664
|
|
|
$
|
1,878
|
|
|
$
|
2,107
|
|
|
$
|
2,104
|
|
|
Television broadcasting
|
493
|
|
|
601
|
|
|
544
|
|
|
550
|
|
|
Manufacturing
|
17
|
|
|
19
|
|
|
18
|
|
|
18
|
|
|
Healthcare
|
122
|
|
|
165
|
|
|
143
|
|
|
143
|
|
|
SocialCode
|
156
|
|
|
205
|
|
|
181
|
|
|
181
|
|
|
Other businesses
|
116
|
|
|
154
|
|
|
147
|
|
|
161
|
|
|
Corporate office
|
1,372
|
|
|
1,295
|
|
|
1,333
|
|
|
1,334
|
|
|
|
$
|
4,940
|
|
|
$
|
4,317
|
|
|
$
|
4,473
|
|
|
$
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Year Ended
|
|
|
September 30
|
|
December 31
|
|
(in thousands)
|
2019
|
|
2018
|
|
2018
|
|
2017
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
Education
|
$
|
1,097,536
|
|
|
$
|
1,104,105
|
|
|
$
|
1,451,015
|
|
|
$
|
1,516,776
|
|
|
Television broadcasting
|
340,012
|
|
|
352,902
|
|
|
505,549
|
|
|
409,916
|
|
|
Manufacturing
|
341,706
|
|
|
369,896
|
|
|
487,619
|
|
|
414,193
|
|
|
Healthcare
|
119,057
|
|
|
111,315
|
|
|
149,275
|
|
|
154,202
|
|
|
SocialCode
|
45,804
|
|
|
41,850
|
|
|
58,728
|
|
|
62,077
|
|
|
Other businesses
|
224,814
|
|
|
26,856
|
|
|
43,880
|
|
|
34,733
|
|
|
Corporate office
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intersegment elimination
|
(308
|
)
|
|
(45
|
)
|
|
(100
|
)
|
|
(51
|
)
|
|
|
$
|
2,168,621
|
|
|
$
|
2,006,879
|
|
|
$
|
2,695,966
|
|
|
$
|
2,591,846
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
Education
|
$
|
44,739
|
|
|
$
|
82,516
|
|
|
$
|
97,136
|
|
|
$
|
77,687
|
|
|
Television broadcasting
|
116,847
|
|
|
137,113
|
|
|
210,533
|
|
|
139,258
|
|
|
Manufacturing
|
14,811
|
|
|
22,439
|
|
|
28,851
|
|
|
14,947
|
|
|
Healthcare
|
6,135
|
|
|
(9,329
|
)
|
|
(8,401
|
)
|
|
(2,569
|
)
|
|
SocialCode
|
(5,371
|
)
|
|
(399
|
)
|
|
(1,081
|
)
|
|
(3,674
|
)
|
|
Other businesses
|
(23,435
|
)
|
|
(22,176
|
)
|
|
(28,016
|
)
|
|
(30,536
|
)
|
|
Corporate office
|
(39,492
|
)
|
|
(39,585
|
)
|
|
(52,861
|
)
|
|
(58,710
|
)
|
|
|
$
|
114,234
|
|
|
$
|
170,579
|
|
|
$
|
246,161
|
|
|
$
|
136,403
|
|
|
Equity in Earnings (Losses) of Affiliates, Net
|
7,829
|
|
|
13,047
|
|
|
14,473
|
|
|
(3,249
|
)
|
|
Interest Expense, Net
|
(17,834
|
)
|
|
(27,487
|
)
|
|
(32,549
|
)
|
|
(27,305
|
)
|
|
Debt Extinguishment Costs
|
—
|
|
|
(11,378
|
)
|
|
(11,378
|
)
|
|
—
|
|
|
Non-Operating Pension and Postretirement Benefit Income, Net
|
51,737
|
|
|
66,641
|
|
|
120,541
|
|
|
72,699
|
|
|
Gain (Loss) on Marketable Equity Securities, Net
|
49,261
|
|
|
28,306
|
|
|
(15,843
|
)
|
|
—
|
|
|
Other Income, Net
|
36,135
|
|
|
14,662
|
|
|
2,103
|
|
|
4,241
|
|
|
Income Before Income Taxes
|
$
|
241,362
|
|
|
$
|
254,370
|
|
|
$
|
323,508
|
|
|
$
|
182,789
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
Education
|
$
|
18,596
|
|
|
$
|
21,130
|
|
|
$
|
28,099
|
|
|
$
|
32,906
|
|
|
Television broadcasting
|
9,839
|
|
|
9,243
|
|
|
13,204
|
|
|
12,179
|
|
|
Manufacturing
|
7,488
|
|
|
7,115
|
|
|
9,515
|
|
|
9,173
|
|
|
Healthcare
|
1,783
|
|
|
1,948
|
|
|
2,577
|
|
|
4,583
|
|
|
SocialCode
|
892
|
|
|
620
|
|
|
797
|
|
|
1,004
|
|
|
Other businesses
|
3,459
|
|
|
1,095
|
|
|
1,523
|
|
|
1,546
|
|
|
Corporate office
|
701
|
|
|
758
|
|
|
1,007
|
|
|
1,118
|
|
|
|
$
|
42,758
|
|
|
$
|
41,909
|
|
|
$
|
56,722
|
|
|
$
|
62,509
|
|
|
Amortization of Intangible Assets and Impairment of Goodwill and Other Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
Education
|
$
|
11,581
|
|
|
$
|
5,494
|
|
|
$
|
9,362
|
|
|
$
|
5,162
|
|
|
Television broadcasting
|
4,224
|
|
|
4,224
|
|
|
5,632
|
|
|
6,349
|
|
|
Manufacturing
|
19,580
|
|
|
18,216
|
|
|
24,746
|
|
|
31,052
|
|
|
Healthcare
|
4,722
|
|
|
13,456
|
|
|
14,855
|
|
|
7,905
|
|
|
SocialCode
|
470
|
|
|
771
|
|
|
928
|
|
|
333
|
|
|
Other businesses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate office
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
40,577
|
|
|
$
|
42,161
|
|
|
$
|
55,523
|
|
|
$
|
50,801
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
|
|
Education
|
$
|
7,789
|
|
|
$
|
6,649
|
|
|
$
|
8,753
|
|
|
$
|
9,720
|
|
|
Television broadcasting
|
2,273
|
|
|
1,638
|
|
|
2,188
|
|
|
1,942
|
|
|
Manufacturing
|
60
|
|
|
54
|
|
|
72
|
|
|
79
|
|
|
Healthcare
|
369
|
|
|
430
|
|
|
573
|
|
|
665
|
|
|
SocialCode
|
658
|
|
|
542
|
|
|
723
|
|
|
593
|
|
|
Other businesses
|
577
|
|
|
417
|
|
|
578
|
|
|
453
|
|
|
Corporate office
|
3,600
|
|
|
4,000
|
|
|
5,334
|
|
|
5,235
|
|
|
|
$
|
15,326
|
|
|
$
|
13,730
|
|
|
$
|
18,221
|
|
|
