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Graham Holdings Co - Quarter Report: 2014 March (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2014
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-671
GRAHAM HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
53-0182885
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1150 15th Street, N.W. Washington, D.C.
20071
(Address of principal executive offices)
(Zip Code)
(202) 334-6000
(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 May 2, 2014:
Class A Common Stock – 1,169,073 Shares
Class B Common Stock – 6,236,106 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 Months Ended March 31, 2014 and 2013
 
 
 
 
b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
c. Condensed Consolidated Balance Sheets at March 31, 2014 (Unaudited) and December 31, 2013
 
 
 
 
d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
e. Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 6.
Exhibits
 
 
Signatures




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  
Three Months Ended 
 March 31
  
(in thousands, except per share amounts)
2014
 
2013
Operating Revenues
  
 
  
Education
$
526,174

 
$
527,815

Subscriber
191,128

 
186,790

Advertising
78,247

 
69,122

Other
45,012

 
36,865

  
840,561

 
820,592

Operating Costs and Expenses
 
 
  
Operating
379,069

 
376,545

Selling, general and administrative
325,637

 
334,224

Depreciation of property, plant and equipment
53,245

 
58,959

Amortization of intangible assets
3,081

 
3,717

  
761,032

 
773,445

Income from Operations
79,529

 
47,147

Equity in earnings of affiliates, net
4,052

 
3,418

Interest income
599

 
510

Interest expense
(8,820
)
 
(8,960
)
Other income (expense), net
133,273

 
(4,083
)
Income from Continuing Operations Before Income Taxes
208,633

 
38,032

Provision for Income Taxes
77,400

 
15,800

Income from Continuing Operations
131,233

 
22,232

Income (Loss) from Discontinued Operations, Net of Tax
1,072

 
(16,973
)
Net Income
132,305

 
5,259

Net Loss (Income) Attributable to Noncontrolling Interests
219

 
(97
)
Net Income Attributable to Graham Holdings Company
132,524

 
5,162

Redeemable Preferred Stock Dividends
(426
)
 
(444
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
132,098

 
$
4,718

Amounts Attributable to Graham Holdings Company Common Stockholders
  
 
  
Income from continuing operations
$
131,026

 
$
21,691

Income (loss) from discontinued operations, net of tax
1,072

 
(16,973
)
Net income attributable to Graham Holdings Company common stockholders
$
132,098

 
$
4,718

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  
 
  
Basic income per common share from continuing operations
$
17.71

 
$
2.92

Basic income (loss) per common share from discontinued operations
0.14

 
(2.28
)
Basic net income per common share
$
17.85

 
$
0.64

Basic average number of common shares outstanding
7,275

 
7,227

Diluted income per common share from continuing operations
$
17.65

 
$
2.92

Diluted income (loss) per common share from discontinued operations
0.14

 
(2.28
)
Diluted net income per common share
$
17.79

 
$
0.64

Diluted average number of common shares outstanding
7,352

 
7,266


See accompanying Notes to Condensed Consolidated Financial Statements.

1



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
  
 
Three Months Ended 
 March 31
(in thousands)
 
2014
 
2013
Net Income
 
$
132,305

 
$
5,259

Other Comprehensive Income, Before Tax
 
 
 
  
Foreign currency translation adjustments:
 
 
 
  
Translation adjustments arising during the period
 
746

 
(4,191
)
Unrealized gains on available-for-sale securities:
 
 
 
 
Unrealized gains for the period, net
 
27,738

 
49,078

Reclassification adjustment for write-down and realization of loss (gain) on sale of available-for-sale securities included in net income
 
785

 
(551
)
  
 
28,523

 
48,527

Pension and other postretirement plans:
 
  
 
  
Amortization of net prior service credit included in net income
 
(102
)
 
(437
)
Amortization of net actuarial (gain) loss included in net income
 
(7,182
)
 
2,317

Settlement gain included in net income
 

 
(3,471
)
  
 
(7,284
)
 
(1,591
)
Cash flow hedge gain
 
172

 
30

Other Comprehensive Income, Before Tax
 
22,157

 
42,775

Income tax expense related to items of other comprehensive income
 
(8,566
)
 
(18,787
)
Other Comprehensive Income, Net of Tax
 
13,591

 
23,988

Comprehensive Income
 
145,896

 
29,247

Comprehensive loss (income) attributable to noncontrolling interests
 
219

 
(118
)
Total Comprehensive Income Attributable to Graham Holdings Company
 
$
146,115

 
$
29,129


See accompanying Notes to Consolidated Financial Statements.

2



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
(in thousands)
March 31,
2014
 
December 31,
2013
  
(Unaudited)
 
  
Assets
  
 
  
Current Assets
  
 
  
Cash and cash equivalents
$
642,833

 
$
569,719

Restricted cash
52,035

 
83,769

Investments in marketable equity securities and other investments
645,594

 
522,318

Accounts receivable, net
406,293

 
428,653

Income taxes receivable

 
17,991

Inventories and contracts in progress
3,234

 
2,924

Other current assets
80,431

 
77,013

Current assets held for sale
397

 

Total Current Assets
1,830,817

 
1,702,387

Property, Plant and Equipment, Net
845,868

 
927,542

Investments in Affiliates
20,953

 
15,754

Goodwill, Net
1,241,949

 
1,288,622

Indefinite-Lived Intangible Assets, Net
519,128

 
541,278

Amortized Intangible Assets, Net
36,494

 
39,588

Prepaid Pension Cost
1,250,658

 
1,245,505

Deferred Charges and Other Assets
61,383

 
50,370

Noncurrent Assets Held for Sale
113,312

 

Total Assets
$
5,920,562

 
$
5,811,046

Liabilities and Equity
  

 
  

Current Liabilities
  

 
  

Accounts payable and accrued liabilities
$
393,962

 
$
505,699

Income taxes payable
55,278

 

Deferred income taxes
70,447

 
58,411

Deferred revenue
393,289

 
366,831

Dividends declared
19,051

 

Short-term borrowings
49,389

 
3,168

Total Current Liabilities
981,416

 
934,109

Postretirement Benefits Other Than Pensions
35,709

 
36,219

Accrued Compensation and Related Benefits
207,346

 
211,526

Other Liabilities
84,420

 
86,000

Deferred Income Taxes
779,803

 
778,735

Long-Term Debt
403,160

 
447,608

Total Liabilities
2,491,854

 
2,494,197

Redeemable Noncontrolling Interest
5,579

 
5,896

Redeemable Preferred Stock
10,665

 
10,665

Preferred Stock

 

Common Stockholders’ Equity
  

 
  

Common stock
20,000

 
20,000

Capital in excess of par value
289,402

 
288,129

Retained earnings
4,877,200

 
4,782,777

Accumulated other comprehensive income, net of tax
 
 
  

Cumulative foreign currency translation adjustment
25,759

 
25,013

Unrealized gain on available-for-sale securities
190,776

 
173,663

Unrealized gain on pensions and other postretirement plans
497,075

 
501,446

Cash flow hedge
(525
)
 
(628
)
Cost of Class B common stock held in treasury
(2,487,492
)
 
(2,490,333
)
Total Common Stockholders’ Equity
3,412,195

 
3,300,067

Noncontrolling Interests
269

 
221

Total Equity
3,412,464

 
3,300,288

Total Liabilities and Equity
$
5,920,562

 
$
5,811,046


See accompanying Notes to Condensed Consolidated Financial Statements.

3



GRAHAM HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  
Three Months Ended 
 March 31
(in thousands)
2014
 
2013
Cash Flows from Operating Activities
  
 
  
Net Income
$
132,305

 
$
5,259

Adjustments to reconcile net income to net cash provided by operating activities:
  
 
  
Depreciation of property, plant and equipment
54,124

 
65,973

Amortization of intangible assets
3,081

 
3,717

Net pension (benefit) expense
(16,600
)
 
4,390

Early retirement program expense
4,490

 
14,258

Foreign exchange (gain) loss
(5,037
)
 
4,614

Equity in earnings of affiliates, net of distributions
(4,052
)
 
(3,408
)
Provision for deferred income taxes
4,660

 
1,877

Net (gain) loss on sale of property, plant and equipment
(127,259
)
 
327

Change in assets and liabilities:
 
 
 
Decrease in accounts receivable, net
23,498

 
23,020

Decrease in accounts payable and accrued liabilities
(112,811
)
 
(43,487
)
Increase in deferred revenue
25,739

 
15,529

Increase in income taxes payable
73,236

 
2,273

Decrease (Increase) in other assets and other liabilities, net
21,536

 
(20,837
)
Other
145

 
513

Net Cash Provided by Operating Activities
77,055

 
74,018

Cash Flows from Investing Activities
  
 
  
Net proceeds from sales of businesses, property, plant and equipment and other assets
157,314

 
3,636

Purchases of commercial paper, marketable equity securities and other investments
(101,241
)
 
(8,623
)
Purchases of property, plant and equipment
(36,562
)
 
(36,462
)
Investments in certain businesses, net of cash acquired
(5,608
)
 
(700
)
Other

 
(18
)
Net Cash Provided by (Used) in Investing Activities
13,903

 
(42,167
)
Cash Flows from Financing Activities
  
 
  
Dividends paid
(19,051
)
 
(222
)
Repayment of short-term borrowing

 
(240,121
)
Common shares repurchased

 
(4,196
)
Other
19

 
3,311

Net Cash Used in Financing Activities
(19,032
)
 
(241,228
)
Effect of Currency Exchange Rate Change
1,188

 
(2,402
)
Net Increase (Decrease) in Cash and Cash Equivalents
73,114

 
(211,779
)
Beginning Cash and Cash Equivalents
569,719

 
512,431

Ending Cash and Cash Equivalents
$
642,833

 
$
300,652


See accompanying Notes to Condensed Consolidated Financial Statements.

