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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| | | | | |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2022
or
| | | | | |
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 001-06714
GRAHAM HOLDINGS COMPANY
| | |
(Exact name of registrant as specified in its charter) |
| | | | | | | | | | | | | | | | | | | | |
Delaware | | 53-0182885 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | |
1300 North 17th Street, Arlington, Virginia |
| 22209 |
(Address of principal executive offices) | | (Zip Code) |
(703) 345-6300
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class B Common Stock, par value $1.00 per share | | GHC | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒. No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒. No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐. No ☒.
Shares outstanding at April 29, 2022:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 3,917,774 Shares
GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
| | | | | | | | |
PART I. FINANCIAL INFORMATION | |
| | |
Item 1. | Financial Statements | |
| | |
| Condensed Consolidated Statements of Operations | |
| | |
| Condensed Consolidated Statements of Comprehensive Income | |
| | |
| Condensed Consolidated Balance Sheets | |
| | |
| Condensed Consolidated Statements of Cash Flows | |
| | |
| Condensed Consolidated Statements of Changes in Common Stockholders' Equity | |
| | |
| Notes to Condensed Consolidated Financial Statements | |
| | |
| Organization, Basis of Presentation and Recent Accounting Pronouncements | |
| Acquisitions and Dispositions of Businesses | |
| Investments | |
| Accounts Receivable, Accounts Payable and Accrued Liabilities | |
| Inventories, Contracts in Progress and Vehicle Floor Plan Payable | |
| | |
| Goodwill and Other Intangible Assets | |
| Debt | |
| Fair Value Measurements | |
| | |
| Revenue From Contracts With Customers | |
| Earnings Per Share | |
| Pension and Postretirement Plans | |
| Other Non-Operating Income | |
| Accumulated Other Comprehensive Income (Loss) | |
| Contingencies | |
| Business Segments | |
| | |
Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition | |
| | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |
| | |
Item 4. | Controls and Procedures | |
| |
PART II. OTHER INFORMATION | |
| | |
| | |
| | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| | |
Item 6. | Exhibits | |
| |
Signatures | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31 |
| |
(in thousands, except per share amounts) | | | | | 2022 | | 2021 |
Operating Revenues | | | | | | | |
Sales of services | | | | | $ | 557,569 | | | $ | 483,669 | |
Sales of goods | | | | | 357,152 | | | 228,786 | |
| | | | | 914,721 | | | 712,455 | |
Operating Costs and Expenses | | | | | | | |
Cost of services sold (exclusive of items shown below) | | | | | 324,981 | | | 292,434 | |
Cost of goods sold (exclusive of items shown below) | | | | | 290,520 | | | 178,787 | |
Selling, general and administrative | | | | | 224,862 | | | 175,861 | |
Depreciation of property, plant and equipment | | | | | 19,475 | | | 16,545 | |
Amortization of intangible assets | | | | | 14,912 | | | 13,937 | |
Impairment of long-lived assets | | | | | — | | | 1,047 | |
| | | | | 874,750 | | | 678,611 | |
Income from Operations | | | | | 39,971 | | | 33,844 | |
Equity in earnings of affiliates, net | | | | | 2,604 | | | 13,428 | |
Interest income | | | | | 715 | | | 890 | |
Interest expense | | | | | (11,417) | | | (8,448) | |
Non-operating pension and postretirement benefit income, net | | | | | 50,505 | | | 28,787 | |
Gain on marketable equity securities, net | | | | | 46,912 | | | 79,214 | |
Other income, net | | | | | 2,876 | | | 6,320 | |
Income Before Income Taxes | | | | | 132,166 | | | 154,035 | |
Provision for Income Taxes | | | | | 35,600 | | | 41,400 | |
Net Income | | | | | 96,566 | | | 112,635 | |
Net Income Attributable to Noncontrolling Interests | | | | | (942) | | | (185) | |
Net Income Attributable to Graham Holdings Company Common Stockholders | | | | | $ | 95,624 | | | $ | 112,450 | |
| | | | | | | |
Per Share Information Attributable to Graham Holdings Company Common Stockholders | | | | | | | |
Basic net income per common share | | | | | $ | 19.50 | | | $ | 22.49 | |
Basic average number of common shares outstanding | | | | | 4,871 | | | 4,967 | |
Diluted net income per common share | | | | | $ | 19.45 | | | $ | 22.44 | |
Diluted average number of common shares outstanding | | | | | 4,885 | | | 4,977 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31 |
(in thousands) | | | | | 2022 | | 2021 |
Net Income | | | | | $ | 96,566 | | | $ | 112,635 | |
Other Comprehensive Loss, Before Tax | | | | | | | |
Foreign currency translation adjustments: | | | | | | | |
Translation adjustments arising during the period | | | | | (1,738) | | | (486) | |
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Pension and other postretirement plans: | | | | | | | |
Amortization of net prior service cost included in net income | | | | | 716 | | | 792 | |
Amortization of net actuarial gain included in net income | | | | | (17,774) | | | (2,429) | |
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| | | | | (17,058) | | | (1,637) | |
Cash flow hedge gain | | | | | 1,642 | | | 621 | |
Other Comprehensive Loss, Before Tax | | | | | (17,154) | | | (1,502) | |
Income tax benefit related to items of other comprehensive loss | | | | | 4,019 | | | 299 | |
Other Comprehensive Loss, Net of Tax | | | | | (13,135) | | | (1,203) | |
Comprehensive Income | | | | | 83,431 | | | 111,432 | |
Comprehensive income attributable to noncontrolling interests | | | | | (942) | | | (185) | |
Total Comprehensive Income Attributable to Graham Holdings Company | | | | | $ | 82,489 | | | $ | 111,247 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
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| As of |
(in thousands) | March 31, 2022 | | December 31, 2021 |
| (Unaudited) | | |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 132,224 | | | $ | 145,886 | |
Restricted cash | 25,818 | | | 12,175 | |
Investments in marketable equity securities and other investments | 816,966 | | | 824,445 | |
Accounts receivable, net | 517,551 | | | 607,471 | |
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Inventories and contracts in progress | 156,678 | | | 141,471 | |
Prepaid expenses | 101,154 | | | 81,741 | |
Income taxes receivable | 15,381 | | | 32,744 | |
Other current assets | 1,237 | | | 1,241 | |
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Total Current Assets | 1,767,009 | | | 1,847,174 | |
Property, Plant and Equipment, Net | 456,430 | | | 468,126 | |
Lease Right-of-Use Assets | 438,226 | | | 437,969 | |
Investments in Affiliates | 172,584 | | | 155,444 | |
Goodwill, Net | 1,649,646 | | | 1,649,582 | |
Indefinite-Lived Intangible Assets | 141,077 | | | 142,180 | |
Amortized Intangible Assets, Net | 231,091 | | | 247,120 | |
Prepaid Pension Cost | 2,334,773 | | | 2,306,514 | |
Deferred Income Taxes | 6,720 | | | 7,900 | |
Deferred Charges and Other Assets (includes $646 and $782 of restricted cash) | 162,580 | | | 163,516 | |
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Total Assets | $ | 7,360,136 | | | $ | 7,425,525 | |
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Liabilities and Equity | | | |
Current Liabilities | | | |
Accounts payable and accrued liabilities | $ | 503,794 | | | $ | 583,629 | |
Deferred revenue | 346,091 | | | 358,720 | |
Income taxes payable | 5,610 | | | 4,585 | |
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Current portion of lease liabilities | 74,825 | | | 77,655 | |
Current portion of long-term debt | 104,824 | | | 141,749 | |
Dividends declared | 7,748 | | | — | |
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Total Current Liabilities | 1,042,892 | | | 1,166,338 | |
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Accrued Compensation and Related Benefits | 163,208 | | | 175,391 | |
Other Liabilities | 34,629 | | | 36,497 | |
Deferred Income Taxes | 686,883 | | | 676,706 | |
Mandatorily Redeemable Noncontrolling Interest | 17,031 | | | 13,661 | |
Lease Liabilities | 405,119 | | | 405,200 | |
Long-Term Debt | 523,102 | | | 525,752 | |
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Total Liabilities | 2,872,864 | | | 2,999,545 | |
Commitments and Contingencies (Note 14) | | | |
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Redeemable Noncontrolling Interests | 14,331 | | | 14,311 | |
Preferred Stock | — | | | — | |
Common Stockholders’ Equity | | | |
Common stock | 20,000 | | | 20,000 | |
Capital in excess of par value | 391,133 | | | 389,456 | |
Retained earnings | 7,206,888 | | | 7,126,761 | |
Accumulated other comprehensive income, net of taxes | | | |
Cumulative foreign currency translation adjustment | (8,036) | | | (6,298) | |
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Unrealized gain on pensions and other postretirement plans | 966,496 | | | 979,157 | |
Cash flow hedge | (207) | | | (1,471) | |
Cost of Class B common stock held in treasury | (4,116,112) | | | (4,108,022) | |