$
|
18,687
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Education
|
|
|
|
|
$
|
54,159
|
|
|
$
|
27,520
|
|
|
Television broadcasting
|
|
|
|
|
27,013
|
|
|
16,802
|
|
|
Manufacturing
|
|
|
|
|
14,806
|
|
|
8,012
|
|
|
Healthcare
|
|
|
|
|
1,741
|
|
|
2,987
|
|
|
SocialCode
|
|
|
|
|
113
|
|
|
756
|
|
|
Other businesses
|
|
|
|
|
235
|
|
|
1,003
|
|
|
Corporate office
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
$
|
98,067
|
|
|
$
|
57,080
|
|
Asset information for the Company’s business segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in thousands)
|
September 30, 2019
|
|
December 31, 2018
|
|
Identifiable Assets
|
|
|
|
|
Education
|
$
|
1,925,819
|
|
|
$
|
1,568,747
|
|
|
Television broadcasting
|
470,915
|
|
|
452,853
|
|
|
Manufacturing
|
577,244
|
|
|
593,111
|
|
|
Healthcare
|
132,068
|
|
|
108,596
|
|
|
SocialCode
|
238,253
|
|
|
213,394
|
|
|
Other businesses
|
333,720
|
|
|
20,608
|
|
|
Corporate office
|
71,501
|
|
|
162,971
|
|
|
|
$
|
3,749,520
|
|
|
$
|
3,120,280
|
|
|
Investments in Marketable Equity Securities
|
535,564
|
|
|
496,390
|
|
|
Investments in Affiliates
|
163,986
|
|
|
143,813
|
|
|
Prepaid Pension Cost
|
1,038,676
|
|
|
1,003,558
|
|
|
Total Assets
|
$
|
5,487,746
|
|
|
$
|
4,764,041
|
|
The Company’s education division comprises the following operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine months ended
|
|
|
September 30
|
|
September 30
|
|
(in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
178,169
|
|
|
$
|
167,668
|
|
|
$
|
552,505
|
|
|
$
|
535,553
|
|
|
Higher education
|
78,712
|
|
|
89,269
|
|
|
237,780
|
|
|
275,080
|
|
|
Test preparation
|
64,710
|
|
|
67,749
|
|
|
191,533
|
|
|
195,504
|
|
|
Professional (U.S.)
|
33,820
|
|
|
34,302
|
|
|
110,181
|
|
|
98,715
|
|
|
Kaplan corporate and other
|
2,450
|
|
|
143
|
|
|
7,121
|
|
|
870
|
|
|
Intersegment elimination
|
(542
|
)
|
|
(530
|
)
|
|
(1,584
|
)
|
|
(1,617
|
)
|
|
|
$
|
357,319
|
|
|
$
|
358,601
|
|
|
$
|
1,097,536
|
|
|
$
|
1,104,105
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
(14,226
|
)
|
|
$
|
8,375
|
|
|
$
|
35,596
|
|
|
$
|
52,966
|
|
|
Higher education
|
5,177
|
|
|
6,042
|
|
|
9,813
|
|
|
18,616
|
|
|
Test preparation
|
4,959
|
|
|
10,572
|
|
|
8,794
|
|
|
17,213
|
|
|
Professional (U.S.)
|
4,939
|
|
|
6,768
|
|
|
20,943
|
|
|
20,863
|
|
|
Kaplan corporate and other
|
(8,011
|
)
|
|
(9,452
|
)
|
|
(30,405
|
)
|
|
(27,110
|
)
|
|
Intersegment elimination
|
1
|
|
|
(43
|
)
|
|
(2
|
)
|
|
(32
|
)
|
|
|
$
|
(7,161
|
)
|
|
$
|
22,262
|
|
|
$
|
44,739
|
|
|
$
|
82,516
|
|
|
Depreciation of Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
3,600
|
|
|
$
|
3,759
|
|
|
$
|
11,198
|
|
|
$
|
11,497
|
|
|
Higher education
|
840
|
|
|
915
|
|
|
2,066
|
|
|
4,047
|
|
|
Test preparation
|
774
|
|
|
1,033
|
|
|
2,358
|
|
|
2,984
|
|
|
Professional (U.S.)
|
978
|
|
|
859
|
|
|
2,802
|
|
|
2,171
|
|
|
Kaplan corporate and other
|
66
|
|
|
119
|
|
|
172
|
|
|
431
|
|
|
|
$
|
6,258
|
|
|
$
|
6,685
|
|
|
$
|
18,596
|
|
|
$
|
21,130
|
|
|
Amortization of Intangible Assets
|
$
|
3,944
|
|
|
$
|
2,682
|
|
|
$
|
10,888
|
|
|
$
|
5,494
|
|
|
Impairment of Long-lived Assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
693
|
|
|
$
|
—
|
|
|
Pension Service Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
114
|
|
|
$
|
66
|
|
|
$
|
341
|
|
|
$
|
233
|
|
|
Higher education
|
1,136
|
|
|
1,050
|
|
|
3,401
|
|
|
3,260
|
|
|
Test preparation
|
847
|
|
|
577
|
|
|
2,534
|
|
|
2,035
|
|
|
Professional (U.S.)
|
340
|
|
|
291
|
|
|
1,017
|
|
|
871
|
|
|
Kaplan corporate and other
|
166
|
|
|
123
|
|
|
496
|
|
|
250
|
|
|
|
$
|
2,603
|
|
|
$
|
2,107
|
|
|
$
|
7,789
|
|
|
$
|
6,649
|
|
Asset information for the Company’s education division is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
(in thousands)
|
September 30, 2019
|
|
December 31, 2018
|
|
Identifiable assets
|
|
|
|
|
Kaplan international
|
$
|
1,336,238
|
|
|
$
|
1,101,040
|
|
|
Higher education
|
202,553
|
|
|
126,752
|
|
|
Test preparation
|
165,471
|
|
|
145,308
|
|
|
Professional (U.S.)
|
154,568
|
|
|
166,916
|
|
|
Kaplan corporate and other
|
66,989
|
|
|
28,731
|
|
|
|
$
|
1,925,819
|
|
|
$
|
1,568,747
|
|
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company reported net income attributable to common shares of $43.1 million ($8.05 per share) for the third quarter of 2019, compared to $125.1 million ($23.28 per share) for the third quarter of 2018.
