10-Q 1 d10q.htm FORM 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2016
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 July 29, 2016:
Class A Common Stock – 964,001 Shares
Class B Common Stock – 4,652,319 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 Six Months Ended June 30, 2016 and 2015
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
c. Condensed Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
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 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
  
 
(in thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Operating Revenues
  
 
  
 
  
 
  

Education
$
419,144

 
$
523,625

 
$
820,150

 
$
1,024,227

Advertising
70,901

 
70,137

 
139,059

 
136,591

Other
138,888

 
87,128

 
271,464

 
167,497

  
628,933

 
680,890

 
1,230,673

 
1,328,315

Operating Costs and Expenses
 
 
  
 
 
 
  
Operating
296,033

 
311,121

 
587,665

 
620,344

Selling, general and administrative
236,437

 
276,412

 
471,650

 
578,817

Depreciation of property, plant and equipment
16,045

 
25,609

 
32,806

 
47,806

Amortization of intangible assets
6,278

 
4,647

 
12,540

 
9,385

Impairment of long-lived assets

 
6,876

 

 
6,876

  
554,793

 
624,665

 
1,104,661

 
1,263,228

Income from Operations
74,140

 
56,225

 
126,012

 
65,087

Equity in (losses) earnings of affiliates, net
(891
)
 
(353
)
 
113

 
(757
)
Interest income
721

 
323

 
1,312

 
882

Interest expense
(7,971
)
 
(8,348
)
 
(15,919
)
 
(16,849
)
Other income, net
19,000

 
11,678

 
34,096

 
10,573

Income from Continuing Operations Before Income Taxes
84,999

 
59,525

 
145,614

 
58,936

Provision for Income Taxes
23,800

 
19,600

 
46,200

 
20,500

Income from Continuing Operations
61,199

 
39,925

 
99,414

 
38,436

Income from Discontinued Operations, Net of Tax

 
18,502

 

 
41,791

Net Income
61,199

 
58,427

 
99,414

 
80,227

Net Income Attributable to Noncontrolling Interests
(433
)
 
(434
)
 
(868
)
 
(1,208
)
Net Income Attributable to Graham Holdings Company
60,766

 
57,993

 
98,546

 
79,019

Redeemable Preferred Stock Dividends

 
(211
)
 

 
(631
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
60,766

 
$
57,782

 
$
98,546

 
$
78,388

Amounts Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Income from continuing operations
$
60,766

 
$
39,280

 
$
98,546

 
$
36,597

Income from discontinued operations, net of tax

 
18,502

 

 
41,791

Net income attributable to Graham Holdings Company common stockholders
$
60,766

 
$
57,782

 
$
98,546

 
$
78,388

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Basic income per common share from continuing operations
$
10.82

 
$
6.74

 
$
17.42

 
$
6.26

Basic income per common share from discontinued operations

 
3.18

 

 
7.21

Basic net income per common share
$
10.82

 
$
9.92

 
$
17.42

 
$
13.47

Basic average number of common shares outstanding
5,544

 
5,720

 
5,584

 
5,712

Diluted income per common share from continuing operations
$
10.76

 
$
6.71

 
$
17.33

 
$
6.22

Diluted income per common share from discontinued operations

 
3.16

 

 
7.18

Diluted net income per common share
$
10.76

 
$
9.87

 
$
17.33

 
$
13.40

Diluted average number of common shares outstanding
5,574

 
5,805

 
5,613

 
5,798


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Net Income
$
61,199

 
$
58,427

 
$
99,414

 
$
80,227

Other Comprehensive Loss, Before Tax
  
 
  
 
 
 
  
Foreign currency translation adjustments:
  
 
  
 
 
 
  
Translation adjustments arising during the period
(5,121
)
 
5,249

 
(1,276
)
 
(6,839
)
Adjustment for sales of businesses with foreign operations

 
(484
)
 

 
(525
)
  
(5,121
)
 
4,765

 
(1,276
)
 
(7,364
)
Unrealized losses on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized losses for the period, net
(5,307
)
 
(11,455
)
 
(4,964
)
 
(20,333
)
Reclassification of realized gain on sale of available-for-sale securities included in net income
(4,502
)
 

 
(6,256
)
 

  
(9,809
)
 
(11,455
)
 
(11,220
)
 
(20,333
)
Pension and other postretirement plans:
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
105

 
70

 
209

 
139

Amortization of net actuarial loss included in net income
289

 
628

 
579

 
1,257

  
394

 
698

 
788

 
1,396

Cash flow hedge gain

 

 

 
179

Other Comprehensive Loss, Before Tax
(14,536
)
 
(5,992
)
 
(11,708
)
 
(26,122
)
Income tax benefit related to items of other comprehensive loss
3,766

 
4,303

 
4,173

 
7,505

Other Comprehensive Loss, Net of Tax
(10,770
)
 
(1,689
)
 
(7,535
)
 
(18,617
)
Comprehensive Income
50,429

 
56,738

 
91,879

 
61,610

Comprehensive income attributable to noncontrolling interests
(433
)
 
(434
)
 
(868
)
 
(1,208
)
Total Comprehensive Income Attributable to Graham Holdings Company
$
49,996

 
$
56,304

 
$
91,011

 
$
60,402


See accompanying Notes to Condensed Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
June 30,
2016
 
December 31,
2015
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
600,340

 
$
754,207

Restricted cash
31,878

 
20,745

Investments in marketable equity securities and other investments
367,584

 
379,445

Accounts receivable, net
522,759

 
572,435

Income taxes receivable
8,429

 
48,383

Inventories and contracts in progress
32,281

 
32,068

Other current assets
64,142

 
53,439

Total Current Assets
1,627,413

 
1,860,722

Property, Plant and Equipment, Net
222,408

 
231,123

Investments in Affiliates
63,834

 
59,229

Goodwill, Net
1,153,975

 
1,017,513

Indefinite-Lived Intangible Assets, Net
70,189

 
21,885

Amortized Intangible Assets, Net
100,658

 
107,191

Prepaid Pension Cost
1,004,445

 
979,970

Deferred Charges and Other Assets
85,717

 
75,192

Total Assets
$
4,328,639

 
$
4,352,825

 
 
 
 
Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
451,044

 
$
428,014

Deferred revenue
286,502

 
297,135

Dividends declared
6,797

 