4



GRAHAM HOLDINGS COMPANY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of cable systems and television broadcasting (through the ownership and operation of six television broadcast stations).
On April 11, 2014, the Company announced that it had entered into an exchange agreement that will result in the disposal of WPLG, its Miami-based television station. The operating results of WPLG have been presented in income (loss) from discontinued operations, net of tax, for all periods presented.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three months ended March 31, 2014 and 2013 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Certain amounts in previously issued financial statements have been reclassified to conform to the current year presentation, which includes the reclassification of the results of operations of certain businesses as discontinued operations for all periods presented.
Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.
Assets Held for Sale – An asset or business is classified as held for sale when (i) management commits to a plan to sell the asset or business; (ii) the asset or business is available for immediate sale in its present condition; (iii) the asset or business is actively marketed for sale at a reasonable price; (iv) the sale is expected to be completed within one year; and (v) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets and related liabilities are aggregated and reported separately in the Company’s condensed consolidated balance sheet.
Recently Adopted and Issued Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (FASB) issued new guidance that modifies the requirements for reporting discontinued operations. The new guidance requires the reporting of the disposal of an entity or component of an entity as discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results. The new guidance also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. This guidance is effective for interim and fiscal years beginning after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued or available for issuance. The Company is in the process of evaluating the impact of this new guidance on its condensed consolidated financial statements.

5



2. DISCONTINUED OPERATIONS
On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes WPLG, the Company's Miami-based television station, a number of Berkshire shares currently held by the Company and an amount of cash in exchange for approximately 1.6 million shares of Graham Holdings Class B common stock currently owned by Berkshire. The transaction is expected to close in the second or third quarter of 2014.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses. The publishing businesses sold include The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Greater Washington Publishing, Fairfax County Times and El Tiempo Latino and related websites (Publishing Subsidiaries).
In March 2013, the Company completed the sale of The Herald which resulted in a pre-tax loss of $0.1 million that was recorded in the first quarter of 2013.
The results of operations of WPLG, the Publishing Subsidiaries and The Herald are included in the Company’s Consolidated Statements of Operations as Income (Loss) from Discontinued Operations, Net of Tax, for all periods presented. The assets of WPLG have been classified on the Company’s condensed consolidated balance sheet as assets held for sale as of March 31, 2014. The Company did not reclassify its Statements of Cash Flows or prior Condensed Consolidated Balance Sheets to reflect the various discontinued operations.
The carrying amounts of the major classes of assets included in assets held for sale at March 31, 2014 are as follows: 
 
As of
(in thousands)
March 31, 2014
Other current assets
$
397

Current Assets Held for Sale
$
397

Property, plant and equipment, net
$
30,954

Goodwill, net
60,206

Indefinite-lived intangible assets, net
22,150

Deferred charges and other assets
2

Noncurrent Assets Held for Sale
$
113,312

In the first quarter of 2014, an after-tax adjustment of $3.0 million was made to reduce the $100.0 million after-tax gain on the sale of the Publishing Subsidiaries previously reported in the fourth quarter of 2013, as a result of changes in estimates related to liabilities retained as part of the sale.
The summarized income (loss) from discontinued operations, net of tax, is presented below:
  
Three Months Ended 
 March 31
  
(in thousands)
2014
 
2013
Operating revenues
$
16,274

 
$
141,974

Operating costs and expenses
(10,134
)
 
(168,077
)
Income (loss) from discontinued operations
6,140

 
(26,103
)
Expense (benefit) from income taxes
2,026

 
(9,176
)
Net Income (Loss) from Discontinued Operations
4,114

 
(16,927
)
Loss on sales of discontinued operations
(4,737
)
 
(70
)
Benefit from income taxes on sales of discontinued operations
(1,695
)
 
(24
)
Income (Loss) from Discontinued Operations, Net of Tax
$
1,072

 
$
(16,973
)

6



The following table summarizes the 2013 quarterly operating results of the Company following the reclassification of the operations discussed above as discontinued operations:
  
March 31,
 
June 30,
 
September 30,
 
December 31,
(in thousands, except per share amounts)
2013
 
2013
 
2013
 
2013
Operating Revenues
  
 
  
 
  
 
  
Education
$
527,815

 
$
548,230

 
$
546,452

 
$
555,011

Subscriber
186,790

 
192,273

 
190,302

 
186,297

Advertising
69,122

 
79,898

 
73,549

 
87,692

Other
36,865

 
50,103

 
48,651

 
42,635

  
820,592

 
870,504

 
858,954

 
871,635

Operating Costs and Expenses
  

 
  

 
  

 
  

Operating
376,545

 
394,841

 
395,436

 
375,876

Selling, general and administrative
334,224

 
319,170

 
327,560

 
332,207

Depreciation of property, plant and equipment
58,959

 
56,879

 
54,705

 
58,954

Amortization of intangible assets
3,717

 
3,313

 
2,837

 
3,731

Impairment of goodwill and other long-lived assets

 

 

 
3,250

  
773,445

 
774,203

 
780,538

 
774,018

Income from Operations
47,147

 
96,301

 
78,416

 
97,617

Equity in earnings of affiliates, net
3,418

 
3,868

 
5,892

 
37

Interest income
510

 
522

 
642

 
590

Interest expense
(8,960
)
 
(9,048
)
 
(9,221
)
 
(8,838
)
Other (expense) income, net
(4,083
)
 
(12,858
)
 
8,110

 
(14,920
)
Income from Continuing Operations before Income Taxes
38,032

 
78,785

 
83,839

 
74,486

Provision for Income Taxes
15,800

 
31,700

 
29,900

 
24,100

Income from Continuing Operations
22,232

 
47,085

 
53,939

 
50,386

(Loss) Income from Discontinued Operations, Net of Tax
(16,973
)
 
(1,951
)
 
(23,515
)
 
106,142

Net Income
5,259

 
45,134

 
30,424

 
156,528

Net Income Attributable to Noncontrolling Interests
(97
)
 
(253
)
 
(75
)
 
(55
)
Net Income Attributable to Graham Holdings Company
5,162

 
44,881

 
30,349

 
156,473

Redeemable Preferred Stock Dividends
(444
)
 
(206
)
 
(205
)
 

Net Income Attributable to Graham Holdings Company Common Stockholders
$
4,718

 
$
44,675

 
$
30,144

 
$
156,473

Amounts Attributable to Graham Holdings Company Common Stockholders
 
 
 
 
 
 
 
Income from continuing operations
$
21,691

 
$
46,626

 
$
53,659

 
$
50,331

(Loss) Income from discontinued operations, net of tax
(16,973
)
 
(1,951
)
 
(23,515
)
 
106,142

Net income attributable to Graham Holdings Company common stockholders
$
4,718

 
$
44,675

 
$
30,144

 
$
156,473

Per Share Information Attributable to Graham Holdings Company Common Stockholders
  

 
  

 
  

 
  

Basic income per common share from continuing operations
$
2.92

 
$
6.28

 
$
7.23

 
$
6.82

Basic (loss) income per common share from discontinued operations
(2.28
)
 
(0.26
)
 
(3.16
)
 
14.38

Basic net income per common share
$
0.64

 
$
6.02

 
$
4.07

 
$
21.20

Diluted income per common share from continuing operations
$
2.92

 
$
6.28

 
$
7.22

 
$
6.80

Diluted (loss) income per common share from discontinued operations
(2.28
)
 
(0.26
)
 
(3.17
)
 
14.34

Diluted net income per common share
$
0.64

 
$
6.02

 
$
4.05

 
$
21.14



7



The following table summarizes the annual operating results of the Company following the reclassification of operations discussed above as discontinued operations:
(in thousands, except per share amounts)
2013
 
2012
Operating Revenues
  
 
  
Education
$
2,177,508

 
$
2,196,496

Subscriber
755,662

 
732,370

Advertising
310,261

 
337,621

Other
178,254

 
118,063

  
3,421,685

 
3,384,550

Operating Costs and Expenses
  

 
  