Items included in the Company’s net income for the third quarter of 2019:
|
|
|
|
•
|
a $20.4 million provision recorded at Kaplan International related to a Value Added Tax (VAT) receivable at UK Pathways (after-tax impact of $16.5 million, or $3.09 per share);
|
|
|
|
|
•
|
a $1.1 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of $0.9 million, or $0.16 per share);
|
|
|
|
|
•
|
$17.4 million in net gains on marketable equity securities (after-tax impact of $13.1 million, or $2.44 per share);
|
|
|
|
|
•
|
non-operating gain of $3.7 million from write-ups of cost method investments (after-tax impact of $2.8 million or $0.51 per share); and
|
|
|
|
|
•
|
$0.7 million in non-operating foreign currency gains (after-tax impact of $0.5 million, or $0.09 per share).
|
Items included in the Company’s net income for the third quarter of 2018:
|
|
|
|
•
|
a $7.9 million intangible asset impairment charge at the healthcare business (after-tax impact of $5.8 million, or $1.08 per share);
|
|
|
|
|
•
|
a $1.0 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of $0.8 million, or $0.14 per share);
|
|
|
|
|
•
|
$45.0 million in net gains on marketable equity securities (after-tax impact of $33.6 million, or $6.26 per share);
|
|
|
|
|
•
|
non-operating gain, net, of $10.1 million from sales, write-ups and impairments of cost method and equity method investments, and related to sales of businesses (after-tax impact of $8.0 million, or $1.48 per share);
|
|
|
|
|
•
|
$0.1 million in non-operating foreign currency losses (after-tax impact of $0.1 million, or $0.02 per share); and
|
|
|
|
|
•
|
a nonrecurring discrete $17.8 million deferred state tax benefit related to the release of valuation allowances ($3.31 per share).
|
Revenue for the third quarter of 2019 was $738.8 million, up 9% from $674.8 million in the third quarter of 2018, largely due to the acquisition of two automotive dealerships in January 2019 and the acquisition of Clyde’s Restaurant Group (CRG) in July 2019. Revenues grew at healthcare and SocialCode, partially offset by declines at the television broadcasting and manufacturing businesses. The Company reported operating income of $16.3 million for the third quarter of 2019, compared to $60.7 million for the third quarter of 2018. The operating income decline is driven by lower earnings in education, television broadcasting, SocialCode and other businesses, partially offset by improvements in manufacturing and healthcare results.
For the first nine months of 2019, the Company reported net income attributable to common shares of $182.0 million ($33.96 per share), compared to $214.5 million ($39.54 per share) for the first nine months of 2018.
Items included in the Company’s net income for the nine months of 2019:
|
|
|
|
•
|
a $17.1 million provision recorded at Kaplan International related to a VAT receivable at UK Pathways (after-tax impact of $13.9 million, or $2.59 per share);
|
|
|
|
|
•
|
a $10.7 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of $8.3 million, or $1.55 per share);
|
|
|
|
|
•
|
$6.6 million in expenses related to a second quarter non-operating Separation Incentive Program (SIP) at the education division (after-tax impact of $5.1 million, or $0.95 per share);
|
|
|
|
|
•
|
$49.3 million in net gains on marketable equity securities (after-tax impact of $36.9 million, or $6.90 per share);
|
|
|
|
|
•
|
non-operating gain of $5.1 million from write-ups of cost method investments (after-tax impact of $3.9 million or $0.73 per share);
|
|
|
|
|
•
|
$29.0 million gain from the sale of Gimlet Media (after-tax impact of $21.7 million, or $4.06 per share);
|
|
|
|
|
•
|
$1.3 million in non-operating foreign currency gains (after-tax impact of $1.0 million, or $0.18 per share); and
|
|
|
|
|
•
|
$1.7 million in income tax benefits related to stock compensation ($0.32 per share).
|
Items included in the Company’s net income for the nine months of 2018:
|
|
|
|
•
|
a $7.9 million intangible asset impairment charge at the healthcare business (after-tax impact of $5.8 million, or $1.08 per share);
|
|
|
|
|
•
|
a $2.1 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of $1.6 million, or $0.29 per share);
|
|
|
|
|
•
|
$6.2 million in interest expense related to the settlement of a mandatorily redeemable noncontrolling interest ($1.14 per share);
|
|
|
|
|
•
|
$11.4 million in debt extinguishment costs (after-tax impact of $8.6 million, or $1.60 per share);
|
|
|
|
|
•
|
$28.3 million in net losses on marketable equity securities (after-tax impact of $20.9 million, or $3.86 per share);
|
|
|
|
|
•
|
non-operating gain, net, of $17.0 million from sales, write-ups and impairments of cost method and equity method investments, and related to sales of land and businesses (after-tax impact of $13.4 million, or $2.46 per share);
|
|
|
|
|
•
|
a $4.3 million gain on the Kaplan University Transaction (after-tax impact of $1.8 million, or $0.33 per share);
|
|
|
|
|
•
|
$2.2 million in non-operating foreign currency losses (after-tax impact of $1.7 million, or $0.31 per share);
|
|
|
|
|
•
|
a nonrecurring discrete $17.8 million deferred state tax benefit related to the release of valuation allowances ($3.31 per share); and
|
|
|
|
|
•
|
$1.8 million in income tax benefits related to stock compensation ($0.33 per share).
|
Revenue for the first nine months of 2019 was $2,168.6 million, up 8% from $2,006.9 million in the first nine months of 2018, largely due to the acquisition of two automotive dealerships in January 2019 and the acquisition of CRG in July 2019. Revenues grew at healthcare and SocialCode, partially offset by declines at the education, television broadcasting and manufacturing businesses. The Company reported operating income of $114.2 million for the first nine months of 2019, compared to $170.6 million for the first nine months of 2018. Operating results declined at the education, television broadcasting, manufacturing, SocialCode and other businesses, partially offset by improvements at healthcare.
Division Results
Education
Education division revenue totaled $357.3 million for the third quarter of 2019, down slightly from $358.6 million for the same period of 2018. Kaplan reported an operating loss of $7.2 million for the third quarter of 2019, compared to operating income of $22.3 million for the third quarter of 2018.
For the first nine months of 2019, education division revenue totaled $1,097.5 million, down 1% from revenue of $1,104.1 million for the same period of 2018. Kaplan reported operating income of $44.7 million for the first nine months of 2019, a 46% decline from $82.5 million for the first nine months of 2018.
