Market Overview

Graham Holdings Company Reports Second Quarter Earnings

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Graham Holdings Company (NYSE:GHC) today reported net income
attributable to common shares of $46.6 million ($8.63 per share) for the
second quarter of 2018, compared to $42.0 million ($7.46 per share) for
the second quarter of 2017.

The results for the second quarter of 2018 and 2017 were affected by a
number of items as described in the following paragraphs. Excluding
these items, net income attributable to common shares was $65.0 million
($12.05 per share) for the second quarter of 2018, compared to $45.6
million ($8.10 per share) for the second quarter of 2017. (Refer to the
Non-GAAP Financial Information schedule at the end of this release for
additional details.)

Items included in the Company's net income for the second quarter of
2018:

  • $6.2 million in interest expense related to the settlement of a
    mandatorily redeemable noncontrolling interest ($1.14 per share);
  • $11.4 million in debt extinguishment costs (after-tax impact of $8.6
    million, or $1.60 per share);
  • $2.6 million in net losses on marketable equity securities (after-tax
    impact of $1.9 million or $0.36 per share); and
  • $2.3 million in non-operating foreign currency losses (after-tax
    impact of $1.7 million, or $0.32 per share).

Items included in the Company's net income for the second quarter of
2017:

  • a $9.2 million goodwill and other long-lived asset impairment charge
    in other businesses (after-tax impact of $5.8 million, or $1.03 per
    share); and
  • $3.5 million in non-operating foreign currency gains (after-tax impact
    of $2.2 million, or $0.39 per share).

Revenue for the second quarter of 2018 was $672.7 million, down 1% from
$676.1 million in the second quarter of 2017. Revenues declined at the
education division, offset by growth at the television broadcasting and
manufacturing businesses. The Company reported operating income of $65.6
million for the second quarter of 2018, compared to $49.7 million for
the second quarter of 2017. The operating income increase is driven by
higher earnings at the education, television broadcasting and
manufacturing businesses.

For the first six months of 2018, the Company reported net income
attributable to common shares of $89.5 million ($16.40 per share),
compared to $63.1 million ($11.21 per share) for the first six months of
2017. The results for the first six months of 2018 and 2017 were
affected by a number of items as described in the following paragraphs.
Excluding these items, net income attributable to common shares was
$114.9 million ($21.08 per share) for the first six months of 2018,
compared to $59.7 million ($10.60 per share) for the first six months of
2017. (Refer to the Non-GAAP Financial Information schedule at the end
of this release for additional details.)

Items included in the Company's net income for the first six months of
2018:

  • $6.2 million in interest expense related to the settlement of a
    mandatorily redeemable noncontrolling interest ($1.14 per share);
  • $11.4 million in debt extinguishment costs (after-tax impact of $8.6
    million, or $1.60 per share);
  • $16.7 million in net losses on marketable equity securities (after-tax
    impact of $12.7 million, or $2.30 per share);
  • a $4.3 million gain on the Kaplan University Transaction (after-tax
    impact of $1.8 million, or $0.33 per share);
  • $2.1 million in non-operating foreign currency losses (after-tax
    impact of $1.6 million, or $0.30 per share); and
  • $1.8 million in income tax benefits related to stock compensation
    ($0.33 per share).

Items included in the Company's net income for the first six months of
2017:

  • a $9.2 million goodwill and other long-lived asset impairment charge
    in other businesses (after-tax impact of $5.8 million, or $1.03 per
    share);
  • $5.2 million in non-operating foreign currency gains (after-tax impact
    of $3.3 million, or $0.58 per share); and
  • $5.9 million in income tax benefits related to stock compensation
    ($1.06 per share).

Revenue for the first six months of 2018 was $1,332.1 million, up 6%
from $1,258.8 million in the first six months of 2017. Revenues
increased at the television broadcasting and manufacturing businesses,
offset by a decline at the education division. The Company reported
operating income of $109.8 million for the first six months of 2018,
compared to $60.0 million for first six months of 2017. Operating
results improved at the education, television broadcasting and
manufacturing businesses.

On April 27, 2017, certain subsidiaries of Kaplan, Inc. (Kaplan), a
subsidiary of Graham Holdings Company entered into a Contribution and
Transfer Agreement (Transfer Agreement) to contribute the institutional
assets and operations of Kaplan University (KU) to an Indiana
non-profit, public-benefit corporation that is a subsidiary affiliated
with Purdue University (Purdue). The closing of the transactions
contemplated by the Transfer Agreement occurred on March 22, 2018. At
the same time, the parties entered into a Transition and Operations
Support Agreement (TOSA) pursuant to which Kaplan will provide key
non-academic operations support to the new university. The new
university will operate almost exclusively online as a new Indiana
public university affiliated with Purdue under the name Purdue
University Global (Purdue Global).

Division Results

Education

Education division revenue totaled $370.0 million for the second quarter
of 2018, down 4% from $386.5 million for the same period of 2017. Kaplan
reported operating income of $37.6 million for the second quarter of
2018, up 13% from $33.3 million for the second quarter of 2017.

For the first six months of 2018, education division revenue totaled
$745.5 million, down 2% from revenue of $759.4 million for the same
period of 2017. Kaplan reported operating income of $60.3 million for
the first six months of 2018, a 41% increase from $42.8 million for the
first six months of 2017.

As a result of the KU Transaction that closed on March 22, 2018, the
Company has revised the financial reporting for its education division
to provide operating results for Higher Education and Professional
(U.S.).

A summary of Kaplan's operating results is as follows:

                 
Three Months Ended Six Months Ended
June 30 June 30
(in thousands)       2018     2017     % Change     2018     2017     % Change
Revenue        
Kaplan international $ 184,303 $ 171,747 7 $ 367,885 $ 336,309 9
Higher education 85,981 111,840 (23 ) 185,811 222,951 (17 )
Test preparation 68,604 75,730 (9 ) 127,755 140,298 (9 )
Professional (U.S.) 31,057 27,364 13 64,413 60,563 6
Kaplan corporate and other 442 57 727 71
Intersegment elimination (382 )     (239 ) (1,087 )     (796 )
$ 370,005       $ 386,499   (4 ) $ 745,504       $ 759,396   (2 )
Operating Income (Loss)
Kaplan international $ 24,187 $ 15,954 52 $ 44,591 $ 23,661 88
Higher education 11,219 13,140 (15 ) 12,574 15,586 (19 )
Test preparation 6,120 5,741 7 6,641 2,877
Professional (U.S.) 4,780 4,571 5 14,095 14,729 (4 )
Kaplan corporate and other (7,100 ) (4,722 ) (50 ) (14,846 ) (11,665 ) (27 )
Amortization of intangible assets (1,663 ) (1,323 ) (26 ) (2,812 ) (2,443 ) (15 )
Intersegment elimination 11       (30 ) 11       23  
$ 37,554       $ 33,331   13 $ 60,254       $ 42,768   41
 

Kaplan International includes English-language programs, and
postsecondary education and professional training businesses largely
outside the United States. Kaplan International revenue increased 7% and
9% for the second quarter and first six months of 2018, respectively. On
a constant currency basis, revenue increased 3% for both the second
quarter and first six months of 2018. Operating income increased to
$24.2 million in the second quarter of 2018, compared to $16.0 million
in the second quarter of 2017. Operating income increased to $44.6
million for the first six months of 2018, compared to $23.7 million for
the same period of 2017. These increases are due largely to improved
results at Pathways, UK Professional, English-language and MPW.

Prior to the KU Transaction closing on March 22, 2018, Higher Education
included Kaplan's domestic postsecondary education businesses, made up
of fixed-facility colleges and online postsecondary and career programs.
Following the KU Transaction closing, the Higher Education division
includes the results as a service provider to higher education
institutions.

In the second quarter and first six months of 2018, Higher Education
revenue was down 23% and 17%, respectively, and operating results
declined, due largely to the sale of KU on March 22, 2018 and fewer
average enrollments at KU prior to the sale. The Company recorded the
service fee with Purdue Global in the second quarter of 2018, based on
an assessment of its collectability under the TOSA. The Company will
continue to assess the collectability of the service fee with Purdue
Global on a quarterly basis to make a determination as to whether to
record all or part of the service fee in the future.

Kaplan Test Preparation (KTP) includes Kaplan's standardized test
preparation programs. KTP revenue declined 9% for the second quarter and
first six months of 2018 due to soft enrollments in certain test
preparation programs and the disposition of Dev Bootcamp, which made up
the majority of KTP's new economy skills training programs. KTP
operating results improved in the second quarter and first six months of
2018, due primarily to decreased losses from the new economy skills
training programs. Operating losses for the new economy skills training
programs were $1.8 million and $7.2 million for the first six months of
2018 and 2017, respectively. Dev Bootcamp was closed in the second half
of 2017.

Kaplan Professional (U.S.) includes the domestic professional and other
continuing education businesses. In the second quarter of 2018, Kaplan
Professional (U.S.) revenue was up 13% and operating results improved
5%, due partly to the May 2018 acquisition of Professional Publications,
Inc. (PPI), an independent publisher of professional licensing exam
review materials that provides engineering, surveying, architecture, and
interior design licensure exam review products. Revenues were up 6% for
the first half of 2018, while operating results decreased 4% due to
increased spending on sales and technology.

Kaplan corporate and other represents unallocated expenses of Kaplan,
Inc.'s corporate office, other minor businesses and certain shared
activities, with increased healthcare and pension expense in 2018.

Television Broadcasting

Revenue at the television broadcasting division increased 8% to $114.1
million in the second quarter of 2018, from $106.1 million in the same
period of 2017 due to an $8.7 million increase in retransmission
revenues and a $3.9 million increase in political advertising revenue.
Operating income for the second quarter of 2018 increased 3% to $41.1
million, from $39.8 million in the same period of 2017 due to higher
revenues.

Revenue at the television broadcasting division increased 13% to $222.9
million in the first six months of 2018, from $197.6 million in the same
period of 2017. The revenue increase is due primarily to $16.9 million
in higher retransmission revenues, $8.6 million in 2018 incremental
winter Olympics-related advertising revenue at the Company's NBC
stations, and a $6.1 million increase in political advertising revenue.
Operating income for the first six months of 2018 increased 23% to $81.7
million from $66.3 million in the same period of 2017, due to higher
revenues.

Manufacturing

Manufacturing includes four businesses: Dekko, a manufacturer of
electrical workspace solutions, architectural lighting and electrical
components and assemblies; Joyce/Dayton Corp., a manufacturer of screw
jacks and other linear motion systems; Forney, a global supplier of
products and systems that control and monitor combustion processes in
electric utility and industrial applications; and Hoover Treated Wood
Products, Inc., a supplier of pressure impregnated kiln-dried lumber and
plywood products for fire retardant and preservative applications that
the Company acquired in April 2017.

Manufacturing revenues and operating income increased in the second
quarter and first six months of 2018 due primarily to the Hoover
acquisition.

In the second quarter of 2017, the Company recorded a $9.2 million
goodwill and other long-lived asset impairment charge at Forney, due to
lower than expected revenues resulting from sluggish overall demand for
its energy products.

Healthcare

The Graham Healthcare Group (GHG) provides home health and hospice
services in three states. At the end of June 2017, GHG acquired Hometown
Home Health and Hospice, a Lapeer, MI-based healthcare services
provider. Healthcare revenues were up 1% in the first six months of
2018, while overall operating results were similar to results in 2017.

SocialCode

SocialCode is a provider of marketing solutions on social, mobile and
video platforms. SocialCode revenue increased 2% for the first six
months of 2018, due to modest growth in digital advertising service
revenues. SocialCode reported operating losses of $1.7 million and $5.5
million in the second quarter and first six months of 2018,
respectively, compared to operating income of $2.6 million and an
operating loss of $1.9 million in the second quarter and first six
months of 2017, respectively. The decline in 2018 results is largely
attributable to a $4.7 million and $3.9 million credit related to
SocialCode's phantom equity plan that was included in the second quarter
and first six months of 2017, respectively.

Other Businesses

Other businesses include Slate and Foreign Policy, which publish online
and print magazines and websites; and two investment stage businesses,
Panoply and CyberVista. Losses from each of these businesses in the
first half of 2018 adversely affected operating results.

Corporate Office

Corporate office includes the expenses of the Company's corporate office
and certain continuing obligations related to prior business
dispositions.

Equity in Earnings (Losses) of Affiliates

At June 30, 2018, the Company held interests in a number of home health
and hospice joint ventures, and interests in several other affiliates.
In the second half of 2017, the Company acquired approximately 11% of
Intersection Holdings, LLC, which provides digital marketing and
advertising services and products for cities, transit systems, airports,
and other public and private spaces. The Company recorded equity in
earnings of affiliates of $0.9 million for the second quarter of 2018,
compared to $1.3 million for the second quarter of 2017. The Company
recorded equity in earnings of affiliates of $3.5 million for the first
six months of 2018, compared to $2.0 million for the first six months of
2017.

Net Interest Expense, Debt Extinguishment Costs
and Related Balances

On May 30, 2018, the Company issued 5.75% unsecured eight-year
fixed-rate notes due June 1, 2026. Interest is payable semi-annually on
June 1 and December 1, beginning on December 1, 2018. On June 29, 2018,
the Company used the net proceeds from the sale of the notes and other
cash to repay $400 million of 7.25% notes that were due February 1,
2019. The Company incurred $11.4 million in debt extinguishment costs
related to the early termination of the 7.25% notes.

The Company incurred net interest expense of $15.3 million and $22.0
million for the second quarter and first six months of 2018, compared to
$7.9 million and $14.6 million for the second quarter and first six
months of 2017. The Company incurred $6.2 million in interest expense
related to the mandatorily redeemable noncontrolling interest at the
Graham Healthcare Group settled in the second quarter of 2018. The
increased interest expense in 2018 is also due to both the $400 million
eight-year and ten-year notes outstanding for the month of June 2018.

At June 30, 2018, the Company had $485.3 million in borrowings
outstanding at an average interest rate of 5.0% and cash, marketable
equity securities and other investments of $776.9 million.

Non-operating Pension and Postretirement
Benefit Income, net

In the first quarter of 2018, the Company adopted new accounting
guidance that changes the income statement classification of net
periodic pension and postretirement pension cost. Under the new
guidance, service cost is included in operating income, while the other
components (including expected return on assets) are included in
non-operating income. The new guidance was required to be applied
retrospectively, with prior period financial information revised to
reflect the reclassification. From a segment reporting perspective, this
change had a significant impact on Corporate office reporting, with
minimal impact on the television broadcasting and Kaplan corporate
reporting.

The Company recorded net non-operating pension and postretirement
benefit income of $23.0 million and $44.4 million for the second quarter
and first six months of 2018, compared to $18.6 million and $37.4
million for the second quarter and first six months of 2017.

Loss on Marketable Equity Securities, net

In the first quarter of 2018, the Company adopted new guidance that
requires changes in the fair value of marketable equity securities to be
included in non-operating income (expense) on a prospective basis.
Overall, the Company recognized $2.6 million and $16.7 million in net
losses on marketable equity securities in the second quarter and first
six months of 2018, respectively.

Other Non-Operating Income (Expense)

The Company recorded total other non-operating income, net, of $2.3
million for the second quarter of 2018, compared to $4.1 million for the
second quarter of 2017. The 2018 amounts included a $1.4 million
contingent consideration gain related to the sale of a business; a $2.5
million gain on sale of land and other items; partially offset by $2.3
million in foreign currency losses. The 2017 amounts included $3.5
million in foreign currency gains, and other items.

The Company recorded total other non-operating income, net, of $11.5
million for the first six months of 2018, compared to $4.9 million for
the first six months of 2017. The 2018 amounts included a $7.2 million
gain on sales of businesses and related contingent consideration; a $2.8
million gain on sale of a cost method investment; a $2.5 million gain on
sale of land and other items; offset by $2.1 million in foreign currency
losses. The 2017 amounts included $5.2 million in foreign currency
gains, offset by other items.