Operating
1,542,698

 
1,543,083

Selling, general and administrative
1,313,161

 
1,318,946

Depreciation of property, plant and equipment
229,497

 
240,313

Amortization of intangible assets
13,598

 
20,946

Impairment of goodwill and other long-lived assets
3,250

 
111,593

  
3,102,204

 
3,234,881

Income from Operations
319,481

 
149,669

Equity in earnings of affiliates, net
13,215

 
14,086

Interest income
2,264

 
3,393

Interest expense
(36,067
)
 
(35,944
)
Other expense, net
(23,751
)
 
(5,456
)
Income from Continuing Operations before Income Taxes
275,142

 
125,748

Provision for Income Taxes
101,500

 
73,400

Income from Continuing Operations
173,642

 
52,348

Income from Discontinued Operations, Net of Tax
63,703

 
79,839

Net Income
237,345

 
132,187

Net Income Attributable to Noncontrolling Interests
(480
)
 
(74
)
Net Income Attributable to Graham Holdings Company
236,865

 
132,113

Redeemable Preferred Stock Dividends
(855
)
 
(895
)
Net Income Attributable to Graham Holdings Company Common Stockholders
$
236,010

 
$
131,218

Amounts Attributable to Graham Holdings Company Common Stockholders
 
 
 
Income from continuing operations
$
172,307

 
$
51,379

Income from discontinued operations, net of tax
63,703

 
79,839

Net income attributable to Graham Holdings Company common stockholders
$
236,010

 
$
131,218

Per Share Information Attributable to Graham Holdings Company Common Stockholders
 
 
  

Basic income per common share from continuing operations
$
23.44

 
$
6.54

Basic income per common share from discontinued operations
8.66

 
10.85

Basic net income per common share
$
32.10

 
$
17.39

Diluted income per common share from continuing operations
$
23.40

 
$
6.54

Diluted income per common share from discontinued operations
8.65

 
10.85

Diluted net income per common share
$
32.05

 
$
17.39

3. INVESTMENTS
Investments in marketable equity securities comprised the following:
  
As of
  
March 31,
2014
 
December 31,
2013
(in thousands)
 
Total cost
$
192,736

 
$
197,718

Net unrealized gains
317,961

 
289,438

Total Fair Value
$
510,697

 
$
487,156

There were no new investments in marketable equity securities during the first three months of 2014 and 2013. During the first three months of 2014, the proceeds from sales of marketable securities were $4.2 million, of which $0.4 million will settle in April 2014, and net realized losses from such sales were $0.3 million. During the first three months of 2013, the proceeds from sales of marketable securities were $2.1 million, and net realized gains on such sales were $0.6 million.
As of March 31, 2014, the Company's investment in Corinthian Colleges, Inc., a publicly traded company, was in an unrealized loss position and the Company concluded that the loss was other-than-temporary and recorded a $0.5 million write-down of the investment in the first quarter of 2014.

8



As of March 31, 2014, the Company held investments in commercial paper totaling $99.9 million with original maturities of 91 to 180 days. These investments are included in Investments in marketable equity securities and other investments in the Condensed Consolidated Balance Sheets.
On April 1, 2014, the Company received a gross cash distribution of approximately $95 million from Classified Ventures' sale of apartments.com. In connection with this sale, the Company will record a pre-tax gain of approximately $92 million in the second quarter of 2014. The Company owns a 16.5% interest in Classified Ventures.
4. ACQUISITIONS AND DISPOSITIONS
Acquisitions.  In the first three months of 2014, the Company acquired one small business included in its education division; the purchase price allocation comprised goodwill on a preliminary basis. In the first three months of 2013, the Company acquired one small business included in other business; the purchase price allocation mostly comprised goodwill and other intangible assets.
On April 1, 2014, Celtic Healthcare acquired VNA-TIP Healthcare, a provider of home health and hospice services in Missouri and Illinois. The operating results of VNA-TIP will be included in other businesses beginning in the second quarter of 2014.
Dispositions. On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes WPLG, the Company's Miami-based television station, a number of Berkshire shares currently held by the Company and an amount of cash in exchange for approximately 1.6 million shares of Graham Holdings Class B common stock currently owned by Berkshire. The transaction is expected to close in the second or third quarter of 2014.
The specific number of shares of each company and the amount of cash will be determined on the closing date based on certain factors, including the market prices of the shares of both companies at that time. The transaction is subject to FCC approval and other customary conditions. In addition, there are certain termination rights relating to minimum trading prices of the stock of each company immediately prior to closing and to a minimum value of the television station for purposes of the transaction on the closing date.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses. The publishing businesses sold include The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Greater Washington Publishing, Fairfax County Times and El Tiempo Latino and related websites (Publishing Subsidiaries).
In March 2013, the Company completed the sale of certain assets of The Herald, a daily and Sunday newspaper headquartered in Everett, WA.
Consequently, the Company’s income from continuing operations excludes these sold businesses, which have been reclassified to discontinued operations, net of tax (see Note 2). 
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of intangible assets for the three months ended March 31, 2014 and 2013 was $3.1 million and $3.7 million, respectively. Amortization of intangible assets is estimated to be approximately $9 million for the remainder of 2014, $9 million in 2015, $7 million in 2016, $4 million in 2017, $4 million in 2018, and $3 million in 2019.
The Company's wireless licenses have been reclassified to assets held for sale at March 31, 2014.
The changes in the carrying amount of goodwill, by segment, were as follows:
(in thousands)
Education
 
Cable
Television
 
Television
Broadcasting
 
Other
Businesses
 
Total
Balance as of December 31, 2013
  
 
  
 
  
 
  
 
  
Goodwill
$
1,073,433

 
$
85,488

 
$
203,165

 
$
34,877

 
$
1,396,963

Accumulated impairment losses
(102,259
)
 

 

 
(6,082
)
 
(108,341
)
 
971,174

 
85,488

 
203,165

 
28,795

 
1,288,622

Acquisitions
5,608

 

 

 

 
5,608

Reclassification to assets held for sale

 

 
(60,205
)
 

 
(60,205
)
Foreign currency exchange rate changes
7,924

 

 

 

 
7,924

Balance as of March 31, 2014
  

 
  

 
  

 
  

 
  

Goodwill
1,086,965

 
85,488

 
142,960

 
34,877

 
1,350,290

Accumulated impairment losses
(102,259
)
 

 

 
(6,082
)
 
(108,341
)
 
$
984,706

 
$
85,488

 
$
142,960

 
$
28,795

 
$
1,241,949


9



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

 
$
152,187

 
$
512,230

 
$
1,073,433

Accumulated impairment losses

 
(102,259
)
 

 
(102,259
)
 
409,016

 
49,928

 
512,230

 
971,174

Acquisitions

 
5,608

 

 
5,608

Foreign currency exchange rate changes
(76
)
 

 
8,000

 
7,924

Balance as of March 31, 2014
  

 
  

 
  

 
  

Goodwill
408,940

 
157,795

 
520,230

 
1,086,965

Accumulated impairment losses

 
(102,259
)
 

 
(102,259
)
 
$
408,940

 
$
55,536

 
$
520,230

 
$
984,706

Other intangible assets consist of the following:
 
 
 
As of March 31, 2014
 
As of December 31, 2013
(in thousands)
Useful Life
Range
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Noncompete agreements
2–5 years
 
$
13,565

 
$
12,737

 
$
828

 
$
13,540

 
$
12,622

 
$
918

Student and customer relationships
2–10 years
 
66,163

 
41,725

 
24,438

 
72,050

 
45,718

 
26,332

Databases and technology
3–5 years
 
10,790

 
7,331

 
3,459

 
10,790

 
6,991

 
3,799

Trade names and trademarks
2–10 years
 
22,359

 
16,660

 
5,699

 
22,327

 
16,052

 
6,275

Other
1–25 years
 
9,858

 
7,788

 
2,070

 
9,836

 
7,572

 
2,264

  
  
 
$
122,735

 
$
86,241

 
$
36,494

 
$
128,543

 
$
88,955

 
$
39,588

Indefinite-Lived Intangible Assets
  
 
  
 
  

 
  

 
  
 
  

 
  

Franchise agreements
  
 
$
496,321

 
  

 
  

 
$
496,321

 
  

 
  

Wireless licenses
  
 

 
  

 
  

 
22,150

 
  

 
  

Licensure and accreditation
  
 
7,171

 
  

 
  

 
7,171

 
  

 
  

Other
  
 
15,636

 
  

 
  

 
15,636

 
  

 
  

 
  
 
$
519,128

 
 
 
 
 
$
541,278

 
 
 
 
6. DEBT
The Company’s borrowings consist of the following:
  
As of
  
March 31,
2014
 
December 31,
2013
(in thousands)
 
7.25% unsecured notes due February 1, 2019
$
397,997

 
$
397,893

AUD Revolving credit borrowing
46,231

 
44,625

Other indebtedness
8,321

 
8,258

Total Debt
452,549

 
450,776

Less: current portion
(49,389
)
 
(3,168
)
Total Long-Term Debt
$
403,160

 
$
447,608

The Company’s other indebtedness at March 31, 2014 and December 31, 2013 is at interest rates from 0% to 6% and matures from 2014 to 2017.

10



During the three months ended March 31, 2014 and 2013, the Company had average borrowings outstanding of approximately $451.2 million and $516.7 million, respectively, at average annual interest rates of approximately 7.0%. During the three months ended March 31, 2014 and 2013, the Company incurred net interest expense of $8.2 million and $8.5 million, respectively.
At March 31, 2014, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $469.0 million, compared with the carrying amount of $398.0 million. At December 31, 2013, the fair value of the Company’s 7.25% unsecured notes, based on quoted market prices, totaled $475.2 million, compared with the carrying amount of $397.9 million. The carrying value of the Company’s other unsecured debt at March 31, 2014 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 March 31, 2014
(in thousands)
Level 1
 
Level 2
 
Total
Assets
  
 
  
 
  
Money market investments (1) 
$

 
$
460,928

 
$
460,928

Marketable equity securities (2) 
510,697

 

 
510,697

Commercial paper (3)
99,893

 

 
99,893

Other current investments (4) 
11,692

 
23,312

 
35,004

Total Financial Assets
$
622,282

 
$
484,240

 
$
1,106,522

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
64,614

 
$
64,614

7.25% unsecured notes (6) 

 
469,012

 
469,012

AUD revolving credit borrowing (6) 

 
46,231

 
46,231

Interest rate swap (7) 

 
875

 
875

Total Financial Liabilities
$

 
$
580,732

 
$
580,732

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

 
$
431,836

 
$
431,836

Marketable equity securities (2) 
487,156

 

 
487,156

Other current investments (4) 
11,826

 
23,336

 
35,162

Total Financial Assets
$
498,982

 
$
455,172

 
$
954,154

Liabilities
  
 
  
 
  
Deferred compensation plan liabilities (5) 
$

 
$
67,603

 
$
67,603

7.25% unsecured notes (6) 

 
475,224

 
475,224

AUD revolving credit borrowing (6) 

 
44,625

 
44,625

Interest rate swap (7) 

 
1,047

 
1,047

Total Financial Liabilities
$

 
$
588,499

 
$
588,499

____________
(1)
The Company’s money market investments are included in cash, cash equivalents and restricted cash.
(2)
The Company’s investments in marketable equity securities are classified as available-for-sale.
(3)
The Company's commercial paper investments have original maturities greater than 90 days, but less than 180 days.
(4)
Includes U.S. Government Securities, corporate bonds, mutual funds and time deposits (with original maturities greater than 90 days, but less than one year).
(5)
Includes Graham Holdings Company's Deferred Compensation Plan and supplemental savings plan benefits under the Graham Holdings Company's Supplemental Executive Retirement Plan, which are included in accrued compensation and related benefits.
(6)
See Note 6 for carrying amount of these notes and borrowing.
(7)
Included in Other liabilities. The Company utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates.
8. EARNINGS PER SHARE

12



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 
 March 31
(in thousands, except per share amounts)
2014
 
2013
Numerator:
 
 
 
Numerator for basic earnings per share:
  
 
  
Income from continuing operations attributable to Graham Holdings Company common stockholders
$
131,026

 
$
21,691

Less: Dividends-common stock outstanding and unvested restricted shares
(37,675
)
 

Undistributed earnings
93,351

 
21,691

Percent allocated to common stockholders
98.33
%
 
97.38
%
 
91,790

 
21,122

Add: Dividends-common stock outstanding
37,044

 

Numerator for basic earnings per share
$
128,834

 
$
21,122

Add: Additional undistributed earnings due to dilutive stock options
5

 

Numerator for diluted earnings per share
$
128,839

 
$
21,122

Denominator:
 
 
 
Denominator for basic earnings per share:


 


Weighted average shares outstanding
7,275

 
7,227

Add: Effect of dilutive stock options
26

 
1

Denominator for diluted earnings per share
7,301

 
7,228

Graham Holdings Company Common Stockholders:
  
 
  
Basic earnings per share from continuing operations
$
17.71

 
$
2.92

Diluted earnings per share from continuing operations
$
17.65

 
$
2.92

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 
 March 31
(in thousands)
 
2014
 
2013
Weighted average restricted stock
 
51

 
38

For the first quarter of 2014 and 2013, the diluted earnings per share amounts exclude the effects of 5,000 and 85,861 stock options outstanding, respectively, as their inclusion would have been antidilutive. The first quarter of 2014 and 2013 diluted earnings per share amounts exclude the effects of 5,550 and 52,200 restricted stock awards, respectively, as their inclusion would have been antidilutive.
In the first quarter of 2014, the Company declared regular dividends totaling $5.10 per share. No dividends were paid in 2013.
9. PENSION AND POSTRETIREMENT PLANS

13



Defined Benefit Plans. The total (benefit) cost arising from the Company’s defined benefit pension plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended March 31
(in thousands)
2014
 
2013
Service cost
$
7,537

 
$
13,365

Interest cost
13,082

 
14,291

Expected return on assets
(30,263
)
 
(26,322
)
Amortization of prior service cost
82

 
909

Recognized actuarial (gain) loss
(7,038
)
 
2,147

Net Periodic (Benefit) Cost
(16,600
)
 
4,390

Early retirement programs expense
4,490

 
14,258

Total (Benefit) Cost
$
(12,110
)
 
$
18,648

For the three months ended March 31, 2014 and 2013, the net periodic (benefit) cost for the Company's pension plans, as reported above, includes costs of $0.1 million and $7.1 million, respectively, reported in discontinued operations. The early retirement programs expense for the March 31, 2013 is included in discontinued operations.
In the first quarter of 2014, the Company recorded $4.5 million related to a Separation Incentive Program for certain Corporate employees, which will be funded from the assets of the Company's pension plan.
The Company announced a Voluntary Retirement Incentive Program in February 2013, which was offered to certain employees of the Washington Post newspaper. The total early retirement program expense for this program was $20.4 million. Of this amount, $12.0 million was recorded in the first quarter of 2013 and $8.4 million was recorded in the second quarter of 2013. In addition, the Washington Post newspaper recorded $2.3 million in special separation benefits for a group of employees in the first quarter of 2013. The early retirement program expense and special separation benefits for these programs were funded from the assets of the Company’s pension plan and are included in discontinued operations, net of tax, in 2013.
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 March 31
(in thousands)
2014
 
2013
Service cost
$
373

 
$
429

Interest cost
1,085

 
1,023

Amortization of prior service cost
12

 
14

Recognized actuarial loss
375

 
711

Net Periodic Cost
$
1,845

 
$
2,177

For the three months ended March 31, 2014 and 2013, the net periodic cost for the Company's SERP, as reported above, includes costs of $0.1 million and $0.3 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 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
  
March 31,
2014
 
December 31,
2013
  
 
U.S. equities
59
%
 
58
%
U.S. fixed income
13
%
 
12
%
International equities
28
%
 
30
%
  
100
%
 
100
%
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of March 31, 2014, the managers can invest no more than 24% of the assets in international stocks, at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.

14



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 March 31, 2014. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At March 31, 2014 and December 31, 2013, the pension plan held common stock in one investment that exceeded 10% of total plan assets. This investment was valued at $429.1 million and $382.1 million at March 31, 2014 and December 31, 2013, respectively, or approximately 18% and 16%, respectively, of total plan assets. Assets also included $219.5 million and $208.4 million of Berkshire Hathaway common stock at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $447.0 million and $398.9 million at March 31, 2014 and December 31, 2013, respectively, or approximately 19% and 17%, respectively, of total plan assets.
Other Postretirement Plans. The total cost (benefit) arising from the Company’s other postretirement plans, including a portion included in discontinued operations, consists of the following components:
  
Three Months Ended March 31
(in thousands)
2014
 
2013
Service cost
$
375

 
$
727

Interest cost
362

 
510

Amortization of prior service credit
(196
)
 
(1,360
)
Recognized actuarial gain
(519
)
 
(541
)
Net Periodic Cost (Benefit)
22

 
(664
)
Settlement gain

 
(3,471
)
Total Cost (Benefit)
$
22

 
$
(4,135
)
For the three months ended March 31, 2013, the net periodic benefit, as reported above, includes a benefit of $0.6 million included in discontinued operations. As part of the sale of The Herald, changes were made with respect to its postretirement medical plan, resulting in a $3.5 million settlement gain that is included in discontinued operations, net of tax, for the first quarter of 2013.
10. OTHER NON-OPERATING INCOME (EXPENSE)
A summary of non-operating income (expense) is as follows:
 
 
Three Months Ended 
 March 31
(in thousands)
 
