Graham Holdings Co: Form 10-Q for the period ended Sep 30, 2024

This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.

Results of Operations

The Company reported net income attributable to common shares of $72.5 million ($16.42 per share) for the third quarter of 2024, compared to a net loss of $23.0 million ($5.02 per share) for the third quarter of 2023.

Items included in the Company’s net income for the third quarter of 2024:

• $3.7 million in non-operating expenses related to Separation Incentive Programs (SIPs) at Kaplan, manufacturing and other businesses (after tax-impact of $2.7 million, or $0.62 per share);
• $9.7 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $13.2 million, or $3.00 per share);
• $30.5 million in net gains on marketable equity securities (after-tax impact of $22.7 million, or $5.14 per share);
• $2.3 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $1.7 million, or $0.39 per share);
• a non-operating gain of $3.8 million from the sale of certain businesses and websites (after-tax impact of $2.6 million, or $0.58 per share); and
• a net non-operating loss of $14.2 million from the impairment and write-up of equity and cost method investments (after-tax impact of $10.6 million, or $2.40 per share).

Items included in the Company’s net income for the third quarter of 2023:

• $98.3 million in goodwill and other long-lived asset impairment charges (after tax impact of $84.4 million, or $18.18 per share);
• $16.8 million in net gains on marketable equity securities (after-tax impact of $12.3 million, or $2.66 per share);
• $2.8 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $2.1 million, or $0.45 per share);
• a $4.6 million credit to interest expense resulting from gains realized related to the termination of interest rate swaps (after-tax impact of $3.3 million, or $0.72 per share); and
• $1.1 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $1.0 million, or $0.22 per share).

Revenue for the third quarter of 2024 was $1,207.2 million, up 9% from $1,111.5 million in the third quarter of 2023. Revenues increased at education, television broadcasting, healthcare and automotive, partially offset by declines at manufacturing and other businesses. The Company reported operating income of $81.6 million for the third quarter of 2024, compared to an operating loss of $57.1 million for the third quarter of 2023. The improvement in operating results is due to goodwill and other long-lived asset impairment charges at World of Good Brands (WGB) and Dekko in the third quarter of 2023 and increases at education, television broadcasting, healthcare and automotive, partially offset by declines at manufacturing and other businesses, excluding the impairments.

For the first nine months of 2024, the Company recorded net income attributable to common shares of $175.8 million ($39.49 per share), compared to $152.0 million ($32.14 per share) for the first nine months of 2023.

Items included in the Company’s net income for the first nine months of 2024:

• $26.3 million in goodwill and intangible asset impairment charges at WGB (after tax impact of $21.2 million, or $4.77 per share);
• $20.5 million in non-operating expenses related to a Voluntary Retirement Incentive Program (VRIP) at the television broadcasting division and the corporate office, and SIPs at Kaplan, manufacturing and other businesses (after tax-impact of $15.2 million, or $3.42 per share);
• $85.1 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $76.4 million, or $17.16 per share);
• $154.3 million in net gains on marketable equity securities (after-tax impact of $114.8 million, or $25.77 per share);
• $4.9 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $3.7 million, or $0.82 per share);
• a non-operating gain of $7.2 million from the sale of certain businesses and websites (after-tax impact of $5.3 million, or $1.19 per share); and
• a net non-operating loss of $15.0 million from the impairment and write-up of equity and cost method investments (after-tax impact of $11.1 million, or $2.50 per share).

Items included in the Company’s net income for the first nine months of 2023:

• a $4.7 million net credit related to a fair value change in contingent consideration from prior acquisitions (after-tax impact of $4.5 million, or $0.98 per share);
• $99.1 million in goodwill and other long-lived asset impairment charges (after-tax impact of $85.0 million, or $18.30 per share);
• $9.6 million in expenses related to non-operating SIPs at other businesses and the education and television broadcasting divisions (after-tax impact of $7.2 million, or $1.54 per share);
• $1.4 million in net interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $1.3 million, or $0.27 per share);
• $113.4 million in net gains on marketable equity securities (after-tax impact of $83.6 million, or $17.99 per share);
• $9.7 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $7.1 million, or $1.53 per share);
• a non-operating gain of $10.0 million on the sale of Pinna (after-tax impact of $7.4 million, or $1.59 per share);
• non-operating gain of $3.9 million from the write-up and sales of cost method investments (after-tax impact of $2.9 million, or $0.63 per share); and
• a $4.6 million credit to interest expense resulting from gains realized related to the termination of interest rate swaps (after-tax impact of $3.3 million, or $0.72 per share).

