Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits.
Exhibits
EX-31.1
dex311.htm
EX-31.2
dex312.htm
EX-32
dex32.htm
Graham Holdings Earnings 2018-09-30
GHC 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 d10q.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2018
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-671
GRAHAM HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1300 North 17th Street, Arlington, Virginia
22209
(Address of principal executive offices)
(Zip Code)
(703) 345-6300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý. No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
ý
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller reporting
company
¨
Emerging growth
company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨. No ý.
Shares outstanding at October 26, 2018:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,337,758 Shares
GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017
Unrealized gain on pensions and other postretirement plans
328,885
334,536
Cash flow hedge
303
(184
)
Cost of Class B common stock held in treasury
(3,914,058
)
(3,802,834
)
Total Equity
2,975,357
2,915,145
Total Liabilities and Equity
$
4,873,743
$
4,937,823
See accompanying Notes to Condensed Consolidated Financial Statements.
3
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30
(in thousands)
2018
2017
Cash Flows from Operating Activities
Net Income
$
214,670
$
87,929
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and goodwill and other long-lived asset impairment
84,070
84,351
Net pension benefit
(55,458
)
(44,281
)
Early retirement program expense
—
932
Gain on marketable equity securities and cost method investments, net
(36,793
)
—
Stock-based compensation expense, net
5,172
7,528
(Gain) loss on disposition of businesses, property, plant and equipment and investments, net
(13,379
)
504
Debt extinguishment costs
10,563
—
Foreign exchange loss (gain)
2,205
(6,608
)
Write-down of cost method investments
2,500
200
Equity in earnings of affiliates, net of distributions
(10,294
)
(1,434
)
(Benefit) provision for deferred income taxes
(10,867
)
16,306
Change in operating assets and liabilities:
Accounts receivable, net
55,200
106,230
Accounts payable and accrued liabilities
(95,100
)
(63,255
)
Deferred revenue
38,148
27,254
Income taxes receivable
23,073
14,477
Other assets and other liabilities, net
(23,757
)
(9,795
)
Other
1,905
519
Net Cash Provided by Operating Activities
191,858
220,857
Cash Flows from Investing Activities
Investments in certain businesses, net of cash acquired
(111,451
)
(299,938
)
Proceeds from sales of marketable equity securities
66,741
—
Purchases of property, plant and equipment
(58,850
)
(43,863
)
Advance related to Kaplan University transaction and loan to affiliate
(28,061
)
(6,771
)
Net (payments) proceeds from disposition of businesses, property, plant and equipment and investments
(13,483
)
2,672
Investments in equity affiliates, cost method and other investments
(10,679
)
(66,097
)
Return of investment in equity affiliates
4,521
3,527
Net Cash Used in Investing Activities
(151,262
)
(410,470
)
Cash Flows from Financing Activities
Repayments of borrowings and early redemption premium
(417,112
)
(7,712
)
Issuance of borrowings
400,000
—
Common shares repurchased
(110,848
)
(35,394
)
Dividends paid
(21,564
)
(21,304
)
Purchase of noncontrolling interest
(16,500
)
—
Payments of debt financing costs
(6,490
)
—
Deferred payments of acquisition and noncontrolling interest
—
(5,187
)
Other
5,303
(4,962
)
Net Cash Used in Financing Activities
(167,211
)
(74,559
)
Effect of Currency Exchange Rate Change
(4,216
)
9,768
Net Decrease in Cash and Cash Equivalents and Restricted Cash
(130,831
)
(254,404
)
Beginning Cash and Cash Equivalents and Restricted Cash
407,566
670,816
Ending Cash and Cash Equivalents and Restricted Cash
$
276,735
$
416,412
See accompanying Notes to Condensed Consolidated Financial Statements.
4
GRAHAM HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of seven television broadcasting stations, several websites and print publications, and a marketing solutions provider. The Company’s other business operations include manufacturing and home health and hospice services.
On March 22, 2018, Kaplan completed the sale of the institutional assets and operations of Kaplan University (KU) to an Indiana non-profit, public-benefit corporation that is a subsidiary affiliated with Purdue University (Purdue) (see Note 2). The gain on the sale of the institutional assets of KU is included in other income, net, in the Condensed Consolidated Statement of Operations.
As a result of the transaction, Kaplan reorganized its higher education operations into the following two operating segments for the purpose of making operating decisions and assessing performance: Higher Education and Professional (U.S.) (see Note 16). The higher education segment comprises the historical KU for-profit postsecondary education business and the current non-academic operations support services provided to the new university, Purdue University Global. The Professional (U.S.) segment comprises the KU School of Professional and Continuing Education, which provides professional training and exam preparation for professional certifications and licensures.
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, 2018 and 2017 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 Current Report on Form 8-K filed on May 21, 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 May 2014, the Financial Accounting Standards Board (FASB) issued comprehensive new guidance that supersedes all existing revenue recognition guidance. In August 2015, the FASB issued an amendment to the guidance that defers the effective date by one year. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. The guidance is effective for interim and fiscal years beginning after December 15, 2017. The standard permits two implementation approaches, full retrospective, requiring retrospective application of the new guidance with a restatement of prior years, or modified retrospective, requiring prospective application of the new guidance with disclosure of results under the old guidance in the first year of adoption. The Company adopted the new guidance on January 1, 2018 using the modified retrospective approach for contracts not completed as of the adoption date.
Upon adoption of the new guidance, the Company recorded a net increase to the opening balance of retained earnings of $7.4 million. This adjustment was driven by changes in the timing of recognition of both revenues and
5
expenses. A change in revenue recognition at a manufacturing business resulted in the acceleration of revenue and associated expenses as revenue is now recognized over time versus at a point in time. A change in the contract term at an education business resulted in a different revenue recognition pattern from previous recognition. Finally, the Company’s treatment of certain commissions paid to employees and agents at its education division changed. The Company previously expensed such commissions as incurred. Upon adoption of the new guidance, the Company capitalizes certain commission costs as an incremental cost of obtaining a contract and subsequently amortizes the cost as the tuition services are delivered to students.
The cumulative effect of the changes to the Company’s Condensed Consolidated Balance Sheet as a result of adopting the new guidance was as follows:
(in thousands)
Balance as of December 31, 2017
Adjustments
Balance as of January 1, 2018
Assets
Accounts receivable, net
$
620,319
$
2,142
$
622,461
Inventories and contracts in progress
60,612
903
61,515
Other current assets
66,253
6,343
72,596
Liabilities
Accounts payable and accrued liabilities
$
526,323
$
88
$
526,411
Deferred revenue
339,454
(346
)
339,108
Deferred income taxes
362,701
2,197
364,898
Equity
Retained earnings
$
5,791,724
$
7,449
$
5,799,173
Under the modified retrospective method of adoption, the Company is required to disclose the impact the adoption of the revenue guidance had on its Condensed Consolidated Statement of Operations. Under the previous guidance, KU’s fee revenue with Purdue University Global is not fixed and determinable until the end of Purdue University Global’s fiscal year (see Note 2). As a result, the Company would report $4.5 million less revenue and operating income. If the company continued to follow its accounting policies under the previous guidance for all other revenue streams, revenue would be $0.1 million higher and expenses would be $1.8 million lower for the quarter ended September 30, 2018. For the nine months ended September 30, 2018, revenue and expenses would be $1.2 million and $2.6 million lower, respectively. This is primarily due to the net impact of the change in the timing of the recognition of revenue and costs to obtain a contract.
In January 2016, the FASB issued new guidance that substantially revises the recognition, measurement and presentation of financial assets and financial liabilities. The new guidance, among other things, requires, (i) equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, with some exceptions, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and (v) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for interim and fiscal years beginning after December 15, 2017.
The Company adopted this guidance in the first quarter of 2018 and recorded a cumulative adjustment of $194.9 million to retained earnings on its Condensed Consolidated Balance Sheet related to unrealized gains of available-for-sale securities, net of tax, previously classified within accumulated other comprehensive income. Results for reporting periods beginning after January 1, 2018 are presented under this new guidance, with any changes in fair value recognized in net income. In addition, the Company elected the measurement alternative to measure cost method investments that do not have a readily determinable fair value at cost less impairment, adjusted by observable price changes with any fair value changes recognized in net income.
In February 2016, the FASB issued new guidance that requires, among other things, a lessee to recognize a right-of-use asset representing an entity’s right to use the underlying asset for the lease term and a liability for lease payments on its balance sheet, regardless of classification of a lease as operating or financing. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and account for the lease similar to existing guidance for operating leases today. This new guidance supersedes all prior guidance. The guidance is effective for interim and fiscal years beginning after December 15, 2018. Early adoption is permitted. The standard provides two methods of adoption. Using a modified retrospective approach, lessees and lessors are required to recognize and measure leases at either the beginning of the earliest period presented or in the period of adoption. The Company will adopt
6
the new guidance on January 1, 2019 and will recognize and measure leases at that date. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements; however, the recognition of right-of-use assets and lease liabilities is expected to have a material effect on its Condensed Consolidated Balance Sheet.
In March 2017, the FASB issued new guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost for defined benefit plans. The guidance requires an issuer to disaggregate the service cost component of net periodic pension and postretirement benefit cost from other components. Under the new guidance, service cost will be included in the same line item(s) as other compensation costs arising from services rendered by employees during the period, while the other components will be recognized after income from operations. The guidance is effective for interim and fiscal years beginning after December 15, 2017. The guidance must be applied retrospectively; however, a practical expedient is available which permits an employer to use amounts previously disclosed in its pension and postretirement plans footnote for the prior comparative periods.
The Company adopted the new standard in the first quarter of 2018. In combination with the presentation change to net periodic pension cost and net periodic postretirement benefit cost, the Company allocated its costs associated with fringe benefits between operating expenses and selling, general and administrative expenses. Previously, costs related to fringe benefits were generally classified as selling, general and administrative expenses. The amounts in the previously issued financial statements have been reclassified to conform to the reclassified presentation. The effect of these changes to the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2017 is as follows:
As Previously Reported
Adjustment
Upon Adoption
(in thousands)
Three Months Ended September 30, 2017
Operating expenses
$
352,635
$
22,352
$
374,987
Selling, general and administrative expenses
232,782
(4,731
)
228,051
Income from Operations
44,571
(17,621
)
26,950
Non-operating pension and postretirement benefit income, net
—
17,621
17,621
Income Before Income Taxes
38,244
—
38,244
Nine Months Ended September 30, 2017
Operating expenses
$
1,011,553
$
70,868
$
1,082,421
Selling, general and administrative expenses
678,139
(15,826
)
662,313
Income from Operations
141,986
(55,042
)
86,944
Non-operating pension and postretirement benefit income, net
—
55,042
55,042
Income Before Income Taxes
127,929
—
127,929
2. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
Acquisitions. In the first nine months of 2018, the Company acquired eight businesses, five in its education division, one in its healthcare division, and two in other businesses for $120.9 million in cash and contingent consideration.
In September 2018, Graham Healthcare Group (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 the test preparation division.
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. The acquisition is included in other businesses.
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 industry. 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 other businesses.
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 the Professional (U.S.) division.
7
In May 2018, Kaplan acquired a 100% interest in Professional Publications, Inc. (PPI), an independent publisher of professional licensing exam review materials and a leader in 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 the Professional (U.S.) division.
In January and February 2018, Kaplan acquired the assets of i-Human Patients, Inc., a leader in cloud-based, interactive patient encounter simulations for medical and nursing professionals and educators, and another small business in its test preparation and international divisions, respectively. These acquisitions are expected to provide strategic benefits in the future.
During 2017, the Company acquired six businesses, two in its education division, two in its television broadcasting division, one in its healthcare division and one in other businesses for $318.9 million in cash and contingent consideration, and the assumption of $59.1 million in certain pension and postretirement obligations.
On January 17, 2017, the Company closed on its agreement with Nexstar Broadcasting Group, Inc. and Media General, Inc. to acquire the assets of WCWJ, a CW affiliate television station in Jacksonville, FL and WSLS, an NBC affiliate television station in Roanoke, VA, for cash and the assumption of certain pension obligations. The acquisition of WCWJ and WSLS will complement the other stations that GMG operates. Both of these acquisitions are included in television broadcasting.
In February 2017, Kaplan acquired a 100% interest in Genesis Training Institute, a Dubai-based provider of professional development training in the United Arab Emirates, by purchasing all of its issued and outstanding shares. Additionally, Kaplan acquired a 100% interest in Red Marker Pty Ltd, an Australia-based regulatory technology company by purchasing all of its outstanding shares. These acquisitions are expected to provide certain strategic benefits in the future. Both of these acquisitions are included in Kaplan International.
In April 2017, the Company acquired 97.72% of the issued and outstanding shares of Hoover Treated Wood Products, Inc., a Thomson, GA-based supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications for $206.8 million, net of cash acquired. The fair value of the redeemable noncontrolling interest in Hoover was $3.7 million at the acquisition date, determined using a market approach. The minority shareholders have an option to put some of their shares to the Company starting in 2019 and the remaining shares starting in 2021. The Company has an option to buy the shares of minority shareholders starting in 2027. This acquisition is consistent with the Company’s ongoing strategy of investing in companies with a history of profitability and strong management. Hoover is included in other businesses.
At the end of June 2017, GHG acquired a 100% interest in Hometown Home Health and Hospice, a Lapeer, MI-based healthcare services provider by purchasing all of its issued and outstanding shares. This acquisition expands GHG’s service area in Michigan. GHG is included in healthcare.
Acquisition-related costs for acquisitions that closed during 2018 were $1.2 million and were expensed as incurred. Acquisition-related costs for acquisitions that closed during the first nine months of 2017 were $4.1 million and were expensed as incurred. The aggregate purchase price of the 2018 and 2017 acquisitions was allocated as follows (2018 on a preliminary basis):
Purchase Price Allocation
Nine Months Ended
Twelve Months Ended
(in thousands)
September 30, 2018
December 31, 2017
Accounts receivable
$
2,334
$
12,502
Inventory
1,268
25,253
Property, plant and equipment
1,518
29,921
Goodwill
41,397
143,149
Indefinite-lived intangible assets
14,200
33,800
Amortized intangible assets
64,327
170,658
Other assets
4,912
1,880
Pension and other postretirement benefits liabilities
—
(59,116
)
Other liabilities
(7,575
)
(12,177
)
Deferred income taxes
(4,460
)
(37,289
)
Redeemable noncontrolling interest
—
(3,666
)
Aggregate purchase price, net of cash acquired
$
117,921
$
304,915
The 2018 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
8
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 $32.4 million of goodwill for income tax purposes for the acquisitions completed during the first nine months of 2018. The Company expects to deduct $11.0 million of goodwill for income tax purposes for the acquisitions completed in 2017.
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 for the companies acquired in 2018 of $10.2 million for the third quarter of 2018 and had no impact on operating income. The Company’s Condensed Consolidated Statements of Operations include aggregate revenues and operating losses of $12.6 million and $0.8 million, respectively, for the first nine months of 2018. The following unaudited pro forma financial information presents the Company’s results as if the 2018 acquisitions had occurred at the beginning of 2017. The unaudited pro forma information also includes the 2017 acquisitions as if they occurred at the beginning of 2016:
Three Months Ended September 30
Nine Months Ended September 30
(in thousands)
2018
2017
2018
2017
Operating revenues
$
680,279
$
674,991
$
2,046,792
$
2,033,078
Net income
126,104
25,896
219,092
98,564
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 April 27, 2017, certain subsidiaries of Kaplan entered into a Contribution and Transfer Agreement to contribute the institutional assets and operations of Kaplan University to an Indiana non-profit, public-benefit corporation that is a subsidiary affiliated with Purdue University. The closing of the transactions contemplated by the Transfer Agreement occurred on March 22, 2018. At the same time, the parties entered into a Transition and Operations Support Agreement (TOSA) pursuant to which Kaplan will provide key non-academic operations support to the new university.
The new university will operate largely online as a new Indiana public university affiliated with Purdue under the name Purdue University Global. As part of the transfer to Purdue University Global, KU transferred students, academic personnel, faculty and operations, property leases for KU’s campuses and learning centers, Kaplan-owned academic curricula and content related to KU courses. The operations support activities that Kaplan will provide to Purdue University Global will include technology support, help-desk functions, human resources support for transferred faculty and employees, admissions support, financial aid administration, marketing and advertising, back-office business functions, certain test preparation and domestic and international student recruiting services.
The transfer of KU does not include any of the assets of the KU School of Professional and Continuing Education, which provides professional training and exam preparation for professional certifications and licensures, nor does it include the transfer of other Kaplan businesses such as Kaplan Test Preparation and Kaplan International. Those entities, programs and business lines will remain part of Kaplan. Kaplan received nominal cash consideration upon transfer of the institutional assets.
Pursuant to the TOSA, Kaplan is not entitled to receive any reimbursement of costs incurred in providing support functions, or any fee, unless and until Purdue University Global has first covered all of its operating costs (subject to a cap). If Purdue University Global achieves cost efficiencies in its operations, then Purdue University Global may be entitled to an additional payment equal to 20 percent of such cost efficiencies (Purdue Efficiency Payment). In addition, during each of Purdue University Global’s first five years, prior to any payment to Kaplan, Purdue University Global is entitled to a priority payment of $10 million per year beyond costs. To the extent Purdue University Global’s revenue is insufficient to pay the $10 million per year priority payment, Kaplan is required to advance an amount to Purdue University Global to cover such insufficiency. At closing, Kaplan paid to Purdue University Global an advance in the amount of $20 million, representing, and in lieu of, priority payments for Purdue University Global’s fiscal years ending June 30, 2019 and June 30, 2020.
To the extent that there are sufficient revenues to pay the Purdue Efficiency Payment, Purdue University Global is reimbursed for its operating costs (subject to a cap) and the priority payment to Purdue University Global is paid. To
9
the extent there is remaining revenue, Kaplan will then receive reimbursement for its operating costs (subject to a cap) of providing the support activities. If Kaplan achieves cost efficiencies in its operations, then Kaplan may be entitled to an additional payment equal to 20 percent of such cost efficiencies (Kaplan Efficiency Payment). If there are sufficient revenues, Kaplan may also receive a fee equal to 12.5 percent of Purdue University Global’s revenue. The fee will increase to 13 percent beginning with Purdue University Global’s fiscal year ending June 30, 2023 and continuing through Purdue University Global’s fiscal year ending June 30, 2027, and then the fee will return to 12.5 percent thereafter. Subject to certain limitations, a portion of the fee that is earned by Kaplan in one year may be carried over and instead paid to Kaplan in subsequent years.
After the first five years of the TOSA, Kaplan and Purdue University Global will be entitled to payments in a manner consistent with the structure described above, except that (i) Purdue University Global will no longer be entitled to a priority payment and (ii) to the extent that there are sufficient revenues after payment of the Kaplan Efficiency Payment (if any), Purdue University Global will be entitled to an annual payment equal to 10 percent of the remaining revenue after the Kaplan Efficiency Payment (if any) is paid and subject to certain other adjustments. The TOSA has a 30-year initial term, which will automatically renew for five-year periods unless terminated. After the sixth year, Purdue University Global has the right to terminate the agreement upon payment of a termination fee equal to 1.25 times Purdue University Global’s revenue for the preceding 12-month period, which payment would be made pursuant to a 10-year note, and at the election of Purdue University Global, it may receive for no additional consideration certain assets used by Kaplan to provide the support activities pursuant to the TOSA. At the end of the 30-year term, if Purdue University Global does not renew the TOSA, Purdue University Global will be obligated to make a final payment of 75% of its total revenue earned during the preceding 12-month period, which payment will be made pursuant to a 10-year note, and at the election of Purdue University Global, it may receive for no additional consideration certain assets used by Kaplan to provide the support activities pursuant to the TOSA.
Either party may terminate the TOSA at any time if Purdue University Global generates (i) $25 million in cash operating losses for three consecutive years or (ii) aggregate cash operating losses greater than $75 million at any point during the initial term. Operating loss is defined as the amount of revenue Purdue University Global generates minus the sum of (1) Purdue University Global’s and Kaplan’s respective costs in performing academic and support functions and (2) the $10 million priority payment to Purdue University Global in each of the first five years. Upon termination for any reason, Purdue University Global will retain the assets that Kaplan contributed pursuant to the Transfer Agreement. Each party also has certain termination rights in connection with a material default or material breach of the TOSA by the other party.
Pursuant to the U.S. Department of Education (ED) requirements, Purdue assumes responsibility for any liability arising from the operation of the institution. This assumption will not limit Kaplan’s obligation to indemnify Purdue for pre-closing liabilities under the Transfer Agreement. As a result of the transfer of KU, Kaplan will no longer own or operate KU or any other institution participating in student financial aid programs that have been created under Title IV of the U.S. Federal Higher Education Act of 1965, as amended. Consequently, Kaplan is no longer responsible for operating KU. However, pursuant to the TOSA, Kaplan will be performing functions that fall within the ED's definition of a third-party servicer and will, therefore, assume certain regulatory responsibilities that require approval by the ED. The third-party servicer arrangement between Kaplan and Purdue University Global is also subject to information security requirements established by the Federal Trade Commission as well as all aspects of the Family Educational Rights and Privacy Act. As a third-party servicer, Kaplan may be required to undergo an annual compliance audit of its administration of the Title IV functions or services that it performs.
As a result of the KU Transaction, the Company 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 for the sale of the institutional assets as part of the fee to the extent there are sufficient revenues available after paying all amounts required by the TOSA. The Company recorded a $0.5 million and $1.9 million contingent consideration gain related to the disposition in the three and nine months ended September 30, 2018, respectively.
The revenue and operating income related to the KU business disposed of are as follows:
Three Months Ended September 30
Nine Months Ended September 30
(in thousands)
2018
2017
2018
2017
Revenue
$
—
$
105,036
$
91,526
$
327,529
Operating income
—
1,785
213
18,582
Sale of Businesses. In September 2018, Kaplan Australia completed the sale of a small business which was included in Kaplan International. In February 2018, Kaplan completed the sale of a small business which was included in Test Preparation. In February 2017, GHG completed the sale of Celtic Healthcare of Maryland. In the fourth quarter of 2017, 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 (losses) in other non-operating income (see Note 13).
10
Other Transactions. 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
As of September 30, 2018 and December 31, 2017, the Company had money market investments of $86.0 million and $217.6 million, respectively, that are classified as cash, cash equivalents and restricted cash in the Company’s Condensed Consolidated Balance Sheets.
Investments in marketable equity securities comprised the following:
As of
September 30, 2018
December 31, 2017
(in thousands)
Total cost
$
239,904
$
269,343
Gross unrealized gains
257,975
266,972
Total Fair Value
$
497,879
$
536,315
There were no purchases of marketable equity securities during the first nine months of 2018 and 2017.
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. There were no sales of marketable equity securities for the first nine months of 2017.
The gain on marketable equity securities comprised the following:
Three Months Ended
Nine Months Ended
(in thousands)
September 30, 2018
September 30, 2018
Gain on marketable equity securities, net
$
44,962
$
28,306
Plus: Net losses in earnings from marketable equity securities sold
—
4,271
Net unrealized gains in earnings from marketable equity securities still held at the end of the period
$
44,962
$
32,577
As of September 30, 2018, 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, 2018, the Company recorded $2.5 million and $9.5 million, respectively, in revenue for services provided to the affiliates of GHG. For the three and nine months ended September 30, 2017, the Company recorded $4.5 million and $14.1 million, respectively, in revenue for services provided to the affiliates of 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.
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 will be repayable over 25 years at an interest rate of 7% and the loan is guaranteed by the University of York.
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 $27.4 million and $19.9 million as of September 30, 2018 and December 31, 2017, respectively. 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, 2018
December 31, 2017
(in thousands)
Receivables from contracts with customers, less doubtful accounts of $14,453 and $22,975
$
544,487
$
600,215
Other receivables
45,158
20,104
$
589,645
$
620,319
11
Bad debt expense was $1.8 million and $6.5 million for the three months ended September 30, 2018 and 2017, respectively; and $7.9 million and $18.7 million for the nine months ended September 30, 2018 and 2017, respectively.
5.
INVENTORIES AND CONTRACTS IN PROGRESS
Inventories and contracts in progress consist of the following:
As of
September 30, 2018
December 31, 2017
(in thousands)
Raw materials
$
37,300
$
30,429
Work-in-process
10,926
10,258
Finished goods
18,506
18,851
Contracts in progress
6,964
1,074
$
73,696
$
60,612
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company reorganized its operations in the first quarter of 2018 into the following six operating segments for the purpose of making operating decisions and assessing performance: Kaplan International, Higher Education, Test Preparation, Professional (U.S.), Television Broadcasting and Healthcare (see Note 16). The reorganization changed the composition of the reporting units within the education division, and resulted in the reassignment of the assets and liabilities to the reporting units affected. The goodwill was allocated to the affected reporting units using the relative fair value approach. As a result of the reassignment and allocation, the Company performed an interim review of the carrying value of goodwill at the education division for possible impairment on both a pre and post-reorganization basis. No impairment of goodwill was indicated at the pre- and post-reorganization reporting units.
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.
In the second quarter of 2017, as a result of a challenging operating environment, the Forney reporting unit recorded a goodwill and other long-lived asset impairment charge of $9.2 million. The Company performed an interim review of the goodwill and other long-lived assets of the reporting unit by utilizing a discounted cash flow model to estimate the fair value. The carrying value of the reporting unit exceeded the estimated fair value, resulting in a goodwill impairment charge for the amount by which the carrying value exceeded the reporting unit’s estimated fair value. Forney is included in other businesses.
Amortization of intangible assets for the three months ended September 30, 2018 and 2017 was $12.3 million and $10.9 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2018 and 2017 was $34.1 million and $28.3 million, respectively. Amortization of intangible assets is estimated to be approximately $12 million for the remainder of 2018, $48 million in 2019, $45 million in 2020, $39 million in 2021, $33 million in 2022 and $83 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
Television
Broadcasting
Healthcare
Other
Businesses
Total
Balance as of December 31, 2017
Goodwill
$
1,171,812
$
190,815
$
69,409
$
233,825
$
1,665,861
Accumulated impairment losses
(350,850
)
—
—
(15,301
)
(366,151
)
820,962
190,815
69,409
218,524
1,299,710
Acquisitions
19,981
—
217
21,199
41,397
Dispositions
(11,191
)
—
—
—
(11,191
)
Foreign currency exchange rate changes
(19,841
)
—
—
—
(19,841
)
Balance as of September 30, 2018
Goodwill
1,141,062
190,815
69,626
255,024
1,656,527
Accumulated impairment losses
(331,151
)
—
—
(15,301
)
(346,452
)
$
809,911
$
190,815
$
69,626
$
239,723
$
1,310,075
12
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, 2017
Goodwill
$
615,861
$
205,494
$
166,098
$
184,359
$
1,171,812
Accumulated impairment losses
—
(131,023
)
(102,259
)
(117,568
)
(350,850
)
615,861
74,471
63,839
66,791
820,962
Acquisitions
26
—
626
19,329
19,981
Dispositions
—
(11,191
)
—
—
(11,191
)
Foreign currency exchange rate changes
(19,775
)
(40
)
—
(26
)
(19,841
)
Balance as of September 30, 2018
Goodwill
596,112
174,564
166,724
203,662
1,141,062
Accumulated impairment losses
—
(111,324
)
(102,259
)
(117,568
)
(331,151
)
$
596,112
$
63,240
$
64,465
$
86,094
$
809,911
Other intangible assets consist of the following:
As of September 30, 2018
As of December 31, 2017
(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 (1)
$
281,639
$
106,235
$
175,404
$
260,464
$
83,690
$
176,774
Trade names and trademarks
2–10 years
71,870
37,858
34,012
50,286
25,596
24,690
Network affiliation agreements
10 years
17,400
2,972
14,428
17,400
1,668
15,732
Databases and technology
3–6 years
28,788
8,537
20,251
19,563
5,008
14,555
Noncompete agreements
2–5 years
1,093
778
315
930
467
463
Other
1–8 years
24,530
8,885
15,645
13,430
7,668
5,762
$
425,320
$
165,265
$
260,055
$
362,073
$
124,097
$
237,976
Indefinite-Lived Intangible Assets
Trade names and trademarks
$
95,802
$
82,745
FCC licenses
18,800
18,800
Licensure and accreditation
150
650
$
114,752
$
102,195
____________
(1)
As of December 31, 2017, the student and customer relationships’ minimum useful life was 1 year.
7. DEBT
The Company’s borrowings consist of the following:
As of
September 30, 2018
December 31, 2017
(in thousands)
5.75% unsecured notes due June 1, 2026 (1)
$
394,504
$
—
7.25% unsecured notes due February 1, 2019
—
399,507
UK Credit facility (2)
85,024
93,671
Other indebtedness
100
109
Total Debt
$
479,628
$
493,287
Less: current portion
(6,568
)
(6,726
)
Total Long-Term Debt
$
473,060
$
486,561
____________
(1)
The carrying value is net of $5.5 million of unamortized debt issuance costs as of September 30, 2018.
(2)
The carrying value is net of $0.3 million and $0.4 million of unamortized debt issuance costs as of September 30, 2018 and December 31, 2017, respectively.
The Company’s other indebtedness at September 30, 2018 and December 31, 2017 is at an interest rate of 2% and matures in 2026.
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
13
Indenture). The Notes have a coupon rate of 5.75% per annum, payable semi-annually on June 1 and December 1, beginning on December 1, 2018. 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, 2018.
During the three months ended September 30, 2018 and 2017, the Company had average borrowings outstanding of approximately $480.6 million and $492.4 million, respectively, at average annual interest rates of approximately 5.1% and 6.3%, respectively. During the three months ended September 30, 2018 and 2017, the Company incurred net interest expense of $5.5 million and $7.8 million, respectively.
During the nine months ended September 30, 2018 and 2017, the Company had average borrowings outstanding of approximately $529.2 million and $493.5 million, respectively, at average annual interest rates of approximately 5.7% and 6.3%, respectively. During the nine months ended September 30, 2018 and 2017, the Company incurred net interest expense of $27.5 million and $22.4 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, 2018, the fair value of the Company’s 5.75% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $409.4 million, compared with the carrying amount of $394.5 million. At December 31, 2017, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices (Level 2 fair value assessment), totaled $414.7 million, compared with the carrying amount of $399.5 million. The carrying value of the Company’s other unsecured debt at September 30, 2018 and December 31, 2017 approximates fair value.
14
8. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
The Company’s money market investments are included in Cash and Cash Equivalents and Restricted Cash and the value considers the liquidity of the counterparty.
(2)
The Company’s investments in marketable equity securities are held in common shares of U.S. corporations that are actively traded on U.S. stock exchanges. Price quotes for these shares are readily available. Investments in marketable securities were classified as available-for-sale in 2017 prior to the adoption of the new accounting guidance (see Note 1).
(3)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits. These investments are valued using a market approach based on the quoted market prices of the security or inputs that include quoted market prices for similar instruments and are classified as either Level 1 or Level 2 in the fair value hierarchy.
(4)
Included in Deferred Charges and Other 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.
(5)
Includes Graham Holdings Company’s Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company’s Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits. These plans measure the market value of a participant’s balance in a notional investment account that is comprised primarily of mutual funds, which are based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.
(6)
Included in Other Liabilities. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
(7)
The fair value of the mandatorily redeemable noncontrolling interest is based on an EBITDA multiple, adjusted for working capital and other items, which approximates fair value.
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.
In the third quarter of 2018, the Company recorded long-lived asset impairment charges of $8.1 million. In the second quarter of 2017, the Company recorded a goodwill and other long-lived asset impairment charge of $9.2 million. The remeasurement of the goodwill and other long-lived assets is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value. The Company used a discounted cash flow model to determine the estimated fair value of the reporting unit and other long-lived assets, and made estimates and assumptions regarding future cash flows, discount rates and long-term growth rates.
9. INCOME TAXES
The Tax Cuts and Jobs Act (the Tax Act) was enacted in December 2017, making significant changes to the Internal Revenue Code. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows the registrant to record provisional amounts during a measurement period not to extend
15
beyond one year of the enactment date. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. In accordance with SAB 118, the Company has calculated a reasonable estimate of the impact of the Tax Act and recorded a provisional amount in its financial statements based on its understanding of the Tax Act and guidance available as of the date of this filing. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
Changes as a result of the Tax Act include, but are not limited to, a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018 and the imposition of new U.S. taxes on certain non-U.S. earnings. The Company estimates that unremitted non-U.S. subsidiary earnings, when distributed, will not be subject to tax except to the extent non-U.S. withholding taxes are imposed.
Further, the Tax Act provides a 100% dividends received deduction for distributions from non-U.S. subsidiaries after December 31, 2017, subject to certain holding period requirements. The Tax Act establishes a new regime, the Global Intangible Low Taxed Income (GILTI) tax, that may currently subject to U.S. tax the operations of non-U.S. subsidiaries. The GILTI tax is imposed annually based on all current year non-U.S. operations starting January 1, 2018. The Company has elected to record the GILTI tax regime as a periodic tax expense. The Company estimated the 2018 annual GILTI tax expense and considered this when estimating the annual effective tax rate.
In the third quarter of 2018, the Company’s education division released valuation allowances recorded against state deferred tax assets, net of U.S. Federal tax, of approximately $17.8 million because the education division recently generated positive operating results that support the realization of these deferred tax assets.
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition. The following table presents the Company’s revenue disaggregated by revenue source for the three and nine months ended September 30, 2018 and September 30, 2017:
Three Months Ended September 30
Nine Months Ended September 30
(in thousands)
2018
2017
2018
2017
Education Revenue
Kaplan international
$
167,668
$
171,259
$
535,553
$
507,568
Higher education
89,269
105,210
275,080
328,161
Test preparation
67,749
72,680
195,504
212,978
Professional (U.S.)
34,302
28,249
98,715
88,812
Kaplan corporate and other
143
49
870
120
Intersegment elimination
(530
)
(642
)
(1,617
)
(1,438
)
358,601
376,805
1,104,105
1,136,201
Television broadcasting
130,014
101,295
352,902
298,893
Manufacturing
126,028
115,594
369,896
298,164
Healthcare
35,486
40,473
111,315
115,592
SocialCode
13,781
14,497
41,850
41,926
Other
10,856
8,561
26,856
25,253
Intersegment elimination
—
—
(45
)
—
Total Revenue
$
674,766
$
657,225
$
2,006,879
$
1,916,029
The Company generated 78% and 76% of its revenue from U.S. domestic sales for the three and nine months ended September 30, 2018, respectively. The remaining 22% and 24% of revenue for the three and nine months ended September 30, 2018, respectively, was from non-U.S. sales.
In the three and nine months ended September 30, 2018, the Company recognized 80% of its revenue over time as control of the services and goods transferred to the customer. The remaining 20% of revenues were recognized at a point in time, when the customer obtained control of the promised goods. The determination of the method by which the Company measures its progress towards the satisfaction of its performance obligations requires judgment and is described below for each revenue stream.
The Company identifies a contract for revenue recognition when there is approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and the collectability of consideration is probable. The Company evaluates each contract to determine the number of distinct performance obligations in the contract, which requires the use of judgment.
Education Revenue. Education revenue is primarily derived from postsecondary education services, professional education and test preparation services provided both domestically and abroad. Generally tuition and other fees are paid upfront and recorded in deferred revenue in advance of the date when education services are provided to the
16
student. In some instances, installment billing is available to students which reduces the amount of cash consideration received in advance of performing the service. The contractual terms and conditions associated with installment billing indicate that the student is liable for the total contract price, therefore mitigating the Company’s exposure to losses associated with nonpayment. The Company determined the installment billing does not represent a significant financing component.
Kaplan International (KI). KI provides higher education, professional education, and test preparation services and materials to students primarily in the United Kingdom, Singapore, and Australia. Some KI contracts consist of one performance obligation that is a combination of indistinct promises to the student, while other KI contracts include multiple performance obligations as the promises in the contract are both capable of being distinct and distinct within the context of the contract. One KI business offers an option whereby students receive future services at a discount that is accounted for as a material right.
The transaction price is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract. KI generally determines standalone selling prices based on prices charged to students.
Revenue is recognized ratably over the instruction period or access period for higher education, professional education and test preparation services. KI generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of these services. Course materials determined to be a separate performance obligation are recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.
Higher Education (KHE). In the first quarter of 2018, KHE provided postsecondary education services to students through KU’s online programs and fixed-facility colleges.
These contracts consisted either of one performance obligation that is a combination of distinct promises to a student, or two performance obligations if the student also enrolled in the Kaplan Tuition Cap, which established a maximum amount of tuition that KHE may charge students for higher education services. The Kaplan Tuition Cap was accounted for as a material right. The transaction price of a higher education contract was stated in the contract and known at the time of contract inception, therefore no variable consideration existed. A portion of the transaction price was allocated to the material right, if applicable, based on the expected value method.
Higher education services revenue was recognized ratably over the instruction period. The Company used the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of higher education services.
On March 22, 2018, Kaplan contributed the institutional assets and operations of KU to Purdue University Global (see Note 2). Subsequent to the transaction, KHE provides non-academic operations support services to Purdue University Global pursuant to the TOSA. This contract has a thirty year term and consists of one performance obligation, which represents a series of daily promises to provide support services to Purdue University Global. The transaction price is entirely made up of variable consideration related to the reimbursement of KU support costs and the KU fee. The TOSA outlines a payment structure, which dictates how cash will be distributed at the end of Purdue University Global’s fiscal year, which is the 30th of June. The collectability of the KU support costs and KU fee is entirely dependent on the availability of cash at the end of the fiscal year. This variable consideration is constrained based on fiscal year forecasts prepared for Purdue University Global. The forecasts are updated throughout the fiscal year until the uncertainty is ultimately resolved, which is at the end of each fiscal year for Purdue University Global. As KHE’s performance obligation is made up of a series, the variable consideration is allocated to the distinct service period to which it relates, which is the Purdue University Global fiscal year.
Support services revenue is recognized over time based on the expenses incurred to date and the percentage of expected reimbursement. KU fee revenue is also recognized over time based on the amount of Purdue University Global revenue recognized to date and the percentage of fee expected to be collected for the fiscal year. The Company used these input measures as Purdue Global University simultaneously receives and consumes the benefits of the services provided by KHE.
Kaplan Test Preparation (KTP). KTP offers test preparation services and materials to students related to pre-college, graduate, health and bar review products. Generally KTP contracts include promises for test preparation services and course materials. As each promise is both capable of being distinct and distinct in the context of the contract, each promise is accounted for as a separate performance obligation. As the transaction price is stated in the contract and known at the time of contract inception, no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. KTP generally determines standalone selling prices based on prices charged to students. Any discounts within the contract are allocated across all performance
17
obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.
Test preparation services revenue is recognized ratably over the period of access. At KTP, an estimate of average access period is developed for each course, and this estimate is evaluated on an ongoing basis and adjusted as necessary. KTP generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to test preparation services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.
KTP offers a guarantee on certain courses that gives students the ability to repeat a course if they are not satisfied with their exam score. The Company accounts for this guarantee as a separate performance obligation.
Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of September 30, 2018, KTP’s deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $6.2 million. KTP expects to recognize 82% of this revenue over the next twelve months and the remainder thereafter.
Kaplan Professional (U.S.) (KP): KP provides professional training and exam preparation for professional certifications and licensures to students. KP contracts include promises for professional education services and course materials. Generally KP revenue contracts consist of multiple performance obligations as each distinct promise is both capable of being distinct and distinct in the context of the contract. The transaction price is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. KP generally determines standalone selling prices based on the prices charged to students. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.
Professional education services revenue is recognized ratably over the period of access. KP generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to professional education services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.
Television Broadcasting Revenue. Television broadcasting revenue at Graham Media Group (GMG) is primarily comprised of television and internet advertising revenue, and retransmission revenue.
Television Advertising Revenue. GMG accounts for the series of advertisements included in television advertising contracts as one performance obligation and recognizes advertising revenue over time. The Company elected the right to invoice practical expedient, an output method, as GMG has the right to consideration that equals the value provided to the customer for advertisements delivered to date. As a result of the election to use the right to invoice practical expedient, GMG does not determine the transaction price or allocate any variable consideration at contract inception. Rather, GMG recognizes revenue commensurate with the amount to which GMG has the right to invoice the customer. Payment is typically received in arrears within sixty days of revenue recognition.
Retransmission Revenue. Retransmission revenue represents compensation paid by cable, satellite and other multichannel video programming distributors (MVPDs) to retransmit GMG’s stations’ broadcasts in its designated market area. The retransmission rights granted to MVPDs are accounted for as a license of functional intellectual property as the retransmitted broadcast provides significant standalone functionality. As such, each retransmission contract with an MVPD includes one performance obligation for each station’s retransmission license. GMG recognizes revenue using the usage-based royalty method in which revenue is recognized in the month the broadcast is retransmitted based on the number of MVPD subscribers and the applicable per user rate identified in the retransmission contract. Payment is typically received in arrears within sixty days of revenue recognition.
Manufacturing Revenue. Manufacturing revenue consists primarily of product sales generated by four businesses: Hoover, Dekko, Joyce and Forney. The Company has determined that each item ordered by the customer is a distinct performance obligation as it has standalone value and is distinct within the context of the contract. For arrangements with multiple performance obligations, the Company initially allocates the transaction price to each obligation based on its standalone selling price, which is the retail price charged to customers. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.
The Company sells some products and services with a right of return. This right of return constitutes variable consideration and is constrained from revenue recognition on a portfolio basis, using the expected value method until the refund period expires.
18
The Company recognizes revenue when or as control transfers to the customer. Some manufacturing revenue is recognized ratably over the manufacturing period, if the product created for the customer does not have an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. The determination of the method by which the Company measures its progress towards the satisfaction of its performance obligations requires judgment. The Company measures its progress for these products using the units delivered method, an output measure. These arrangements represented 25% and 27% of the manufacturing revenue recognized in the three and nine months ended September 30, 2018, respectively.
Other manufacturing revenue is recognized at the point in time when control transfers to the customer, generally when the products are shipped. Some customers have a bill and hold arrangement with the Company. Revenue for bill and hold arrangements is recognized when control transfers to the customer, even though the customer does not have physical possession of the goods. Control transfers when the bill-and-hold arrangement has been requested from the customer, the product is identified as belonging to the customer and is ready for physical transfer, and the product cannot be directed for use by anyone but the customer.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within ninety days of delivery.
The Company evaluated the terms of the warranties and guarantees offered by its manufacturing businesses and determined that these should not be accounted for as a separate performance obligation as a distinct service is not identified.
Healthcare Revenue. The Company contracts with patients to provide home health or hospice services. Payment is typically received from third party payors such as Medicare, Medicaid, and private insurers. The payor is a third party to the contract that stipulates the transaction price of the contract. The Company identifies the patient as the party who benefits from its healthcare services and as such, the patient is its customer.
The Company determined that healthcare services contracts generally have one performance obligation to provide healthcare services to patients. The transaction price reflects the amount of revenue the Company expects to receive in exchange for providing these services. As the transaction price for healthcare services is known at the time of contract inception, no variable consideration exists. Healthcare revenue is recognized ratably over the period of care. The Company generally uses the time-elapsed method, an input measure as it best depicts the simultaneous delivery and consumption of healthcare services.
Payment is received from third party payors within sixty days after a claim is filed, or in some cases in two installments, one during the contract and one after the services have been provided. Medicare is the most common third party payor.
Home health revenue contracts may be modified to account for changes in the patient’s plan of care. The Company identifies contract modifications when the modification changes the existing enforceable rights and obligations. As modifications to the plan of care modify the original performance obligation, the Company accounts for the contract modification as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Other Revenue. The Company recognizes revenue associated with management services it provides to its affiliates. The Company accounts for the management services provided as one performance obligation and recognizes revenue over time as the services are delivered. The Company uses the right to invoice practical expedient, an output method, as the Company’s right to revenue corresponds directly with the value delivered to the affiliate. As a result of the election to use the right to invoice practical expedient, the Company does not determine the transaction price or allocate any variable consideration at contract inception. Rather, the Company recognizes revenue commensurate with the amount to which it has the right to invoice the affiliate which is based on contractually identified percentages. Payment is received monthly in arrears.
SocialCode Revenue. SocialCode generates media management revenue in exchange for providing social media marketing solutions to its clients. The Company determined that SocialCode contracts generally have one performance obligation made up of a series of promises to manage the client’s media spend on advertising platforms for the duration of the contract period.
SocialCode recognizes revenue, net of media acquisition costs, over time as media management services are delivered to the customer. Generally, SocialCode recognizes revenue using the right to invoice practical expedient, an output method, as SocialCode’s right to revenue corresponds directly with the value delivered to its customer. As a result of the election to use the right to invoice practical expedient, SocialCode does not determine the transaction price or allocate any variable consideration at contract inception. Rather, SocialCode recognizes revenue commensurate with the amount to which it has the right to invoice the customer which is a function of the cost of social media placement plus a management fee, less any applicable discounts. Payment is typically received within forty-five days of revenue recognition.
19
SocialCode evaluates whether it is the principal (i.e. presents revenue on a gross basis) or agent (i.e. presents revenue on a net basis) in its contracts. SocialCode presents revenue for media management services net of media acquisition costs, as an agent, as SocialCode does not control the media before placement on social media platforms.
Other Revenue. Other revenue primarily includes advertising and circulation revenue from Slate, Panoply and Foreign Policy. The Company accounts for other advertising revenues consistently with the advertising revenue streams addressed above. Circulation revenue consists of fees that provide customers access to online and print publications. The Company recognizes circulation revenue ratably over the subscription period beginning on the date that the publication is made available to the customer. Circulation revenue contracts are generally annual or monthly subscription contracts that are paid in advance of delivery of performance obligations.
Accounting Policy Elections. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of the good as a fulfillment cost rather than as an additional promised service. Therefore, revenue for these performance obligations is recognized when control of the good transfers to the customer, which is when the good is ready for shipment. The Company accrues the related shipping and handling costs over the period when revenue is recognized.
The Company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Practical Expedients. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the amount of revenue recognized is based on the amount to which the Company has the right to invoice the customer for services performed, (iii) contracts for which the consideration received is a usage-based royalty promised in exchange for a license of intellectual property and (iv) contracts for which variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
With the exception of the education division, the Company expenses costs to obtain a contract as incurred as all contracts are less than one year.
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 during the nine months ended September 30, 2018:
As of
September 30, 2018
January 1, 2018
%
(in thousands)
Change
Deferred revenue
$
337,964
$
342,640
(1)
The majority of the change in the deferred revenue balance is related to the KU Transaction and cyclical nature of services at the Kaplan international division. During the nine months ended September 30, 2018, the Company recognized $239.6 million related to the Company’s deferred revenue balance as of January 1, 2018.
Costs to Obtain a Contract. The Company incurs costs to obtain a contract that are both incremental and expected to be recovered as the costs would not have been incurred if the contract was not obtained and the revenue from the contract exceeds the associated cost. The revenue guidance provides a practical expedient to expense sales commissions as incurred in instances where the amortization period is one year or less. The amortization period is defined in the guidance as the contract term, inclusive of any expected contract renewal periods. The Company has elected to apply this practical expedient to all contracts except for contracts in its education division. In the education division costs to obtain a contract are amortized over the applicable amortization period except for cases in which commissions paid on initial contracts and renewals are commensurate. The Company amortizes these costs to obtain a contract on a straight line basis over the amortization period. These expenses are included as operating expenses in the Company’s Condensed Consolidated Statement of Operations.
20
The following table presents changes in the Company’s costs to obtain a contract asset during the nine months ended September 30, 2018:
(in thousands)
Balance at
Beginning
of Period
Costs associated with new contracts
Less: Costs amortized during the period
Other
Balance
at
End of
Period
2018
$
16,043
$
32,827
$
(33,642
)
$
(540
)
$
14,688
The majority of other activity is related to currency translation adjustments during the nine months ended September 30, 2018. Amortization expense for costs to obtain a contract was $10.9 million for the three months ended September 30, 2018.
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)
2018
2017
2018
2017
Numerator:
Numerator for basic earnings per share:
Net income attributable to Graham Holdings Company common stockholders
$
125,064
$
24,784
$
214,521
$
87,866
Less: Dividends paid-common stock outstanding and unvested restricted shares
(7,048
)
(7,047
)
(28,635
)
(28,329
)
Undistributed earnings
118,016
17,737
185,886
59,537
Percent allocated to common stockholders
99.34
%
99.07
%
99.34
%
99.07
%
117,235
17,572
184,657
58,981
Add: Dividends paid-common stock outstanding
7,001
6,981
28,447
28,066
Numerator for basic earnings per share
$
124,236
$
24,553
$
213,104
$
87,047
Add: Additional undistributed earnings due to dilutive stock options
5
1
8
4
Numerator for diluted earnings per share
$
124,241
$
24,554
$
213,112
$
87,051
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding
5,302
5,518
5,354
5,530
Add: Effect of dilutive stock options
35
36
36
37
Denominator for diluted earnings per share
5,337
5,554
5,390
5,567
Graham Holdings Company Common Stockholders:
Basic earnings per share
$
23.43
$
4.45
$
39.81
$
15.74
Diluted earnings per share
$
23.28
$
4.42
$
39.54
$
15.64
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)
2018
2017
2018
2017
Weighted average restricted stock
21
30
23
29
The diluted earnings per share amounts for the three and nine months ended September 30, 2018 and September 30, 2017 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 and September 30, 2017 exclude the effects of 5,250 restricted stock awards, as their inclusion would have been antidilutive due to a performance condition.
21
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. In the three and nine months ended September 30, 2017, the Company declared regular dividends totaling $1.27 and $5.08 per common share, respectively.
12. PENSION AND POSTRETIREMENT PLANS
In the first quarter of 2018, the Company adopted new guidance which requires the presentation of service cost in the same line item as other compensation costs arising from services by employees during the period, while the other components of the net periodic benefit are recognized in non-operating pension and postretirement benefit income in the Company’s Condensed Consolidated Statement of Operations.
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)
2018
2017
2018
2017
Service cost
$
4,473
$
4,591
$
13,730
$
14,096
Interest cost
11,844
11,980
34,943
35,945
Expected return on assets
(31,969
)
(30,338
)
(97,251
)
(91,078
)
Amortization of prior service cost
36
42
114
128
Recognized actuarial gain
(2,974
)
(1,039
)
(6,994
)
(3,372
)
Net Periodic Benefit
(18,590
)
(14,764
)
(55,458
)
(44,281
)
Curtailment gain
—
—
(806
)
—
Special separation benefit expense
—
932
—
932
Total Benefit
$
(18,590
)
$
(13,832
)
$
(56,264
)
$
(43,349
)
In the third quarter of 2017, the Company recorded $0.9 million related to a Separation Incentive Program for certain Forney employees, which was funded from the assets of the Company’s pension plan.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP) consists of the following components:
Three Months Ended September 30
Nine Months Ended September 30
(in thousands)
2018
2017
2018
2017
Service cost
$
205
$
214
$
614
$
643
Interest cost
967
1,059
2,899
3,175
Amortization of prior service cost
77
114
233
342
Recognized actuarial loss
600
444
1,802
1,331
Net Periodic Cost
$
1,849
$
1,831
$
5,548
$
5,491
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, 2018
December 31, 2017
U.S. equities
52
%
53
%
U.S. stock index fund
31
%
30
%
U.S. fixed income
11
%
11
%
International equities
6
%
6
%
100
%
100
%
The Company manages approximately 45% of the pension assets internally, of which the majority is invested in a U.S. stock index fund with the remaining investments in Berkshire Hathaway stock and short-term fixed income securities. The remaining 55% of plan assets are managed by two investment companies. The goal for the
22
investments is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both investment managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval from the Plan administrator. As of September 30, 2018, the investment managers can invest no more than 23% of the assets they manage in specified international exchanges, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2018. 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, 2018 and December 31, 2017, the pension plan held investments in one common stock and one U.S. stock index fund that exceeded 10% of total plan assets. These investments were valued at $1,154.4 million and $1,079.3 million at September 30, 2018 and December 31, 2017, respectively, or approximately 46% 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)
2018
2017
2018
2017
Service cost
$
267
$
257
$
803
$
771
Interest cost
170
195
509
584
Amortization of prior service credit
(44
)
(38
)
(132
)
(112
)
Recognized actuarial gain
(921
)
(972
)
(2,764
)
(2,917
)
Net Periodic Benefit
$
(528
)
$
(558
)
$
(1,584
)
$
(1,674
)
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)
2018
2017
2018
2017
Gain on cost method investments
$
8,487
$
—
$
8,487
$
—
Impairment of cost method investments
(2,500
)
(200
)
(2,500
)
(200
)
Gain (loss) on sales of businesses
916
—
8,157
(342
)
Gain on sale of a cost method investment
—
—
2,845
—
Gain on sale of land
—
—
2,542
—
Foreign currency (loss) gain, net
(116
)
1,414
(2,205
)
6,608
Other, net
(3,645
)
749
(2,664
)
815
Total Other Non-Operating Income
$
3,142
$
1,963
$
14,662
$
6,881
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 $1.9 million in contingent consideration gains related to the sale of a business (see Note 2).
23
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive (loss) income consists of the following components:
Three Months Ended September 30
2018
2017
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
$
(2,844
)
$
—
$
(2,844
)
$
11,470
$
—
$
11,470
Unrealized gains on available-for-sale securities: