CAPITAL STOCK, STOCK AWARDS AND STOCK OPTIONS

Capital Stock. Each share of Class A common stock and Class B common stock participates equally in dividends. The Class B stock has limited voting rights and as a class has the right to elect 30% of the Board of Directors; the Class A stock has unlimited voting rights, including the right to elect a majority of the Board of Directors.

During 2018, 2017, and 2016 the Company purchased a total of 199,023, 88,361, and 229,498 shares, respectively, of its Class B common stock at a cost of approximately $118.0 million, $50.8 million, and $108.9 million, respectively. On November 9, 2017, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock. The Company did not announce a ceiling price or time limit for the purchases. The authorization included 163,237 shares that remained under the previous authorization. At December 31, 2018, the Company had remaining authorization from the Board of Directors to purchase up to 273,655 shares of Class B common stock.

Stock Awards. In 2012, the Company adopted an incentive compensation plan (the 2012 Plan), which, among other provisions, authorizes the awarding of Class B common stock to key employees in the form of stock awards, stock options and other awards involving the actual transfer of shares. All stock awards, stock options and other awards involving the actual transfer of shares issued subsequent to the adoption of this plan are covered under this incentive compensation plan. Stock awards made under the 2012 Plan are primarily subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant’s employment terminates before the end of a specified period of service to the Company. Some of the awards are also subject to performance conditions and will be forfeited and revert to Company ownership if the conditions are not met. The number of Class B common shares authorized for issuance under the 2012 Plan is 772,588 shares. At December 31, 2018, there were 575,208 shares reserved for issuance under the 2012 incentive compensation plan. Of this number, 138,131 shares were subject to stock awards and stock options outstanding, and 437,077 shares were available for future awards.

Activity related to stock awards under the 2012 incentive compensation plan for the year ended December 31, 2018 was as follows:



	Number of Shares		Average Grant-Date Fair Value
Beginning of year, unvested	51,575		$	744.07
Awarded	375		875.40
Vested	(14,275	)	694.81
Forfeited	(5,475	)	863.21
End of Year, unvested	32,200		747.18

For the share awards outstanding at December 31, 2018, the aforementioned restriction will lapse in 2019 for 18,500 shares, in 2020 for 250 shares and in 2021 for 13,450 shares. Also, in early 2019, the Company issued stock awards of 16,665 shares. Stock-based compensation costs resulting from Company stock awards were $4.4 million, $8.1 million and $11.0 million in 2018, 2017 and 2016, respectively.

As of December 31, 2018, there was $3.6 million of total unrecognized compensation expense related to these awards. That cost is expected to be recognized on a straight-line basis over a weighted average period of 0.9 years.

Stock Options. The Company’s 2003 employee stock option plan reserves 1,900,000 shares of the Company’s Class B common stock for options to be granted under the plan. The purchase price of the shares covered by an option cannot be less than the fair value on the grant date. Options generally vest over six years and have a maximum term of ten years. At December 31, 2018, there were 79,001 shares reserved for issuance under this stock option plan, which were all subject to options outstanding.

Stock options granted under the 2012 Plan cannot be less than the fair value on the grant date, generally vest over six years and have a maximum term of ten years. In 2017, a grant was issued that vests over six years.

Activity related to options outstanding for the year ended December 31, 2018 was as follows:



	Number of Shares		Average Option Price
Beginning of year	185,520		$	565.65
Granted	—		—
Exercised	(588	)	281.18
Expired or forfeited	—		—
End of Year	184,932		566.55

Of the shares covered by options outstanding at the end of 2018, 145,138 are now exercisable; 17,333 will become exercisable in 2019; 17,334 will become exercisable in 2020; 4,459 will become exercisable in 2021; 333 will become exercisable in 2022; and 335 will become exercisable in 2023. For 2018, 2017 and 2016, the Company recorded expense of $2.0 million, $2.0 million and $2.4 million related to stock options, respectively. Information related to stock options outstanding and exercisable at December 31, 2018, is as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding at 12/31/2018	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares Exercisable at 12/31/2018	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price
$244–276	3,674	2.5	$	259.19	3,674	2.5	$	259.19
325	77,258	2.1	325.26		77,258	2.1	325.26
719	77,258	5.8	719.15		51,504	5.8	719.15
805–872	26,742	7.0	865.02		12,702	6.9	866.03
	184,932	4.4	566.55		145,138	3.9	510.69

At December 31, 2018, the intrinsic value for all options outstanding, exercisable and unvested was $25.8 million, $25.8 million and $0.0 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of the Company’s stock was $640.58 at December 31, 2018. At December 31, 2018, there were 39,794 unvested options related to this plan with an average exercise price of $770.29 and a weighted average remaining contractual term of 6.3 years. At December 31, 2017, there were 57,126 unvested options with an average exercise price of $770.67 and a weighted average remaining contractual term of 7.2 years.

As of December 31, 2018, total unrecognized stock-based compensation expense related to stock options was $4.4 million, which is expected to be recognized on a straight-line basis over a weighted average period of approximately 2.3 years. There were 588 options exercised during 2018. The total intrinsic value of options exercised during 2018 was $0.2 million; a tax benefit from these stock option exercises of $0.1 million was realized. There were 3,476 options exercised during 2017. The total intrinsic value of options exercised during 2017 was $0.7 million; a tax benefit from these stock option exercises of $0.3 million was realized. There were 4,726 options exercised during 2016. The total intrinsic value of options exercised during 2016 was $1.2 million; a tax benefit from these option exercises of $0.5 million was realized.

During 2017, the Company granted 2,000 options at an exercise price above the fair market value of its common stock at the date of grant. The weighted average grant-date fair value of options granted during 2017 was $120.47. No options were granted during 2018 or 2016.

The fair value of options at date of grant was estimated using the Black-Scholes method utilizing the following assumptions:



	2017
Expected life (years)	8
Interest rate	2.28%
Volatility	26.93%
Dividend yield	0.85%

The Company also maintains a stock option plan at Kaplan. Under the provisions of this plan, options are issued with an exercise price equal to the estimated fair value of Kaplan’s common stock, and options vest ratably over the number of years specified (generally four to five years) at the time of the grant. Upon exercise, an option holder may receive Kaplan shares or cash equal to the difference between the exercise price and the then fair value.

At December 31, 2018, a Kaplan senior manager holds 7,206 Kaplan restricted shares. The fair value of Kaplan’s common stock is determined by the Company’s compensation committee of the Board of Directors, and in January 2019, the committee set the fair value price at $1,575 per share. No options were awarded during 2018, 2017, or 2016; no options were exercised during 2018, 2017 or 2016; and no options were outstanding at December 31, 2018.

Kaplan recorded stock compensation expense of $0.5 million, $1.2 million, and $0.6 million in 2018, 2017 and 2016, respectively. At December 31, 2018, the Company’s accrual balance related to the Kaplan restricted shares totaled $11.3 million. There were no payouts in 2018, 2017 or 2016.

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 earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.

The following reflects the Company’s net income and share data used in the basic and diluted earnings per share computations using the two-class method:



	Year Ended December 31
(in thousands, except per share amounts)	2018			2017			2016
Numerator:
Numerator for basic earnings per share:
Net income attributable to Graham Holdings Company common stockholders	$	271,206		$	302,044		$	168,590
Less: Dividends paid–common stock outstanding and unvested restricted shares	(28,617		)	(28,329		)	(27,325		)
Undistributed earnings	242,589			273,715			141,265
Percent allocated to common stockholders	99.39		%	99.06		%	98.79		%
	241,115			271,150			139,562
Add: Dividends paid–common stock outstanding	28,423			28,060			26,962
Numerator for basic earnings per share	269,538			299,210			166,524
Add: Additional undistributed earnings due to dilutive stock options	10			17			9
Numerator for diluted earnings per share	$	269,548		$	299,227		$	166,533
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding	5,333			5,516			5,559
Add: Effect of dilutive stock options	37			36			30
Denominator for diluted earnings per share	5,370			5,552			5,589
Graham Holdings Company Common Stockholders:
Basic earnings per share	$	50.55		$	54.24		$	29.95
Diluted earnings per share	$	50.20		$	53.89		$	29.80

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:



	Year Ended December 31
(in thousands)	2018	2017	2016
Weighted average restricted stock	23	30	40

The 2018, 2017 and 2016 diluted earnings per share amounts exclude the effects of 104,000, 104,000 and 102,000 stock options outstanding, respectively, as their inclusion would have been antidilutive due to a market condition. The 2018, 2017 and 2016 diluted earnings per share amounts also exclude the effects of 2,650, 5,250 and 5,450 restricted stock awards, respectively, as their inclusion would have been antidilutive due to a performance condition.

In 2018, 2017 and 2016, the Company declared regular dividends totaling $5.32, $5.08 and $4.84 per share, respectively.