Total Current Liabilities
744,343

 
725,149

Postretirement Benefits Other Than Pensions
34,831

 
33,947

Accrued Compensation and Related Benefits
191,660

 
203,280

Other Liabilities
71,510

 
70,678

Deferred Income Taxes
403,890

 
403,316

Mandatorily Redeemable Noncontrolling Interest
9,897

 

Long-Term Debt
400,028

 
399,800

Total Liabilities
1,856,159

 
1,836,170

Redeemable Noncontrolling Interest

 
25,957

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
357,178

 
356,887

Retained earnings
5,525,689

 
5,447,677

Accumulated other comprehensive income (loss), net of tax
 
 
  

Cumulative foreign currency translation adjustment
(6,125
)
 
(4,849
)
Unrealized gain on available-for-sale securities
51,768

 
58,500

Unrealized gain on pensions and other postretirement plans
261,502

 
261,029

Cost of Class B common stock held in treasury
(3,737,532
)
 
(3,648,546
)
Total Equity
2,472,480

 
2,490,698

Total Liabilities and Equity
$
4,328,639

 
$
4,352,825


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Six Months Ended 
 June 30
(in thousands)
2016
 
2015
Cash Flows from Operating Activities
  
 
  
Net Income
$
99,414

 
$
80,227

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation, amortization and long-lived asset impairment
45,346

 
135,881

Net pension benefit
(24,325
)
 
(22,872
)
Stock-based compensation expense, net
7,152

 
13,843

Gain on disposition of businesses, property, plant and equipment, investments and other assets, net
(62,273
)
 
(7,040
)
Foreign exchange loss
29,527

 
3,219

Gain on sale of equity affiliate

 
(4,827
)
Equity in (earnings) losses of affiliates, net of distributions
(113
)
 
948

Benefit for deferred income taxes
(6,806
)
 
(1,858
)
Change in operating assets and liabilities:
 
 
 
Restricted cash
(11,133
)
 
(1,635
)
Accounts receivable, net
49,786

 
26,950

Accounts payable and accrued liabilities
4,612

 
47,530

Deferred revenue
(19,751
)
 
(45,219
)
Income taxes receivable
38,989

 
(120,480
)
Other assets and other liabilities, net
(15,459
)
 
(28,256
)
Other
502

 
879

Net Cash Provided by Operating Activities
135,468

 
77,290

Cash Flows from Investing Activities
  
 
  
Investments in certain businesses, net of cash acquired
(200,336
)
 

Net proceeds from disposition of businesses, property, plant and equipment, investments and other assets
36,771

 
3,019

Proceeds from sales of marketable equity securities
22,837

 

Purchases of property, plant and equipment
(22,202
)
 
(100,240
)
Purchases of marketable equity securities
(18,274
)
 

Investments in equity affiliates and cost method investments
(2,387
)
 
(16,834
)
Net Cash Used in Investing Activities
(183,591
)
 
(114,055
)
Cash Flows from Financing Activities
  
 
  
Common shares repurchased
(89,062
)
 

Purchase of noncontrolling interest
(21,000
)
 

Dividends paid
(13,736
)
 
(31,316
)
Issuance of borrowings

 
550,000

Repayments of borrowings

 
(39,343
)
Payments of financing costs

 
(9,865
)
Other
19,896

 
16,534

Net Cash Used in Financing Activities
(103,902
)
 
486,010

Effect of Currency Exchange Rate Change
(1,842
)
 
(3,897
)
Net (Decrease) Increase in Cash and Cash Equivalents
(153,867
)
 
445,348

Beginning Cash and Cash Equivalents
754,207

 
773,986

Ending Cash and Cash Equivalents
$
600,340

 
$
1,219,334


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 five television broadcasting stations. The Company's other business operations include home health and hospice services and manufacturing.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and six months ended June 30, 2016 and 2015 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, 2015.
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.
Out of Period Adjustment – In the second quarter of 2016, the Company benefited from a favorable $5.6 million out of period adjustment to the provision for deferred income taxes related to the $248.6 million goodwill impairment at the KHE reporting unit in the third quarter of 2015.  With respect to this error, the Company has concluded that it was not material to the Company’s financial position or results of operations for 2016 and 2015 and the related interim periods, based on its consideration of quantitative and qualitative factors.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Recently Adopted and Issued Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (FASB) issued comprehensive new guidance that supersedes all existing revenue recognition guidance. In August 2015, the FASB issued an amendment to the guidance that defers the effective date by one year. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. The guidance is effective for interim and fiscal years beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. 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 because of 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.

5



In April 2015, the FASB issued new guidance that simplifies the presentation of debt issuance costs. The new guidance requires that debt issuance costs be reported in the balance sheet as a direct deduction from the gross amount of debt instead of classified as a deferred asset. The guidance is effective for interim and fiscal years beginning after December 15, 2015. The Company adopted the new guidance retrospectively as of January 1, 2016. Therefore, prior periods have been adjusted to reflect this guidance which resulted in the reclassification of $0.1 million of unamortized debt issuance costs related to the Company's 7.25% unsecured notes from deferred charges and other assets to long-term debt within its Condensed Consolidated Balance Sheet as of December 31, 2015.
In January 2016, the FASB issued new guidance that substantially revises the recognition, measurement and presentation of financial assets and financial liabilities. The new guidance, among other things, requires, (i) equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, with some exceptions, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and (v) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for interim and fiscal years beginning after December 15, 2017. Early adoption is not permitted. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements.
In February 2016, the FASB issued new guidance that requires, among other things, a lessee to recognize a right-of-use asset representing an entity's right to use the underlying asset for the lease term and a liability for lease payments on its balance sheet, regardless of classification of a lease as operating or financing. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and account for the lease similar to existing guidance for operating leases today. This new guidance supersedes all prior guidance. The guidance is effective for interim and fiscal years beginning after December 15, 2018. Early adoption is permitted. The standard requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements.
In March 2016, the FASB issued new guidance that simplifies the accounting for stock-based compensation. The new guidance (i) requires all excess tax benefits and tax deficiencies to be recognized in the income statement with the tax effects of vested or exercised awards treated as discrete items. Additionally, excess tax benefits will be recognized regardless of whether the benefit reduces taxes payable in the current period, effectively eliminating the APIC pool, (ii) concludes excess tax benefits should be classified as an operating activity in the statement of cash flows, (iii) requires an entity to make an entity-wide accounting policy election to either estimate a forfeiture rate for awards or account for forfeitures as they occur, (iv) changes the threshold for equity classification for cash settlements of awards for withholding requirements to the maximum statutory tax rate in the applicable jurisdiction and (v) concludes cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity in the statement of cash flows. The guidance is effective for interim and fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its Condensed Consolidated Financial Statements.
2. DISCONTINUED OPERATIONS
Cable ONE Spin-Off. On July 1, 2015 (the “Distribution Date”), the Company completed the spin-off of Cable One, Inc. (Cable ONE) as an independent, publicly traded company. The transaction was structured as a tax-free spin-off of Cable ONE to the stockholders of the Company as one share of Cable ONE common stock was distributed for every share of Class A and Class B common stock of Graham Holdings outstanding on the June 15, 2015, record date. Cable ONE is now an independent public company trading on the New York Stock Exchange under the symbol “CABO”. After the spin, the Company does not beneficially own any shares of Cable ONE common stock.
The results of operations of Cable ONE are included in the Company’s Condensed Consolidated Statements of Operations as income from discontinued operations, net of tax, for 2015. The Company did not reclassify its Statements of Cash Flows to reflect the various discontinued operations.

6



Cash flows from Cable ONE for the three and six months ended June 30, 2015 are combined with the cash flows from operations within each of the categories presented. Cash flows from Cable ONE are as follows:
 
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
June 30, 2015
 
June 30, 2015
Net Cash Provided by Operating Activities
 
$
76,917

 
$
116,133

Net Cash Used in Investing Activities
 
(37,007
)
 
(74,416
)
Other 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 was sold by Kaplan in January of 2015 that resulted in a pre-tax loss of $0.7 million. The results of operations of the schools in China are included in the Company’s Condensed Consolidated Statements of Operations as income from discontinued operations, net of tax, for 2015.
The summarized income from discontinued operations, net of tax, is presented below:
  
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
June 30, 2015
 
June 30, 2015
Operating revenues
 
$
198,681

 
$
397,404

Operating costs and expenses
 
(166,010
)
 
(327,041
)
Operating income
 
32,671

 
70,363

Non-operating expense
 
(1,269
)
 
(1,288
)
Income from discontinued operations
 
31,402

 
69,075

Provision for income taxes
 
12,900

 
26,500

Net Income from Discontinued Operations
 
18,502

 
42,575

Loss on sale of discontinued operations
 

 
(732
)
Provision for income taxes on disposition of discontinued operations
 

 
52

Income from Discontinued Operations, Net of Tax
 
$
18,502

 
$
41,791

3. INVESTMENTS
As of June 30, 2016 and December 31, 2015, the Company had commercial paper and money market investments of $454.7 million and $433.0 million, respectively, that are classified as cash, cash equivalents and restricted cash in the Company's Condensed Consolidated Balance Sheets.
Investments in marketable equity securities comprised the following:
  
As of
  
June 30,
2016
 
December 31,
2015
(in thousands)
 
Total cost
$
254,352

 
$
253,062

Gross unrealized gains
95,490

 
97,741

Gross unrealized losses
(9,209
)
 
(240
)
Total Fair Value
$
340,633

 
$
350,563

The Company settled on $18.3 million of marketable equity securities purchases during the first six months of 2016, of which $17.9 million was purchased in the first six months. There were no new investments in marketable equity securities during the first six months of 2015.
The total proceeds from the sales of marketable equity securities for the first six months of 2016 were $22.8 million, with realized gains of $6.3 million. There were no sales of marketable equity securities in the first six months of 2015.
As of June 30, 2016, the Company held an approximate 20% interest in HomeHero and interests in several other affiliates; Residential Healthcare (Residential) held a 40% interest in Residential Home Health Illinois, a 42.5% interest in Residential Hospice Illinois and a 40% interest in the joint venture formed between Residential and a Michigan hospital; and Celtic Healthcare (Celtic) held a 40% interest in the joint venture formed between Celtic Healthcare and Allegheny Health Network (AHN) (see Note 4).

7



4. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
AcquisitionsIn May 2016, Graham Media Group entered into an agreement to acquire two television stations for $60 million in cash and the assumption of certain pension obligations. The acquisition is subject to approval by the Federal Communications Commission, other regulatory approvals and the satisfaction of closing conditions.
In the first six months of 2016, the Company acquired three businesses included in its education division totaling $208.7 million. In January and February 2016, Kaplan acquired a 100% interest in Mander Portman Woodward, a leading provider of high-quality, bespoke education to UK and international students in London, Cambridge and Birmingham; and a 100% interest in Osborne Books, an educational publisher of learning resources for accounting qualifications in the UK. These acquisitions are included in Kaplan International. In the first six months of 2015, the Company did not make any acquisitions.
Acquisition-related costs were expensed as incurred and were not significant. The aggregate purchase price of these 2016 acquisitions was allocated as follows on a preliminary basis:
 
Weighted Average Life
 
Purchase Price Allocation
(in thousands)
 
Cash and cash equivalents
 
 
$
8,370

Accounts receivable
 
 
6,065

Other current assets
 
 
748

Property, plant and equipment
 
 
1,940

Goodwill
 
 
161,399

Indefinite-lived intangible assets
 
 
 
Trade names and trademarks
 
 
53,110

Amortized intangible assets
 
 
 
Student and customer relationships
3 years
 
5,174

Trade names and trademarks
5 years
 
1,347

 
3 years
 
6,521

Current liabilities
 
 
(18,353
)
Noncurrent liabilities
 
 
(11,094
)
 
 
 
$
208,706

The fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The recording of deferred tax assets or liabilities, and the final amount of residual goodwill are not yet finalized. The Company expects no tax basis of goodwill for income tax purposes from these three acquisitions.
The acquired companies were consolidated into the Company’s financial statements starting on their respective acquisition dates. The Company’s Condensed Consolidated Statements of Operations include aggregate revenues and operating income for the companies acquired in 2016 of $13.9 million and $5.1 million, respectively, for the second quarter of 2016 and $25.3 million and $8.9 million, respectively, for the first six months of 2016. The following unaudited pro forma financial information presents the Company’s results as if the acquisitions had occurred at the beginning of 2015. The unaudited pro forma information also includes the 2015 acquisitions as if they occurred at the beginning of 2014:
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Operating revenues
$
628,933

 
$
740,593

 
$
1,230,852

 
$
1,440,903

Net income
62,133

 
65,341

 
102,225

 
90,915

These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had these entities been part of the Company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.
On November 13, 2015, the Company acquired a 100% interest in Group Dekko, a Garrett, IN-based manufacturer of electrical solutions for applications across three business lines: workspace power solutions, architectural lighting, and electrical components and assemblies, which is included in other businesses. On December 22, 2015, Kaplan acquired a 100% interest in SmartPros, a provider of accredited professional education and training, primarily in accountancy, which is included in Higher Education.

8



Spin-Off. On July 1, 2015, the Company completed the spin-off of Cable ONE, by way of a distribution of all the issued and outstanding shares of Cable ONE common stock, on a pro rata basis, to the Company's stockholders (see Note 2).
Sale of Businesses. In January 2016, Kaplan completed the sale of Colloquy, which was included in Kaplan Corporate and Other.
On September 3, 2015, Kaplan completed the sale of substantially all of the assets of its KHE Campuses business, consisting of 38 nationally accredited ground campuses and certain related assets, in exchange for a preferred equity interest in Education Corporation of America (ECA). KHE Campuses schools that were closed or were in the process of closing were not included in the sale transaction. In connection with the sale agreement, if required by the U.S. Department of Education (ED) in connection with its post-closing review of the transaction, Kaplan will provide a letter of credit or other credit support with the ED of up to approximately $45 million; any such letter of credit or other credit support could be drawn by the ED in the event that ECA defaults on its obligations to students. If issued, such letter of credit or other credit support would have a term of two years, after which Kaplan would have no further obligations.
The revenue and operating losses related to schools that were sold as part of the ECA transaction are as follows:
 
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
(in thousands)
 
 
Revenue
 
$
63,036

 
$
124,123

Operating loss
 
(4,287
)
 
(7,301
)
In the second quarter of 2015, Kaplan also recorded a $6.9 million long-lived assets impairment charge in connection with the KHE Campuses business, of which $4.7 million was an unfavorable out of period expense adjustment related to the first quarter of 2015 (this amount is included in the above table). With respect to this error, the Company has concluded that it was not material to the Company’s financial position or results of operations for the first or second quarter of 2015, based on its consideration of quantitative and qualitative factors.
In the third quarter of 2015, Kaplan sold Franklyn Scholar, which was part of Kaplan International. In the second quarter of 2015, the Company sold The Root, a component of Slate, and Kaplan sold two small businesses, Structuralia, which was part of Kaplan International, and Fire and EMS Training, which was part of Kaplan Higher Education. As a result of these sales, the Company reported gains in other non-operating income (see Note 10). 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. In January 2015, Kaplan completed the sale of an additional school in China.
Other. In June 2016, Residential and a Michigan hospital formed a joint venture to provide home health services to patients in western Michigan. In connection with this transaction, Residential contributed its western Michigan home health operations to the joint venture and then sold 60% of the newly formed venture to its Michigan hospital partner. Although Residential manages the operations of the joint venture, Residential holds a 40% interest in the joint venture, so the operating results of the joint venture are not consolidated and the pro rata operating results are included in the Company's equity in earnings of affiliates.
In June 2016, the Company purchased the outstanding 20% redeemable noncontrolling interest in Residential. At that time, the Company recorded an increase to redeemable noncontrolling interest of $3.4 million, with a corresponding decrease to capital in excess of par value, to reflect the redemption value of the redeemable noncontrolling interest at $24.0 million. Following this transaction, Celtic and Residential combined their business operations to form Graham Healthcare Group (GHG). The redeemable noncontrolling interest shareholders in Celtic exchanged their 20% interest in Celtic for a 10% mandatorily redeemable noncontrolling interest in the combined entity and the Company recorded a $4.1 million net increase to the mandatorily redeemable noncontrolling interest to reflect the estimated fair value of the mandatorily redeemable noncontrolling interest. The minority shareholders have an option to put their shares to the Company starting in 2020, and are required to put a percentage of their shares in 2022 and 2024, with the remaining shares required to be put by the minority shareholders in 2026. The redemption value is based on an EBITDA multiple, adjusted for working capital and other items, computed annually, with no limit on the amount payable. The Company now owns 90% of GHG. Because the noncontrolling interest is now mandatorily redeemable by the Company by 2026, it is reported as a noncurrent liability at June 30, 2016.
In January 2015, Celtic and AHN closed on the formation of a joint venture to combine each other’s home health and hospice assets in the western Pennsylvania region. Although Celtic manages the operations of the joint venture, Celtic holds a 40% interest in the joint venture, so the operating results of the joint venture are not consolidated and the pro rata operating results are included in the Company’s equity in earnings of affiliates.
The Company’s income from continuing operations excludes Cable ONE and the sold Kaplan China school, which have been reclassified to discontinued operations, net of tax (see Note 2). 

9



5. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended June 30, 2016 and 2015 was $6.3 million and $4.6 million, respectively. Amortization of intangible assets for the six months ended June 30, 2016 and 2015 was $12.5 million and $9.4 million, respectively. Amortization of intangible assets is estimated to be approximately $12 million for the remainder of 2016, $21 million in 2017, $19 million in 2018, $17 million in 2019, $15 million in 2020 and $17 million thereafter.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Television
Broadcasting
 
Other
Businesses
 
Total
Balance as of December 31, 2015
  
 
  
 
  
 
  
Goodwill
$
1,006,096

 
$
168,345

 
$
202,814

 
$
1,377,255

Accumulated impairment losses
(350,850
)
 

 
(8,892
)
 
(359,742
)
 
655,246

 
168,345

 
193,922

 
1,017,513

Acquisitions
160,894

 

 
505

 
161,399

Dispositions

 

 
(2,800
)
 
(2,800
)
Foreign currency exchange rate changes
(22,137
)
 

 

 
(22,137
)
Balance as of June 30, 2016
  

 
  

 
  

 
  

Goodwill
1,144,853

 
168,345

 
197,709

 
1,510,907

Accumulated impairment losses
(350,850
)
 

 
(6,082
)
 
(356,932
)
 
$
794,003

 
$
168,345

 
$
191,627

 
$
1,153,975

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, 2015
  
 
  
 
  
 
  
Goodwill
$
392,457

 
$
166,098

 
$
447,541

 
$
1,006,096

Accumulated impairment losses
(248,591
)
 
(102,259
)
 

 
(350,850
)
 
143,866

 
63,839

 
447,541

 
655,246

Acquisitions

 

 
160,894

 
160,894

Foreign currency exchange rate changes
116

 

 
(22,253
)
 
(22,137
)
Balance as of June 30, 2016
  

 
  

 
  

 
  

Goodwill
392,573

 
166,098

 
586,182

 
1,144,853

Accumulated impairment losses
(248,591
)
 
(102,259
)
 

 
(350,850
)
 
$
143,982

 
$
63,839

 
$
586,182

 
$
794,003

Other intangible assets consist of the following:
 
 
 
As of June 30, 2016
 
As of December 31, 2015
(in thousands)
Useful Life
Range
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Student and customer relationships
2–10 years
 
$
113,339

 
$
47,858

 
$
65,481

 
$
108,806

 
$
40,280

 
$
68,526

Trade names and trademarks
2–10 years
 
54,714

 
26,463

 
28,251

 
53,848

 
23,941

 
29,907

Databases and technology
3–5 years
 
4,617

 
4,241

 
376

 
4,617

 
4,114

 
503

Noncompete agreements
2–5 years
 
1,381

 
1,174

 
207

 
1,381

 
1,012

 
369

Other
1–7 years
 
10,101

 
3,758

 
6,343

 
10,095

 
2,209

 
7,886

  
  
 
$
184,152

 
$
83,494

 
$
100,658

 
$
178,747

 
$
71,556

 
$
107,191

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Trade names and trademarks
  
 
$
69,355

 
  

 
  

 
$
21,051

 
  

 
  

Licensure and accreditation
  
 
834

 
  

 
  

 
834

 
  

 
  

 
  
 
$
70,189

 
 
 
 
 
$
21,885

 
 
 
 

10



6. DEBT
The Company’s borrowings consist of the following:
  
As of
  
June 30,
2016
 
December 31,
2015
(in thousands)
 
7.25% unsecured notes due February 1, 2019 (1)
$
398,824

 
$
398,596

Other indebtedness
1,204

 
1,204

Total Debt
$
400,028

 
$
399,800

____________
(1)
The carrying value is net of $0.1 million of unamortized debt issuance costs as of June 30, 2016 and December 31, 2015, respectively.
The Company’s other indebtedness at June 30, 2016 is at an interest rate of 6% and matures in 2019.
On June 29, 2015, the Company entered into a credit agreement (the Credit Agreement) providing for a U.S. $200 million five-year revolving credit facility (the Facility). The Company may draw on the Facility for general corporate purposes. The Facility will expire on July 1, 2020, unless the Company and the banks agree to extend the term. The Credit Agreement contains terms and conditions, including remedies in the event of a default by the Company, typical of facilities of this type. As of June 30, 2016, the Company is in compliance with all financial covenants.
On July 14, 2016, Kaplan entered into a Facility Agreement (the Kaplan Credit Agreement) among Kaplan International Holdings Limited, as borrower, the lenders party thereto, HSBC BANK PLC as Facility Agent, and other agents party thereto. The Kaplan Credit Agreement provides for a four-year credit facility in an aggregate principal amount of £75 million. Borrowings will bear interest at a rate per annum of LIBOR plus an applicable interest rate margin between 1.25% and 1.75%, in each case determined on a quarterly basis by reference to a pricing grid based upon the Company's total leverage ratio. The credit facility requires that 6.66% of the outstanding aggregate amount of the loan be repaid on the first three anniversaries of funding, with the remaining balance due on July 1, 2020.
On July 25, 2016, Kaplan borrowed £75 million under the Kaplan Credit Agreement. On the same date, Kaplan entered into an interest rate swap agreement with a total notional value of £75 million and a maturity date of July 1, 2020. The interest rate swap agreement will pay Kaplan variable interest on the £75 million notional amount at the three-month LIBOR, and Kaplan will pay the counterparties a fixed rate of 0.51%, effectively resulting in a total fixed interest rate of 2.01% on the outstanding borrowings at the current applicable margin of 1.50%. The interest rate swap agreement was entered into to convert the variable rate British pound borrowing under the Kaplan Credit Agreement into a fixed rate borrowing. The Company provided a guarantee on any borrowings under the Kaplan Credit Agreement. Based on the terms of the interest rate swap agreement and the underlying borrowing, the interest rate swap agreement was determined to be effective, and thus qualifies as a cash flow hedge. As such, any changes in the fair value of the interest rate swap will be recorded in other comprehensive income on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows.
During the three months ended June 30, 2016 and 2015, the Company had average borrowings outstanding of approximately $400.0 million and $454.4 million, respectively, at average annual interest rates of approximately 7.2% and 6.8%, respectively. During the three months ended June 30, 2016 and 2015, the Company incurred net interest expense of $7.3 million and $8.0 million, respectively.
During the six months ended June 30, 2016 and 2015, the Company had average borrowings outstanding of approximately $399.9 million and $450.2 million, respectively, at average annual interest rates of approximately 7.2% and 7.0%, respectively. During the six months ended June 30, 2016 and 2015, the Company incurred net interest expense of $14.6 million and $16.0 million, respectively.
At June 30, 2016, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $437.5 million, compared with the carrying amount of $398.8 million. At December 31, 2015, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $436.6 million, compared with the carrying amount of $398.6 million. The carrying value of the Company’s other unsecured debt at June 30, 2016 approximates fair value.

11



7. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of June 30, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
  
 
  
 
 
 
  
Money market investments (1) 
$

 
$
354,846

 
$

 
$
354,846

Commercial paper (2)
99,842

 

 

 
99,842

Marketable equity securities (3) 
340,633

 

 

 
340,633

Other current investments (4) 
12,795

 
14,156

 

 
26,951

Total Financial Assets
$
453,270

 
$
369,002

 
$

 
$
822,272

Liabilities
  
 
  
 
 
 
  
Deferred compensation plan liabilities (5) 
$

 
$
46,245

 
$

 
$
46,245

Mandatorily redeemable noncontrolling interest (6)

 

 
9,897

 
9,897

Total Financial Liabilities
$

 
$
46,245

 
$
9,897

 
$
56,142

 
As of December 31, 2015
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
433,040

 
$
433,040

Marketable equity securities (3) 
350,563

 

 
350,563

Other current investments (4) 
12,822

 
16,060

 
28,882

Total Financial Assets
$
363,385

 
$
449,100

 
$
812,485

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
48,055

 
$
48,055

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2)
The Company's commercial paper investments with original maturities of 90 days or less are included in cash and cash equivalents.
(3)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits. These investments are valued using a market approach based on the quoted market prices of the security or inputs that include quoted market prices for similar instruments and are classified as either Level 1 or Level 2 in the valuation hierarchy.
(5)
Includes Graham Holdings Company's Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company's Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits. These plans measure the market value of a participant's balance in a notional investment account that is comprised primarily of mutual funds, which are based on observable market prices. However, since the deferred compensation obligations are not exchanged in an active market, they are classified as Level 2 in the fair value hierarchy. Realized and unrealized gains (losses) on deferred compensation are included in operating income.
(6)
The fair value of the mandatorily redeemable noncontrolling interest is based on an EBITDA multiple, adjusted for working capital and other items, computed annually. 
In the second quarter of 2015, the Company recorded a long-lived asset impairment charge of $6.9 million. The remeasurement of the long-lived asset is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair values.

12



8. EARNINGS PER SHARE
The Company's unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of the earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.
The following reflects the Company's 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 
 June 30
 
Six Months Ended 
 June 30
(in thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Numerator for basic earnings per share:
  
 
  
 
  
 
  
Income from continuing operations attributable to Graham Holdings Company common stockholder
$
60,766

 
$
39,280

 
$
98,546

 
$
36,597

Less: Dividends paid-common stock outstanding and unvested restricted shares
(6,775
)
 
(15,484
)
 
(20,533
)
 
(46,354
)
Undistributed earnings (loss)
53,991

 
23,796

 
78,013

 
(9,757
)
Percent allocated to common stockholders(1)
98.68
%
 
98.18
%
 
98.68
%
 
100.00
%
 
53,277

 
23,363

 
76,981

 
(9,757
)
Add: Dividends paid-common stock outstanding
6,685

 
15,201

 
20,264

 
45,506

Numerator for basic earnings per share
$
59,962

 
$
38,564

 
$
97,245

 
$
35,749

Add: Additional undistributed earnings due to dilutive stock options
4

 
2

 
5

 

Numerator for diluted earnings per share
$
59,966

 
$
38,566

 
$
97,250

 
$
35,749

Denominator:
  

 
  

 
 
 
 
Denominator for basic earnings per share:


 


 


 


Weighted average shares outstanding
5,544

 
5,720

 
5,584

 
5,712

Add: Effect of dilutive stock options
30

 
30

 
29

 
32

Denominator for diluted earnings per share
5,574

 
5,750

 
5,613

 
5,744

Graham Holdings Company Common Stockholders:
  
 
  
 
  
 
  
Basic earnings per share from continuing operations
$
10.82

 
$
6.74

 
$
17.42

 
$
6.26

Diluted earnings per share from continuing operations
$
10.76

 
$
6.71

 
$
17.33

 
$
6.22

____________
(1)
Percent of undistributed losses allocated to common stockholders is 100% in the first six months of 2015 as participating securities are not contractually obligated to share in losses.
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 
 June 30
 
Six Months Ended 
 June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Weighted average restricted stock
41

 
55

 
39

 
54

The diluted earnings per share amounts for the three and six months ended June 30, 2016 exclude the effects of 102,000 stock options outstanding as their inclusion would have been antidilutive due to a market condition. The diluted earnings per share amounts for the three and six months ended June 30, 2015 exclude the effects of 50,000 stock options outstanding as their inclusion would have been antidilutive due to a market condition. The diluted earnings per share amounts for the three and six months ended June 30, 2016 exclude the effects of 6,100 restricted stock awards as their inclusion would have been antidilutive due to a performance condition. The diluted earnings per share amounts for the three and six months ended June 30, 2015 exclude the effects of 5,850 restricted stock awards, as their inclusion would have been antidilutive due to a performance condition.
In the three and six months ended June 30, 2016, the Company declared dividends totaling $1.21 and $3.63, respectively. In the three and six months ended June 30, 2015, the Company declared regular dividends totaling $2.65 and $7.95, respectively.

13



9. PENSION AND POSTRETIREMENT PLANS
Defined Benefit Plans. The total benefit arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended June 30
 
Six Months Ended June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
5,040

 
$
7,251

 
$
10,382

 
$
14,503

Interest cost
12,845

 
12,781

 
25,918

 
25,561

Expected return on assets
(30,226
)
 
(31,553
)
 
(60,774
)
 
(63,098
)
Amortization of prior service cost
75

 
81

 
149

 
162

Net Periodic Benefit
$
(12,266
)
 
$
(11,440
)
 
$
(24,325
)
 
$
(22,872
)
For the three and six months ended June 30, 2015, the net periodic benefit for the Company's pension plans, as reported above, includes costs of $1.0 million and $2.0 million, respectively, reported in discontinued operations.
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 June 30
 
Six Months Ended June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
246

 
$
509

 
$
492

 
$
1,018

Interest cost
1,096

 
1,135

 
2,192

 
2,270

Amortization of prior service cost
114

 
114

 
228

 
228

Recognized actuarial loss
665

 
877

 
1,330

 
1,755

Net Periodic Cost
$
2,121

 
$
2,635

 
$
4,242

 
$
5,271

For the three and six months ended June 30, 2015, the net periodic cost for the Company's SERP, as reported above, includes costs of $0.1 million and $0.2 million, respectively, reported in discontinued operations.
Defined Benefit Plan Assets. The Company’s defined benefit pension obligations are funded by a portfolio made up of a U.S. stock index fund, a relatively small number of stocks and high-quality fixed-income securities that are held by a third-party trustee. The assets of the Company’s pension plan were allocated as follows:
  
As of
  
June 30,
2016
 
December 31,
2015
  
 
U.S. equities
74
%
 
62
%
U.S. fixed income
20
%
 
13
%
International equities
6
%
 
25
%
  
100
%
 
100
%
Beginning in the second quarter of 2016, the Company started managing approximately 44% of the pension assets internally, of which the majority is invested in a U.S. stock index fund with the remaining investments in Berkshire Hathaway stock and short-term fixed income securities. The remaining 56% of plan assets are still managed by two investment companies. The goal for the investments is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both investment managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval from the Plan administrator. As of June 30, 2016, the investment managers can invest no more than 23% of the assets they manage in specified international exchanges, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of June 30, 2016. 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 June 30, 2016, the pension plan held investments in one common stock and one U.S. stock index fund that exceeded 10% of total plan assets, valued at $894.0 million, or 45% of total plan assets. At December 31, 2015, the pension plan held common stock in two investments that exceeded

14



10% of total plan assets, valued at $562.6 million, or 25% of total plan assets. At December 31, 2015, the pension plan held investments in one foreign country that exceeded 10% of total plan assets, valued at $332.4 million, or 15% of total plan assets.
Other Postretirement Plans. The total cost arising from the Company’s other postretirement plans consists of the following components:
  
Three Months Ended June 30
 
Six Months Ended June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
347

 
$
333

 
$
693

 
$
666

Interest cost
307

 
324

 
615

 
649

Amortization of prior service credit
(84
)
 
(125
)
 
(168
)
 
(251
)
Recognized actuarial gain
(376
)
 
(249
)
 
(751
)
 
(498
)
Net Periodic Cost
$
194

 
$
283

 
$
389

 
$
566

10. OTHER NON-OPERATING INCOME
A summary of non-operating income (expense) is as follows:
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
(in thousands)
2016
 
2015
 
2016
 
2015
Gain on sale of land
$
34,072

 
$

 
$
34,072

 
$

Foreign currency (loss) gain, net
(24,084
)
 
3,608

 
(29,527
)
 
(3,219
)
Gain on sales of businesses

 
2,918

 
18,931

 
2,918

Gain on sales of marketable equity securities (see Note 3)
4,502

 

 
6,256

 

Gain on formation of joint ventures
3,232

 

 
3,232

 
5,972

Additional gain on sale of Classified Ventures

 
4,827

 

 
4,827

Other, net
1,278

 
325

 
1,132

 
75

Total Other Non-Operating Income
$
19,000

 
$
11,678

 
$
34,096

 
$
10,573

In the second quarter of 2016, the Company sold the remaining portion of the Robinson Terminal real estate retained from the sale of the Publishing Subsidiaries, for a gain of $34.1 million.
In June 2016, Residential contributed assets to a joint venture entered into with a Michigan hospital in exchange for a 40% equity interest and other assets, resulting in a $3.2 million gain (see Note 4). The Company used an income and market approach to value the equity interest. The measurement of the equity interest in the joint venture is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value.
In the first quarter of 2016, Kaplan sold Colloquy, which was a part of Kaplan corporate and other, for a gain of $18.9 million.
In the second quarter of 2015, the Company sold The Root and Kaplan sold two small businesses for a total gain of $2.9 million.
In the second quarter of 2015, the Company benefited from a $4.8 million favorable out of period adjustment to the gain on the sale of Classified Ventures related to the fourth quarter of 2014. With respect to this error, the Company has concluded that it was not material to the Company's financial position or results of operations for 2015 and the related interim periods, based on its consideration of quantitative and qualitative factors.
In January 2015, Celtic contributed assets to a joint venture entered into with AHN in exchange for a 40% equity interest, resulting in the Company recording a $6.0 million gain (see Note 4). The Company used an income and market approach to value the equity interest. The measurement of the equity interest in the joint venture is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in the determination of the fair value.

15



11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The other comprehensive income (loss) consists of the following components:
 
Three Months Ended June 30
  
2016
 
2015
  
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
$
(5,121
)
 
$

 
$
(5,121
)
 
$
5,249

 
$

 
$
5,249

Adjustment for sale of a business with foreign operations

 

 

 
(484
)
 

 
(484
)
  
(5,121
)
 

 
(5,121
)
 
4,765

 

 
4,765

Unrealized losses on available-for-sale securities:
 
 
  
 
  
 
  
 
  
 
  
Unrealized losses for the period, net
(5,307
)
 
2,123

 
(3,184
)
 
(11,455
)
 
4,582

 
(6,873
)
Reclassification of realized gain on sale of available-for-sale securities included in net income
(4,502
)
 
1,801

 
(2,701
)
 

 

 

  
(9,809
)
 
3,924

 
(5,885
)
 
(11,455
)
 
4,582

 
(6,873
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
105

 
(43
)
 
62

 
70

 
(28
)
 
42

Amortization of net actuarial loss included in net income
289

 
(115
)
 
174

 
628

 
(251
)
 
377

 
394

 
(158
)
 
236

 
698

 
(279
)
 
419

Other Comprehensive Loss
$
(14,536
)
 
$
3,766

 
$
(10,770
)
 
$
(5,992
)
 
$
4,303

 
$
(1,689
)
  
Six Months Ended June 30
  
2016
 
2015
  
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
$
(1,276
)
 
$

 
$
(1,276
)
 
$
(6,839
)
 
$

 
$
(6,839
)
Adjustment for sales of businesses with foreign operations

 

 

 
(525
)
 

 
(525
)
  
(1,276
)
 

 
(1,276
)
 
(7,364
)
 

 
(7,364
)
Unrealized losses on available-for-sale securities:
 
 
  
 
  
 
 
 
  
 
  
Unrealized losses for the period, net
(4,964
)
 
1,986

 
(2,978
)
 
(20,333
)
 
8,134

 
(12,199
)
Reclassification of realized gain on sale of available-for-sale securities included in net income
(6,256
)
 
2,502

 
(3,754
)
 

 

 

  
(11,220
)
 
4,488

 
(6,732
)
 
(20,333
)
 
8,134

 
(12,199
)
Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service cost included in net income
209

 
(84
)
 
125

 
139

 
(55
)
 
84

Amortization of net actuarial loss included in net income
579

 
(231
)
 
348

 
1,257

 
(503
)
 
754

  
788

 
(315
)
 
473

 
1,396

 
(558
)
 
838

Cash flow hedge:
 
 
  
 
  
 
  
 
  
 
  
Gain for the period

 

 

 
179

 
(71
)
 
108

Other Comprehensive Loss
$
(11,708
)
 
$
4,173

 
$
(7,535
)
 
$
(26,122
)
 
$
7,505

 
$
(18,617
)
The accumulated balances related to each component of other comprehensive income (loss) 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
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2015
$
(4,849
)
 
$
58,500

 
$
261,029

 
$
314,680

Other comprehensive loss before reclassifications
(1,276
)
 
(2,978
)
 

 
(4,254
)
Net amount reclassified from accumulated other comprehensive income

 
(3,754
)
 
473

 
(3,281
)
Other comprehensive (loss) income, net of tax
(1,276
)
 
(6,732
)
 
473

 
(7,535
)
Balance as of June 30, 2016
$
(6,125
)
 
$
51,768

 
$
261,502

 
$
307,145


16



The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income (Loss) are as follows:
  
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
Affected Line Item in the Condensed Consolidated Statement of Operations
  
 
 
(in thousands)
2016
 
2015
 
2016
 
2015
 
Foreign Currency Translation Adjustments:
  
 
  
 
  
 
  
 
  
Adjustment for sales of businesses with foreign operations
$

 
$
(484
)
 
$

 
$
(525
)
 
Other income, net
Unrealized Gains on Available-for-sale Securities:
 
 
  
 
  
 
  
 
  
Realized gain for the period
(4,502
)
 

 
(6,256
)
 

 
Other income, net
  
1,801

 

 
2,502

 

 
Provision for Income Taxes
  
(2,701
)
 

 
(3,754
)
 

 
Net of Tax
Pension and Other Postretirement Plans:
  
 
  
 
 
 
  
 
  
Amortization of net prior service cost
105

 
70

 
209

 
139

 
(1)
Amortization of net actuarial loss
289

 
628

 
579

 
1,257

 
(1)
  
394

 
698

 
788

 
1,396

 
Before tax
  
(158
)
 
(279
)
 
(315
)
 
(558
)
 
Provision for Income Taxes
  
236

 
419

 
473

 
838

 
Net of Tax
Cash Flow Hedge
 
 
 
 
 
 
  
 
  
  

 

 

 
132

 
Interest expense
  

 

 

 
(53
)
 
Provision for Income Taxes
  

 

 

 
79

 
Net of Tax
Total reclassification for the period
$
(2,465
)
 
$
(65
)
 
$
(3,281
)
 
$
392

 
Net of Tax
____________
(1)
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.
Certain Kaplan subsidiaries are subject to two unsealed cases filed by former employees that include, among other allegations, claims under the False Claims Act relating to eligibility for Title IV funding. The U.S. Government declined to intervene in all cases, and, as previously reported, court decisions either dismissed the cases in their entirety or narrowed the scope of their allegations. The two cases are captioned: United States of America ex rel. Carlos Urquilla-Diaz et al. v. Kaplan University et al. (unsealed March 25, 2008) and United States of America ex rel. Charles Jajdelski v. Kaplan Higher Education Corp. et al. (unsealed January 6, 2009).
In August 2011, the U.S. District Court for the Southern District of Florida issued a series of rulings in the Diaz case, which included three separate complaints: Diaz, Wilcox and Gillespie. The court dismissed the Wilcox complaint in its entirety; dismissed all False Claims Act allegations in the Diaz complaint, leaving only an individual employment claim; and dismissed in part the Gillespie complaint, thereby limiting the scope and time frame of its False Claims Act allegations regarding compliance with the U.S. Federal Rehabilitation Act. In October 2012, the court entered summary judgment in favor of the Company as to the sole remaining employment claim in the Diaz complaint. In July 2013, the court likewise entered summary judgment in favor of the Company on all remaining claims in the Gillespie complaint. Diaz and Gillespie each appealed to the U.S. Court of Appeals for the Eleventh Judicial Court. Arguments on both appeals were heard in February 2015. In March 2015, the court issued a decision affirming the lower court's dismissal of all of Gillespie's claims and three of the four Diaz claims but reversing and remanding on one remaining claim alleging that incentive compensation for admissions representatives was improperly based on enrollment counts. Kaplan filed an answer to Diaz's amended complaint in September 2015 and a renewed motion to dismiss, and a hearing was held in December 2015. In March 2016, the Court denied the motion to dismiss and discovery is proceeding in the case. In February 2016, Gillespie filed a new motion with the District Court alleging that the Court improperly refused to consider a motion to vacate while the case was on appeal; Kaplan filed an opposition to this motion that was denied by the Court.
In February 2016, Acquire Learning (Acquire) filed a statement of claim against Kaplan Australia and Kaplan Inc. in the Victorian Supreme Court, alleging breaches of warranty in connection with Acquire's September 2015 purchase of Franklyn Scholar from Kaplan Australia, and seeking payment under the indemnity provisions of the sale

17



agreement. The alleged breaches of warranty relate to certain courses which were the subject of Victorian Government Department of Education and Training audits and subsequent repayment demands. Kaplan Australia filed its "Defence and Counterclaim" in April 2016, denying the allegations and bringing claims against Acquire. In June 2016, the claim was settled.
ED Program Reviews.  ED has undertaken program reviews at various KHE locations. Currently, there are five open program reviews, four of which are at campuses that were formerly a part of the KHE Campuses business, including the ED’s final reports on the program reviews at KHE’s Broomall, PA, and Pittsburgh, PA, locations. Kaplan retains responsibility for any financial obligation resulting from the ED program reviews at the KHE Campuses business.
On February 23, 2015, the ED began a review of Kaplan University. The review will assess Kaplan’s administration of its Title IV, HEA programs and will initially focus on the 2013 to 2014 and 2014 to 2015 award years. On December 17, 2015, Kaplan University received a notice from the ED that it had been placed on provisional certification status until September 30, 2018, in connection with the open and ongoing ED program review. The ED has not notified Kaplan University of any negative findings. However, at this time, Kaplan cannot predict the outcome of this review, when it will be completed or any liability or other limitations that the ED may place on Kaplan University as a result of this review. During the period of provisional certification, Kaplan University must obtain prior ED approval to open a new location, add an educational program, acquire another school or make any other significant change.
In March and April 2015, the ED conducted a program review of the nationally accredited San Antonio (Ingram) and Hammond (Indiana) KHE campuses. These campuses were subsequently a part of the sale of the nationally accredited campuses to ECA. Kaplan retains liability for any deficiency findings relating to pre-sale conduct. On July 20, 2016, ECA received the Preliminary Program Review Report for the two reviews from the ED. The Report highlighted a number of required policy changes and requires ECA to conduct a full review of student files over a two year period to help the Department determine if the school properly reported enrollment status for certain students to the National Student Loan Data System. Failure to properly report status could result in students receiving funds for which they were not entitled. Kaplan will work with ECA on these reviews; however, until they are completed, Kaplan cannot predict the final outcome or potential liability associated with these reviews.
The Company does not expect the open program reviews to have a material impact on KHE; however, the results of open program reviews and their impact on Kaplan’s operations are uncertain.
Accreditation Review. In the second quarter of 2016, the Higher Learning Commission (HLC), Kaplan University's accreditor, conducted an on-site review as part of Kaplan University's regularly scheduled reaffirmation of accreditation. HLC is expected to issue its final report in September 2016.


18



13. BUSINESS SEGMENTS
The Company has four reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International and television broadcasting.
The following table summarizes financial information related to each of the Company's business segments:
  
Three Months Ended June 30
 
Six Months Ended June 30
(in thousands)
2016
 
2015
 
2016