Total Common Stockholders’ Equity | 4,460,162 | | | 4,399,583 | |
Noncontrolling Interests | 12,779 | | | 12,086 | |
Total Equity | 4,472,941 | | | 4,411,669 | |
Total Liabilities and Equity | $ | 7,360,136 | | | $ | 7,425,525 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Three Months Ended March 31 |
(in thousands) | 2022 | | 2021 |
Cash Flows from Operating Activities | | | |
Net Income | $ | 96,566 | | | $ | 112,635 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation, amortization and long-lived asset impairments | 34,387 | | | 31,529 | |
Amortization of lease right-of-use asset | 17,569 | | | 18,594 | |
Net pension benefit | (44,782) | | | (24,501) | |
Gain on marketable equity securities and cost method investments, net | (46,912) | | | (81,937) | |
Gain on disposition of businesses, property, plant and equipment and investments, net | (1,593) | | | (240) | |
Provision for doubtful trade receivables | 1,503 | | | 1,126 | |
Stock-based compensation expense, net | 1,677 | | | 1,485 | |
Foreign exchange loss (gain) | 1,047 | | | (3) | |
Equity in earnings of affiliates, net of distributions | 2,020 | | | (11,241) | |
Provision for deferred income taxes | 16,182 | | | 29,311 | |
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Change in operating assets and liabilities: | | | |
Accounts receivable | 89,228 | | | 25,196 | |
Inventories | (15,298) | | | (11,493) | |
Accounts payable and accrued liabilities | (78,819) | | | (29,965) | |
Deferred revenue | (9,037) | | | (6,655) | |
Income taxes receivable/payable | 18,392 | | | 10,860 | |
Lease liabilities | (20,247) | | | (21,119) | |
Other assets and other liabilities, net | (18,549) | | | (20,881) | |
Other | 1,558 | | | 1,298 | |
Net Cash Provided by Operating Activities | 44,892 | | | 23,999 | |
Cash Flows from Investing Activities | | | |
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Proceeds from sales of marketable equity securities | 55,731 | | | — | |
Investments in equity affiliates, cost method and other investments | (23,698) | | | (2,415) | |
Purchases of property, plant and equipment | (14,207) | | | (13,113) | |
Net proceeds from disposition of businesses, property, plant and equipment, and investments | 1,334 | | | 270 | |
Purchases of marketable equity securities | — | | | (48,036) | |
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Other | 363 | | | 4 | |
Net Cash Provided by (Used in) Investing Activities | 19,523 | | | (63,290) | |
Cash Flows from Financing Activities | | | |
Net payments under revolving credit facilities | (37,000) | | | (2,223) | |
Common shares repurchased | (9,527) | | | — | |
Dividends paid | (7,749) | | | (7,553) | |
Net (repayments of) proceeds from vehicle floor plan payable | (3,889) | | | 2,462 | |
(Repayments of) proceeds from bank overdrafts | (2,868) | | | 3,212 | |
Deferred payments of acquisitions | (3,294) | | | (1,340) | |
Proceeds from exercise of stock options | 1,437 | | | — | |
Repayments of borrowings | (977) | | | (1,034) | |
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Purchase of noncontrolling interest | — | | | (3,508) | |
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Other | (495) | | | (145) | |
Net Cash Used in Financing Activities | (64,362) | | | (10,129) | |
Effect of Currency Exchange Rate Change | (208) | | | (1,015) | |
Net Decrease in Cash and Cash Equivalents and Restricted Cash | (155) | | | (50,435) | |
Beginning Cash and Cash Equivalents and Restricted Cash | 158,843 | | | 423,054 | |
Ending Cash and Cash Equivalents and Restricted Cash | $ | 158,688 | | | $ | 372,619 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)
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(in thousands) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Noncontrolling Interest | Total Equity | | Redeemable Noncontrolling Interest |
As of December 31, 2021 | $ | 20,000 | | $ | 389,456 | | $ | 7,126,761 | | $ | 971,388 | | $ | (4,108,022) | | $ | 12,086 | | $ | 4,411,669 | | | $ | 14,311 | |
Net income for the period | | | 96,566 | | | | | 96,566 | | | |
Net income attributable to noncontrolling interests | | | (986) | | | | 986 | | — | | | |
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Net loss attributable to redeemable noncontrolling interests | | | 44 | | | | | 44 | | | (44) | |
Change in redemption value of redeemable noncontrolling interests | | | | | | 64 | | 64 | | | 64 | |
Distribution to noncontrolling interest | | | | | | (357) | | (357) | | | |
Dividends on common stock | | | (15,497) | | | | | (15,497) | | | |
Repurchase of Class B common stock | | | | | (9,527) | | | (9,527) | | | |
Issuance of Class B common stock | | | | | 1,437 | | | 1,437 | | | |
Amortization of unearned stock compensation and stock option expense | | 1,677 | | | | | | 1,677 | | | |
Other comprehensive loss, net of income taxes | | | | (13,135) | | | | (13,135) | | | |
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As of March 31, 2022 | $ | 20,000 | | $ | 391,133 | | $ | 7,206,888 | | $ | 958,253 | | $ | (4,116,112) | | $ | 12,779 | | $ | 4,472,941 | | | $ | 14,331 | |
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(in thousands) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Noncontrolling Interest | Total Equity | | Redeemable Noncontrolling Interest |
As of December 31, 2020 | $ | 20,000 | | $ | 388,159 | | $ | 6,804,822 | | $ | 603,314 | | $ | (4,056,993) | | $ | 7,091 | | $ | 3,766,393 | | | $ | 11,928 | |
Net income for the period | | | 112,635 | | | | | 112,635 | | | |
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Net income attributable to noncontrolling interests | | | (185) | | | | 185 | | — | | | |
Change in redemption value of redeemable noncontrolling interests | | 697 | | | | | 64 | | 761 | | | (634) | |
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Distribution to noncontrolling interest | | | | | | (126) | | (126) | | | |
Dividends on common stock | | | (15,106) | | | | | (15,106) | | | |
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Issuance of Class B common stock, net of restricted stock forfeitures | | (5,188) | | | | 5,084 | | | (104) | | | |
Amortization of unearned stock compensation and stock option expense | | 1,589 | | | | | | 1,589 | | | |
Other comprehensive loss, net of income taxes | | | | (1,203) | | | | (1,203) | | | |
Purchase of redeemable noncontrolling interest | | | | | | | — | | | (3,508) | |
As of March 31, 2021 | $ | 20,000 | | $ | 385,257 | | $ | 6,902,166 | | $ | 602,111 | | $ | (4,051,909) | | $ | 7,214 | | $ | 3,864,839 | | | $ | 7,786 | |
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GRAHAM HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States (U.S.). The Company’s media operations comprise the ownership and operation of seven television broadcasting stations, several websites and print publications, podcast content and a marketing solutions provider. The Company’s other business operations include manufacturing, automotive dealerships, consumer internet brands, restaurants and entertainment venues, custom framing services and home health and hospice services.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three months ended March 31, 2022 and 2021 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, 2021.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information, in context with the information reasonably available to the Company and the unknown future impacts of the novel coronavirus (COVID-19) pandemic as of March 31, 2022 and through the date of this filing. The accounting matters assessed included, but were not limited to, the Company’s carrying value of goodwill and other long-lived assets, allowance for doubtful accounts, inventory valuation and related reserves, fair value of financial assets, valuation allowances for tax assets and revenue recognition. These assessments had no impact on the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2022. The Company’s assessments as of and for the three months ended March 31, 2021 resulted in other long-lived asset impairment charges (see Note 8). The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s condensed consolidated financial statements in future reporting periods.
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Acquisitions. During 2021, the Company acquired six businesses: two in education, two in healthcare, one in automotive, and one in other businesses for $392.4 million in cash and contingent consideration and the assumption of floor plan payables. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of the acquisition.
On June 14, 2021, the Company acquired all of the outstanding common shares of Leaf Group Ltd. (Leaf) for $308.6 million in cash and the assumption of $9.2 million in liabilities related to their previous stock compensation plan, which will be paid in the future. Leaf is a consumer internet company that builds creator-driven brands in lifestyle and home and art design categories. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and providing operating synergies with other business units. The Company includes Leaf in other businesses.
Kaplan acquired certain assets of Projects in Knowledge, a continuing medical education provider for healthcare professionals, and another small business in November 2021. These acquisitions are expected to build upon Kaplan’s existing customer base in the medical and test preparation fields. Both business are included in Kaplan’s supplemental education division.
In December 2021, GHG acquired two businesses, a home health business in Florida and a 50.1% interest in Weiss, a physician practice specializing in allergies, asthma and immunology. The minority shareholder of Weiss has an option to put 10% of the shares to the Company annually starting in 2026 and may put all of the shares starting in 2033. The fair value of the redeemable noncontrolling interest in Weiss was $6.6 million at the acquisition date, determined using an income approach. These acquisitions are expected to expand the market the healthcare division serves and are included in healthcare.
On December 28, 2021, the Company’s automotive subsidiary acquired a Ford automotive dealership for cash and the assumption of $16.2 million in floor plan payables (see Note 5). In connection with the acquisition, the automotive subsidiary of the Company borrowed $22.5 million to finance the acquisition. The dealership is operated and managed by an entity affiliated with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. The acquisition expands the Company’s automotive business operations and is included in automotive.
Acquisition-related costs were expensed as incurred. The aggregate purchase price of the 2021 acquisitions was allocated as follows on a preliminary basis, based on acquisition date fair values to the following assets and liabilities:
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| | | Purchase Price Allocation |
| | | Year Ended |
(in thousands) | | | December 31, 2021 |
Accounts receivable | | | $ | 17,928 | |
Inventory | | | 25,383 | |
Property, plant and equipment | | | 13,126 | |
Lease right-of-use assets | | | 25,890 | |
Goodwill | | | 206,238 | |
Indefinite-lived intangible assets | | | 22,200 | |
Amortized intangible assets | | | 99,800 | |
Other assets | | | 4,911 | |
Deferred income taxes | | | 42,903 | |
Floor plan payables | | | (16,198) | |
Other liabilities | | | (52,856) | |
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Current and noncurrent lease liabilities | | | (25,593) | |
Redeemable noncontrolling interest | | | (6,616) | |
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Aggregate purchase price, net of cash acquired | | | $ | 357,116 | |
The 2021 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). These values include measurement period adjustments related to accounts receivable, goodwill, amortized intangible assets, current and noncurrent lease liabilities and contingent consideration. The recording of deferred tax assets and liabilities, working capital and the amounts of residual goodwill 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 $80.0 million of goodwill for income tax purposes for the acquisitions completed in 2021.
The acquired companies were consolidated into the Company’s financial statements starting on their respective acquisition dates. The following unaudited pro forma financial information presents the Company’s results as if the 2021 acquisitions occurred at the beginning of 2020:
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| | | Three Months Ended March 31 |
(in thousands) | | | | | 2022 | | 2021 |
Operating revenues | | | | | $ | 915,045 | | | $ | 824,121 | |
Net income | | | | | 97,395 | | | 111,422 | |
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.
Other Transactions. In March 2021, Hoover’s minority shareholders put the remaining outstanding shares to the Company, which had a redemption value of $3.5 million. Following the redemption, the Company owns 100% of Hoover.
3. INVESTMENTS
Investments in Marketable Equity Securities. Investments in marketable equity securities consist of the following:
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| As of |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | |
Total cost | $ | 259,071 | | | $ | 273,201 | |
Gross unrealized gains | 543,620 | | | 537,915 | |
Gross unrealized losses | (1,513) | | | (1,119) | |
Total Fair Value | $ | 801,178 | | | $ | 809,997 | |
At March 31, 2022 and December 31, 2021, the Company owned 44,430 shares in Markel Corporation (Markel) valued at $65.5 million and $54.8 million, respectively. The Co-Chief Executive Officer of Markel, Mr. Thomas S. Gayner, is a member of the Company’s Board of Directors. As of March 31, 2022, the Company owned 422 Class A and 482,945 Class B shares in Berkshire Hathaway valued at $393.6 million, which exceeded 5% of the Company’s total assets.
There were no purchases of marketable equity securities during the first three months of 2022. The Company purchased $48.0 million of marketable equity securities during the first three months of 2021.
