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Corporate restructuring
Home›Corporate restructuring›GRAHAM HOLDINGS CO Management discussion and analysis of operating results and financial condition. (form 10-Q)

GRAHAM HOLDINGS CO Management discussion and analysis of operating results and financial condition. (form 10-Q)

By Laura Wirth
November 3, 2021
20
0
This analysis should be read in conjunction with the condensed consolidated
financial statements and the notes thereto.
Results of Operations
The Company reported net income attributable to common shares of $39.6 million
($7.90 per share) for the third quarter of 2021, compared to $77.6 million
($15.22 per share) for the third quarter of 2020.
The COVID-19 pandemic and measures taken to prevent its spread, such as travel
restrictions, shelter in place orders and mandatory closures, significantly
impacted the Company's results for 2020 and the first nine months of 2021,
largely from reduced demand for the Company's products and services. This
significant adverse impact is expected to continue for several of the Company's
businesses for the remainder of 2021. The Company's management has taken a
variety of measures to reduce costs and implement changes to business
operations. The Company cannot predict the severity or duration of the pandemic,
the extent to which demand for the Company's products and services will be
adversely affected or the degree to which financial and operating results will
be negatively impacted.
Items included in the Company's income before income taxes for the third quarter
of 2021:
•a $1.7 million net credit related to a fair value change in contingent
consideration from a prior acquisition;
•a $0.1 million reduction to operating expenses from property, plant and
equipment gains in connection with the spectrum repacking mandate of the FCC;
•$26.8 million in goodwill and other long-lived asset impairment charges;
•$14.1 million in net gains on marketable equity securities;
•$16.7 million in net earnings of affiliates whose operations are not managed by
the Company;
•a net non-operating loss of $6.4 million from the write-down of an equity
method investment; and
•$2.6 million in net interest expense to adjust the fair value of the
mandatorily redeemable noncontrolling interest.
Items included in the Company's income before income taxes for the third quarter
of 2020:
•$1.9 million in long-lived asset impairment charges at the education division;
•$1.9 million in restructuring charges at the education division;
•$2.8 million in accelerated depreciation at other businesses;
•a $1.2 million reduction to operating expenses from property, plant and
equipment gains in connection with the spectrum repacking mandate of the FCC;
•$7.0 million in expenses related to non-operating Separation Incentive Programs
at the education division;
•$59.4 million in net gains on marketable equity securities;
•$0.8 million in net earnings of affiliates whose operations are not managed by
the Company;
•a non-operating gain of $1.6 million from write-up of a cost method investment;
and
•$2.3 million in non-operating foreign currency losses.

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Revenue for the third quarter of 2021 was $809.4 million, up 13% from $717.0
million in the third quarter of 2020. Revenues increased at education,
healthcare, automotive and other businesses, offset by decreases at television
broadcasting and manufacturing. The Company reported an operating loss of $16.6
million for the third quarter of 2021, compared to operating income of $40.2
million for the third quarter of 2020. Operating results declined at
manufacturing, television broadcasting, healthcare and other businesses, offset
by an improvement at education and automotive.
Items included in the Company's income before income taxes for the nine months
of 2021:
•a $3.9 million net credit related to fair value changes in contingent
consideration from prior acquisitions;
•a $0.9 million reduction to operating expenses from property, plant and
equipment gains in connection with the spectrum repacking mandate of the FCC;
•$30.2 million in goodwill and long-lived asset impairment charges;
•$1.1 million in expenses related to a non-operating Separation Incentive
Program at manufacturing;
•$177.0 million in net gains on marketable equity securities;
•$25.6 million in net earnings of affiliates whose operations are not managed by
the Company;
•a net non-operating gain of $10.8 million from the sale, write-up and
write-down of cost and equity method investments;
•$2.7 million in net interest expense to adjust the fair value of the
mandatorily redeemable noncontrolling interest; and
•$0.7 million in non-operating foreign currency gains.
Items included in the Company's income before income taxes for the nine months
of 2020:
•$27.6 million in goodwill and other long-lived asset impairment charges;
•$12.1 million in restructuring charges at the education division;
•$5.7 million in accelerated depreciation at other businesses;
•a $2.5 million reduction to operating expenses from property, plant and
equipment gains in connection with the spectrum repacking mandate of the FCC;
•$11.6 million in expenses related to non-operating Separation Incentive
Programs at the education division and other businesses;
•$1.1 million in net losses on marketable equity securities;
•$2.9 million in net losses of affiliates whose operations are not managed by
the Company;
•non-operating gain, net, of $3.3 million from write-ups, sales and impairments
of cost and equity method investments; and
•$0.9 million in non-operating foreign currency gains.
Revenue for the first nine months of 2021 was $2,323.0 million, up 11% from
$2,102.1 million in the first nine months of 2020. Revenues increased at all the
Company's divisions. The Company reported operating income of $54.8 million for
the first nine months of 2021, compared to $54.2 million for the first nine
months of 2020. Operating results improved at education and automotive, offset
by declines at manufacturing and television broadcasting.
Division Results
Education
Education division revenue totaled $336.0 million for the third quarter of 2021,
up 11% from $302.5 million for the same period of 2020. Kaplan reported
operating income of $9.9 million for the third quarter of 2021, compared to $3.3
million for the third quarter of 2020.
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For the first nine months of 2021, education division revenue totaled $1,005.3
million, up 1% from revenue of $992.0 million for the same period of 2020.
Kaplan reported operating income of $42.0 million for the first nine months of
2021, compared to $20.3 million for the first nine months of 2020.
The COVID-19 pandemic adversely impacted Kaplan's operating results beginning in
February 2020 and continued through the first nine months of 2021.
Kaplan serves a significant number of students who travel to other countries to
study a second language, prepare for licensure, or pursue a higher education
degree. Government-imposed travel restrictions and school closures arising from
COVID-19 had a negative impact on the ability of international students to
travel and attend Kaplan's programs, particularly Kaplan International's
Language programs. In addition, most licensing bodies and administrators of
standardized exams postponed or canceled scheduled examinations due to COVID-19,
resulting in a significant number of students deciding to defer their studies,
negatively impacting Kaplan's exam preparation education businesses. Overall,
this is expected to continue to adversely impact Kaplan's revenues and operating
results for the remainder of 2021, particularly at Kaplan International
Languages (Languages).
To help mitigate the adverse impact of COVID-19, Kaplan implemented a number of
significant cost reduction and restructuring activities across its businesses.
Related to these restructuring activities, Kaplan recorded $0.1 million and $3.3
million in impairment of long-lived assets charges in the third quarter and
first nine months of 2021, respectively. In the first nine months of 2020,
Kaplan recorded $12.5 million in lease restructuring costs and in the third
quarter and first nine months of 2020, Kaplan recorded $1.9 million and $3.1
million in severance restructuring costs, respectively. The lease restructuring
costs included $3.4 million in accelerated depreciation expense in the first
nine months of 2020. Kaplan also recorded $1.9 million and $11.9 million in
lease impairment charges in connection with these restructuring plans in the
third quarter and first nine months of 2020, respectively. These impairment
charges included $0.2 million and $2.2 million in property, plant and equipment
write-downs in the third quarter and first nine months, respectively. In the
second and third quarters of 2020, the Company approved Separation Incentive
Programs (SIP) that reduced the number of employees at all of Kaplan's
divisions, resulting in $7.8 million and $12.8 million in non-operating pension
expense in the third quarter and first nine months of 2020, respectively. Kaplan
management is continuing to monitor the ongoing COVID-19 disruptions and changes
in its operating environment and may develop and implement further restructuring
activities in 2021.
In 2020, Kaplan also accelerated the development and promotion of various online
programs and solutions, rapidly transitioned most of its classroom-based
programs online and addressed the individual needs of its students and partners,
substantially reducing the disruption from COVID-19 while simultaneously adding
important new product offerings and operating capabilities. Further, in the
fourth quarter of 2020, Kaplan combined its three primary divisions based in the
United States (Kaplan Test Prep, Kaplan Professional, and Kaplan Higher
Education) into one business known as Kaplan North America (KNA). This
combination is designed to enhance Kaplan's competitiveness by better leveraging
its diversified academic and professional portfolio, as well as its relationship
with students, universities and businesses. For financial reporting purposes,
KNA is reported in two segments: Higher Education and Supplemental Education
(combining Kaplan Test Prep and Kaplan Professional (U.S.) into one reporting
segment).
A summary of Kaplan's operating results is as follows:
                                            Three Months Ended                                             Nine Months Ended
                                               September 30                                                  September 30
(in thousands)                            2021               2020               % Change                2021                2020               % Change
Revenue
Kaplan international                  $ 168,143          $ 123,768                     36          $   521,314          $ 488,096                      7
Higher education                         85,518             83,841                      2              239,944            243,831                     (2)
Supplemental education                   80,489             92,568                    (13)             238,055            253,641                     (6)
Kaplan corporate and other                3,761              3,194                     18               10,739              9,438                     