A summary of Kaplan’s operating results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
September 30
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
178,169
|
|
|
$
|
167,668
|
|
|
6
|
|
|
$
|
552,505
|
|
|
$
|
535,553
|
|
|
3
|
|
|
Higher education
|
78,712
|
|
|
89,269
|
|
|
(12
|
)
|
|
237,780
|
|
|
275,080
|
|
|
(14
|
)
|
|
Test preparation
|
64,710
|
|
|
67,749
|
|
|
(4
|
)
|
|
191,533
|
|
|
195,504
|
|
|
(2
|
)
|
|
Professional (U.S.)
|
33,820
|
|
|
34,302
|
|
|
(1
|
)
|
|
110,181
|
|
|
98,715
|
|
|
12
|
|
|
Kaplan corporate and other
|
2,450
|
|
|
143
|
|
|
—
|
|
|
7,121
|
|
|
870
|
|
|
—
|
|
|
Intersegment elimination
|
(542
|
)
|
|
(530
|
)
|
|
—
|
|
|
(1,584
|
)
|
|
(1,617
|
)
|
|
—
|
|
|
|
$
|
357,319
|
|
|
$
|
358,601
|
|
|
0
|
|
|
$
|
1,097,536
|
|
|
$
|
1,104,105
|
|
|
(1
|
)
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaplan international
|
$
|
(14,226
|
)
|
|
$
|
8,375
|
|
|
—
|
|
|
$
|
35,596
|
|
|
$
|
52,966
|
|
|
(33
|
)
|
|
Higher education
|
5,177
|
|
|
6,042
|
|
|
(14
|
)
|
|
9,813
|
|
|
18,616
|
|
|
(47
|
)
|
|
Test preparation
|
4,959
|
|
|
10,572
|
|
|
(53
|
)
|
|
8,794
|
|
|
17,213
|
|
|
(49
|
)
|
|
Professional (U.S.)
|
4,939
|
|
|
6,768
|
|
|
(27
|
)
|
|
20,943
|
|
|
20,863
|
|
|
0
|
|
|
Kaplan corporate and other
|
(4,067
|
)
|
|
(6,770
|
)
|
|
40
|
|
|
(18,824
|
)
|
|
(21,616
|
)
|
|
13
|
|
|
Amortization of intangible assets
|
(3,944
|
)
|
|
(2,682
|
)
|
|
(47
|
)
|
|
(10,888
|
)
|
|
(5,494
|
)
|
|
(98
|
)
|
|
Impairment of long-lived assets
|
—
|
|
|
—
|
|
|
—
|
|
|
(693
|
)
|
|
—
|
|
|
—
|
|
|
Intersegment elimination
|
1
|
|
|
(43
|
)
|
|
—
|
|
|
(2
|
)
|
|
(32
|
)
|
|
—
|
|
|
|
$
|
(7,161
|
)
|
|
$
|
22,262
|
|
|
—
|
|
|
$
|
44,739
|
|
|
$
|
82,516
|
|
|
(46
|
)
|
Kaplan International includes English-language programs, and postsecondary education and professional training businesses largely outside the United States. In July 2019, Kaplan acquired Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. Kaplan International revenue increased 6% and 3% for the third quarter and first nine months of 2019, respectively. On a constant currency basis, revenue increased 13% and 8% for the third quarter and first nine months of 2019, respectively. The revenue increases were due to growth at UK Pathways, UK Professional and Australia, and from the Heverald acquisition. Kaplan International reported an operating loss of $14.2 million in the third quarter of 2019, compared to operating income of $8.4 million in the third quarter of 2018. Operating income decreased to $35.6 million in the first nine months of 2019, compared to $53.0 million in the first nine months of 2018. The decline in operating results in 2019 is due to the VAT provision recorded at UK Pathways and a decline in Singapore, offset by increases at UK Professional and Australia.
In 2017, HMRC raised assessments against Kaplan UK Pathways for VAT relating to 2014 to 2017, which were paid by Kaplan. Kaplan challenged these assessments and the Company believes it has met all requirements under UK VAT law and is entitled to recover the £17.3 million receivable from assessments and subsequent payments through September 30, 2019. Due to recent developments in the case, in the third quarter of 2019, the Company recorded a full provision of £17.3 million ($21.0 million) against this receivable; of this amount, £14.1 million ($17.1 million) relates to years 2014 to 2018. The Company estimates total additional annual VAT expense at the UK Pathways business of approximately $6.0 million related to this matter for 2019. If the Company ultimately prevails in this case, the provision will be reversed and a pre-tax credit will be recorded in the Company’s Consolidated Statement of Operations. The result of the case is expected to be known by the end of 2020.
Prior to the KU Transaction closing on March 22, 2018, Higher Education included Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. Following the KU Transaction closing, the Higher Education division includes the results as a service provider to higher education institutions. In the third quarter and first nine months of 2019, Higher Education revenue was down 12% and 14%, respectively, due to the KU Transaction. In the first nine months of 2019, the Company recorded a portion of the service fee with Purdue Global based on an assessment of its collectability under the TOSA. This resulted in a decline in Higher Education results for the first nine months of 2019, as the Company recorded the full service fee for Purdue Global for the first six months of 2018, and a portion of the service fee for the third quarter of 2018. Following the transition from KU, Purdue Global launched a planned marketing campaign to fully establish its new brand. This significant marketing spend, which the Company supports, impacts the cash generated by Purdue Global and its current ability to fully pay the KHE service fee under the TOSA. The Company will continue to assess the collectability of the service fee with Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the service fee in the future and whether to make adjustments to service fee amounts recognized in earlier periods.
As of September 30, 2019, Kaplan had a total outstanding accounts receivable balance of $72.3 million from Purdue Global related to amounts due for reimbursements for services and a deferred service fee. In addition, Kaplan has a $20.0 million long-term receivable balance due from Purdue Global at September 30, 2019, related to the initial KU Transaction.
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. In September 2018, KTP acquired the test preparation and study guide assets of Barron’s Educational Series, a New York-based education publishing company. KTP revenue decreased 4% and 2% for the third quarter and first nine months of 2019, respectively. Excluding revenue from the Barron’s acquisition, revenues were down 11% and 9%, respectively, due to declines in KTP’s retail comprehensive test preparation programs. KTP operating results declined 53% and 49% in the third quarter and first nine months of 2019, respectively, due primarily to revenue declines for retail comprehensive test preparation programs. Operating losses for the new economy skills training programs were $3.2 million and $2.8 million for each of the first nine months of 2019 and 2018, respectively.