Provision for Income Taxes

The Company's effective tax rate for the first six months of 2018 was
24.9%. The Tax Cuts and Jobs Act was enacted in December 2017, which
included lowering the federal corporate income tax rate from 35% to 21%.

The Company's effective tax rate for the first six months of 2017 was
29.7%. This low effective tax rate is due to a $5.9 million income tax
benefit related to the vesting of restricted stock awards. In the first
quarter of 2017, the Company adopted a new accounting standard that
requires all excess income tax benefits and deficiencies from stock
compensation to be recorded as discrete items in the provision for
income taxes. Excluding this $5.9 million benefit, the overall income
tax rate for the first six months of 2017 was 36.3%.

Earnings Per Share

The calculation of diluted earnings per share for the second quarter and
first six months of 2018 was based on 5,362,277 and 5,417,162 weighted
average shares outstanding, compared to 5,577,275 and 5,573,167 for the
second quarter and first six months of 2017. At June 30, 2018, there
were 5,346,550 shares outstanding. 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 has remaining authorization for
315,646 shares as of June 30, 2018.

Adoption of Revenue Recognition Standard

On January 1, 2018, the Company adopted the new revenue recognition
guidance using the modified retrospective approach. If the company
applied the accounting policies under the previous guidance, revenue
would have been $1.3 million lower and operating expenses would have
been $0.8 million lower for the first six months of 2018.

Forward-Looking Statements

This press release contains certain forward-looking statements that are
based largely on the Company's current expectations. Forward-looking
statements are subject to certain risks and uncertainties that could
cause actual results and achievements to differ materially from those
expressed in the forward-looking statements. For more information about
these forward-looking statements and related risks, please refer to the
section titled "Forward-Looking Statements" in Part I of the Company's
Annual Report on Form 10-K.

 
GRAHAM HOLDINGS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
         
Three Months Ended
June 30 %
(in thousands, except per share amounts)       2018     2017     Change
Operating revenues $ 672,677     $ 676,087 (1 )
Operating expenses 582,033 590,720 (1 )
Depreciation of property, plant and equipment 13,619 15,871 (14 )
Amortization of intangible assets 11,399 10,531 8
Impairment of goodwill and other long-lived assets       9,224  
Operating income 65,626 49,741 32
Equity in earnings of affiliates, net 931 1,331 (30 )
Interest income 1,901 1,173 62
Interest expense (17,165 ) (9,035 ) 90
Debt extinguishment costs (11,378 )
Non-operating pension and postretirement benefit income, net 23,041 18,620 24
Loss on marketable equity securities, net (2,554 )
Other income, net 2,333       4,069   (43 )
Income before income taxes 62,735 65,899 (5 )
Provision for income taxes 16,100       23,900   (33 )
Net income 46,635 41,999 11
Net income attributable to noncontrolling interests (69 )     (3 )
Net Income Attributable to Graham Holdings Company Common
Stockholders
$ 46,566       $ 41,996   11

Per Share Information Attributable to Graham Holdings Company
Common Stockholders

Basic net income per common share $ 8.69 $ 7.51 16
Basic average number of common shares outstanding 5,325 5,539
Diluted net income per common share $ 8.63 $ 7.46 16
Diluted average number of common shares outstanding 5,362 5,577
 
 
GRAHAM HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
     
Six Months Ended
June 30 %
(in thousands, except per share amounts)       2018     2017   Change
Operating revenues $ 1,332,113     $ 1,258,804 6
Operating expenses 1,172,229 1,141,696 3
Depreciation of property, plant and equipment 28,261 30,523 (7 )
Amortization of intangible assets 21,783 17,367 25
Impairment of goodwill and other long-lived assets       9,224  
Operating income 109,840 59,994 83
Equity in earnings of affiliates, net 3,510 1,980 77
Interest income 3,273 2,536 29
Interest expense (25,236 ) (17,164 ) 47
Debt extinguishment costs (11,378 )
Non-operating pension and postretirement benefit income, net 44,427 37,421 19
Loss on marketable equity securities, net (16,656 )
Other income, net 11,520       4,918  
Income before income taxes 119,300 89,685 33
Provision for income taxes 29,700       26,600   12
Net income 89,600 63,085 42
Net income attributable to noncontrolling interests (143 )     (3 )
Net Income Attributable to Graham Holdings Company Common
Stockholders
$ 89,457       $ 63,082   42
Per Share Information Attributable to Graham Holdings Company
Common Stockholders
Basic net income per common share $ 16.52 $ 11.29 46
Basic average number of common shares outstanding 5,380 5,537
Diluted net income per common share $ 16.40 $ 11.21 46
Diluted average number of common shares outstanding 5,417 5,573
 
 
GRAHAM HOLDINGS COMPANY
BUSINESS DIVISION INFORMATION
(Unaudited)
      Three Months Ended         Six Months Ended    
June 30 % June 30 %
(in thousands)       2018     2017     Change     2018     2017     Change
Operating Revenues        
Education $ 370,005 $ 386,499 (4 ) $ 745,504 $ 759,396 (2 )
Television broadcasting 114,086 106,102 8 222,888 197,598 13
Manufacturing 126,462 120,672 5 243,868 182,570 34
Healthcare 38,208 38,220 75,829 75,119 1
SocialCode 14,770 14,855 (1 ) 28,069 27,429 2
Other businesses 9,167 9,739 (6 ) 16,000 16,692 (4 )
Corporate office
Intersegment elimination (21 )       (45 )      
$ 672,677       $ 676,087   (1 ) $ 1,332,113       $ 1,258,804   6
Operating Expenses
Education $ 332,451 $ 353,168 (6 ) $ 685,250 $ 716,628 (4 )
Television broadcasting 72,968 66,325 10 141,228 131,338 8
Manufacturing 117,797 124,847 (6 ) 226,575 183,080 24
Healthcare 37,444 37,836 (1 ) 76,456 75,661 1
SocialCode 16,512 12,251 35 33,592 29,333 15
Other businesses 17,144 17,470 (2 ) 32,519 33,218 (2 )
Corporate office 12,756 14,449 (12 ) 26,698 29,552 (10 )
Intersegment elimination (21 )       (45 )      
$ 607,051       $ 626,346   (3 ) $ 1,222,273       $ 1,198,810   2
Operating Income (Loss)
Education $ 37,554 $ 33,331 13 $ 60,254 $ 42,768 41
Television broadcasting 41,118 39,777 3 81,660 66,260 23
Manufacturing 8,665 (4,175 ) 17,293 (510 )
Healthcare 764 384 99 (627 ) (542 ) (16 )
SocialCode (1,742 ) 2,604 (5,523 ) (1,904 )
Other businesses (7,977 ) (7,731 ) (3 ) (16,519 ) (16,526 )
Corporate office (12,756 )     (14,449 ) 12 (26,698 )     (29,552 ) 10
$ 65,626       $ 49,741   32 $ 109,840       $ 59,994   83
Depreciation
Education $ 6,839 $ 8,325 (18 ) $ 14,445 $ 16,909 (15 )
Television broadcasting 2,974 2,991 (1 ) 6,045 5,585 8
Manufacturing 2,331 2,404 (3 ) 4,782 3,912 22
Healthcare 647 1,194 (46 ) 1,300 2,263 (43 )
SocialCode 200 251 (20 ) 433 497 (13 )
Other businesses 375 415 (10 ) 750 776 (3 )
Corporate office 253       291   (13 ) 506       581   (13 )
$ 13,619       $ 15,871   (14 ) $ 28,261       $ 30,523   (7 )
Amortization of Intangible Assets and Impairment of Goodwill and
Other Long-Lived Assets
Education $ 1,663 $ 1,323 26 $ 2,812 $ 2,443 15
Television broadcasting 1,408 970 45 2,816 1,872 50
Manufacturing 5,935 15,734 (62 ) 11,871 18,811 (37 )
Healthcare 1,809 1,644 10 3,617 3,298 10
SocialCode 584 84 667 167
Other businesses
Corporate office                
$ 11,399       $ 19,755   (42 ) $ 21,783       $ 26,591   (18 )
Pension Expense
Education $ 1,878 $ 2,153 (13 ) $ 4,542 $ 4,859 (7 )
Television broadcasting 601 479 25 1,094 972 13
Manufacturing 19 22 (14 ) 36 47 (23 )
Healthcare 165 166 (1 ) 287 332 (14 )
SocialCode 205 142 44 361 296 22
Other businesses 154 85 81 270 223 21
Corporate office 1,295       1,544   (16 ) 2,667       2,776   (4 )
$ 4,317       $ 4,591   (6 ) $ 9,257       $ 9,505   (3 )
 
 
GRAHAM HOLDINGS COMPANY
EDUCATION DIVISION INFORMATION
(Unaudited)
                 
Three Months Ended Six Months Ended
June 30

%

June 30 %
(in thousands)       2018     2017     Change     2018     2017     Change
Operating Revenues        
Kaplan international $ 184,303 $ 171,747 7 $ 367,885 $ 336,309 9
Higher education 85,981 111,840 (23 ) 185,811 222,951 (17 )
Test preparation 68,604 75,730 (9 ) 127,755 140,298 (9 )
Professional (U.S.) 31,057 27,364 13 64,413 60,563 6
Kaplan corporate and other 442 57 727 71
Intersegment elimination (382 )     (239 ) (1,087 )     (796 )
$ 370,005       $ 386,499   (4 ) $ 745,504       $ 759,396   (2 )
Operating Expenses
Kaplan international $ 160,116 $ 155,793 3 $ 323,294 $ 312,648 3
Higher education 74,762 98,700 (24 ) 173,237 207,365 (16 )
Test preparation 62,484 69,989 (11 ) 121,114 137,421 (12 )
Professional (U.S.) 26,277 22,793 15 50,318 45,834 10
Kaplan corporate and other 7,542 4,779 58 15,573 11,736 33
Amortization of intangible assets 1,663 1,323 26 2,812 2,443 15
Intersegment elimination (393 )     (209 ) (1,098 )     (819 )
$ 332,451       $ 353,168   (6 ) $ 685,250       $ 716,628   (4 )
Operating Income (Loss)
Kaplan international $ 24,187 $ 15,954 52 $ 44,591 $ 23,661 88
Higher education 11,219 13,140 (15 ) 12,574 15,586 (19 )
Test preparation 6,120 5,741 7 6,641 2,877
Professional (U.S.) 4,780 4,571 5 14,095 14,729 (4 )
Kaplan corporate and other (7,100 ) (4,722 ) (50 ) (14,846 ) (11,665 ) (27 )
Amortization of intangible assets (1,663 ) (1,323 ) (26 ) (2,812 ) (2,443 ) (15 )
Intersegment elimination 11       (30 ) 11       23  
$ 37,554       $ 33,331   13 $ 60,254       $ 42,768   41
Depreciation
Kaplan international $ 3,764 $ 3,609 4 $ 7,738 $ 7,291 6
Higher education 1,274 2,484 (49 ) 3,132 5,132 (39 )
Test preparation 973 1,332 (27 ) 1,951 2,673 (27 )
Professional (U.S.) 670 765 (12 ) 1,312 1,548 (15 )
Kaplan corporate and other 158       135   17 312       265   18
$ 6,839       $ 8,325   (18 ) $ 14,445       $ 16,909   (15 )
Pension Expense
Kaplan international $ 84 $ 87 (3 ) $ 167 $ 174 (4 )
Higher education 804 1,742 (54 ) 2,210 3,484 (37 )
Test preparation 729 911 (20 ) 1,458 1,822 (20 )
Professional (U.S.) 290 302 (4 ) 580 604 (4 )
Kaplan corporate and other (29 )     (889 ) (97 ) 127       (1,225 )
$ 1,878       $ 2,153   (13 ) $ 4,542       $ 4,859   (7 )
 

NON-GAAP FINANCIAL INFORMATION

GRAHAM HOLDINGS COMPANY

(Unaudited)

In addition to the results reported in accordance with accounting
principles generally accepted in the United States (GAAP) included in
this press release, the Company has provided information regarding net
income, excluding certain items described below, reconciled to the most
directly comparable GAAP measures. Management believes that these
non-GAAP measures, when read in conjunction with the Company's GAAP
financials, provide useful information to investors by offering:

  • the ability to make meaningful period-to-period comparisons of the
    Company's ongoing results;
  • the ability to identify trends in the Company's underlying business;
    and
  • a better understanding of how management plans and measures the
    Company's underlying business.