2014
 
2013
Gain on sale of building
 
$
127,670

 
$

Foreign currency gain (loss), net
 
5,037

 
(4,614
)
(Losses) gains on sales or write-downs of marketable equity securities
 
(785
)
 
542

Other, net
 
1,351

 
(11
)
Total Other Non-Operating Income (Expense)
 
$
133,273

 
$
(4,083
)
On March 27, 2014, the Company completed the sale of its headquarters building for approximately $158 million. In connection with the sale, the Company recorded a $127.7 million pre-tax gain in the first quarter of 2014. The headquarters building is used primarily by The Washington Post newspaper, which was sold by the Company in October 2013.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The other comprehensive income consists of the following components:
 

15



  
Three Months Ended March 31
  
2014
 
2013
  
Before-Tax
 
Income
 
After-Tax
 
Before-Tax
 
Income
 
After-Tax
(in thousands)
Amount
 
Tax
 
Amount
 
Amount
 
Tax
 
Amount
Foreign currency translation adjustments:
  
 
  
 
  
 
  
 
  
 
  
Translation adjustments arising during the period
$
746

 

 
$
746

 
$
(4,191
)
 

 
$
(4,191
)
Unrealized gains on available-for-sale securities:
 
 
  
 
  
 
  
 
  
 
  
Unrealized gains for the period, net
27,738

 
(11,096
)
 
16,642

 
49,078

 
(19,631
)
 
29,447

Reclassification adjustment for write-down and realization of loss (gain) on sale of available-for-sale securities included in net income
785

 
(314
)
 
471

 
(551
)
 
220

 
(331
)
  
28,523

 
(11,410
)
 
17,113

 
48,527

 
(19,411
)
 
29,116

Pension and other postretirement plans:
  
 
  
 
  
 
  
 
  
 
  
Amortization of net prior service credit included in net income
(102
)
 
40

 
(62
)
 
(437
)
 
175

 
(262
)
Amortization of net actuarial (gain) loss included in net income
(7,182
)
 
2,873

 
(4,309
)
 
2,317

 
(927
)
 
1,390

Settlement gain included in net income

 

 

 
(3,471
)
 
1,388

 
(2,083
)
  
(7,284
)
 
2,913

 
(4,371
)
 
(1,591
)
 
636

 
(955
)
Cash flow hedge:
 
 
  
 
  
 
  
 
  
 
  
Gain for the period
172

 
(69
)
 
103

 
30

 
(12
)
 
18

Other Comprehensive Income
$
22,157

 
$
(8,566
)
 
$
13,591

 
$
42,775

 
$
(18,787
)
 
$
23,988

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

 
$
173,663

 
$
501,446

 
$
(628
)
 
$
699,494

Other comprehensive income (loss) before reclassifications
746

 
16,642

 

 
(24
)
 
17,364

Net amount reclassified from accumulated other comprehensive income

 
471

 
(4,371
)
 
127

 
(3,773
)
Other comprehensive income, net of tax
746

 
17,113

 
(4,371
)
 
103

 
13,591

Balance as of March 31, 2014
$
25,759

 
$
190,776

 
$
497,075

 
$
(525
)
 
$
713,085

The amounts and line items of reclassifications out of Accumulated Other Comprehensive Income are as follows:
  
Three Months Ended 
 March 31
 
Affected Line Item in the Condensed Consolidated Statement of Operations
  
 
(in thousands)
2014
 
2013
 
Unrealized Gains on Available-for-sale Securities:
  
 
  
 
  
Realized loss (gains) for the period
$
785

 
$
(551
)
 
Other income (expense), net
  
(314
)
 
220

 
Provision for Income Taxes
  
471

 
(331
)
 
Net of Tax
Pension and Other Postretirement Plans:
 
 
  
 
  
Amortization of net prior service credit
(102
)
 
(437
)
 
(1)
Amortization of net actuarial (gain) loss
(7,182
)
 
2,317

 
(1)
Settlement gain

 
(3,471
)
 
(1)
  
(7,284
)
 
(1,591
)
 
Before tax
  
2,913

 
636

 
Provision for Income Taxes
  
(4,371
)
 
(955
)
 
Net of Tax
Cash Flow Hedge
 
 
  
 
  
  
212

 
186

 
Interest expense
  
(85
)
 
(74
)
 
Provision for Income Taxes
  
127

 
112

 
Net of Tax
Total reclassification for the period
$
(3,773
)
 
$
(1,174
)
 
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.
ED Program Reviews.  The U.S. Department of Education (ED) undertakes program reviews at Title IV participating institutions. Currently, there are three open program reviews, including Broomall, PA, as the Company is awaiting the ED’s final program review report. The Company does not expect the final program review reports to have a material impact on KHE; however, the results of these open reviews and their impact on Kaplan’s operations are uncertain.
The 90/10 Rule.  Under regulations referred to as the 90/10 rule, a KHE school would lose its eligibility to participate in Title IV programs for a period of at least two fiscal years if the institution derives more than 90% of its receipts from Title IV programs, as calculated on a cash basis in accordance with the Higher Education Act and applicable ED regulations, in each of two consecutive fiscal years. An institution with Title IV receipts exceeding 90% for a single fiscal year would be placed on provisional certification and may be subject to other enforcement measures. The 90/10 rule calculations are performed for each OPEID unit. KHE is taking various measures to reduce the percentage of its receipts attributable to Title IV funds, including modifying student payment options; emphasizing direct-pay and employer-paid education programs; encouraging students to carefully evaluate the amount of their Title IV borrowing; eliminating some programs; cash-matching; and developing and offering additional non-Title IV-eligible certificate preparation, professional development and continuing education programs,
some of which programs were acquired by certain KHE campuses in 2013 from other Kaplan businesses. Absent the adoption of the changes mentioned above, and if current trends continue, management estimates that in 2014, three of the KHE Campuses’ OPEID units, representing approximately 1.7% of KHE’s 2013 revenues, could have a 90/10 ratio over 90%. As noted above, Kaplan is taking steps to address compliance with the 90/10 rule; however, there can be no guarantee that these measures will be adequate to prevent the 90/10 ratio at some of the schools from exceeding 90% in the future.
13. BUSINESS SEGMENTS
The Company has six reportable segments: Kaplan Higher Education, Kaplan Test Preparation, Kaplan International, cable, television broadcasting and other businesses.
Television Broadcasting. In April 2014, the Company announced it has entered into an agreement to sell WPLG, a television station serving the Miami market. WPLG results are included in discontinued operations, net of tax, for all periods presented. The television broadcasting segment operating results have been restated to reflect this change.

16



 The following table summarizes the quarterly financial information related to each of the Company’s business segments:
  
March 31,
 
March 31,
 
June 30,
 
September 30,
 
December 31,
(in thousands)
2014
 
2013
 
2013
 
2013
 
2013
Operating Revenues
 
 
  
 
  
 
  
 
  
Education
$
526,174

 
$
527,815

 
$
548,230

 
$
546,452

 
$
555,011

Cable
203,921

 
200,138

 
204,550

 
202,381

 
200,240

Television broadcasting
85,651

 
68,902

 
80,228

 
73,488

 
85,688

Other businesses
24,913

 
23,814

 
37,572

 
36,682

 
30,735

Corporate office

 

 

 

 

Intersegment elimination
(98
)
 
(77
)
 
(76
)
 
(49
)
 
(39
)
  
$
840,561

 
$
820,592

 
$
870,504

 
$
858,954

 
$
871,635

Income (Loss) From Operations
 
 
 
 
 
 
 
 
 
Education
$
2,522

 
$
(4,056
)
 
$
23,726

 
$
17,035

 
$
14,596

Cable
41,162

 
36,613

 
44,710

 
39,715

 
48,697

Television broadcasting
44,386

 
29,111

 
39,235

 
32,847

 
43,999

Other businesses
(10,747
)
 
(8,542
)
 
(5,968
)
 
(5,046
)
 
(3,912
)
Corporate office
2,206

 
(5,979
)
 
(5,402
)
 
(6,135
)
 
(5,763
)
  
$
79,529

 
$
47,147

 
$
96,301

 
$
78,416

 
$
97,617

Equity in Earnings of Affiliates, Net
4,052

 
3,418

 
3,868

 
5,892

 
37

Interest Expense, Net
(8,221
)
 
(8,450
)
 
(8,526
)
 
(8,579
)
 
(8,248
)
Other Income (Expense), Net
133,273

 
(4,083
)
 
(12,858
)
 
8,110

 
(14,920
)
Income from Continuing Operations Before Income Taxes
$
208,633

 
$
38,032

 
$
78,785

 
$
83,839

 
$
74,486

Depreciation of Property, Plant and Equipment
 
 
 
 
 
 
 
 
 