In the second quarter of 2019, the Company approved a SIP to reduce the number of employees at KTP and Higher Education. In connection with the SIP, the Company recorded $6.6 million in non-operating pension expense in the second quarter of 2019.
Kaplan Professional (U.S.) includes the domestic professional and other continuing education businesses. Kaplan Professional (U.S.) revenue in the third quarter of 2019 declined 1% due to declines in CFA, real estate and accountancy programs. In the first nine months of 2019, Kaplan Professional (U.S.) revenue increased 12%, due to the May 2018 acquisition of Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials that provides engineering, surveying, architecture, and interior design licensure exam review products, and the July 2018 acquisition of College for Financial Planning (CFFP), a provider of financial education and training to individuals through programs of study for professionals pursuing a career in Financial Planning. Kaplan Professional (U.S.) operating results declined in the third quarter of 2019, primarily due to lower demand for real estate and accountancy programs and increased spending for sales and marketing. Kaplan Professional (U.S) operating results were flat for the first nine months of 2019, due to increased earnings at PPI and CFFP, offset by increased sales and marketing expenses.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities. Overall, Kaplan corporate and other expenses declined in 2019 due to lower incentive compensation costs.
Television Broadcasting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
September 30
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
$
|
115,161
|
|
|
$
|
130,014
|
|
|
(11
|
)
|
|
$
|
340,012
|
|
|
$
|
352,902
|
|
|
(4
|
)
|
|
Operating Income
|
36,813
|
|
|
55,453
|
|
|
(34
|
)
|
|
116,847
|
|
|
137,113
|
|
|
(15
|
)
|
Revenue at the television broadcasting division declined 11% to $115.2 million in the third quarter of 2019, from $130.0 million in the same period of 2018. The revenue decrease is due to a $19.9 million decrease in political advertising revenue, slightly offset by a $3.1 million increase in retransmission revenues. In the third quarter of 2019 and 2018, the television broadcasting division recorded $1.1 million and $1.0 million, respectively, in reductions to operating expenses related to property, plant and equipment gains due to new equipment received at no cost in connection with the spectrum repacking mandate of the FCC. Operating income for the third quarter of 2019 decreased 34% to $36.8 million, from $55.5 million in the same period of 2018, due to lower revenues and higher network fees.
Revenue at the television broadcasting division declined 4% to $340.0 million in the first nine months of 2019, from $352.9 million in the same period of 2018. The revenue decrease is due primarily to a $25.0 million decrease in political advertising revenue, an $8.6 million decrease in 2018 incremental winter Olympics-related advertising revenue at the Company’s NBC stations; partially offset by $17.5 million in higher retransmission revenues. In the first nine months of 2019 and 2018, the television broadcasting division recorded $10.7 million and $2.1 million, respectively, in reductions to operating expenses related to non-cash property, plant and equipment gains due to new equipment received at no cost in connection with the spectrum repacking mandate of the FCC. Operating income for the first nine months of 2019 decreased 15% to $116.8 million from $137.1 million in the same period of 2018, due to lower revenues and higher network fees, partially offset by increased property, plant and equipment gains.
In March 2019, the Company’s television station in Orlando (WKMG) entered into a new network affiliation agreement with CBS that covers the period April 7, 2019 through June 30, 2022.
In October 2019, the Company’s television stations in Houston (KPRC), Detroit (WDIV) and Roanoke (WSLS) have entered into a new three-year NBC Affiliation Agreement effective January 1, 2020 through December 31, 2022.
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
September 30
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
$
|
111,676
|
|
|
$
|
126,028
|
|
|
(11
|
)
|
|
$
|
341,706
|
|
|
$
|
369,896
|
|
|
(8
|
)
|
|
Operating Income
|
6,845
|
|
|
5,146
|
|
|
33
|
|
|
14,811
|
|
|
22,439
|
|
|
(34
|
)
|
Manufacturing includes four businesses: Hoover, a supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications; Dekko, a manufacturer of electrical workspace solutions, architectural lighting and electrical components and assemblies; Joyce/Dayton, a manufacturer of screw jacks and other linear motion systems; and Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications. In July 2018, Dekko acquired Furnlite, Inc., a Fallston, NC-based manufacturer of power and data solutions for the hospitality and residential furniture industry.
Manufacturing revenues declined 11% and 8% in the third quarter and first nine months of 2019, respectively, due primarily to a decline at Hoover from lower wood prices, partially offset by increases due to the Furnlite acquisition. Manufacturing operating income increased in the third quarter of 2019, due partly to improved results at Hoover from losses on inventory sales in the third quarter of 2018. Operating income declined in the first nine months of 2019 due largely to increased labor and other operating costs at Hoover.
In connection with the Company’s annual impairment testing in 2018, the Company performed a quantitative goodwill impairment process at all of its reporting units. At the time, the estimated fair value of three reporting units at the manufacturing businesses exceeded their respective carrying values by a margin less than 25%. The total goodwill at these three reporting units was $226.6 million as of September 30, 2019, or 17% of the total goodwill of the Company. There exists a reasonable possibility that a decrease in the assumed projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of these reporting units, could result in an impairment charge.
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
September 30
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
$
|
40,688
|
|
|
$
|
35,486
|
|
|
15
|
|
$
|
119,057
|
|
|
$
|
111,315
|
|
|
7
|
|
Operating Income (Loss)
|
1,208
|
|
|
(8,702
|
)
|
|
—
|
|
6,135
|
|
|
(9,329
|
)
|
|
—
|
The Graham Healthcare Group (GHG) provides home health and hospice services in three states. Healthcare revenues increased in the first nine months of 2019, largely due to growth in home health and hospice services. The improvement in GHG operating results in 2019 is due to increased revenues and the absence of integration costs and other overall cost reduction in the first nine months of 2019. In the third quarter of 2018, GHG recorded a $7.9 million intangible asset impairment charge related to the Celtic trademark, which was phased-out in the second half of 2018.
SocialCode
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30
|
|
|
|
September 30
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
Revenue
|
$
|
15,975
|
|
|
$
|
13,781
|
|
|
16
|
|
$
|
45,804
|
|
|
$
|
41,850
|
|
|
9
|
|
Operating Income (Loss)
|
(378
|
)
|
|
5,124
|
|
|
—
|
|
(5,371
|
)
|
|
(399
|
)
|
|
—
|
SocialCode is a provider of marketing solutions managing data, creative, media and marketplaces to accelerate client growth. In the third quarter of 2018, SocialCode acquired Marketplace Strategy, a Cleveland-based Amazon sales acceleration agency. SocialCode’s revenue increased 16% and 9% in the third quarter and first nine months of 2019, respectively. SocialCode reported operating losses of $0.4 million and $5.4 million in the third quarter and first nine months of 2019, respectively, compared to operating income of $5.1 million and an operating loss of $0.4 million in the third quarter and first nine months of 2018, respectively. The 2018 results include a $7.5 million and $7.2 million credit related to SocialCode’s phantom equity plans in the third quarter and first nine months of 2018, respectively.
Other Businesses
On July 31, 2019, the Company acquired CRG. CRG owns and operates thirteen restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton, two of the top twenty
highest grossing independent restaurants in the United States. CRG is managed by its existing management team as a wholly-owned subsidiary of the Company.
On January 31, 2019, the Company acquired two automotive dealerships, Lexus of Rockville and Honda of Tysons Corner, from Sonic Automotive. The Company also announced it had entered into an agreement with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and his team of industry professionals operate and manage the dealerships. Graham Holdings Company holds a 90% stake.
Revenues from other businesses increased due mostly to the automotive dealership and CRG acquisitions.
Other businesses also includes Slate and Foreign Policy, which publish online and print magazines and websites; and three investment stage businesses, Megaphone, Pinna and CyberVista. Megaphone, Slate and CyberVista reported revenue increases in the first nine months of 2019. Losses from each of these five businesses in the first nine months of 2019 adversely affected operating results.
Corporate Office
Corporate office includes the expenses of the Company’s corporate office and certain continuing obligations related to prior business dispositions.
Equity in Earnings of Affiliates
At September 30, 2019, the Company held an approximate 11% interest in Intersection Holdings, LLC, a company that provides digital marketing and advertising services and products for cities, transit systems, airports, and other public and private spaces. The Company also holds interests in a number of home health and hospice joint ventures, and several other affiliates. The Company recorded equity in earnings of affiliates of $4.7 million for the third quarter of 2019, compared to $9.5 million for the third quarter of 2018. The Company recorded equity in earnings of affiliates of $7.8 million for the first nine months of 2019, compared to $13.0 million for the first nine months of 2018. In the third quarter of 2018, the Company recorded $7.9 million in gains in equity in earnings of affiliates related to two of its investments.
Net Interest Expense, Debt Extinguishment Costs and Related Balances
In connection with the auto dealership acquisition that closed on January 31, 2019, a subsidiary of the Company borrowed $30 million to finance a portion of the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum. The subsidiary is required to repay the loan over a 10-year period by making monthly installment payments.
On May 30, 2018, the Company issued 5.75% unsecured eight-year fixed-rate notes due June 1, 2026. Interest is payable semi-annually on June 1 and December 1. On June 29, 2018, the Company used the net proceeds from the sale of the notes and other cash to repay $400 million of 7.25% notes that were due February 1, 2019. The Company incurred $11.4 million in debt extinguishment costs related to the early termination of the 7.25% notes.
The Company incurred net interest expense of $5.3 million and $17.8 million for the third quarter and first nine months of 2019, respectively, compared to $5.5 million and $27.5 million for the third quarter and first nine months of 2018, respectively. The Company incurred $6.2 million in interest expense related to the mandatorily redeemable noncontrolling interest at the Graham Healthcare Group settled in the second quarter of 2018. The higher interest expense in 2018 is also due to both the $400 million eight-year and ten-year notes outstanding for the month of June 2018.
At September 30, 2019, the Company had $502.2 million in borrowings outstanding at an average interest rate of 5.1% and cash, marketable equity securities and other investments of $711.6 million.
Non-operating Pension and Postretirement Benefit Income, net
The Company recorded net non-operating pension and postretirement benefit income of $19.6 million and $51.7 million for the third quarter and first nine months of 2019, respectively, compared to $22.2 million and $66.6 million for the third quarter and first nine months of 2018, respectively.
In the second quarter of 2019, the Company recorded $6.6 million in expenses related to a non-operating SIP at the education division.
Gain on Marketable Equity Securities, net
Overall, the Company recognized $17.4 million and $49.3 million in net gains on marketable equity securities in the third quarter and first nine months of 2019, respectively, compared to $45.0 million and $28.3 million in net gains on marketable equity securities in the third quarter and first nine months of 2018, respectively.
Other Non-Operating Income
The Company recorded total other non-operating income, net, of $5.6 million for the third quarter of 2019, compared to $3.1 million for the third quarter of 2018. The 2019 amounts included $3.7 million in fair value increases on cost method investments; $0.7 million in foreign currency gains; and other items. The 2018 amounts included $8.5 million in fair value increases on cost method investments and other items, partially offset by a $3.3 million net loss related to sales of businesses and contingent consideration; a $2.5 million impairment of a cost method investment; and $0.1 million in foreign currency losses.
The Company recorded total other non-operating income, net, of $36.1 million for the first nine months of 2019 compared to $14.7 million for the first nine months of 2018. The 2019 amounts included a $29.0 million gain on the sale of the Company’s interest in Gimlet Media; $5.1 million in fair value increases on cost method investments; $1.3 million in foreign currency gains and other items. The 2018 amounts include $8.5 million in fair value increases on cost method investments; $4.0 million net gain related to sales of businesses and contingent consideration; a $2.8 million gain on sale of a cost method investment; a $2.5 million gain on sale of land; and other items, partially offset by a $2.5 million impairment of a cost method investment and $2.2 million in foreign currency losses.
Provision for Income Taxes
The Company’s effective tax rate for the first nine months of 2019 was 24.7%. In the first quarter of 2019, the Company recorded income tax benefits related to stock compensation of $1.7 million.
The Company’s effective tax rate for the first nine months of 2018 was 15.6%. In the third quarter of 2018, the Company recorded a $17.8 million deferred state tax benefit related to the release of valuation allowances. Excluding this $17.8 million benefit and a $1.8 million income tax benefit related to stock compensation recorded in the first quarter of 2018, the overall income tax rate for the first nine months of 2018 was 23.3%.
Earnings Per Share
The calculation of diluted earnings per share for the third quarter and first nine months of 2019 was based on 5,328,855 and 5,327,865 weighted average shares outstanding, compared to 5,336,612 and 5,390,049 for the third quarter and first nine months of 2018. At September 30, 2019, there were 5,314,386 shares outstanding. On November 9, 2017, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock; the Company has remaining authorization for 273,655 shares as of September 30, 2019.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions of Businesses and Other Transactions
Acquisitions. In the first nine months of 2019, the Company acquired seven businesses; one in education, two in healthcare, one in manufacturing, and three in other businesses for $191.6 million in cash and contingent consideration and the assumption of $25.8 million in floor plan payables.
On January 31, 2019, the Company acquired an interest in two automotive dealerships for cash and the assumption of floor plan payables. In connection with the acquisition, the automotive subsidiary of the Company borrowed $30 million to finance the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum. The Company has a 90% interest in the automotive subsidiary. The Company also entered into a management services agreement with an entity affiliated with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and his team will operate and manage the dealerships. In addition, the Company advanced $3.5 million to the minority shareholder, an entity controlled by Mr. Ourisman, at an interest rate of 6% per annum. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In July 2019, Graham Healthcare Group (GHG) acquired an interest in a small business which is expected to provide certain strategic benefits in the future and is included in healthcare. On July 11, 2019, Kaplan acquired Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. The acquisition is expected to provide synergies within Kaplan’s International English business and is included in its international division.
On July 31, 2019, the Company announced the closing of its acquisition of Clyde’s Restaurant Group (CRG). CRG owns and operates 13 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton, two of the top 20 highest grossing independent restaurants in the United States. CRG is managed by its existing management team as a wholly-owned subsidiary of the Company. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.
In September 2019, Joyce/Dayton Corp. acquired the assets of a small business. The acquisition is expected to complement current product offerings and is included in manufacturing.
During 2018, the Company acquired eight businesses, five in education, one in manufacturing, one in healthcare, and one in SocialCode for $121.1 million in cash and contingent consideration. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of acquisition.
In January and February 2018, Kaplan acquired the assets of i-Human Patients, Inc., a provider of cloud-based, interactive patient encounter simulations for medical and nursing professionals and educators, and another small business in test preparation and international, respectively. These acquisitions are expected to provide strategic benefits in the future.
In May 2018, Kaplan acquired a 100% interest in Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials and engineering, surveying, architecture, and interior design licensure exam review, by purchasing all of its issued and outstanding shares. This acquisition is expected to provide certain strategic benefits in the future. This acquisition is included in Professional (U.S.).
On July 12, 2018, Kaplan acquired 100% of the issued and outstanding shares of the College for Financial Planning (CFFP), a provider of financial education and training to individuals pursuing the Certified Financial Planner certification, a Master of Science in Personal Financial Planning, or a Master of Science in Finance. The acquisition is expected to expand Kaplan’s financial education product offerings and is included in Professional (U.S.).
On July 31, 2018, Dekko acquired 100% of the issued and outstanding shares of Furnlite, Inc., a Fallston, NC-based manufacturer of power and data solutions for the hospitality and residential furniture industries. Dekko’s primary reasons for the acquisition are to complement existing product offerings and to provide potential synergies across the businesses. The acquisition is included in manufacturing.
In August 2018, SocialCode acquired 100% of the membership interests of Marketplace Strategy (MPS), a Cleveland-based digital marketing agency that provides strategy consulting, optimization services, advertising management and creative solutions on online marketplaces including Amazon. SocialCode’s primary reason for the acquisition is to expand its platform offerings.
In September 2018, GHG acquired the assets of a small business and Kaplan acquired the test preparation and study guide assets of Barron’s Educational Series, a New York-based education publishing company. The acquisitions are expected to complement the healthcare and test preparation services currently offered by GHG and Kaplan, respectively. GHG is included in the healthcare division. The Barron’s Educational Series acquisition is included in test preparation.
Kaplan University Transaction. On March 22, 2018, the Company closed on the Kaplan University (KU) transaction and recorded a pre-tax gain of $4.3 million in the first quarter of 2018. For financial reporting purposes, Kaplan may receive payment of additional consideration related to the sale of the institutional assets as part of its fee to the extent there are sufficient revenues available after paying all amounts required by the Transition and Operations Support Agreement (TOSA). The Company did not recognize any contingent consideration as part of the initial disposition. The Company recorded a $0.5 million contingent consideration gain in each of the three months ended September 30, 2019 and September 30, 2018. In the nine months ended September 30, 2019 and September 30, 2018, the Company recorded a $0.9 million and $1.9 million contingent consideration gain, respectively.
Sale of Businesses. In February 2018, Kaplan completed the sale of a small business which was included in Test Preparation. In September 2018, Kaplan Australia completed the sale of a small business which was included in Kaplan International. As a result of these sales, the Company reported gains in other non-operating income.
Other Transactions. In March 2019, a Hoover minority shareholder put some of his shares to the Company, which had a redemption value of $0.6 million. Following the redemption, the Company owns 98.01% of Hoover. In June 2018, the Company incurred $6.2 million of interest expense related to the mandatorily redeemable noncontrolling interest redemption settlement at GHG. The mandatorily redeemable noncontrolling interest was redeemed and paid in July 2018.
Capital Expenditures
During the first nine months of 2019, the Company’s capital expenditures totaled $73.3 million. This amount includes assets acquired during the year, whereas the amounts reflected in the Company’s Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods. The Company estimates that its capital expenditures will be in the range of $90 million to $100 million in 2019. This includes amounts for constructing an academic and student residential facility in connection with Kaplan’s Pathways program in Liverpool, U.K. This also includes capital expenditures in connection with spectrum repacking at the Company’s television stations in Detroit, MI, Jacksonville, FL, and Roanoke, VA, as mandated by the FCC; these expenditures are expected to be largely reimbursed to the Company by the FCC.
Liquidity
The Company’s borrowings were $502.2 million and $477.1 million, at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, there was $5.0 million outstanding under the Company’s revolving credit facility at an interest rate of 5.5%; this was fully repaid on October 1, 2019.
At September 30, 2019, the Company had cash and cash equivalents, restricted cash and investments in marketable securities and other investments totaling $711.6 million, compared with $778.7 million at December 31, 2018. At September 30, 2019, the Company held approximately $130 million in cash and cash equivalents in businesses domiciled outside the U.S., of which approximately $8 million is not available for immediate use in operations or for distribution. Additionally, Kaplan’s business operations outside the U.S. retain cash balances to support ongoing working capital requirements, capital expenditures, and regulatory requirements. As a result, the Company considers a significant portion of the cash and cash equivalents balance held outside the U.S. as not readily available for use in U.S. operations.
The Company’s net cash provided by operating activities, as reported in the Company’s Condensed Consolidated Statements of Cash Flows, was $72.3 million for the first nine months of 2019, compared to $191.9 million for the first nine months of 2018. The decrease is due to changes in working capital and an increase in incentive compensation payments.