Net income, excluding certain items, should not be considered
substitutes or alternatives to computations calculated in accordance
with and required by GAAP. These non-GAAP financial measures should be
read only in conjunction with financial information presented on a GAAP
basis.

The following table reconciles the non-GAAP financial measures to the
most directly comparable GAAP measures:

     
Three Months Ended June 30
2018     2017
(in thousands, except per share amounts)      

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

   

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

Amounts attributable to Graham Holdings Company Common
Stockholders
                   
As reported $ 62,735 $ 16,100 $ 46,635 $ 65,899 $ 23,900 $ 41,999
Attributable to noncontrolling interests (69 ) (3 )
Attributable to Graham Holdings Company Stockholders 46,566 41,996
Adjustments:
Goodwill and other long-lived asset impairment charge 9,224 3,413 5,811
Interest expense related to the settlement of a mandatorily
redeemable noncontrolling interest
6,169 6,169

Debt extinguishment costs 11,378 2,731 8,647

Net losses on marketable equity securities 2,554 613 1,941

Foreign currency loss (gain) 2,266 544 1,722   (3,466 ) (1,283 ) (2,183 )
Net Income, adjusted (non-GAAP) $ 65,045   $ 45,624  
 
Per share information attributable to Graham Holdings Company
Common Stockholders
Diluted income per common share, as reported $ 8.63   $ 7.46  
Adjustments:
Goodwill and other long-lived asset impairment charge 1.03
Interest expense related to the settlement of a mandatorily
redeemable noncontrolling interest
1.14
Debt extinguishment costs 1.60
Net losses on marketable equity securities 0.36
Foreign currency loss (gain) 0.32   (0.39 )
Diluted income per common share, adjusted (non-GAAP) $ 12.05   $ 8.10  
 

The adjusted diluted per share amounts may not compute due to rounding.

      Six Months Ended June 30
2018     2017
(in thousands, except per share amounts)      

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

   

Income
before
income
taxes

   

Income
Taxes

   

Net
Income

Amounts attributable to Graham Holdings Company Common
Stockholders
                   
As reported $ 119,300 $ 29,700 $ 89,600 $ 89,685 $ 26,600 $ 63,085
Attributable to noncontrolling interests (143 ) (3 )
Attributable to Graham Holdings Company Stockholders $ 89,457 $ 63,082
Adjustments:
Goodwill and other long-lived asset impairment charge 9,224 3,413 5,811
Interest expense related to the settlement of a mandatorily
redeemable noncontrolling interest
6,169 6,169
Debt extinguishment costs 11,378 2,731 8,647
Net losses on marketable equity securities 16,656 3,997 12,659

Gain on Kaplan University Transaction (4,315 ) (2,472 ) (1,843 )
Foreign currency loss (gain) 2,089 502 1,587 (5,194 ) (1,922 ) (3,272 )
Tax benefit related to stock compensation 1,810 (1,810 ) 5,933 (5,933 )
Net Income, adjusted (non-GAAP) $ 114,866   $ 59,688  
 
Per share information attributable to Graham Holdings Company
Common Stockholders
Diluted income per common share, as reported $ 16.40   $ 11.21  
Adjustments:
Goodwill and other long-lived asset impairment charge 1.03
Interest expense related to the settlement of a mandatorily
redeemable noncontrolling interest
1.14
Debt extinguishment costs 1.60
Net losses on marketable equity securities 2.30

Gain on Kaplan University Transaction (0.33 )
Foreign currency loss (gain) 0.30 (0.58 )
Tax benefit related to stock compensation (0.33 ) (1.06 )
Diluted income per common share, adjusted (non-GAAP) $ 21.08   $ 10.60  
 

The adjusted diluted per share amounts may not compute due to rounding.

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