Education
$
16,444

 
$
22,588

 
$
20,064

 
$
18,978

 
$
28,134

Cable
33,787

 
33,733

 
33,964

 
32,946

 
27,541

Television broadcasting
1,994

 
2,209

 
2,214

 
2,181

 
2,142

Other businesses
520

 
429

 
577

 
555

 
616

Corporate office
500

 

 
60

 
45

 
521

  
$
53,245

 
$
58,959

 
$
56,879

 
$
54,705

 
$
58,954

Amortization of Intangible Assets and Impairment of Goodwill and Other Long-Lived Assets
 
 
 
 
 
 
 
 
 
Education
$
2,288

 
$
2,518

 
$
2,363

 
$
2,287

 
$
6,044

Cable
35

 
50

 
57

 
61

 
52

Television broadcasting

 

 

 

 

Other businesses
758

 
1,149

 
893

 
489

 
885

Corporate office

 

 

 

 

  
$
3,081

 
$
3,717

 
$
3,313

 
$
2,837

 
$
6,981

Net Pension (Credit) Expense
 
 
  

 
  

 
  

 
  

Education
$
4,143

 
$
4,106

 
$
4,231

 
$
4,169

 
$
4,032

Cable
864

 
882

 
913

 
973

 
940

Television broadcasting
320

 
1,344

 
1,250

 
1,297

 
70

Other businesses
164

 
116

 
134

 
173

 
187

Corporate office
(17,679
)
 
(9,121
)
 
(9,129
)
 
(9,299
)
 
(14,287
)
  
$
(12,188
)
 
$
(2,673
)
 
$
(2,601
)
 
$
(2,687
)
 
$
(9,058
)

17



The following table summarizes annual financial information related to each of the Company’s business segments:
  
Year Ended December 31
(in thousands)
2013
 
2012
Operating Revenues
  
 
  
Education
$
2,177,508

 
$
2,196,496

Cable television
807,309

 
787,117

Television broadcasting
308,306

 
328,396

Other businesses
128,803

 
72,837

Corporate office

 

Intersegment elimination
(241
)
 
(296
)
  
$
3,421,685

 
$
3,384,550

Income (Loss) from Operations
 
 
 
Education
$
51,301

 
$
(105,368
)
Cable television
169,735

 
154,581

Television broadcasting
145,192

 
162,131

Other businesses
(23,468
)
 
(33,010
)
Corporate office
(23,279
)
 
(28,665
)
  
$
319,481

 
$
149,669

Equity in Earnings of Affiliates, Net
13,215

 
14,086

Interest Expense, Net
(33,803
)
 
(32,551
)
Other Expense, Net
(23,751
)
 
(5,456
)
Income from Continuing Operations Before Income Taxes
$
275,142

 
$
125,748

Depreciation of Property, Plant and Equipment
 
 
 
Education
$
89,764

 
$
101,183

Cable television
128,184

 
129,107

Television broadcasting
8,746

 
9,253

Other businesses
2,177

 
770

Corporate office
626

 

  
$
229,497

 
$
240,313

Amortization of Intangible Assets and Impairment of Goodwill and Other Intangible Assets
  

 
  

Education
$
13,212

 
$
129,312

Cable television
220

 
211

Television broadcasting

 

Other businesses
3,416

 
3,016

Corporate office

 

  
$
16,848

 
$
132,539

Net Pension (Credit) Expense
  

 
  

Education
$
16,538

 
$
11,584

Cable television
3,708

 
2,540

Television broadcasting
3,961

 
5,046

Other businesses
610

 
169

Corporate office
(41,836
)
 
(27,871
)
  
$
(17,019
)
 
$
(8,532
)
Asset information for the Company’s business segments are as follows:
  
As of
(in thousands)
March 31,
2014
 
December 31,
2013
Identifiable Assets
  
 
  
Education
$
1,745,562

 
$
1,921,037

Cable television
1,183,434

 
1,215,320

Television broadcasting
291,518

 
383,251

Other businesses
156,858

 
171,539

Corporate office
647,173

 
371,484

  
$
4,024,545

 
$
4,062,631

Investments in Marketable Equity Securities
510,697

 
487,156

Investments in Affiliates
20,953

 
15,754

Prepaid Pension Cost
1,250,658

 
1,245,505

Assets Held for Sale
113,709

 

Total Assets
$
5,920,562

 
$
5,811,046


18



The Company’s education division comprises the following operating segments:
  
Three Months Ended
  
March 31
(in thousands)
2014
 
2013
Operating Revenues
  
 
  
Higher education
$
253,779

 
$
271,860

Test preparation
67,804

 
68,943

Kaplan international
202,867

 
184,813

Kaplan corporate and other
2,014

 
2,604

Intersegment elimination
(290
)
 
(405
)
  
$
526,174

 
$
527,815

Income (Loss) from Operations
  

 
  

Higher education
$
13,144

 
$
5,101

Test preparation
(6,628
)
 
(4,345
)
Kaplan international
10,882

 
6,397

Kaplan corporate and other
(14,920
)
 
(11,340
)
Intersegment elimination
44

 
131

  
$
2,522

 
$
(4,056
)
Depreciation of Property, Plant and Equipment
  

 
  

Higher education
$
7,740

 
$
13,439

Test preparation
3,784

 
4,758

Kaplan international
4,708

 
3,996

Kaplan corporate and other
212

 
395

  
$
16,444

 
$
22,588

Amortization of Intangible Assets
$
2,288

 
$
2,518

Pension Expense
  

 
  

Higher education
$
2,628

 
$
2,807

Test preparation
722

 
640

Kaplan international
89

 
87

Kaplan corporate and other
704

 
572

  
$
4,143

 
$
4,106

Identifiable assets for the Company’s education division consist of the following:
  
As of
(in thousands)
March 31,
2014
 
December 31,
2013
Identifiable assets
  
 
  
Higher education
$
653,409

 
$
859,208

Test preparation
177,288

 
173,435

Kaplan international
866,656

 
864,507

Kaplan corporate and other
48,209

 
23,887

  
$
1,745,562

 
$
1,921,037


Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.
Results of Operations
The Company reported income from continuing operations attributable to common shares of $131.0 million ($17.65 per share) for the first quarter of 2014, compared to $21.7 million ($2.92 per share) for the first quarter of 2013. Net income attributable to common shares was $132.1 million ($17.79 per share) for the first quarter ended March 31, 2014, compared to $4.7 million ($0.64 per share) for the first quarter of last year. Net income includes $1.1 million ($0.14 per share) in income and $17.0 million ($2.28 per share) in losses from discontinued operations for the first quarter of 2014 and 2013, respectively. (Refer to “Discontinued Operations” discussion below.)
On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes, among other things, WPLG, the Company's Miami-based television station. The transaction is expected to close in the second or third quarter of 2014. As a result, income from continuing operations excludes WPLG, which has been reclassified to discontinued operations, net of tax, for all periods presented.

19



Items included in the Company’s income from continuing operations for the first quarter of 2014 are listed below:
$4.5 million in early retirement program expense at the corporate office (after-tax impact of $2.9 million, or $0.39 per share);
$127.7 million gain on the sale of the corporate headquarters building (after-tax impact of $81.8 million, or $11.13 per share); and
$5.0 million in non-operating unrealized foreign currency gains (after-tax impact of $3.2 million, or $0.44 per share).  
Items included in the Company’s income from continuing operations for the first quarter of 2013 are listed below:
$9.4 million in severance and restructuring charges at the education division (after-tax impact of $6.1 million, or $0.85 per share); and
$4.6 million in non-operating unrealized foreign currency losses (after-tax impact of $3.0 million, or $0.41 per share).
Revenue for the first quarter of 2014 was $840.6 million, up 2% from $820.6 million in the first quarter of 2013. The Company reported operating income of $79.5 million in the first quarter of 2014, compared to $47.1 million in the first quarter of 2013. Revenues increased at the television broadcasting and cable divisions, while revenues at the education division were flat. Operating results improved in the first quarter at the television broadcasting, cable and education divisions.
Division Results
Education  
Education division revenue totaled $526.2 million for the first quarter of 2014, essentially flat compared with revenue of $527.8 million for the first quarter of 2013. Kaplan reported first quarter 2014 operating income of $2.5 million, compared to an operating loss of $4.1 million in the first quarter of 2013. Operating results for the first quarter of 2013 include restructuring costs of $9.4 million.
A summary of Kaplan’s operating results for the first quarter of 2014 compared to 2013 is as follows:
 
 
Three Months Ended
 
 
  
 
March 31
 
  
(in thousands)
 
2014
 
2013
 
% Change
Revenue
 
  
 
  
 
  
Higher education
 
$
253,779

 
$
271,860

 
(7
)
Test preparation
 
67,804

 
68,943

 
(2
)
Kaplan international
 
202,867

 
184,813

 
10

Kaplan corporate
 
2,014

 
2,604

 
(23
)
Intersegment elimination
 
(290
)
 
(405
)
 

  
 
$
526,174

 
$
527,815

 
0

Operating Income (Loss)
 
  

 
  

 
  

Higher education
 
$
13,144

 
$
5,101

 

Test preparation
 
(6,628
)
 
(4,345
)
 
(53
)
Kaplan international
 
10,882

 
6,397

 
70

Kaplan corporate
 
(12,632
)
 
(8,822
)
 
(43
)
Amortization of intangible assets
 
(2,288
)
 
(2,518
)
 
9

Intersegment elimination
 
44

 
131

 

  
 
$
2,522

 
$
(4,056
)
 

Kaplan Higher Education (KHE) includes Kaplan’s domestic postsecondary education businesses, made up of fixed-facility colleges and online postsecondary and career programs. KHE also includes the domestic professional training and other continuing education businesses.
In 2012, KHE began implementing plans to close or merge 13 ground campuses, consolidate other facilities and reduce its workforce. In connection with these and other plans, KHE incurred $9.1 million in restructuring costs in the first quarter of 2013, including accelerated depreciation ($3.6 million), severance ($0.9 million), lease obligation losses ($3.7 million) and other items ($0.9 million). At the end of 2013, the KHE campus closures or mergers had been largely completed, though two campuses remain to be closed in the first half of 2014. In April 2014, KHE announced plans to close two additional ground campuses that will be completed by the end of 2015.

20



In the first quarter of 2014, KHE revenue declined 7% due largely to declines in average enrollments that reflect weaker market demand over the past year, lower average tuition and the impact of closed campuses. KHE operating income increased in the first quarter of 2014 due largely to expense reductions associated with lower enrollments and recent restructuring efforts, as well as significant restructuring costs recorded in the first quarter of 2013.
New student enrollments at KHE increased 7% in the first quarter of 2014 due to growth at Kaplan University, offset by the impact of closed campuses.
Total students at March 31, 2014, were down 2% compared to March 31, 2013, but increased 9% compared to December 31, 2013. Excluding campuses closed or planned for closure, total students at March 31, 2014, were down 1% compared to March 31, 2013, but up 10% compared to December 31, 2013. A summary of student enrollments is as follows:
 
 
 
 
 
 
 
 
Excluding Campuses Closing
  
 
As of
 
As of
  
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
 
 
 
 
 
 
Kaplan University
 
47,109

 
42,816

 
45,788

 
47,109

 
42,816

 
45,788

Other Campuses
 
18,842

 
17,417

 
21,408

 
18,309

 
16,868

 
20,002

  
 
65,951

 
60,233

 
67,196

 
65,418

 
59,684

 
65,790

Kaplan University and Other Campuses’ enrollments at March 31, 2014 and 2013, by degree and certificate programs, are as follows:
  
As of March 31
  
2014
 
2013
Certificate
21.6
%
 
22.6
%
Associate’s
30.6
%
 
30.1
%
Bachelor’s
32.3
%
 
33.5
%
Master’s
15.5
%
 
13.8
%
  
100.0
%
 
100.0
%
Kaplan Test Preparation (KTP) includes Kaplan’s standardized test preparation programs. KTP revenue declined 2% for the first quarter of 2014. Enrollment increased 2% for the first quarter of 2014 due to growth in health and bar review programs, offset by declines in graduate programs. KTP operating results declined in the first three months of 2014 due largely to decreased revenues. 
Kaplan International includes English-language programs and postsecondary education and professional training businesses largely outside the United States. Kaplan International revenue increased 10% in the first quarter of 2014 due to enrollment growth in the pathways programs, English-language and Singapore higher education programs. Kaplan International operating income improved in the first quarter of 2014 due to improved earnings in the pathways and English-language programs.
Kaplan corporate represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities.
Kaplan continues to evaluate its cost structure and may develop additional restructuring plans in 2014.
Cable
Cable division revenue increased 2% in the first quarter of 2014 to $203.9 million, from $200.1 million for the first quarter of 2013. The revenue increase for the first three months of 2014 is due to growth of the division's Internet and commercial sales revenues, recent rate increases for many subscribers and a reduction in promotional discounts. The increase was partially offset by a 2% decline in total customers and a 4% decline in total PSUs, as the cable division continues to increase its focus on high-value customers and decrease its focus on marginal customers.  
Cable division operating income grew 12% in the first quarter of 2014 to $41.2 million, from $36.6 million in the first quarter of 2013. The division’s operating income improved in the first three months of 2014 due to increased revenues and tight cost controls that resulted in a small reduction in overall operating costs.   
At March 31, 2014, total customers were down 2% and Primary Service Units (PSUs) were down 4% due to a decline in video subscribers. PSUs include about 6,100 subscribers who receive free basic cable service, primarily local governments, schools and other organizations as required by various franchise agreements. A summary of

21



PSUs and total customers is as follows:
  
As of March 31
  
2014
 
2013
Video
524,563

 
588,180

High-speed data
484,168

 
463,726

Telephony
174,876

 
185,717

Total Primary Service Units (PSUs)
1,183,607

 
1,237,623

Total Customers
714,010

 
732,010

Television Broadcasting
Revenue at the television broadcasting division increased 24% to $85.7 million in the first quarter of 2014, from $68.9 million in the same period of 2013; operating income for the first quarter of 2014 was up 52% to $44.4 million, from $29.1 million in the same period of 2013. The increase in revenue and operating income is due to a $3.1 million increase in political advertising revenue, $9.5 million in incremental winter Olympics-related advertising revenue at the Company's NBC affiliates and $4.7 million in increased retransmission revenues.
As discussed above, the television broadcasting operating results exclude WPLG, the Company's Miami-based television station, which has been reclassified to discontinued operations for all periods presented.
Other Businesses
Other businesses includes the operating results of The Slate Group and Foreign Policy Group, which publish online and print magazines and websites; SocialCode, a marketing solutions provider helping companies with marketing on social-media platforms; Celtic Healthcare, a provider of home health and hospice services; Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications, acquired by the Company in August 2013; and Trove, a digital team focused on emerging technologies and new product development.
In April 2014, Celtic Healthcare acquired the assets of VNA-TIP Healthcare of Bridgeton, MO. This acquisition will expand Celtic's home health and hospice service areas from Pennsylvania and Maryland to the Missouri and Illinois region.
Corporate Office
Corporate office includes the expenses of the Company’s corporate office, the pension credit for the Company's traditional defined benefit plan and certain obligations related to prior business dispositions. In the first quarter of 2014, the corporate office implemented a Separation Incentive Program that resulted in early retirement program expense of $4.5 million, which will be funded from the assets of the Company pension plan. Excluding early retirement program expense, the total pension credit for the Company's traditional defined benefit plan was $22.4 million and $9.2 million in the first quarter of 2014 and 2013, respectively.
Equity in Earnings (Losses) of Affiliates
The Company holds a 16.5% interest in Classified Ventures, LLC and interests in several other affiliates.
The Company’s equity in earnings of affiliates, net, was $4.1 million for the first quarter of 2014, compared to $3.4 million for the first quarter of 2013.
On April 1, 2014, the Company received a gross cash distribution of approximately $95 million from Classified Ventures’ sale of apartments.com. In connection with this sale, the Company will record a pre-tax gain of approximately $92 million in the second quarter of 2014.
Other Non-Operating Income (Expense)
The Company recorded total other non-operating income, net, of $133.3 million for the first quarter of 2014, compared to expense of $4.1 million for the first quarter of 2013. The first quarter 2014 non-operating income, net, included a pre-tax $127.7 million gain on the sale of the headquarters building, $5.0 million in unrealized foreign currency gains and other items. The first quarter 2013 non-operating expense, net, included $4.6 million in unrealized foreign currency losses and other items.
Net Interest Expense 
The Company incurred net interest expense of $8.2 million for the first quarter of 2014, compared to $8.5 million for the first quarter of 2013. At March 31, 2014, the Company had $452.5 million in borrowings outstanding at an average interest rate of 7.0%.