On January 31, 2019, the Company’s automotive subsidiary entered into a Commercial Note with SunTrust Bank in an aggregate principal amount of $30 million. The Commercial Note is payable over a 10 year period in monthly installments of $0.25 million, plus accrued and unpaid interest, due on the first of each month, with a final payment on January 31, 2029. The Commercial Note bears interest at LIBOR plus an applicable interest rate of 1.75% or 2.00% per annum, in each case determined on a quarterly basis based upon the automotive subsidiary’s Adjusted Leverage Ratio. The Commercial Note contains terms and conditions, including remedies in the event of a default by the automotive subsidiary. On the same date, the Company’s automotive subsidiary entered into an interest rate swap agreement with a total notional value of $30 million and a maturity date of January 31, 2029. The interest rate swap agreement will pay the automotive subsidiary variable interest on the $30 million notional amount at the one-month LIBOR, and the automotive subsidiary will pay counterparties a fixed rate of 2.7%, effectively resulting in a total fixed interest rate of 4.7% on the outstanding borrowings at the current applicable margin of 2.0%. The interest rate swap agreement was entered into to convert the variable rate borrowing under the Commercial Note into a fixed rate borrowing. Based on the terms of the interest rate swap agreement and the underlying borrowing, the interest rate swap was determined to be effective and thus qualifies as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows.
The Company finances all new vehicle inventory through a standardized floor plan facility (the “floor plan facility”) with SunTrust Bank. The new vehicle floor plan facility bears interest at variable rates that are based on LIBOR plus 1.15% per annum. The weighted average interest rate for the floor plan facility was 3.4% for both the three and nine months ended September 30, 2019. As of September 30, 2019, the aggregate capacity under the floor plan facility was $50 million, of which $40.9 million had been utilized, and is included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet.
The floor plan facility is collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with respect to the creation of liens and changes in ownership, officers and key management personnel.
On May 30, 2018, the Company issued $400 million senior unsecured fixed-rate notes due June 1, 2026 (the Notes). The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of the Company’s existing and future domestic subsidiaries, as described in the terms of the indenture, dated as of May 30, 2018 (the Indenture). The Notes have a coupon rate of 5.75% per annum, payable semi-annually on June 1 and December 1. The Company may redeem the Notes in whole or in part at any time at the respective redemption prices described in the Indenture.
On June 29, 2018, the Company used the net proceeds from the sale of the Notes, together with cash on hand, to redeem the $400 million of 7.25% notes due February 1, 2019. The Company incurred $11.4 million in debt extinguishment costs in relation to the early termination of the 7.25% notes.
In combination with the issuance of the Notes, the Company and certain of the Company’s domestic subsidiaries named therein as guarantors entered into an amended and restated credit agreement providing for a U.S. $300 million five-year revolving credit facility (the Revolving Credit Facility) with each of the lenders party thereto, certain of the Company’s foreign subsidiaries from time to time party thereto as foreign borrowers, Wells Fargo Bank, N.A., as Administrative Agent (Wells Fargo), JPMorgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, N.A. and Bank of America, N.A. as Documentation Agents (the Amended and Restated Credit Agreement), which amends and restates the Company’s existing Five Year Credit Agreement, dated as of June 29, 2015, among the Company, certain of its domestic subsidiaries as guarantors, the several lenders from time to time party thereto, Wells Fargo Bank, N.A., as Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (the Existing Credit Agreement). The Amended and Restated Credit Agreement amends the Existing Credit Agreement to (i) extend the maturity of the Revolving Credit Facility to May 30, 2023, unless the Company and the lenders agree to further extend the term, (ii) increase the aggregate principal amount of the Revolving Credit Facility to U.S. $300 million, consisting of a U.S. Dollar tranche of U.S. $200 million for borrowings in U.S. Dollars and a multicurrency tranche equivalent to U.S. $100 million for borrowings in U.S. Dollars and certain foreign currencies, (iii) provide for borrowings under the Revolving Credit Facility in U.S. Dollars and certain other foreign currencies specified in the Amended and Restated Credit Agreement, (iv) permit certain foreign subsidiaries of the Company to be added to the Amended and Restated Credit Agreement as foreign borrowers thereunder and (v) effect certain other modifications to the Existing Credit Agreement.
Under the Amended and Restated Credit Agreement, the Company is required to pay a commitment fee on a quarterly basis, based on the Company’s leverage ratio, of between 0.15% and 0.25% of the amount of the average daily unused portion of the Revolving Credit Facility. Any borrowings under the Amended and Restated Credit Agreement are made on an unsecured basis and bear interest at the Company’s option, either at (a) a fluctuating interest rate equal to the highest of Wells Fargo’s prime rate, 0.5 percent above the Federal funds rate or the one-month Eurodollar rate plus 1%, or (b) the Eurodollar rate for the applicable currency and interest period as defined in the Amended and Restated Credit Agreement, which is generally a periodic rate equal to LIBOR, CDOR, BBSY or SOR, as applicable, in the case of each of clauses (a) and (b) plus an applicable margin that depends on the Company’s consolidated debt to consolidated adjusted EBITDA (as determined pursuant to the Amended and Restated Credit Agreement, Total Net Leverage Ratio). The Company and its foreign subsidiaries may draw on the Revolving Credit Facility for general corporate purposes. Any outstanding borrowings must be repaid on or prior to the final termination date. The Amended and Restated Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type and requires the Company to maintain a Total Net Leverage Ratio of not greater than 3.5 to 1.0 and a consolidated interest coverage ratio of at least 3.5 to 1.0 based upon the ratio of consolidated adjusted EBITDA to consolidated interest expense as determined pursuant to the Amended and Restated Credit Agreement.
On May 21, 2018, Moody’s affirmed the Company’s credit ratings, but revised the outlook from Negative to Stable.
The Company’s current credit ratings are as follows:
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Standard
& Poor’s
|
|
Long-term
|
Ba1
|
|
BB+
|
At September 30, 2019 and December 31, 2018, the Company had working capital of $545.3 million and $720.2 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds. In management’s opinion, the Company will have sufficient liquidity to meet its various cash needs within the next 12 months.
The Company adopted the new lease accounting guidance on January 1, 2019 and recognized right-of-use assets of $369.3 million and lease liabilities of $418.3 million. Please refer to Note 1 - Organization, Basis of Presentation and Recent Accounting Pronouncements and Note 6 - Leases for further discussion of the new lease accounting guidance.
There were no other significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
Forward-Looking Statements
This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2018 Annual Report filed on Form 10-K have not otherwise changed significantly.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Chief Financial Officer (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of September 30, 2019. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION