10-Q 1 d10q.htm FORM 10-Q GHC 2014 Q3 10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2014
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-671
GRAHAM HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1300 North 17th Street, Arlington, Virginia
22209
(Address of principal executive offices)
(Zip Code)
(703) 345-6300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý.    No  ¨.  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý.    No  ¨.  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  ý.  
Shares outstanding at October 31, 2014:
Class A Common Stock – 997,023 Shares
Class B Common Stock – 4,796,637 Shares
 




GRAHAM HOLDINGS COMPANY
Index to Form 10-Q
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
a. Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
c. Condensed Consolidated Balance Sheets at September 30, 2014 (Unaudited) and December 31, 2013
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
  
 
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Operating Revenues
  
 
  
 
  
 
  
Education
$
543,918

 
$
543,599

 
$
1,609,036

 
$
1,613,116

Subscriber
183,161

 
190,302

 
562,012

 
569,365

Advertising
81,583

 
73,549

 
242,305

 
222,569

Other
90,209

 
48,651

 
196,470

 
135,619

  
898,871

 
856,101

 
2,609,823

 
2,540,669

Operating Costs and Expenses
 
 
  
 
 
 
  
Operating
398,922

 
393,010

 
1,171,012

 
1,160,026

Selling, general and administrative
358,189

 
327,062

 
1,005,704

 
979,687

Depreciation of property, plant and equipment
53,074

 
54,672

 
158,280

 
170,431

Amortization of intangible assets
7,405

 
2,468

 
13,117

 
8,780

  
817,590

 
777,212

 
2,348,113

 
2,318,924

Income from Operations
81,281

 
78,889

 
261,710

 
221,745

Equity in earnings of affiliates, net
4,613

 
5,892

 
100,168

 
13,178

Interest income
529

 
642

 
1,769

 
1,674

Interest expense
(9,330
)
 
(9,221
)
 
(26,707
)
 
(27,229
)
Other income (expense), net
64,526

 
8,110

 
465,913

 
(8,831
)
Income from Continuing Operations Before Income Taxes
141,619

 
84,312

 
802,853

 
200,537

Provision for Income Taxes
58,200

 
29,900

 
214,200

 
77,400

Income from Continuing Operations
83,419

 
54,412

 
588,653

 
123,137

(Loss) Income from Discontinued Operations, Net of Tax
(6,980
)
 
(23,988
)
 
369,941

 
(42,320
)
Net Income
76,439

 
30,424

 
958,594

 
80,817

Net Loss (Income) Attributable to Noncontrolling Interests
121

 
(75
)
 
839

 
(425
)
Net Income Attributable to Graham Holdings Company
76,560

 
30,349

 
959,433

 
80,392

Redeemable Preferred Stock Dividends
(209
)
 
(205
)
 
(847
)
 
(855
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
76,351

 
$
30,144

 
$
958,586

 
$
79,537

Amounts Attributable to Graham Holdings Company Common Stockholders
  
 
  
 
  
 
  
Income from continuing operations
$
83,331

 
$
54,132

 
$
588,645

 
$
121,857

(Loss) income from discontinued operations, net of tax
(6,980
)
 
(23,988
)
 
369,941

 
(42,320
)
Net income attributable to Graham Holdings Company common stockholders
$
76,351

 
$
30,144

 
$
958,586

 
$
79,537

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  
 
  
 
  
 
  
Basic income per common share from continuing operations
$
14.38

 
$
7.29

 
$
85.55

 
$
16.42

Basic (loss) income per common share from discontinued operations
(1.20
)
 
(3.22
)
 
53.75

 
(5.70
)
Basic net income per common share
$
13.18

 
$
4.07

 
$
139.30

 
$
10.72

Basic average number of common shares outstanding
5,671

 
7,231

 
6,737

 
7,229

Diluted income per common share from continuing operations
$
14.32

 
$
7.28

 
$
85.24

 
$
16.41

Diluted (loss) income per common share from discontinued operations
(1.20
)
 
(3.23
)
 
53.55

 
(5.71
)
Diluted net income per common share
$
13.12

 
$
4.05

 
$
138.79

 
$
10.70

Diluted average number of common shares outstanding
5,757

 
7,337

 
6,823

 
7,316


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Net Income
$
76,439

 
$
30,424

 
$
958,594

 
$
80,817

Other Comprehensive (Loss) Income, Before Tax
  
 
  
 
 
 
  
Foreign currency translation adjustments:
  
 
  
 
 
 
  
Translation adjustments arising during the period
(9,777
)
 
5,639

 
(7,111
)
 
(2,061
)
Unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains for the period, net
9,734

 
938

 
46,139

 
81,439

Reclassification adjustment for realization of (gain) loss on exchange, sale or write-down of available-for-sale securities included in net income

 

 
(265,274
)
 
(884
)
  
9,734

 
938

 
(219,135
)
 
80,555

Pension and other postretirement plans:
  
 
  
 
  
 
  
Amortization of net prior service credit included in net income
(101
)
 
(384
)
 
(305
)
 
(1,205
)
Amortization of net actuarial (gain) loss included in net income
(7,425
)
 
2,004

 
(22,032
)
 
6,325

Settlement gain included in net income

 

 

 
(3,471
)
  
(7,526
)
 
1,620

 
(22,337
)
 
1,649

Cash flow hedge gain
230

 
15

 
641

 
259

Other Comprehensive (Loss) Income, Before Tax
(7,339
)
 
8,212

 
(247,942
)
 
80,402

Income tax (expense) benefit related to items of other comprehensive (loss) income
(975
)
 
(1,028
)
 
96,333

 
(32,985
)
Other Comprehensive (Loss) Income, Net of Tax
(8,314
)
 
7,184

 
(151,609
)
 
47,417

Comprehensive Income
68,125

 
37,608

 
806,985

 
128,234

Comprehensive loss (income) attributable to noncontrolling interests
121

 
(75
)
 
839

 
(447
)
Total Comprehensive Income Attributable to Graham Holdings Company
$
68,246

 
$
37,533

 
$
807,824

 
$
127,787


See accompanying Notes to Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
September 30,
2014
 
December 31,
2013
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
441,786

 
$
569,719

Restricted cash
38,595

 
83,769

Investments in marketable equity securities and other investments
206,838

 
522,318

Accounts receivable, net
460,600

 
428,653

Income taxes receivable

 
17,991

Deferred income taxes
25,774

 

Inventories and contracts in progress
10,774

 
2,924

Other current assets
78,277

 
77,013

Current assets held for sale (cash)
1,473

 

Total Current Assets
1,264,117

 
1,702,387

Property, Plant and Equipment, Net
870,182

 
927,542

Investments in Affiliates
21,976

 
15,754

Goodwill, Net
1,353,089

 
1,288,622

Indefinite-Lived Intangible Assets, Net
572,209

 
541,278

Amortized Intangible Assets, Net
78,231

 
39,588

Prepaid Pension Cost
1,267,415

 
1,245,505

Deferred Charges and Other Assets
53,066

 
50,370

Noncurrent Assets Held for Sale
8,151

 

Total Assets
$
5,488,436

 
$
5,811,046

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
462,860

 
$
505,699

Income taxes payable
50,176

 

Deferred income taxes

 
58,411

Deferred revenue
434,764

 
366,831

Dividends declared
14,983

 

Short-term borrowings
50,460

 
3,168

Current liabilities held for sale
1,306

 

Total Current Liabilities
1,014,549

 
934,109

Postretirement Benefits Other Than Pensions
34,614

 
36,219

Accrued Compensation and Related Benefits
223,213

 
211,526

Other Liabilities
88,840

 
86,000

Deferred Income Taxes
795,005

 
778,735

Long-Term Debt
398,298

 
447,608

Total Liabilities
2,554,519

 
2,494,197

Redeemable Noncontrolling Interest
23,413

 
5,896

Redeemable Preferred Stock
10,510

 
10,665

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
296,108

 
288,129

Retained earnings
5,674,096

 
4,782,777

Accumulated other comprehensive income, net of tax
 
 
  

Cumulative foreign currency translation adjustment
17,902

 
25,013

Unrealized gain on available-for-sale securities
42,182

 
173,663

Unrealized gain on pensions and other postretirement plans
488,044

 
501,446

Cash flow hedge
(243
)
 
(628
)
Cost of Class B common stock held in treasury
(3,648,032
)
 
(2,490,333
)
Total Common Stockholders’ Equity
2,890,057

 
3,300,067

Noncontrolling Interests
9,937

 
221

Total Equity
2,899,994

 
3,300,288

Total Liabilities and Equity
$
5,488,436

 
$
5,811,046


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Nine Months Ended 
 September 30
(in thousands)
2014
 
2013
Cash Flows from Operating Activities
  
 
  
Net Income
$
958,594

 
$
80,817

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation of property, plant and equipment
159,917

 
191,388

Amortization of intangible assets
13,847

 
9,867

Intangible assets impairment charge
7,774

 

Net pension (benefit) expense
(51,637
)
 
11,425

Early retirement program expense
8,374

 
22,700

Stock-based compensation expense, net
13,123

 
34,429

Foreign exchange loss
2,618

 
9,350

Net (gain) loss on sales and disposition of businesses
(354,612
)
 
70

Net gain on disposition or write-downs of marketable equity securities and cost method investments
(266,173
)
 
(714
)
Equity in earnings of affiliates, net of certain distributions
(96,315
)
 
(13,168
)
Provision (benefit) for deferred income taxes
8,329

 
(8,802
)
Net (gain) loss on sale or write-down of property, plant and equipment
(119,158
)
 
1,476

Net gain on sale of intangible assets
(75,249
)
 

Change in assets and liabilities:
 
 
 
Decrease (increase) in restricted cash
45,174

 
(18,667
)
Increase in accounts receivable, net
(12,867
)
 
(32,717
)
(Increase) decrease in inventories
(1,978
)
 
1,138

(Decrease) increase in accounts payable and accrued liabilities
(56,666
)
 
8,587

Increase in deferred revenue
70,011

 
31,885

Increase in income taxes payable
68,081

 
21,884

Decrease (increase) in other assets and other liabilities, net
17,278

 
(4,662
)
Other
(1,588
)
 
1,340

Net Cash Provided by Operating Activities
336,877

 
347,626

Cash Flows from Investing Activities
  
 
  
Investments in commercial paper
(399,758
)
 

Proceeds from maturities of commercial paper
349,793

 

Net proceeds from sales of businesses, property, plant and equipment and other assets
248,938

 
5,800

Investments in certain businesses, net of cash acquired
(200,793
)
 
(19,927
)
Purchases of property, plant and equipment
(162,441
)
 
(143,298
)
Net distribution from equity affiliate
93,481

 

Purchases of equity affiliates and cost method investments
(8,388
)
 
(12,029
)
Other
(5,097
)
 
(3
)
Net Cash Used in Investing Activities
(84,265
)
 
(169,457
)
Cash Flows from Financing Activities
  
 
  
Common shares repurchased, including the Berkshire Exchange transaction
(327,718
)
 
(4,196
)
Dividends paid
(53,131
)
 
(649
)
Repayments of borrowings
(1,315
)
 
(240,303
)
Other
6,028

 
(2,397
)
Net Cash Used in Financing Activities
(376,136
)
 
(247,545
)
Effect of Currency Exchange Rate Change
(2,936
)
 
(1,396
)
Net Decrease in Cash and Cash Equivalents
(126,460
)
 
(70,772
)
Beginning Cash and Cash Equivalents
569,719

 
512,431

Ending Cash and Cash Equivalents
$
443,259

 
$
441,659


See accompanying Notes to Condensed Consolidated Financial Statements.

4



GRAHAM HOLDINGS COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of cable systems and television broadcasting (through the ownership and operation of five television broadcast stations).
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and nine months ended September 30, 2014 and 2013 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation, which includes the reclassification of the results of operations of certain businesses as discontinued operations for all periods presented.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Assets Held for Sale – An asset or business is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or business is available for immediate sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets and related liabilities are aggregated and reported separately in the Company’s condensed consolidated balance sheet.
Restricted Cash – Restricted cash represents amounts held for students that were received from U.S. Federal and state governments under various aid grant and loan programs, such as Title IV of the U.S. Federal Higher Education Act of 1965 (Higher Education Act), as amended, that the Company is required to maintain pursuant to U.S. Department of Education (ED) and other regulations. Federal regulations stipulate that the Company has a fiduciary responsibility to segregate Federal funds from all other funds to ensure the funds are only used for the benefit of eligible students. The regulations further indicate that funds received under Federal aid programs are held in trust for the intended student beneficiary and the ED, and as trustee of these funds, the Company may not use the funds for any other purpose until the funds are applied to eligible student charges, which occurs within three days of the receipt of the funds. Restricted cash also includes (i) certain funds that the Company may be required to return if a student who receives Title IV program funds withdraws from a program and (ii) funds required to be held by non-U.S. higher education institutions for prepaid tuition.
Allowance for Doubtful Accounts – Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical collection experience and management’s evaluation of the financial condition of the customer. The Company generally considers an account past due or delinquent when a student or customer misses a scheduled payment. The Company writes off accounts receivable balances deemed uncollectible against the allowance for doubtful

5



accounts following the passage of a certain period of time, or generally when the account is turned over for collection to an outside collection agency.
Revenue Recognition.
Education revenues. Kaplan Higher Education's (KHE) refund policy may permit students who do not complete a course to be eligible for a refund for the portion of the course they did not attend. The amount of the refund differs by school, program, and state, as some states require different policies. Refunds generally result in a reduction in deferred revenue during the period that a student drops or withdraws from a class because the associated tuition revenue is recognized daily over the period of instruction as the services are delivered.
Recently Adopted and Issued Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (FASB) issued new guidance that modifies the requirements for reporting discontinued operations. The new guidance requires the reporting of the disposal of an entity or component of an entity as discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results. The new guidance also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. This guidance is effective for interim and fiscal years beginning after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued or available for issuance. The Company is in the process of evaluating the impact of this new guidance on its condensed consolidated financial statements.
In May 2014, the FASB issued comprehensive new guidance that supersedes all existing revenue recognition guidance. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. This guidance is effective for interim and fiscal years beginning after December 15, 2016. Early adoption is not permitted. The standard permits two implementation approaches, one requiring retrospective application of the new guidance with a restatement of prior years and one requiring prospective application of the new guidance with disclosure of results under the old guidance. The Company is in the process of evaluating the impact of this new guidance on its condensed consolidated financial statements, and believes such evaluation will extend over several future periods due to the significance of the changes to the Company's policies and business processes.
In August 2014, the FASB issued new guidance that requires management to assess the Company’s ability to continue as a going concern, and to provide related disclosures in certain circumstances. This guidance is effective for interim and fiscal years ending after December 15, 2016, with early adoption permitted. The Company does not expect this guidance to have an impact on its condensed consolidated financial statements.
2. DISCONTINUED OPERATIONS
In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously included as part of Kaplan International. An additional school in China is expected to be sold by Kaplan in the fourth quarter of 2014. These sales resulted in a pre-tax loss of $4.4 million that was recorded in the third quarter of 2014.
On June 30, 2014, the Company and Berkshire Hathaway Inc. completed a transaction, as described in Note 4, in which Berkshire acquired a wholly-owned subsidiary of the Company that included, among other things, WPLG, a Miami-based television station; a $375.0 million gain from the WPLG sale was recorded in the second quarter of 2014.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses. The publishing businesses sold include The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Greater Washington Publishing, Fairfax County Times and El Tiempo Latino and related websites (Publishing Subsidiaries).
In March 2013, the Company completed the sale of The Herald which resulted in a pre-tax loss of $0.1 million that was recorded in the first quarter of 2013.
The results of operations of the schools in China, WPLG, the Publishing Subsidiaries and The Herald are included in the Company’s Condensed Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax, for all periods presented. The Company did not reclassify its Statements of Cash Flows or prior Condensed Consolidated Balance Sheets to reflect the various discontinued operations.
In the first quarter of 2014, an after-tax adjustment of $3.0 million was made to reduce the $100.0 million after-tax gain on the sale of the Publishing Subsidiaries previously reported in the fourth quarter of 2013, as a result of changes in estimates related to liabilities retained as part of the sale.

6



The summarized (loss) income from discontinued operations, net of tax, is presented below:
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
  
 
(in thousands)
2014
 
2013
 
2014
 
2013
Operating revenues
$
1,294

 
$
141,152

 
$
46,713

 
$
441,001

Operating costs and expenses
(2,225
)
 
(178,823
)
 
(39,580
)
 
(507,434
)
(Loss) income from discontinued operations
(931
)
 
(37,671
)
 
7,133

 
(66,433
)
Provision (benefit) from income taxes
231

 
(13,683
)
 
3,371

 
(24,159
)
Net (Loss) Income from Discontinued Operations
(1,162
)
 
(23,988
)
 
3,762

 
(42,274
)
(Loss) gain on sales of discontinued operations
(4,352
)
 

 
349,875

 
(70
)
Expense (benefit) from income taxes on sales of discontinued operations
1,466

 

 
(16,304
)
 
(24
)
(Loss) Income from Discontinued Operations, Net of Tax
$
(6,980
)
 
$
(23,988
)
 
$
369,941

 
$
(42,320
)
3. INVESTMENTS
Investments in marketable equity securities comprised the following:
  
As of
  
September 30,
2014
 
December 31,
2013
(in thousands)
 
Total cost
$
56,967

 
$
197,718

Net unrealized gains
70,303

 
289,438

Total Fair Value
$
127,270

 
$
487,156

On June 30, 2014, the Company completed a transaction with Berkshire Hathaway, as described in Note 4, that included the exchange of 2,107 Class A Berkshire shares and 1,278 Class B Berkshire shares owned by the Company; a $266.7 million gain was recorded.
There were no new investments in marketable equity securities during the first nine months of 2014 and 2013. In the first quarter of 2014, the Company recorded a $0.5 million write-down of the Company's investment in Corinthian Colleges, Inc., a publicly traded company. In the second quarter of 2014, the Company sold its remaining investment in Corinthian Colleges, Inc. During the first nine months of 2014, the proceeds from the sale of these marketable securities were $5.8 million and net realized losses were $2.6 million. During the first nine months of 2013, the proceeds from sales of marketable securities were $3.6 million, and net realized gains on such sales were $0.9 million.
As of September 30, 2014, the Company held investments in commercial paper totaling $50.0 million with original maturities of 91 to 180 days. These investments are included in Investments in marketable equity securities and other investments in the Condensed Consolidated Balance Sheets. The Company did not have any investments in commercial paper at December 31, 2013.
On April 1, 2014, the Company received a gross cash distribution of $95.0 million from Classified Ventures' sale of apartments.com. In connection with this sale, the Company recorded a pre-tax gain of $90.9 million in the second quarter of 2014.
On October 1, 2014, the Company and the remaining partners completed the sale of their entire stakes in Classified Ventures. Total proceeds to the Company, net of transaction costs, were $408.5 million, of which $16.5 million will be held in escrow until October 1, 2015. The Company will record a pre-tax gain of approximately $393 million on the sale of its interest in Classified Ventures in the fourth quarter of 2014.
4. ACQUISITIONS, DISPOSITIONS AND EXCHANGES
Acquisitions.  In the first nine months of 2014, the Company acquired seven businesses totaling $204.9 million, comprised of four businesses in other businesses, two businesses in Kaplan Test Prep, and one business in Kaplan Higher Ed. The purchase price allocation mostly comprised goodwill, other intangible assets, and other current assets on a preliminary basis. In the first nine months of 2013, the Company acquired five small businesses included in other businesses and in its education division; the purchase price allocation mostly comprised goodwill and other intangible assets.
On April 1, 2014, Celtic Healthcare acquired VNA-TIP Healthcare, a provider of home health and hospice services in Missouri and Illinois. On May 30, 2014, the Company completed its acquisition of Joyce/Dayton Corp., a Dayton, OH-based manufacturer of screw jacks and other linear motion systems. On July 3, 2014, the Company completed its acquisition of an 80% interest in Residential Healthcare Group, Inc., the parent company of Residential Home Health and Residential Hospice, leading providers of skilled home health care and hospice services in Michigan and Illinois. The operating results of these businesses are included in other businesses. The fair value of the

7



redeemable noncontrolling interest in Residential Healthcare Group, Inc. was $18.8 million at the acquisition date, determined using a market approach. The minority shareholders have an option to put their shares to the Company starting in 2017, and the Company has an option to buy the shares of some minority shareholders in 2020 and the remaining minority shareholders in 2024.
On August 1, 2013, the Company completed its acquisition of Forney Corporation, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications. The operating results of Forney are included in other businesses.
In the second quarter of 2013, Kaplan purchased the remaining 15% noncontrolling interest in Kaplan China; this additional interest was accounted for as an equity transaction.
Dispositions. In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously included as part of Kaplan International. An additional school is expected to be sold in the fourth quarter of 2014.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses. The publishing businesses sold include The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Greater Washington Publishing, Fairfax County Times and El Tiempo Latino and related websites (Publishing Subsidiaries).

In March 2013, the Company completed the sale of certain assets of The Herald, a daily and Sunday newspaper headquartered in Everett, WA.
Exchanges. On June 30, 2014, the Company and Berkshire Hathaway Inc. completed a previously announced transaction in which Berkshire acquired a wholly-owned subsidiary of the Company that included, among other things, WPLG, a Miami-based television station, 2,107 Class A Berkshire shares and 1,278 Class B Berkshire shares owned by Graham Holdings and $327.7 million in cash, in exchange for 1,620,190 shares of Graham Holdings Class B common stock owned by Berkshire Hathaway (Berkshire exchange transaction). As a result, income from continuing operations for the second quarter of 2014 includes a $266.7 million gain from the sale of the Berkshire Hathaway shares, and income from discontinued operations for the second quarter of 2014 includes a $375.0 million gain from the WPLG exchange.
The pre-tax gain of $266.7 million related to the disposition of the Berkshire shares was not subject to income tax as the Berkshire exchange transaction qualifies as a tax-free distribution. The lower effective tax rate for income from continuing operations for the first nine months of 2014 of 26.7% primarily resulted from this tax-free transaction.
As discussed above, this exchange transaction includes significant noncash investing and financing activities. On the date of exchange, the fair value of the Berkshire Class A and B shares was $400.3 million and the fair value of WPLG was determined to be $438.0 million. In total, the Company recorded an increase in treasury stock of $1,165.4 million in the second quarter of 2014 in connection with the Berkshire exchange transaction.
The Company’s income from continuing operations excludes the businesses described in dispositions and exchanges above, which have been reclassified to discontinued operations, net of tax (see Note 2). 
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In the second quarter of 2014, as a result of regulatory changes impacting Kaplan's operations in China, Kaplan recorded an intangible asset impairment charge of $7.8 million, reported in discontinued operations. The Company estimated the fair value of the student and customer relationships using an income approach.
Amortization of intangible assets for the three months ended September 30, 2014 and 2013 was $7.4 million and $2.5 million, respectively. Amortization of intangible assets for the nine months ended September 30, 2014 and 2013 was $13.1 million and $8.8 million, respectively. Amortization of intangible assets is estimated to be approximately $4 million for the remainder of 2014, $17 million in 2015, $16 million in 2016, $12 million in 2017, $10 million in 2018 and $19 million thereafter.
In July 2014, the cable division sold wireless spectrum licenses that were purchased in 2006; a pre-tax non-operating gain of $75.2 million was recorded in the third quarter of 2014 in connection with these sales.

8



The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Cable
 
Television
Broadcasting
 
Other
Businesses
 
Total
Balance as of December 31, 2013
  
 
  
 
  
 
  
 
  
Goodwill
$
1,073,433

 
$
85,488

 
$
203,165

 
$
34,877

 
$
1,396,963

Accumulated impairment losses
(102,259
)
 

 

 
(6,082
)
 
(108,341
)
 
971,174

 
85,488

 
203,165

 
28,795

 
1,288,622

Acquisitions
14,941

 

 

 
98,366

 
113,307

Dispositions
(2,420
)
 

 
(37,661
)
 

 
(40,081
)
Foreign currency exchange rate changes
(8,759
)
 

 

 

 
(8,759
)
Balance as of September 30, 2014
  

 
  

 
  

 
  

 
  

Goodwill
1,077,195

 
85,488

 
165,504

 
133,243

 
1,461,430

Accumulated impairment losses
(102,259
)
 

 

 
(6,082
)
 
(108,341
)
 
$
974,936

 
$
85,488

 
$
165,504

 
$
127,161

 
$
1,353,089

The changes in carrying amount of goodwill at the Company’s education division were as follows:
(in thousands)
Higher
Education
 
Test
Preparation
 
Kaplan
International
 
Total
Balance as of December 31, 2013
  
 
  
 
  
 
  
Goodwill
$
409,016

 
$
152,187

 
$
512,230

 
$
1,073,433

Accumulated impairment losses

 
(102,259
)
 

 
(102,259
)
 
409,016

 
49,928

 
512,230

 
971,174

Acquisitions
1,343

 
13,598

 

 
14,941

Dispositions

 

 
(2,420
)
 
(2,420
)
Foreign currency exchange rate changes
(95
)
 

 
(8,664
)
 
(8,759
)
Balance as of September 30, 2014
  

 
  

 
  

 
  

Goodwill
410,264

 
165,785

 
501,146

 
1,077,195

Accumulated impairment losses

 
(102,259
)
 

 
(102,259
)
 
$
410,264

 
$
63,526

 
$
501,146

 
$
974,936

Other intangible assets consist of the following:
 
 
 
As of September 30, 2014
 
As of December 31, 2013
(in thousands)
Useful Life
Range
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Noncompete agreements
2–5 years
 
$
12,392

 
$
11,373

 
$
1,019

 
$
13,540

 
$
12,622

 
$
918

Student and customer relationships
2–10 years
 
111,354

 
48,558

 
62,796

 
72,050

 
45,718

 
26,332

Databases and technology
3–5 years
 
12,190

 
8,364

 
3,826

 
10,790

 
6,991

 
3,799

Trade names and trademarks
2–10 years
 
26,863

 
17,956

 
8,907

 
22,327

 
16,052

 
6,275

Other
1–25 years
 
9,626

 
7,943

 
1,683

 
9,836

 
7,572

 
2,264

  
  
 
$
172,425

 
$
94,194

 
$
78,231

 
$
128,543

 
$
88,955

 
$
39,588

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Franchise agreements
  
 
$
496,321

 
  

 
  

 
$
496,321

 
  

 
  

Wireless licenses
  
 

 
  

 
  

 
22,150

 
  

 
  

Licensure and accreditation
  
 
7,321

 
  

 
  

 
7,171

 
  

 
  

Other
  
 
68,567

 
  

 
  

 
15,636

 
  

 
  

 
  
 
$
572,209

 
 
 
 
 
$
541,278

 
 
 
 
6. DEBT
The Company’s borrowings consist of the following:
  
As of
  
September 30,
2014
 
December 31,
2013
(in thousands)
 
7.25% unsecured notes due February 1, 2019
$
398,204

 
$
397,893

AUD Revolving credit borrowing
43,669

 
44,625

Other indebtedness
6,885

 
8,258

Total Debt
448,758

 
450,776

Less: current portion
(50,460
)
 
(3,168
)
Total Long-Term Debt
$
398,298

 
$
447,608


9



The Company’s other indebtedness at September 30, 2014 and December 31, 2013 is at interest rates from 0% to 6% and matures from 2014 to 2017.
During the three months ended September 30, 2014 and 2013, the Company had average borrowings outstanding of approximately $450.9 million and $449.8 million, respectively, at average annual interest rates of approximately 7.0%. During the three months ended September 30, 2014 and 2013, the Company incurred net interest expense of $8.8 million and $8.6 million, respectively.
During the nine months ended September 30, 2014 and 2013, the Company had average borrowings outstanding of approximately $451.4 million and $477.5 million, respectively, at average annual interest rates of approximately 7.0%. During the nine months ended September 30, 2014 and 2013, the Company incurred net interest expense of $24.9 million and $25.6 million, respectively.
At September 30, 2014, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $468.0 million, compared with the carrying amount of $398.2 million. At December 31, 2013, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $475.2 million, compared with the carrying amount of $397.9 million. The carrying value of the Company’s other unsecured debt at September 30, 2014 approximates fair value.
7. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of September 30, 2014
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
287,714

 
$
287,714

Marketable equity securities (2) 
127,270

 

 
127,270

Commercial paper (3)
49,965

 

 
49,965

Other current investments (4) 
5,348

 
24,255

 
29,603

Total Financial Assets
$
182,583

 
$
311,969

 
$
494,552

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
66,485

 
$
66,485

7.25% unsecured notes (6) 

 
468,000

 
468,000

AUD revolving credit borrowing (6) 

 
43,669

 
43,669

Interest rate swap (7) 

 
405

 
405

Total Financial Liabilities
$

 
$
578,559

 
$
578,559

 
As of December 31, 2013
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
431,836

 
$
431,836

Marketable equity securities (2) 
487,156

 

 
487,156

Other current investments (4) 
11,826

 
23,336

 
35,162

Total Financial Assets
$
498,982

 
$
455,172

 
$
954,154

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
67,603

 
$
67,603

7.25% unsecured notes (6) 

 
475,224

 
475,224

AUD revolving credit borrowing (6) 

 
44,625

 
44,625

Interest rate swap (7) 

 
1,047

 
1,047

Total Financial Liabilities
$

 
$
588,499

 
$
588,499

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(3)
The Company's commercial paper investments with original maturities greater than 90 days, but less than one year, are included in investments in marketable equity securities and other investments.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits with original maturities greater than 90 days, but less than one year.
(5)
Includes Graham Holdings Company's Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company's Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.
(6)
See Note 6 for carrying amount of these notes and borrowing.
(7)
Included in Other liabilities. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
In the second quarter of 2014, the Company recorded an intangible asset impairment charge of $7.8 million, reported in discontinued operations (see Note 5). The remeasurement of the intangible assets is classified as a

10



Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value.
8. EARNINGS PER SHARE
On June 30, 2014, the Company acquired 1,620,190 of its Class B common stock owned by Berkshire Hathaway, as described in Note 4.
The Company's unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of the earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.
The following reflects the Company's income from continuing operations and share data used in the basic and diluted earnings per share computations using the two-class method:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Numerator for basic earnings per share:
  
 
  
 
  
 
  
Income from continuing operations attributable to Graham Holdings Company common stockholders
$
83,331

 
$
54,132

 
$
588,645

 
$
121,857

Less: Dividends-common stock outstanding and unvested restricted shares
(14,773
)
 

 
(67,267
)
 

Undistributed earnings
68,558

 
54,132

 
521,378

 
121,857

Percent allocated to common stockholders
97.89
%
 
97.42
%
 
97.89
%
 
97.42
%
 
67,112

 
52,736

 
510,384

 
118,714

Add: Dividends-common stock outstanding
14,462

 

 
66,021

 

Numerator for basic earnings per share
$
81,574

 
$
52,736

 
$
576,405

 
$
118,714

Add: Additional undistributed earnings due to dilutive stock options
6

 
3

 
48

 
4

Numerator for diluted earnings per share
$
81,580

 
$
52,739

 
$
576,453

 
$
118,718

Denominator:
  

 
  

 
 
 
 
Denominator for basic earnings per share:


 


 


 


Weighted average shares outstanding
5,671

 
7,231

 
6,737

 
7,229

Add: Effect of dilutive stock options
25

 
15

 
25

 
8

Denominator for diluted earnings per share
5,696

 
7,246

 
6,762

 
7,237

Graham Holdings Company Common Stockholders:
  
 
  
 
  
 
  
Basic earnings per share from continuing operations
$
14.38

 
$
7.29

 
$
85.55

 
$
16.42

Diluted earnings per share from continuing operations
$
14.32

 
$
7.28

 
$
85.24

 
$
16.41

Diluted earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Weighted average restricted stock
61

 
91

 
61

 
79

The diluted earnings per share amounts for the three and nine months ended September 30, 2014 exclude the effects of 5,000 stock options outstanding as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2013 exclude the effects of 13,000 and 63,000 stock options outstanding, respectively, as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2014 exclude the effects of 6,075 restricted stock awards as their inclusion would have been antidilutive. The diluted earnings per share amounts for the three and nine months ended September 30, 2013 exclude the effects of 8,800 restricted stock awards, as their inclusion would have been antidilutive.
In the three and nine months ended September 30, 2014, the Company declared regular dividends totaling $2.55 and $10.20 per share, respectively. No dividends were paid in 2013.

11



9. PENSION AND POSTRETIREMENT PLANS
Defined Benefit Plans. The total (benefit) cost arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended September 30
 
Nine Months Ended September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Service cost
$
6,976

 
$
12,713

 
$
21,489

 
$
38,788

Interest cost
12,894

 
14,242

 
38,870

 
42,776

Expected return on assets
(29,877
)
 
(26,817
)
 
(90,644
)
 
(78,606
)
Amortization of prior service cost
83

 
908

 
247

 
2,726

Recognized actuarial (gain) loss
(7,280
)
 
1,797

 
(21,599
)
 
5,741

Net Periodic (Benefit) Cost
(17,204
)
 
2,843

 
(51,637
)
 
11,425

Early retirement programs expense
3,884

 

 
8,374

 
22,700

Total (Benefit) Cost
$
(13,320
)
 
$
2,843

 
$
(43,263
)
 
$
34,125

For the nine months ended September 30, 2014, the net periodic benefit for the Company's pension plans, as reported above, includes costs of $0.2 million reported in discontinued operations. For the three and nine months ended September 30, 2013, the net periodic cost for the Company's pension plans, as reported above, includes costs of $5.5 million and $19.4 million, respectively, reported in discontinued operations.
In the first quarter of 2014, the Company recorded $4.5 million related to a Separation Incentive Program for certain Corporate employees, which will be funded from the assets of the Company's pension plan. In the third quarter of 2014, the Company recorded $3.9 million related to a Voluntary Retirement Incentive Program (VRIP) for certain Corporate employees, which will be funded from the assets of the Company's pension plan.
The Company announced a VRIP in February 2013, which was offered to certain employees of the Washington Post newspaper. The total early retirement program expense for this program for the nine months ended September 30, 2013 was $20.4 million. In addition, the Washington Post newspaper recorded $2.3 million in special separation benefits for a group of employees in the first quarter of 2013. The early retirement program expense and special separation benefits for these programs were funded from the assets of the Company’s pension plan and are included in discontinued operations, net of tax.
The total cost arising from the Company’s Supplemental Executive Retirement Plan (SERP), including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended September 30
 
Nine Months Ended September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Service cost
$
373

 
$
429

 
$
1,119

 
$
1,288

Interest cost
1,086

 
1,023

 
3,257

 
3,069

Amortization of prior service cost
12

 
14

 
35

 
41

Recognized actuarial loss
374

 
711

 
1,124

 
2,133

Net Periodic Cost
1,845

 
2,177

 
5,535

 
6,531

Early retirement programs expense
2,422

 

 
2,422

 

Total Cost
$
4,267

 
$
2,177

 
$
7,957

 
$
6,531

For the nine months ended September 30, 2014, the net periodic cost for the Company's SERP, as reported above, includes costs of $0.2 million reported in discontinued operations. For the three and nine months ended September 30, 2013, the net periodic cost for the Company's SERP, as reported above, includes costs of $0.3 million and $0.9 million, respectively, reported in discontinued operations.
In the third quarter of 2014, the Company recorded a $2.4 million SERP charge related to the VRIP for certain Corporate employees.

12



Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. The assets of the Company’s pension plan were allocated as follows:
  
As of
  
September 30,
2014
 
December 31,
2013
  
 
U.S. equities
60
%
 
58
%
U.S. fixed income
11
%
 
12
%
International equities
29
%
 
30
%
  
100
%
 
100
%
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of September 30, 2014, the managers can invest no more than 24% of the assets in international stocks, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2014. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At September 30, 2014, the pension plan held common stock in two investments that exceeded 10% of total plan assets. At December 31, 2013, the pension plan held common stock in one investment that exceeded 10% of total plan assets. These investments were valued at $669.5 million and $590.6 million at September 30, 2014 and December 31, 2013, respectively, or approximately 29% and 25%, respectively, of total plan assets. At September 30, 2014 and December 31, 2013, the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $434.3 million and $398.9 million at September 30, 2014 and December 31, 2013, respectively, or approximately 19% and 17%, respectively, of total plan assets.
Other Postretirement Plans. The total cost (benefit) arising from the Company’s other postretirement plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended September 30
 
Nine Months Ended September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Service cost
$
375

 
$
728

 
$
1,125

 
$
2,183

Interest cost
362

 
508

 
1,086

 
1,525

Amortization of prior service credit
(196
)
 
(1,306
)
 
(587
)
 
(3,972
)
Recognized actuarial gain
(519
)
 
(504
)
 
(1,557
)
 
(1,549
)
Net Periodic Cost (Benefit)
22

 
(574
)
 
67

 
(1,813
)
Settlement gain

 

 

 
(3,471
)
Total Cost (Benefit)
$
22

 
$
(574
)
 
$
67

 
$
(5,284
)
For the three and nine months ended September 30, 2013, the net periodic benefit, as reported above, includes a benefit of $1.5 million and $2.9 million, respectively, included in discontinued operations. As part of the sale of The Herald, changes were made with respect to its postretirement medical plan, resulting in a $3.5 million settlement gain that is included in discontinued operations, net of tax, for the first quarter of 2013.

13



10. OTHER NON-OPERATING INCOME (EXPENSE)
A summary of non-operating income (expense) is as follows:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Gain on sale of intangible assets
$
75,249

 
$

 
$
75,249

 
$

Foreign currency (loss) gain, net
(10,564
)
 
7,886

 
(2,618
)
 
(9,350
)
Gain on Berkshire marketable equity securities exchange

 

 
266,733

 

Gain on sale of headquarters building

 

 
127,670

 

(Losses) gain on sales or write-down of marketable equity securities

 

 
(3,044
)
 
879

Other, net
(159
)
 
224

 
1,923

 
(360
)
Total Other Non-Operating Income (Expense)
$
64,526

 
$
8,110

 
$
465,913

 
$
(8,831
)
In July 2014, the cable division sold wireless spectrum licenses for $98.8 million; a pre-tax gain of $75.2 million was reported in the third quarter of 2014 in connection with these sales. The licenses had been purchased in the 2006 AWS Auction.

On June 30, 2014, the Company completed a transaction with Berkshire Hathaway, as described in Note 4 that included the exchange of 2,107 Class A Berkshire shares and 1,278 Class B Berkshire shares owned by the Company; a $266.7 million gain was recorded.
On March 27, 2014, the Company completed the sale of its headquarters building for $158 million. In connection with the sale, the Company recorded a $127.7 million pre-tax gain.

14



11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The other comprehensive (loss) income consists of the following components:
 
Three Months Ended September 30
  
2014
 
2013
  
Before-Tax
 
Income
 
After-Tax
 
Before-Tax
 
Income
 
After-Tax
(in thousands)
Amount
 
Tax
 
Amount
 
Amount
 
Tax
 
Amount
Foreign currency translation adjustments:
  
 
  
 
  
 
  
 
  
 
  
Translation adjustments arising during the period
$
(9,777
)
 
$

 
$
(9,777
)
 
$
5,639

 
$

 
$
5,639

Unrealized gains on available-for-sale securities:
  
 
  
 
  
 
  
 
  
 
  
Unrealized gains for the period, net
9,734

 
(3,894
)
 
5,840

 
938

 
(375
)
 
563

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service credit included in net income
(101
)
 
41

 
(60
)
 
(384
)
 
154

 
(230
)
Amortization of net actuarial (gain) loss included in net income
(7,425
)
 
2,970

 
(4,455
)
 
2,004

 
(801
)
 
1,203

 
(7,526
)
 
3,011

 
(4,515
)
 
1,620

 
(647
)
 
973

Cash flow hedge:
  
 
  
 
  
 
  
 
  
 
  
Gain for the period
230

 
(92
)
 
138

 
15

 
(6
)
 
9

Other Comprehensive (Loss) Income
$
(7,339
)
 
$
(975
)
 
$
(8,314
)
 
$
8,212

 
$
(1,028
)
 
$
7,184

  
Nine Months Ended September 30
  
2014
 
2013
  
Before-Tax
 
Income
 
After-Tax
 
Before-Tax
 
Income
 
After-Tax
(in thousands)
Amount
 
Tax
 
Amount
 
Amount
 
Tax
 
Amount
Foreign currency translation adjustments:
  
 
  
 
  
 
  
 
  
 
  
Translation adjustments arising during the period
$
(7,111
)
 
$

 
$
(7,111
)
 
$
(2,061
)
 
$

 
$
(2,061
)
Unrealized gains on available-for-sale securities:
 
 
  
 
  
 
  
 
  
 
  
Unrealized gains for the period, net
46,139

 
(18,456
)
 
27,683

 
81,439

 
(32,575
)
 
48,864

Reclassification adjustment for realization of (gain) loss on exchange, sale or write-down of available-for-sale securities included in net income
(265,274
)
 
106,110

 
(159,164
)
 
(884
)
 
353

 
(531
)
  
(219,135
)
 
87,654

 
(131,481
)
 
80,555

 
(32,222
)
 
48,333

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service credit included in net income
(305
)
 
122

 
(183
)
 
(1,205
)
 
482

 
(723
)
Amortization of net actuarial (gain) loss included in net income
(22,032
)
 
8,813

 
(13,219
)
 
6,325

 
(2,529
)
 
3,796

Settlement gain included in net income

 

 

 
(3,471
)
 
1,388

 
(2,083
)
  
(22,337
)
 
8,935

 
(13,402
)
 
1,649

 
(659
)
 
990

Cash flow hedge:
 
 
  
 
  
 
  
 
  
 
  
Gain for the period
641

 
(256
)
 
385

 
259

 
(104
)
 
155

Other Comprehensive (Loss) Income
$
(247,942
)
 
$
96,333

 
$
(151,609
)
 
$
80,402

 
$
(32,985
)
 
$
47,417

The accumulated balances related to each component of other comprehensive income are as follows:
(in thousands, net of taxes)
Cumulative
Foreign
Currency
Translation
Adjustment
 
Unrealized Gain
on Available-for-
Sale Securities
 
Unrealized Gain
on Pensions
and Other
Postretirement
Plans
 
Cash Flow
Hedge
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2013
$
25,013

 
$
173,663

 
$
501,446

 
$
(628
)
 
$
699,494

Other comprehensive income (loss) before reclassifications
(7,111
)
 
27,683

 

 
(2
)
 
20,570

Net amount reclassified from accumulated other comprehensive income

 
(159,164
)
 
(13,402
)
 
387

 
(172,179
)
Other comprehensive income, net of tax
(7,111
)
 
(131,481
)
 
(13,402
)
 
385

 
(151,609
)
Balance as of September 30, 2014
$
17,902

 
$
42,182

 
$
488,044

 
$
(243
)
 
$
547,885


15



The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income are as follows:
  
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
Affected Line Item in the Condensed Consolidated Statement of Operations
  
 
 
(in thousands)
2014
 
2013
 
2014
 
2013
 
Unrealized Gains on Available-for-sale Securities:
 
 
  
 
  
 
  
 
  
Realized (gain) loss for the period
$

 
$

 
$
(265,274
)
 
$
(884
)
 
Other income (expense), net
  

 

 
106,110

 
353

 
(1)
  

 

 
(159,164
)
 
(531
)
 
Net of Tax
Pension and Other Postretirement Plans:
  
 
  
 
 
 
  
 
  
Amortization of net prior service credit
(101
)
 
(384
)
 
(305
)
 
(1,205
)
 
(2)
Amortization of net actuarial (gain) loss
(7,425
)
 
2,004

 
(22,032
)
 
6,325

 
(2)
Settlement gain

 

 

 
(3,471
)
 
(2)
  
(7,526
)
 
1,620

 
(22,337
)
 
1,649

 
Before tax
  
3,011

 
(647
)
 
8,935

 
(659
)
 
Provision for Income Taxes
  
(4,515
)
 
973

 
(13,402
)
 
990

 
Net of Tax
Cash Flow Hedge
 
 
 
 
 
 
  
 
  
  
217

 
205

 
645

 
588

 
Interest expense
  
(87
)
 
(82
)
 
(258
)
 
(235
)
 
Provision for Income Taxes
  
130

 
123

 
387

 
353

 
Net of Tax
Total reclassification for the period
$
(4,385
)
 
$
1,096

 
$
(172,179
)
 
$
812

 
Net of Tax
____________
(1)
Benefits of $1.2 million were recorded in Provision for Income Taxes related to the realized loss for the nine months ended September 30, 2014. The remaining $107.3 million for the nine months ended September 30, 2014, relates to the reversal of income taxes previously recorded on the unrealized gain of the Company’s investment in Berkshire Hathaway Inc. marketable equity securities as part of the Berkshire exchange transaction, which qualified as a tax-free distribution under IRC Section 355 and 361 (see Note 4). The amounts for the nine months ended September 30, 2013 were recorded in Provision for Income Taxes.
(2)
These accumulated other comprehensive income components are included in the computation of net periodic pension and postretirement plan cost (see Note 9).
12. CONTINGENCIES
Litigation and Legal Matters.  The Company and its subsidiaries are involved in various legal proceedings that arise in the ordinary course of its business. Although the outcomes of the legal claims and proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company's business, financial condition, results of operations or cash flows. Also, based on currently available information, management is of the opinion that the exposure to future material losses from existing legal proceedings is not reasonably possible, or that future material losses in excess of the amounts accrued are not reasonably possible.
On April 30, 2011, Kaplan Higher Education Corporation received a Civil Investigative Demand from the Office of the Attorney General of the State of Massachusetts. The demand primarily sought information pertaining to KHE's nationally accredited campuses in Massachusetts known as the Charlestown and Kenmore Square campuses.  Both of those campuses closed in 2013. KHE has cooperated with the Massachusetts Attorney General and provided the requested information, as well as additional information requested in 2012 and 2013. In October 2014, the Attorney General's office sent Kaplan a "notice of intention to file" a lawsuit letter under section 93A of the Massachusetts consumer fraud statue. The letter outlined 12 allegations against the Charlestown and Kenmore Square campuses. The Company cannot predict the outcome of this inquiry or any possible litigation.
ED Program Reviews.  The U.S. Department of Education (ED) undertakes program reviews at Title IV participating institutions. Currently, there are two open program reviews, including Broomall, PA, as the Company is awaiting the ED’s final program review report. The Company does not expect the final program review reports to have a material impact on KHE; however, the results of these open reviews and their impact on Kaplan’s operations are uncertain.
The 90/10 Rule.  Under regulations referred to as the 90/10 rule, a KHE school would lose its eligibility to participate in Title IV programs for a period of at least two fiscal years if the institution derives more than 90% of its receipts from Title IV programs, as calculated on a cash basis in accordance with the Higher Education Act and applicable ED regulations, in each of two consecutive fiscal years. An institution with Title IV receipts exceeding 90% for a single fiscal year would be placed on provisional certification and may be subject to other enforcement measures. The 90/10 rule calculations are performed for each OPEID unit. KHE is taking various measures to reduce the percentage of its receipts attributable to Title IV funds, including modifying student payment options; emphasizing direct-pay and employer-paid education programs; encouraging students to carefully evaluate the amount of their Title IV borrowing; eliminating some programs; cash-matching; and developing and offering additional non-Title IV-eligible certificate preparation, professional development and continuing education programs.

16



While there can be no guarantee that these measures will be adequate to prevent the 90/10 ratio at some of the schools from exceeding 90% in the future, management currently estimates that each of KHE's continuing operations campuses will be 90/10 compliant in 2014.
13. BUSINESS SEGMENTS
The Company has six reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International, cable, television broadcasting and other businesses.
Education. In the third quarter of 2014, Kaplan completed the sale of three of its schools in China that were previously included as part of Kaplan International. An additional school in China is expected to be sold by Kaplan in the fourth quarter of 2014. The results of the four schools are included in discontinued operations, net of tax, for all periods presented. The Kaplan International segment operating results have been reclassified to reflect this change.
Television Broadcasting. In June 2014, the Company completed the sale of WPLG, a television station serving the Miami market. WPLG results are included in discontinued operations, net of tax, for all periods presented. The television broadcasting segment operating results have been reclassified to reflect this change.
The following table summarizes financial information related to each of the Company’s business segments:
 
Three Months Ended
 
Nine Months Ended
  
September 30
 
September 30
(in thousands)
2014
 
2013
 
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
Education
$
543,918

 
$
543,599

 
$
1,609,036

 
$
1,613,116

Cable
195,666

 
202,381

 
600,416

 
607,069

Television broadcasting
87,442

 
73,488