22



Provision for Income Taxes
The effective tax rate for income from continuing operations for the first quarter of 2014 was 37.1%, compared to 41.5% for the first quarter of 2013. The higher effective tax rate in 2013 results mostly from losses in Australia for which no tax benefit is recorded.
Discontinued Operations
On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes WPLG, the Company's Miami-based television station, a number of Berkshire shares currently held by the Company and cash in exchange for approximately 1.6 million shares of Graham Holdings Class B common stock currently owned by Berkshire. The transaction is expected to close in the second or third quarter of 2014. As a result, income from continuing operations excludes WPLG, which has been reclassified to discontinued operations, net of tax, for all periods presented.  
The specific number of shares of each company and the amount of cash will be determined on the closing date based on certain factors, including the market prices of the shares of both companies at that time. The transaction is subject to FCC approval and other customary conditions. In addition, there are certain termination rights relating to minimum trading prices of the stock of each company immediately prior to closing and to a minimum value of the television station for purposes of the transaction on the closing date.
Earnings (Loss) Per Share
The calculation of diluted earnings per share for the first quarter of 2014 was based on 7,352,230 weighted average shares outstanding, compared to 7,266,284 for the first quarter of 2013. At March 31, 2014, there were 7,401,499 shares outstanding and the Company had remaining authorization from the Board of Directors to purchase up to 159,219 shares of Class B common stock.
Kaplan Higher Education (KHE) Regulatory Matters
The Department of Education (ED) convened a negotiated rulemaking committee in September 2013 to consider a new gainful employment rule that is expected to go into effect in July 2015. On March 25, 2014, the ED released a final draft regulation. The new proposed regulation requires that each educational program meet certain debt-to-earnings ratios and programmatic level loan cohort default rate metric. Programs that fail one of these proposed metrics multiple years in a row would become ineligible for Title IV aid. The proposed rule also includes revised requirements for program approval, public disclosure on certain outcomes (graduation, placement, repayment rates, and other consumer information) and a “certification” requirement that each program is included in the school’s accreditation grant and has programmatic level accreditation if required for licensure in the occupation. A new final regulation published on or before November 1, 2014, generally would have an effective date of July 1, 2015, although the ultimate effective date is unknown at this time. The Company cannot predict the ultimate timing or substance of gainful employment regulations, nor can the Company fully predict the impact on Kaplan programs or institutions. Moreover, some of the data needed to compute program eligibility under the final draft regulation are not readily accessible; graduate incomes would be compiled by the Social Security Administration. In addition, the continuing eligibility of programs for Title IV funding may be affected by factors beyond Kaplan’s control, such as changes in the actual or deemed income level of its graduates, changes in student borrowing levels, increases in interest rates, changes in the U.S. Federal poverty income level relevant for calculating one of the proposed metrics and other factors. As a result, the ultimate outcome of gainful employment regulation and its impact on Kaplan’s operations is uncertain. The proposed regulation could cause Kaplan to eliminate or limit enrollments in certain educational programs at some or all of its schools, could result in the loss of student access to Title IV programs and could have a material adverse impact on KHE revenues, operating income and cash flows.
Financial Condition: Capital Resources and Liquidity
Acquisitions and Dispositions
Acquisitions.  In the first three months of 2014, the Company acquired one small business included in its education division; the purchase price allocation comprised goodwill on a preliminary basis. In the first three months of 2013, the Company acquired one small business included in other business; the purchase price allocation mostly comprised goodwill and other intangible assets.
On April 1, 2014, Celtic Healthcare acquired VNA-TIP Healthcare, a provider of home health and hospice services in Missouri and Illinois. The operating results of VNA-TIP will be included in other businesses beginning in the second quarter of 2014.

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Dispositions. On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes WPLG, the Company's Miami-based television station, a number of Berkshire shares currently held by the Company and an amount of cash in exchange for approximately 1.6 million shares of Graham Holdings Class B common stock currently owned by Berkshire. The transaction is expected to close in the second or third quarter of 2014.
The specific number of shares of each company and the amount of cash will be determined on the closing date based on certain factors, including the market prices of the shares of both companies at that time. The transaction is subject to FCC approval and other customary conditions. In addition, there are certain termination rights relating to minimum trading prices of the stock of each company immediately prior to closing and to a minimum value of the television station for purposes of the transaction on the closing date.
On October 1, 2013, the Company completed the sale of most of its newspaper publishing businesses. The publishing businesses sold include The Washington Post, Express, The Gazette Newspapers, Southern Maryland Newspapers, Greater Washington Publishing, Fairfax County Times and El Tiempo Latino and related websites (Publishing Subsidiaries).
In March 2013, the Company completed the sale of certain assets of The Herald, a daily and Sunday newspaper headquartered in Everett, WA.
Capital Expenditures
During the first three months of 2014, the Company’s capital expenditures totaled $36.6 million. The Company estimates that its capital expenditures will be in the range of $225 million to $250 million in 2014.
Liquidity
The Company’s borrowings increased by $1.8 million, to $452.5 million at March 31, 2014, as compared to borrowings of $450.8 million at December 31, 2013. At March 31, 2014, the Company had $642.8 million in cash and cash equivalents, compared to $569.7 million at December 31, 2013. Restricted cash at March 31, 2014, totaled $52.0 million, compared to $83.8 million at December 31, 2013. The Company had money market investments of $460.9 million and $431.8 million that are classified as cash, cash equivalents and restricted cash in the Company’s condensed consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014, the Company held investments in commercial paper totaling $99.9 million with original maturities over 90 days. The Company did not have any investments in commercial paper at December 31, 2013. For the first quarter of 2014, these investments are presented in the Company's Condensed Consolidated Statements of Cash Flows as net cash used in investing activities.
The Company’s total debt outstanding of $452.5 million at March 31, 2014 included $398.0 million of 7.25% unsecured notes due February 1, 2019, $46.2 million of AUD 50 million borrowing and $8.3 million in other debt.
On March 27, 2014, the Company completed the sale of its headquarters building for approximately $158.0 million.
On April 1, 2014, the Company received a gross cash distribution of approximately $95 million from Classified Ventures' sale of apartments.com.
On April 11, 2014, the Company and Berkshire Hathaway Inc. announced that they have signed an agreement for Berkshire to acquire a wholly-owned subsidiary of the Company that includes WPLG, the Company's Miami-based television station, a number of Berkshire shares currently held by the Company and cash in exchange for approximately 1.6 million shares of Graham Holdings Class B common stock currently owned by Berkshire. The transaction is expected to close in the second or third quarter of 2014.
In June 2011, the Company entered into a credit agreement (the Credit Agreement) providing for a U.S. $450 million, AUD 50 million four year revolving credit facility (the Facility), with each of the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (JP Morgan), and J.P. Morgan Australia Limited, as Australian Sub-Agent. The Facility will expire on June 17, 2015, unless the Company and the banks agree to extend the term.
In September 2013, Standard and Poor’s affirmed the Company's “BBB” long-term corporate debt rating and changed the outlook from Negative to Stable. In addition, S&P upgraded the Company’s short-term corporate debt rating from “A-3” to “A-2”. On March 12, 2014, Moody's placed the Company's senior unsecured rating and its Prime-2 commercial paper rating on review for downgrade. The Company’s current credit ratings are as follows:
 
Moody’s
 
Standard
& Poor’s
Long-term
Baa1
 
BBB
Short-term
Prime-2
 
A-2

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During the first three months of 2014 and 2013, the Company had average borrowings outstanding of approximately $451.2 million and $516.7 million, respectively, at average annual interest rates of approximately 7.0%. During the first three months of 2014 and 2013, the Company incurred net interest expense of $8.2 million and $8.5 million, respectively.
At March 31, 2014 and December 31, 2013, the Company had working capital of $849.4 million and $768.3 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds and to a lesser extent borrowings supported by our Credit Agreement. In management’s opinion, the Company will have sufficient liquidity to meet its various cash needs throughout 2014.
There were no significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Forward-Looking Statements
This report 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2013 Annual Report filed on Form 10-K have not otherwise changed significantly.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (the Company’s principal executive officer) and the Company’s Senior Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of March 31, 2014. Based on that evaluation, the Company’s Chief Executive Officer and Senior Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Senior Vice President-Finance, in a manner that allows timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 6. Exhibits.
Exhibit
Number 
Description 
 
 
3.1
Restated Certificate of Incorporation of the Company dated November 13, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003).
 
 
3.2
Certificate of Amendment, effective November 29, 2013, to the Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s current Report on Form 8-K dated November 29, 2013).
 
 
3.3
Certificate of Designation for the Company’s Series A Preferred Stock dated September 22, 2003 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Current Report on Form 8-K dated September 22, 2003).
 
 
3.4
By-Laws of the Company as amended and restated through November 29, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated November 29, 2013).
 
 
4.1
Second Supplemental Indenture dated January 30, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A., as successor to The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated January 30, 2009).
 
 
4.2
Four Year Credit Agreement, dated as of June 17, 2011, among the Company, JPMorgan Chase Bank, N.A., J.P. Morgan Australia Limited, Wells Fargo Bank, N.A., The Royal Bank of Scotland PLC, HSBC Bank USA, National Association, The Bank of New York Mellon, PNC Bank, National Association, Bank of America, N.A., Citibank, N.A. and The Northern Trust Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17, 2011).
 
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
 
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
 
 
32
Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer.
 
 
101
The following financial information from Graham Holdings Company Quarterly Report on Form 10-Q for the period ended March 31, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013, (ii) Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013, (iii) Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013, and (v) Notes to Condensed Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GRAHAM HOLDINGS COMPANY
 
 
(Registrant)
 
 
 
Date: May 6, 2014
 
/s/ Donald E. Graham 
 
 
Donald E. Graham,
Chairman & Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: May 6, 2014
 
/s/ Hal S. Jones
 
 
Hal S. Jones,
Senior Vice President-Finance
(Principal Financial Officer)

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