14

Intersegment elimination                 (1,912)              (904)                     -               (4,752)            (2,986)                     -
                                      $ 335,999          $ 302,467                     11          $ 1,005,300          $ 992,020                      1
Operating Income (Loss)
Kaplan international                  $    (999)         $ (13,759)                    93          $    23,285          $  21,256                     10
Higher education                          9,525              6,853                     39               18,152             21,883                    (17)
Supplemental education                   11,769             19,069                    (38)              33,079             12,849                      -
Kaplan corporate and other               (6,426)            (2,579)                     -              (17,375)           (10,971)                   

(58)

Amortization of intangible assets        (3,888)            (4,335)                    10              (11,967)           (12,807)                     7
Impairment of long-lived assets             (67)            (1,916)                    97               (3,273)           (11,936)                    73
Intersegment elimination                      -                  -                      -                   97                  5                      -
                                      $   9,914          $   3,333                      -          $    41,998          $  20,279                      -


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Kaplan International includes postsecondary education, professional training and
language training businesses largely outside the United States. Kaplan
International revenue increased 36% and 7% for the third quarter and first nine
months of 2021, respectively (increase of 31% and decrease of 1%, respectively,
on a constant currency basis). The increase in the third quarter is due largely
to growth at Pathways, UK Professional and Languages. The increase for the first
nine months is due largely to growth at UK Professional and Pathways, partially
offset by declines at Languages. Kaplan International reported an operating loss
of $1.0 million in the third quarter of 2021, compared to $13.8 million in the
third quarter of 2020. Operating income increased to $23.3 million in the first
nine months of 2021, compared to $21.3 million in the first nine months of 2020.
The increase in operating results in the third quarter and first nine months of
2021 is due to a reduction in losses at Languages, and improved results at
Pathways and UK Professional. Overall, Kaplan International's operating results
were negatively impacted by $5 million and $31 million in losses, respectively,
incurred at Languages from continued significant COVID-19 disruptions for the
third quarter and first nine months of 2021. In addition, Kaplan International
recorded $3.9 million of lease restructuring costs and $2.2 million of severance
restructuring costs at Languages in the first nine months of 2020; the lease
restructuring costs included $1.5 million in accelerated depreciation expense.
Due to the travel restrictions imposed as a result of COVID-19, Kaplan expects
the disruption of its Languages business operating environment to continue for
the remainder of 2021.
Higher Education includes the results of Kaplan as a service provider to higher
education institutions. In the third quarter of 2021, Higher Education revenue
increased 2% due to an increase in the Purdue Global fee recorded, resulting in
increased operating income for the quarter. For the first nine months of 2021,
Higher Education revenue was down 2% and operating income declined due to a
reduction in the overall Purdue Global fee recorded during this period. For the
third quarter and first nine months of 2021, Kaplan recorded a portion of the
fee with Purdue Global based on an assessment of its collectability under the
TOSA with a lower fee recognized in the first half of 2021 due to less cash
available for distribution at June 30, 2021 due to timing of cash receipts at
Purdue Global. The Company will continue to assess the collectability of the fee
with Purdue Global on a quarterly basis to make a determination as to whether to
record all or part of the fee in the future and whether to make adjustments to
fee amounts recognized in earlier periods. For the first nine months of 2020,
Kaplan Higher Education recorded $3.5 million in lease restructuring costs, of
which $0.1 million was accelerated depreciation expense.
As of September 30, 2021, Kaplan had a total outstanding accounts receivable
balance of $113.5 million from Purdue Global related to amounts due for
reimbursements for services, fees earned and a deferred fee. Included in this
total, Kaplan has a $19.1 million long-term receivable balance due from Purdue
Global at September 30, 2021, related to the advance of $20 million during the
initial KU Transaction.
Supplemental Education includes Kaplan's standardized test preparation programs
and domestic professional and other continuing education businesses.
Supplemental Education revenue declined 13% and 6%, respectively, for the third
quarter and first nine months of 2021, due to additional revenue recognized in
the third quarter of 2020 from product-life extensions made earlier in 2020
related to the postponement of various standardized test and certification exam
dates due to COVID-19, offset in part by growth in securities and insurance
programs. Operating results were down in the third quarter of 2021 due largely
to additional revenue recognized in the third quarter of 2020 from product-life
extensions made earlier in 2020 related to the postponement of various
standardized test and certification exam dates due to COVID-19. Operating
results improved in the first nine months of 2021 due to savings from
restructuring activities implemented in 2020, $5.1 million of lease
restructuring costs incurred in the second quarter of 2020 (of which $1.8
million was accelerated depreciation), and $0.9 million in severance
restructuring costs incurred in the third quarter of 2020.
Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.'s
corporate office, other minor businesses and certain shared activities. Overall,
Kaplan corporate and other expenses increased in the first nine months of 2021
due to normalization of compensation costs compared to 2020, which included
salary abatements and reduced incentive compensation accruals.
Television Broadcasting
                       Three Months Ended                          Nine Months Ended
                          September 30                                September 30
(in thousands)        2021           2020         % Change        2021           2020         % Change
Revenue            $ 126,498      $ 133,828            (5)     $ 360,089      $ 350,038             3
Operating Income      40,550         52,745           (23)       109,131        112,148            (3)


Revenue at the television broadcasting division decreased 5% to $126.5 million
in the third quarter of 2021, from $133.8 million in the same period of 2020.
The revenue decrease is due to a $24.1 million decline in political advertising
revenue, partially offset by increased local and national advertising revenues,
which were adversely impacted in 2020 by reduced demand related to the COVID-19
pandemic, increased revenue from summer Olympics-related advertising revenue at
the Company's NBC affiliates, and a $2.8 million increase in retransmission
revenues. The increase in local and national advertising was from growth in the
home products, health and fitness,
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and sports betting categories. In the third quarter of 2021 and 2020, the
television broadcasting division recorded $0.1 million and $1.2 million,
respectively, in reductions to operating expenses related to property, plant and
equipment gains due to new equipment received at no cost in connection with the
spectrum repacking mandate of the FCC. Operating income for the third quarter of
2021 decreased 23% to $40.6 million, from $52.7 million in the same period of
2020, due to reduced revenues and higher network fees.
Revenue at the television broadcasting division increased 3% to $360.1 million
in the first nine months of 2021, from $350.0 million in the same period of
2020. The revenue increase is due to increased local and national advertising
revenues, which were adversely impacted in 2020 by reduced demand related to the
COVID-19 pandemic, an $8.7 million increase in retransmission revenues, and
increased revenue from summer Olympics-related advertising revenue at the
Company's NBC affiliates, partially offset by a $38.1 million decline in
political advertising revenue. The increase in local and national advertising
was from growth in the home products, health and fitness, and sports betting
categories. In the first nine months of 2021 and 2020, the television
broadcasting division recorded $0.9 million and $2.5 million, respectively, in
reductions to operating expenses related to property, plant and equipment gains
due to new equipment received at no cost in connection with the spectrum
repacking mandate of the FCC. Operating income for the first nine months of 2021
decreased 3% to $109.1 million, from $112.1 million in the same period of 2020,
due to higher network fees.
In March 2021, the Company's television stations located in Orlando, FL and
Jacksonville, FL received approval of their FCC license renewals through
February 1, 2029.
Manufacturing
                              Three Months Ended                          Nine Months Ended
                                 September 30                                September 30
(in thousands)               2021           2020         % Change        2021           2020         % Change
Revenue                   $  99,766      $ 106,690            (6)     $ 356,849      $ 303,387            18
Operating (Loss) Income     (39,483)         4,851             -        (18,148)         9,870             -


Manufacturing includes four businesses: Hoover, a supplier of pressure
impregnated kiln-dried lumber and plywood products for fire retardant and
preservative applications; Dekko, a manufacturer of electrical workspace
solutions, architectural lighting and electrical components and assemblies;
Joyce/Dayton, a manufacturer of screw jacks and other linear motion systems; and
Forney, a global supplier of products and systems that control and monitor
combustion processes in electric utility and industrial applications.
Manufacturing revenues decreased 6% in the third quarter of 2021, due primarily
to a reduction in revenues at Hoover from lower wood prices during the quarter
and lower product demand. Manufacturing revenue increased 18% in the first nine
months of 2021, due primarily to significantly increased revenues at Hoover from
substantially higher wood prices in 2021 and improved product demand, partially
offset by reduced revenues at Dekko from lower product demand, particularly in
the commercial office electrical products and hospitality sectors. Wood prices
began to decline in June 2021 and this trend has continued through September
2021, which resulted in significant losses on inventory sales at Hoover in the
third quarter of 2021. For the first nine months of 2021, Hoover's operating
results reflect overall gains on inventory sales. Manufacturing operating
results declined in the third quarter of 2021 due to a significant loss at
Hoover from substantial losses on inventory sales, and a $26.7 million goodwill
impairment charge recorded at Dekko, due to continued weakness in demand for
certain Dekko products related to the COVID-19 pandemic, increases in labor and
commodity costs and related supply chain challenges. Manufacturing operating
results declined in the first nine months of 2021 due primarily to the Dekko
goodwill impairment charge.
In the second quarter of 2021, Dekko announced a plan to relocate its
manufacturing operations in Shelton, CT to other Dekko manufacturing facilities.
In connection with this activity, Dekko is in the process of implementing a SIP
for the affected employees, resulting in $1.1 million in non-operating SIP
expense recorded in the second quarter of 2021, to be funded by the assets of
the Company's pension plan.
Healthcare
                             Three Months Ended                          Nine Months Ended
                                September 30                                September 30
      (in thousands)         2021           2020        % Change        2021           2020         % Change
      Revenue            $   55,445      $ 51,426             8      $ 160,184      $ 146,601             9
      Operating Income        5,260         8,142           (35)        20,995         20,129             4