During the first three months of 2022, the gross cumulative realized gains from the sales of marketable equity securities were $41.6 million. The total proceeds from such sales were $55.7 million. There were no sales of marketable equity securities during the first three months of 2021.
The net gain on marketable equity securities comprised the following:
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| | | Three Months Ended March 31 |
(in thousands) | | | | | 2022 | | 2021 |
Gain on marketable equity securities, net | | | | | $ | 46,912 | | | $ | 79,214 | |
Less: Net losses in earnings from marketable equity securities sold | | | | | 5,767 | | | — | |
Net unrealized gains in earnings from marketable equity securities still held at the end of the period | | | | | $ | 52,679 | | | $ | 79,214 | |
Investments in Affiliates. As of March 31, 2022, the Company held an approximate 12% interest in Intersection Holdings, LLC (Intersection), and accounts for its investment under the equity method. The Company holds two of the ten seats of Intersection’s governing board, which allows the Company to exercise significant influence over Intersection. As of March 31, 2022, the Company also held investments in several other affiliates; Graham Healthcare Group (GHG) held a 40% interest in Residential Home Health Illinois, a 40% 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). During the first quarter of 2022, GHG invested an additional $18.5 million in the Residential Home Health Illinois and Residential Hospice Illinois affiliates to fund their acquisition of certain home health and hospice assets of the NorthShore University HealthSystem. The transaction diluted GHG’s interest in Residential Hospice Illinois resulting in a $0.6 million gain on the sale of investment in affiliate (see Note 12). For the three months ended March 31, 2022 and 2021, the Company recorded $3.3 million and $2.5 million, respectively, in revenue for services provided to the affiliates of GHG.
The Company had $51.3 million and $52.5 million in its investment account that represents cumulative undistributed income in its investments in affiliates as of March 31, 2022 and December 31, 2021, respectively.
Additionally, Kaplan International Holdings Limited (KIHL) held a 45% interest in a joint venture formed with University of York. KIHL loaned the joint venture £22 million, which loan is repayable over 25 years at an interest rate of 7% and guaranteed by the University of York. The loan is repayable by December 2041.
Cost Method Investments. The Company held investments without readily determinable fair values in a number of equity securities that are accounted for as cost method investments, which are recorded at cost, less impairment, and adjusted for observable price changes for identical or similar investments of the same issuer. The carrying value of these investments was $50.3 million and $48.9 million as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2021, the Company recorded gains of $2.7 million to those equity securities based on observable transactions.
4. ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable consist of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | |
Receivables from contracts with customers, less estimated credit losses of $22,693 and $21,836 | $ | 494,128 | | | $ | 589,582 | |
Other receivables | 23,423 | | | 17,889 | |
| $ | 517,551 | | | $ | 607,471 | |
Credit loss expense was $1.5 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.
Accounts payable and accrued liabilities consist of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | |
Accounts payable | $ | 100,260 | | | $ | 126,985 | |
Accrued compensation and related benefits | 139,850 | | | 179,307 | |
Other accrued liabilities | 263,684 | | | 277,337 | |
| $ | 503,794 | | | $ | 583,629 | |
Cash overdrafts of $2.7 million and $5.5 million are included in accounts payable as of March 31, 2022 and December 31, 2021, respectively.
5. INVENTORIES, CONTRACTS IN PROGRESS AND VEHICLE FLOOR PLAN PAYABLE
Inventories and contracts in progress consist of the following:
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
(in thousands) | |
Raw materials | $ | 54,995 | | | $ | 54,944 | |
Work-in-process | 15,475 | | | 11,506 | |
Finished goods | 86,142 | | | 72,796 | |
Contracts in progress | 66 | | | 2,225 | |
| $ | 156,678 | | | $ | 141,471 | |
The Company finances new and used vehicle inventory through standardized floor plan facilities with Truist Bank (Truist floor plan facility) and Ford Motor Credit Company (Ford floor plan facility). The Truist floor plan facility bears interest at variable rates that are based on Secured Overnight Financing Rate (SOFR) plus 1.19% per annum. The Ford floor plan facility bears interest at variable interest rates that are based on the prime rate, with a floor of 3.5%, plus 1.5% per annum. The weighted average interest rate for the floor plan facilities was 2.0% and 1.2% for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the aggregate capacity under the floor plan facilities was $70.9 million, of which $27.7 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 facilities are collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with
respect to the creation of liens and changes in ownership, officers and key management personnel. The Company was in compliance with all of these restrictive covenants as of March 31, 2022.
The floor plan interest expense related to the vehicle floor plan arrangements is offset by amounts received from manufacturers in the form of floor plan assistance capitalized in inventory and recorded against cost of goods sold in the Condensed Consolidated Statements of Operations when the associated inventory is sold. For the three months ended March 31, 2022 and 2021, the Company recognized a reduction in cost of goods sold of $0.9 million and $0.6 million, respectively, related to manufacturer floor plan assistance.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended March 31, 2022 and 2021, was $14.9 million and $13.9 million, respectively. Amortization of intangible assets is estimated to be approximately $44 million for the remainder of 2022, $51 million in 2023, $38 million in 2024, $31 million in 2025, $26 million in 2026 and $41 million thereafter. The changes in the carrying amount of goodwill, by segment, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Education | | Television Broadcasting | | Manufacturing | | Healthcare | | Automotive | | Other Businesses | | Total |
Balance as of December 31, 2021 | | | | | | | | | | | | | |
Goodwill | $ | 1,186,236 | | | $ | 190,815 | | | $ | 234,993 | | | $ | 118,329 | | | $ | 45,826 | | | $ | 253,399 | | | $ | 2,029,598 | |
Accumulated impairment losses | (331,151) | | | — | | | (34,302) | | | — | | | — | | | (14,563) | | | (380,016) | |
| 855,085 | | | 190,815 | | | 200,691 | | | 118,329 | | | 45,826 | | | 238,836 | | | 1,649,582 | |
| | | | | | | | | | | | | |
Measurement period adjustments | 1,000 | | | — | | | — | | | 250 | | | — | | | (15) | | | 1,235 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Foreign currency exchange rate changes | (1,171) | | | — | | | — | | | — | | | — | | | — | | | (1,171) | |
Balance as of March 31, 2022 | | | | | | | | | | | | | |
Goodwill | 1,186,065 | | | 190,815 | | | 234,993 | | | 118,579 | | | 45,826 | | | 253,384 | | | 2,029,662 | |
Accumulated impairment losses | (331,151) | | | — | | | (34,302) | | | — | | | — | | | (14,563) | | | (380,016) | |
| $ | 854,914 | | | $ | 190,815 | | | $ | 200,691 | | | $ | 118,579 | | | $ | 45,826 | | | $ | 238,821 | | | $ | 1,649,646 | |
The changes in carrying amount of goodwill at the Company’s education division were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Kaplan International | | Higher Education | | Supplemental Education | | Total |
Balance as of December 31, 2021 | | | | | | | |
Goodwill | $ | 621,268 | | | $ | 174,564 | | | $ | 390,404 | | | $ | 1,186,236 | |
Accumulated impairment losses | — | | | (111,324) | | | (219,827) | | | (331,151) | |
| 621,268 | | | 63,240 | | | 170,577 | | | 855,085 | |
| | | | | | | |
Measurement period adjustments | — | | | — | | | 1,000 | | | 1,000 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency exchange rate changes | (1,222) | | | — | | | 51 | | | (1,171) | |
Balance as of March 31, 2022 | | | | | | | |
Goodwill | 620,046 | | | 174,564 | | | 391,455 | | | 1,186,065 | |
Accumulated impairment losses | — | | | (111,324) | | | (219,827) | | | (331,151) | |
| $ | 620,046 | | | $ | 63,240 | | | $ | 171,628 | | | $ | 854,914 | |
Other intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2022 | | As of December 31, 2021 |
(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 | | $ | 298,952 | | | $ | 212,955 | | | $ | 85,997 | | | $ | 300,027 | | | $ | 206,714 | | | $ | 93,313 | |
Trade names and trademarks | 2–15 years | | 158,202 | | | 71,771 | | | 86,431 | | | 158,365 | | | 68,113 | | | 90,252 | |
Databases and technology | 3–6 years | | 36,650 | | | 28,163 | | | 8,487 | | | 36,585 | | | 26,464 | | | 10,121 | |
Network affiliation agreements | 10 years | | 17,400 | | | 9,062 | | | 8,338 | | | 17,400 | | | 8,628 | | | 8,772 | |
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