GRAHAM HOLDINGS CO Management discussion and analysis of operating results and financial condition. (form 10-Q)
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 theFCC ; •$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 theFCC ; •$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. 26 -------------------------------------------------------------------------------- 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 theFCC ; •$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 theFCC ; •$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. 27 -------------------------------------------------------------------------------- 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 inFebruary 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, particularlyKaplan 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 atKaplan 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$12.8 million in non-operating pension expense in the third quarter and first nine months of 2020, respectively. Kaplan management is continuing to monitor the ongoing COVID-19 disruptions and changes in its operating environment and may develop and implement further restructuring activities in 2021. In 2020, Kaplan also accelerated the development and promotion of various online programs and solutions, rapidly transitioned most of its classroom-based programs online and addressed the individual needs of its students and partners, substantially reducing the disruption from COVID-19 while simultaneously adding important new product offerings and operating capabilities. Further, in the fourth quarter of 2020, Kaplan combined its three primary divisions based inthe United States (Kaplan Test Prep ,Kaplan Professional , and Kaplan Higher Education) into one business known asKaplan North America (KNA). This combination is designed to enhance Kaplan's competitiveness by better leveraging its diversified academic and professional portfolio, as well as its relationship with students, universities and businesses. For financial reporting purposes, KNA is reported in two segments: Higher Education and Supplemental Education (combiningKaplan Test Prep andKaplan Professional (U.S. ) into one reporting segment). A summary of Kaplan's operating results is as follows: Three Months Ended Nine Months Ended September 30 September 30 (in thousands) 2021 2020 % Change 2021 2020 % Change Revenue Kaplan international$ 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 -
28
--------------------------------------------------------------------------------Kaplan International includes postsecondary education, professional training and language training businesses largely outsidethe 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 atUK 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 andUK 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 atJune 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 ofSeptember 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 atSeptember 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$0.9 million in severance restructuring costs incurred in the third quarter of 2020. Kaplan corporate and other represents unallocated expenses ofKaplan, Inc.'s corporate office, other minor businesses and certain shared activities. Overall, Kaplan corporate and other expenses increased in the first nine months of 2021 due to normalization of compensation costs compared to 2020, which included salary abatements and reduced incentive compensation accruals.Television Broadcasting Three Months Ended Nine Months Ended September 30 September 30 (in thousands) 2021 2020 % Change 2021 2020 % Change Revenue$ 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 summerOlympics -related advertising revenue at the Company'sNBC 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, 29 -------------------------------------------------------------------------------- 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 theFCC . 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 summerOlympics -related advertising revenue at the Company'sNBC 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 theFCC . Operating income for the first nine months of 2021 decreased 3% to$109.1 million , from$112.1 million in the same period of 2020, due to higher network fees. InMarch 2021 , the Company's television stations located inOrlando, FL andJacksonville, FL received approval of theirFCC license renewals throughFebruary 1, 2029 . Manufacturing Three Months Ended Nine Months Ended September 30 September 30 (in thousands) 2021 2020 % Change 2021 2020 % Change Revenue$ 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 inJune 2021 and this trend has continued throughSeptember 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 inShelton, 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 TheGraham 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 inCSI 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 30 -------------------------------------------------------------------------------- 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 theDepartment 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 theWashington, D.C. metropolitan area: Lexus ofRockville , Honda ofTysons Corner , and Ourisman Jeep ofBethesda . 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 inMarch 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'sRestaurant Group Clyde's Restaurant Group (CRG) owns and operates eleven restaurants and entertainment venues in theWashington, D.C. metropolitan area, includingOld Ebbitt Grill and TheHamilton . As a result of the COVID-19 pandemic, CRG temporarily closed all of its restaurants and venues inmid-March 2020 throughmid-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. InJune 2020 , CRG made the decision to close its restaurant and entertainment venue inColumbia, MD effectiveJuly 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. InDecember 2020 , CRG temporarily closed its restaurant dining rooms inMaryland and theDistrict of Columbia for the second time, reopening again for limited indoor dining service inmid-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 OnMay 15, 2020 , the Company acquiredFramebridge, Inc. , a custom framing service company, headquartered inWashington, DC , with two retail locations in the DC metropolitan area and a manufacturing facility inRichmond, KY . 31 -------------------------------------------------------------------------------- At the end of the third quarter of 2021,Framebridge had twelve retail locations in theWashington, DC ,New York City ,Atlanta, GA ,Philadelphia, PA ,Boston, MA andChicago, IL areas and three manufacturing facilities inKentucky andNew Jersey .Framebridge expects to open four additional stores in theChicago, IL andNew 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 OnJune 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 inSanta 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 periodJune 14, 2021 toSeptember 30, 2021 are included in other businesses. Leaf has three major operating divisions:Society6 Group andSaatchi Art Group (Marketplace businesses) and theMedia Group . For the third quarter of 2021, revenue forSociety6 Group declined, asSociety6 Group reported rapid growth in the third quarter of 2020, largely related to the COVID-19 pandemic.The Media Group andSaatchi 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 inDecember 2020 . Other Other businesses also include Slate andForeign 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 inDecember 2020 . For the first nine months of 2021, operating revenues for other businesses increased due largely to increases from theFramebridge and Leaf acquisitions and increases at CRG, partially offset due to the sale of Megaphone inDecember 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 atFramebridge 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 theFramebridge acquisition. 32 -------------------------------------------------------------------------------- Equity in Earnings of Affiliates AtSeptember 30, 2021 , the Company held an approximate 12% interest inIntersection 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 BalancesThe 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. AtSeptember 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 . AtSeptember 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) onMarketable 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. 33 -------------------------------------------------------------------------------- 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 TaxesThe 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$15.7 million deferred tax adjustment arising from a change in the estimated deferred state income tax rate attributable to the apportionment formula used in the calculation of deferred taxes related to the Company's pension and other postretirement plans. Earnings Per Share The calculation of diluted earnings per share for the third quarter and first nine months of 2021 was based on 4,976,998 and 4,980,056 weighted average shares outstanding, respectively, compared to 5,071,998 and 5,191,556, respectively, for the third quarter and first nine months of 2020. AtSeptember 30, 2021 , there were 4,965,396 shares outstanding. OnSeptember 10, 2020 , the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock; the Company has remaining authorization for 327,640 shares as ofSeptember 30, 2021 . Financial Condition: Capital Resources and LiquidityThe Company considers the following when assessing its liquidity and capital resources: As of September 30, December 31, (In thousands) 2021 2020 Cash and cash equivalents$ 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 atSeptember 30, 2021 . InMarch 2020 , theU.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 onMarch 27, 2020 , and endingDecember 31, 2020 . As ofSeptember 30, 2021 , the Company has deferred$21.4 million of FICA payments under this program, of which 50% is due byDecember 31, 2021 and the remaining balance due byDecember 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 theProvider Relief Fund to provide relief for lost revenues and expenses incurred in connection with COVID-19. In addition to the above distribution, inApril 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 inApril 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 endedSeptember 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 atKaplan 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 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , compared to$268.8 million atDecember 31, 2020 , which are included in cash and cash equivalents. AtSeptember 30, 2021 , the Company held approximately$98 million in cash and cash equivalents in businesses domiciled outside theU.S. , of which approximately$8 million is not available for immediate use in operations or for distribution. Additionally, Kaplan's business operations outside theU.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 theU.S. as not readily available for use inU.S. operations. AtSeptember 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 . AtSeptember 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 atSeptember 30, 2021 andDecember 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. AtSeptember 30, 2021 andDecember 31, 2020 , the Company had borrowings outstanding of$555.9 million and$512.6 million , respectively. The Company's borrowings atSeptember 30, 2021 were mostly from$400.0 million of 5.75% unsecured notes dueJune 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 atDecember 31, 2020 were mostly from$400.0 million of 5.75% unsecured notes dueJune 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 onJune 1 andDecember 1 . During the nine months endedSeptember 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 endedSeptember 30, 2021 and 2020, the Company incurred net interest expense of$22.5 million and$19.3 million , respectively. OnJune 3, 2021 , Moody's affirmed the Company's credit ratings, but revised the outlook from Negative to Stable. OnApril 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 ofSeptember 30, 2021 , the Company had$122.3 million outstanding under the$300 million revolving credit facility, which borrowing was used to purchase land and buildings atKaplan International's sixth-form college inLondon, U.K. and at the automotive division in the third quarter of 2021, and to repay the £60 million KaplanU.K. credit facility that matured at the end ofJune 2020 . In management's opinion, the Company will have sufficient financial resources to meet its business requirements in the next 12 months, including working capital requirements, capital expenditures, interest payments, potential acquisitions and strategic investments, dividends and stock repurchases. In summary, the Company's cash flows for each period were as follows: Nine Months Ended September 30 (In thousands) 2021 2020 Net cash provided by operating activities$ 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 35
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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
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)
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 inFramebridge, Inc. , which is included in other businesses. TheFramebridge 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 atKaplan International's sixth-form college inLondon, U.K. and at the automotive division. In addition, 2020 includes capital expenditures in connection with spectrum repacking at the Company's television stations inDetroit, MI ,Jacksonville, FL , andRoanoke, VA , as mandated by theFCC ; these expenditures were largely reimbursed to the Company by theFCC . 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$93.8 million , respectively. 36 -------------------------------------------------------------------------------- Financing Activities. The Company's net cash flow used in financing activities were as follows: Nine Months Ended September 30 (In thousands) 2021 2020 Dividends paid$ (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 atKaplan International's sixth-form college inLondon, 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 ofJune 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 . OnSeptember 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. AtSeptember 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 ofFramebridge . InMarch 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 endedDecember 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. 37
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