The Graham Healthcare Group (GHG) provides home health and hospice services in
three states. GHG provides other healthcare services, including nursing care and
prescription services for patients receiving in-home infusion treatments through
its 75% interest in CSI Pharmacy Holdings Company, LLC (CSI). Healthcare
revenues increased 8% and 9% for the third quarter and first nine months of
2021, respectively, largely due to growth at CSI
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and home health services. The decline in GHG operating results in the third
quarter of 2021 was primarily due to lower patient census for hospice services
and increased business development costs. The increase in GHG operating results
in the first nine months of 2021 is due to improved results from home health
services and CSI, offset by a decline in results from hospice services.
In the second quarter of 2020, GHG received $7.4 million from the Federal
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Provider Relief
Fund. GHG did not apply for these funds; they were disbursed to GHG as a
Medicare provider under the CARES Act. Under the Department of Health and Human
Services guidelines, these funds may be used to offset revenue reductions and
expenses incurred in connection with the COVID-19 pandemic. Of this amount, GHG
recorded $5.5 million and $0.2 million in revenue in the second and third
quarters of 2020, respectively, to partially offset the impact of revenue
reductions due to the COVID-19 pandemic from the curtailment of elective
procedures by health systems and other factors. The remaining amount of $1.7
million was recorded as a credit to operating costs in the second quarter of
2020 to partially offset the impact of costs incurred to procure personal
protective equipment for GHG employees and other COVID-19 related costs.
The Company also holds interests in four home health and hospice joint ventures
managed by GHG, whose results are included in equity in earnings of affiliates
in the Company's Consolidated Statements of Operations. The Company recorded
equity in earnings of $2.5 million and $2.8 million for the third quarter of
2021 and 2020, respectively, from these joint ventures. The Company recorded
equity in earnings of $8.0 million and $8.3 million for the first nine months of
2021 and 2020, respectively, from these joint ventures.
Automotive
                              Three Months Ended                          Nine Months Ended
                                 September 30                                September 30
(in thousands)                2021           2020        % Change        2021           2020         % Change
Revenue                   $   84,702      $ 76,790            10      $ 242,702      $ 182,288            33
Operating Income (Loss)        4,506         1,986             -          8,815         (6,629)            -


Automotive includes three automotive dealerships in the Washington, D.C.
metropolitan area: Lexus of Rockville, Honda of Tysons Corner, and Ourisman Jeep
of Bethesda. Revenues for the third quarter and first nine months of 2021
increased 10% and 33%, respectively, due to sales growth at each of the three
dealerships, due partly to significantly reduced demand for sales and service in
the first half of 2020 at the onset of the COVID-19 pandemic in March 2020, and
higher average new and used car selling prices as a result of strong consumer
demand and inventory shortages related to supply chain disruptions and
production delays at vehicle manufacturers. In the first quarter of 2020, the
Company's automotive dealerships recorded a $6.7 million intangible asset
impairment charge as a result of the pandemic and the related recessionary
conditions. Operating earnings for the third quarter and first nine months of
2021 improved significantly from the prior year due to increased sales and
margins, in addition to the impairment charge recorded in the first quarter of
2020.
Other Businesses
Clyde's Restaurant Group
Clyde's Restaurant Group (CRG) owns and operates eleven restaurants and
entertainment venues in the Washington, D.C. metropolitan area, including Old
Ebbitt Grill and The Hamilton. As a result of the COVID-19 pandemic, CRG
temporarily closed all of its restaurants and venues in mid-March 2020 through
mid-June 2020, pursuant to government orders, maintaining limited operations for
outdoor dining, delivery and pickup. CRG recorded a $9.7 million goodwill and
intangible assets impairment charge in the first quarter of 2020. In June 2020,
CRG made the decision to close its restaurant and entertainment venue in
Columbia, MD effective July 19, 2020, resulting in accelerated depreciation of
property, plant and equipment totaling $2.8 million in the second quarter of
2020; an additional $2.8 million in accelerated depreciation was recorded in the
third quarter of 2020. In December 2020, CRG temporarily closed its restaurant
dining rooms in Maryland and the District of Columbia for the second time,
reopening again for limited indoor dining service in mid-February 2021. Dining
restrictions from government orders were substantially lifted for all of CRG's
operations by the end of the second quarter of 2021.
Overall, CRG incurred operating losses in each of the third quarters and first
nine months of 2021 and 2020 due to limited revenues and costs incurred to
maintain its facilities and support its employees; however, the losses incurred
in 2021 were significantly lower than the losses incurred in 2020. While CRG
revenues have been adversely impacted as a result of the pandemic, such revenues
improved steadily in each of the first three quarters of 2021. CRG continues to
develop and implement initiatives to increase sales and reduce costs to mitigate
the impact of COVID-19.
Framebridge
On May 15, 2020, the Company acquired Framebridge, Inc., a custom framing
service company, headquartered in Washington, DC, with two retail locations in
the DC metropolitan area and a manufacturing facility in Richmond, KY.
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At the end of the third quarter of 2021, Framebridge had twelve retail locations
in the Washington, DC, New York City, Atlanta, GA, Philadelphia, PA, Boston, MA
and Chicago, IL areas and three manufacturing facilities in Kentucky and New
Jersey. Framebridge expects to open four additional stores in the Chicago, IL
and New York City areas in the fourth quarter of 2021, with plans for additional
expansion in 2022. Framebridge revenues for the third quarter and first nine
months of 2021 increased from the prior year. Framebridge is an investment stage
business and reported significant operating losses in the first nine months of
2021.
Code3
Code3 is a performance marketing agency focused on driving performance for
brands through three core elements of digital success: media, creative and
commerce. Code 3 revenue was up in the third quarter of 2021, due to strong
growth in creative and commerce revenues. Code 3 revenue was down in the first
nine months of 2021, due to overall sluggish marketing spending by some
advertising clients, offset by strong growth in creative and commerce revenues.
Code3 reported operating losses in the first nine months of 2021 and 2020. For
the third quarter of 2021, however, Code 3 reported operating income due largely
to revenue growth. In the second quarter of 2021, Code 3 recorded a $1.6 million
lease impairment charge (including $0.4 million in property, plant and equipment
write-downs). In the second quarter of 2020, Code3 recorded a $1.5 million lease
impairment charge (including $0.1 million in property, plant and equipment
write-downs) in connection with a restructuring plan that included other cost
reduction initiatives. These initiatives included the approval of a SIP that
reduced the number of employees at Code3, resulting in $1.0 million in
non-operating pension expense in the second quarter of 2020.
Leaf Group
On June 14, 2021, the Company closed on the acquisition of all outstanding
shares of common stock of Leaf Group Ltd. (Leaf) at $8.50 per share in an all
cash transaction valued at approximately $322 million. Leaf Group, headquartered
in Santa Monica, CA, is a consumer internet company that builds enduring,
creator-driven brands that reach passionate audiences in large and growing
lifestyle categories, including fitness and wellness (Well+Good, Livestrong.com
and MyPlate App), and home, art and design (Saatchi Art, Society6 and Hunker).
The Leaf operating results for the period June 14, 2021 to September 30, 2021
are included in other businesses. Leaf has three major operating divisions:
Society6 Group and Saatchi Art Group (Marketplace businesses) and the Media
Group. For the third quarter of 2021, revenue for Society6 Group declined, as
Society6 Group reported rapid growth in the third quarter of 2020, largely
related to the COVID-19 pandemic. The Media Group and Saatchi Art Group each
reported revenue growth in the third quarter of 2021. Overall, Leaf reported an
operating loss for the third quarter of 2021.
Megaphone
Megaphone was sold by the Company to Spotify in December 2020.
Other
Other businesses also include Slate and Foreign Policy, which publish online and
print magazines and websites; and four investment stage businesses, CyberVista,
Decile and Pinna, as well as City Cast, a local daily podcast business that
began operations in 2021. All of these businesses reported revenue increases in
the first nine months of 2021. Losses from each of these six businesses in the
first nine months of 2021 adversely affected operating results.
Overall, for the third quarter of 2021, operating revenues for other businesses
increased due largely to the Leaf acquisition and increases at CRG, partially
offset by declines due to the sale of Megaphone in December 2020. For the first
nine months of 2021, operating revenues for other businesses increased due
largely to increases from the Framebridge and Leaf acquisitions and increases at
CRG, partially offset due to the sale of Megaphone in December 2020. Operating
results improved in the first nine months of 2021 primarily due to improvements
at CRG, in addition to the goodwill and other long-lived asset impairment
charges recorded in the first quarter of 2020 at CRG, partially offset by losses
at Framebridge and Leaf.
Corporate Office
Corporate office includes the expenses of the Company's corporate office and
certain continuing obligations related to prior business dispositions. Corporate
office expenses increased in the first nine months of 2021 due primarily to
higher compensation costs, offset by a credit related to the fair value change
in contingent consideration related to the Framebridge acquisition.
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Equity in Earnings of Affiliates
At September 30, 2021, the Company held an approximate 12% interest in
Intersection Holdings, LLC (Intersection), a company that provides digital
marketing and advertising services and products for cities, transit systems,
airports, and other public and private spaces. The Company also holds interests
in several other affiliates, including a number of home health and hospice joint
ventures managed by GHG and two joint ventures managed by Kaplan. Overall, the
Company recorded equity in earnings of affiliates of $13.0 million for the third
quarter of 2021, compared to $4.1 million for the third quarter of 2020. These
amounts include $16.7 million and $0.8 million in net earnings for the third
quarter of 2021 and 2020, respectively, from affiliates whose operations are not
managed by the Company. The Company recorded $6.4 million in write-downs in
equity in earnings of affiliates related to one of its investments in the third
quarter of 2021.
The Company recorded equity in earnings of affiliates of $28.2 million for the
first nine months of 2021, compared to $3.7 million for the first nine months of
2020. These amounts include $25.6 million in net earnings for the first nine
months of 2021 and $2.9 million in net losses for the first nine months of 2020
from affiliates whose operations are not managed by the Company; this includes
losses from the Company's investment in Intersection in the first nine months of
2021. The Company recorded $6.4 million in write-downs in equity in earnings of
affiliates related to one of its investments in the third quarter of 2021 and
$3.6 million in write-downs in equity in earnings of affiliates related to two
of its investments in the first quarter of 2020.
The recessionary environment resulting from the COVID-19 pandemic adversely
impacted the underlying businesses of Intersection due to lower marketing
spending by advertising clients. The decline in revenues adversely impacted the
operating results and liquidity of the business since the onset of the COVID-19
pandemic. The Company concluded that these events are not indicative of an other
than temporary decline in the value of its investment to an amount less than its
carrying value. Given the uncertain economic impact of the COVID-19 pandemic, it
is possible that an other than temporary impairment charge could occur in the
future should Intersection fail to execute on its operating strategy to address
the decline in revenues and operating results. Further, the Company recorded a
$13.1 million loss in equity earnings related to Intersection in the first nine
months of 2021 and expects to record additional losses for the remainder of
2021.
Net Interest Expense and Related Balances
The Company incurred net interest expense of $9.4 million and $22.5 million for
the third quarter and first nine months of 2021, respectively; compared to $6.4
million and $19.3 million for the third quarter and first nine months of 2020,
respectively. The Company recorded net interest expense of $2.6 million in the
third quarter of 2021 and $2.7 million in the first nine months of 2021 to
adjust the fair value of the mandatorily redeemable noncontrolling interest at
GHG.
At September 30, 2021, the Company had $555.9 million in borrowings outstanding
at an average interest rate of 4.8% and cash, marketable equity securities and
other investments of $928.0 million. At September 30, 2021, the Company had
$122.3 million outstanding on its $300 million revolving credit facility.
Non-operating Pension and Postretirement Benefit Income, net
The Company recorded net non-operating pension and postretirement benefit income
of $27.6 million and $81.6 million for the third quarter and first nine months
of 2021, respectively; compared to $10.5 million and $41.0 million for the third
quarter and first nine months of 2020, respectively.
In the second quarter of 2021, the Company recorded $1.1 million in expenses
related to a non-operating SIP at manufacturing. In the third quarter of 2020,
the Company recorded $7.8 million in expenses related to a non-operating SIP at
the education division. In the second quarter of 2020, the Company recorded $6.0
million in expenses related to non-operating SIPs at the education division and
other businesses.
Gain (Loss) on Marketable Equity Securities, net
Overall, the Company recognized $14.1 million and $177.0 million in net gains on
marketable equity securities in the third quarter and first nine months of 2021,
respectively; compared to $59.4 million in net gains and $1.1 million in net
losses on marketable equity securities in the third quarter and first nine
months of 2020, respectively.
Other Non-Operating Income
The Company recorded total other non-operating income, net, of $5.2 million for
the third quarter of 2021, compared to $0.2 million for the third quarter of
2020. The 2021 amounts included other items. The 2020 amounts included a $1.6
million fair value increase on a cost method investment and other items;
partially offset by $2.3 million in foreign currency losses.
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The Company recorded total other non-operating income, net of $27.7 million for
the first nine months of 2021, compared to $11.0 million for the first nine
months of 2020. The 2021 amounts included $6.8 million in gains on sales of cost
method investments; $10.5 million in fair value increases on cost method
investments and other items. The 2020 amounts included a $4.2 million fair value
increase on a cost method investment; a $3.7 million gain on acquiring a
controlling interest in an equity affiliate; $1.4 million net gain on sales of
equity affiliates, $0.9 million in foreign currency gains and other items;
partially offset by $2.6 million in impairments on cost method investments.
(Benefit from) Provision for Income Taxes
The Company's effective tax rate for the first nine months of 2021 and 2020 was
22.6% and 29.6%, respectively. The Company's effective tax rate for 2021 was
favorably impacted by a $15.7 million deferred tax adjustment arising from a
change in the estimated deferred state income tax rate attributable to the
apportionment formula used in the calculation of deferred taxes related to the
Company's pension and other postretirement plans.
Earnings Per Share
The calculation of diluted earnings per share for the third quarter and first
nine months of 2021 was based on 4,976,998 and 4,980,056 weighted average shares
outstanding, respectively, compared to 5,071,998 and 5,191,556, respectively,
for the third quarter and first nine months of 2020. At September 30, 2021,
there were 4,965,396 shares outstanding. On September 10, 2020, the Board of
Directors authorized the Company to acquire up to 500,000 shares of its Class B
common stock; the Company has remaining authorization for 327,640 shares as of
September 30, 2021.
Financial Condition: Capital Resources and Liquidity
The Company considers the following when assessing its liquidity and capital
resources:
                                                                                     As of
                                                                       September 30,       December 31,
(In thousands)                                                             2021                2020
Cash and cash equivalents                                              $  133,882          $  413,991
Restricted cash                                                            15,054               9,063
Investments in marketable equity securities and other investments         779,073             587,582
Total debt                                                                555,889             512,555


Cash generated by operations is the Company's primary source of liquidity. The
Company maintains investments in a portfolio of marketable equity securities,
which is considered when assessing the Company's sources of liquidity. An
additional source of liquidity includes the undrawn portion of the Company's
$300 million revolving credit facility, amounting to $177.7 million at
September 30, 2021.
In March 2020, the U.S. government enacted legislation, including the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide
stimulus in the form of financial aid to businesses affected by the COVID-19
pandemic. Under the CARES Act, employers may defer the payment of the employer
share of FICA taxes due for the period beginning on March 27, 2020, and ending
December 31, 2020. As of September 30, 2021, the Company has deferred $21.4
million of FICA payments under this program, of which 50% is due by December 31,
2021 and the remaining balance due by December 31, 2022.
The CARES Act also included provisions to support healthcare providers in the
form of grants and changes to Medicare and Medicaid payments. In the second
quarter of 2020, GHG received $7.4 million under the CARES Act as a general
distribution from the Provider Relief Fund to provide relief for lost revenues
and expenses incurred in connection with COVID-19. In addition to the above
distribution, in April 2020, GHG applied for and received $31.5 million under
the expanded Medicare Accelerated and Advanced Payment Program, modified by the
CARES Act. The Department of Health and Human Services (HHS) started to recoup
this advance in April 2021 by withholding a portion of the amount reimbursed for
claims submitted for services provided after the beginning of the recoupment
period. During the three and nine months ended September 30, 2021, an amount of
$6.6 million and $11.6 million, respectively, was withheld by HHS and the
Company expects the remaining balance of $19.9 million to be withheld from
claims submitted in the next twelve months.
Governments in other jurisdictions where the Company operates also provided
relief to businesses affected by the COVID-19 pandemic in the form of job
retention schemes, payroll assistance, deferral of income and other tax
payments, and loans. During the first nine months of 2021, Kaplan recorded
benefits totaling $4.1 million related to job retention and payroll schemes,
mostly at Kaplan International.
During the first nine months of 2021, the Company's cash and cash equivalents
decreased by $280.1 million, due to the acquisition of Leaf, the purchase of
marketable equity securities, deferred payments on previous acquisitions,
capital expenditures, dividend payments and share repurchases, which was offset
by cash generated from
                                       34
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operations and the proceeds from the sale of marketable equity securities. In
the first nine months of 2021, the Company's borrowings increased by $43.3
million, due to additional borrowings under the revolving credit facility, which
were partially offset by repayments.
The Company had no money market investments as of September 30, 2021, compared
to $268.8 million at December 31, 2020, which are included in cash and cash
equivalents. At September 30, 2021, the Company held approximately $98 million
in cash and cash equivalents in businesses domiciled outside the U.S., of which
approximately $8 million is not available for immediate use in operations or for
distribution. Additionally, Kaplan's business operations outside the U.S. retain
cash balances to support ongoing working capital requirements, capital
expenditures, and regulatory requirements. As a result, the Company considers a
significant portion of the cash and cash equivalents balance held outside the
U.S. as not readily available for use in U.S. operations.
At September 30, 2021, the fair value of the Company's investments in marketable
equity securities was $764.8 million, which includes investments in the common
stock of seven publicly traded companies. The Company purchased $48.0 million of
marketable equity securities during the first nine months of 2021. During the
first nine months of 2021, the Company sold marketable equity securities that
generated proceeds of $38.3 million. At September 30, 2021, the net unrealized
gain related to the Company's investments totaled $489.0 million.
The Company had working capital of $681.0 million and $824.5 million at
September 30, 2021 and December 31, 2020, respectively. The Company maintains
working capital levels consistent with its underlying business requirements and
consistently generates cash from operations in excess of required interest or
principal payments.
At September 30, 2021 and December 31, 2020, the Company had borrowings
outstanding of $555.9 million and $512.6 million, respectively. The Company's
borrowings at September 30, 2021 were mostly from $400.0 million of 5.75%
unsecured notes due June 1, 2026, $122.3 million in outstanding borrowings under
the Company's revolving credit facility and a commercial note of $23.0 million
at the Automotive subsidiary. The Company's borrowings at December 31, 2020 were
mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, £55
million in outstanding borrowings under the Company's revolving credit facility
and a commercial note of $25.3 million at the Automotive subsidiary. The
interest on the $400.0 million of 5.75% unsecured notes is payable semiannually
on June 1 and December 1.
During the nine months ended September 30, 2021 and 2020, the Company had
average borrowings outstanding of approximately $531.3 million and $512.8
million, respectively, at average annual interest rates of approximately 4.9%
and 5.1%, respectively. During the nine months ended September 30, 2021 and
2020, the Company incurred net interest expense of $22.5 million and $19.3
million, respectively.
On June 3, 2021, Moody's affirmed the Company's credit ratings, but revised the
outlook from Negative to Stable. On April 27, 2021, Standard & Poor's affirmed
the Company's credit rating and revised the outlook from Negative to Stable.
The Company's current credit ratings are as follows:
              Moody's       Standard & Poor's
Long-term           Ba1                      BB
Outlook          Stable                  Stable


The Company expects to fund its estimated capital needs through existing cash
balances and internally generated funds, and, as needed, from borrowings under
its revolving credit facility. As of September 30, 2021, the Company had $122.3
million outstanding under the $300 million revolving credit facility, which
borrowing was used to purchase land and buildings at Kaplan International's
sixth-form college in London, U.K. and at the automotive division in the third
quarter of 2021, and to repay the £60 million Kaplan U.K. credit facility that
matured at the end of June 2020. In management's opinion, the Company will have
sufficient financial resources to meet its business requirements in the next 12
months, including working capital requirements, capital expenditures, interest
payments, potential acquisitions and strategic investments, dividends and stock
repurchases.
In summary, the Company's cash flows for each period were as follows:
                                                                              Nine Months Ended
                                                                                 September 30
(In thousands)                                                             2021                2020
Net cash provided by operating activities                              $  197,271          $ 240,890
Net cash (used in) provided by investing activities                      (420,456)            12,722
Net cash used in financing activities                                     (48,025)          (153,674)
Effect of currency exchange rate change                                    (2,908)            (2,729)
Net (decrease) increase in cash and cash equivalents and restricted
cash                                                                   $ (274,118)         $  97,209


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Operating activities. Cash flows from operating activities correspond to net income adjusted for certain non-cash items and changes in assets and liabilities. The Company’s net cash flows generated by operating activities are as follows:

                                                                               Nine Months Ended
                                                                                   September 30
(In thousands)                                                               2021               2020
Net Income                                                               $ 268,244          $  63,025
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and goodwill and other long-lived asset
impairments                                                                127,261            130,568
Amortization of lease right-of-use asset                                    55,246             70,214
Net pension benefit and special separation benefit expense                 (68,644)           (27,669)
Other non-cash activities                                                 (156,326)             7,895
Change in operating assets and liabilities                                 (28,510)            (3,143)
Net Cash Provided by Operating Activities                                $ 

197,271 $ 240,890


Net cash provided by operating activities consists primarily of cash receipts
from customers, less disbursements for costs, benefits, income taxes, interest
and other expenses.
For the first nine months of 2021 compared to the first nine months of 2020, the
decrease in net cash provided by operating activities is primarily driven by
lower net income, net of non-cash adjustments, and changes in operating assets
and liabilities. Changes in operating assets and liabilities were primarily the
result of a decrease in the collection of cash from customers that were
partially offset by lower vendor payments at Code3, and changes in the income
tax receivable and inventory balances.
Investing Activities. The Company's net cash flow (used in) provided by
investing activities were as follows:
                                                                              Nine Months Ended
                                                                                 September 30
(In thousands)                                                             2021                2020
Investments in certain businesses, net of cash acquired                $ (272,428)         $ (20,080)
Purchases of property, plant and equipment                               (140,935)           (56,121)

Net proceeds (purchases of) sales of marketable securities (9,728)

            93,775

Investments in associates, cost method and other investments (6,610)

            (8,298)

Other                                                                       9,245              3,446
Net Cash (Used in) Provided by Investing Activities                    $ 

(420,456) $ 12,722


Acquisitions. During the first nine months of 2021, the Company acquired all of
the outstanding shares of Leaf for cash and the assumption of $9.2 million in
liabilities related to their pre-acquisition stock compensation plan, which will
be paid in the future. Leaf is included in other businesses. During the first
nine months of 2020, the Company acquired three businesses: two small businesses
in its education division and an additional interest in Framebridge, Inc., which
is included in other businesses. The Framebridge purchase price includes $54.3
million in deferred payments and contingent consideration based on the acquiree
achieving certain revenue milestones in the future.
Capital Expenditures. Capital expenditures for the first nine months of 2021
were higher than the first nine months of 2020 primarily due to land and
building purchases at Kaplan International's sixth-form college in London, U.K.
and at the automotive division. In addition, 2020 includes capital expenditures
in connection with spectrum repacking at the Company's television stations in
Detroit, MI, Jacksonville, FL, and Roanoke, VA, as mandated by the FCC; these
expenditures were largely reimbursed to the Company by the FCC. The amounts
reflected in the Company's Condensed Consolidated Statements of Cash Flows are
based on cash payments made during the relevant periods, whereas the Company's
capital expenditures for the first nine months of 2021 of $140.7 million include
assets acquired during the quarter. The Company estimates that its capital
expenditures will be in the range of $155 million to $165 million in 2021.
Net (purchases of) proceeds from sale of investments. The Company purchased
$48.0 million of marketable equity securities during the first nine months of
2021. During the first nine months of 2021 and 2020, the Company sold marketable
equity securities that generated proceeds of $38.3 million and $93.8 million,
respectively.
                                       36
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Financing Activities. The Company's net cash flow used in financing activities
were as follows:
                                                     Nine Months Ended
                                                         September 30
(In thousands)                                      2021            2020
Dividends paid                                   $ (22,659)     $  (22,870)

Net payments on the vehicle floor plan payable (15,035) (16,300) Net borrowings on revolving credit lines 37,696 75,905 Loan repayments

                           (16,878)        (75,841)
Issuance of borrowings                              22,684           2,084
Common shares repurchased                          (21,840)       (123,155)
Other                                              (31,993)          6,503
Net Cash Used in Financing Activities            $ (48,025)     $ (153,674)


Dividends. The quarterly dividend rate per share was $1.51 and $1.45 for the
first nine months of 2021 and 2020, respectively.
Vehicle Floor Plan Payable and Borrowings. In the first nine months of 2021 and
2020, the Company used vehicle floor plan financing to fund the purchase of new
and used vehicles at its automotive division. In the first nine months of 2021,
the Company borrowed against the $300 million revolving credit facility, which
borrowing was used to purchase land and buildings at Kaplan International's
sixth-form college in London, U.K. and at the automotive division in the third
quarter of 2021. In the first nine months of 2020, the Company borrowed £60
million against the $300 million revolving credit facility and used the proceeds
to repay the £60 million outstanding balance under the Kaplan Credit Agreement
that matured at the end of June 2020.
Common Stock Repurchases. During the first nine months of 2021, the Company
purchased a total of 36,511 shares of its Class B common stock at a cost of
approximately $21.8 million. During the first nine months of 2020, the Company
purchased a total of 321,864 shares of its Class B common stock at a cost of
approximately $123.2 million. On September 10, 2020, the Board of Directors
authorized the Company to acquire up to 500,000 shares of its Class B common
stock. The Company did not announce a ceiling price or time limit for the
purchases. At September 30, 2021, the Company had remaining authorization from
the Board of Directors to purchase up to 327,640 shares of Class B common stock.
Other. During the first nine months of 2021, the Company paid $30.9 million
related to contingent consideration and deferred payments from prior
acquisitions, mostly for the 2020 acquisition of Framebridge. In March 2021,
Hoover's minority shareholders put their remaining outstanding shares to the
Company, which had a redemption value of $3.5 million. During the first nine
months of 2021, the Company increased the borrowings under its cash overdraft
facilities by $1.1 million. During the first nine months of 2020, the Company
increased the borrowings under its cash overdraft by $6.5 million and received
$5.3 million in proceeds from the exercise of stock options.
There were no other significant changes to the Company's contractual obligations
or other commercial commitments from those disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2020.
Forward-Looking Statements
All public statements made by the Company and its representatives that are not
statements of historical fact, including certain statements in this report, in
the Company's Annual Report on Form 10-K and in the Company's 2020 Annual Report
to Stockholders, are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to the duration and severity of the COVID-19 pandemic
and its effects on the Company's operations, financial results, liquidity and
cash flows. Other forward-looking statements include comments about expectations
related to acquisitions or dispositions or related business activities,
including the TOSA, the Company's business strategies and objectives,
anticipated results of license renewal applications, the prospects for growth in
the Company's various business operations and the Company's future financial
performance. As with any projection or forecast, forward-looking statements are
subject to various risks and uncertainties, including the risks and
uncertainties described in Item 1A of the Company's Annual Report on Form 10-K,
that could cause actual results or events to differ materially from those
anticipated in such statements. Accordingly, undue reliance should not be placed
on any forward-looking statement made by or on behalf of the Company. The
Company assumes no obligation to update any forward-looking statement after the
date on which such statement is made, even if new information subsequently
becomes available.
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