Revenue for the first nine months of 2024 was $3,545.1 million, up 9% from $3,248.1 million in the first nine months of 2023. Revenues increased at education, television broadcasting, healthcare and automotive, partially offset by declines at manufacturing and other businesses. The Company recorded operated income of $143.0 million for the first nine months of 2024, compared to $28.6 million for the first nine months of 2023. Excluding goodwill and other long-lived asset impairment charges, the improvement in operating results is due to increases at education, television broadcasting, healthcare and automotive, partially offset by declines at manufacturing and other businesses.

Division Results

Education

Education division revenue totaled $438.1 million for the third quarter of 2024, up 6% from $411.8 million for the same period of 2023. Kaplan reported operating income of $34.9 million for the third quarter of 2024, compared to $29.9 million for the third quarter of 2023.

For the first nine months of 2024, education division revenue totaled $1,283.6 million, up 8% from $1,192.1 million for the same period of 2023. Kaplan reported operating income of $100.8 million for the first nine months of 2024, compared to $83.0 million for the first nine months of 2023.

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

(in thousands)

Kaplan International includes postsecondary education, professional training and language training businesses largely outside the United States (U.S.). Kaplan International revenue increased 11% and 14% for the third quarter and first nine months of 2024, respectively (9% and 12%, respectively, on a constant currency basis). The increase is due largely to growth at Australia, Pathways, UK Professional and Singapore. Kaplan International reported operating income of $25.5 million in the third quarter of 2024, compared to $22.2 million in the third quarter of 2023. The increase is due largely to improved results at Australia, UK Professional and Pathways. Operating income increased to $82.7 million in the first nine months of 2024, compared to $64.3 million in the first nine months of 2023. The increase is due largely to improved results at Australia, UK Professional, Pathways and Singapore, partially offset by a decline at Languages.

Higher Education includes the results of Kaplan as a service provider to higher education institutions. Higher Education revenue increased 5% for the third quarter of 2024, due primarily to an increase in the Purdue Global fee recorded. Higher Education revenue declined 1% for the first nine months of 2024, due to reduced reimbursable expenses from Purdue Global. Enrollments at Purdue Global, the largest institutional client, increased 2% for the first nine months of 2024 compared to the first nine months of 2023. For the third quarter and first nine months of 2024 and 2023, Kaplan recorded a portion of the fee from Purdue Global. The Company will continue to assess the fee it records from Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the fee in the future and whether to adjust fee amounts recognized in earlier periods. Higher Education operating results improved in the third quarter of 2024 due to an increase in the Purdue Global fee recorded. Higher Education operating results declined in the first nine months of 2024 due to primarily to an increase in higher education development costs.

Supplemental Education includes Kaplan’s standardized test preparation programs and domestic professional and other continuing education businesses. Supplemental Education revenue declined 3% and 2% for the third quarter and first nine months of 2024, respectively, driven mostly by softness in Medical Licensure test preparation and publishing activities and Real Estate, offset in part by growth in Insurance, CFA, Architecture and Engineering and MCAT test preparation. Operating results improved in the third quarter and first nine months of 2024 due to cost reductions from lower headcount, partially offset by lower revenues.

Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities. Kaplan corporate and other expenses increased in the third quarter and first nine months of 2024, largely due to increased employee benefit and incentive compensation costs.

In the third quarter of 2024, the Company offered a SIP to certain employees at Supplemental Education, which was funded from the assets of the Company’s pension plan; $2.7 million in related non-operating pension expense was recorded in the third quarter of 2024.

Television Broadcasting

A summary of television broadcasting’s operating results is as follows:

(in thousands)

Graham Media Group, Inc. owns seven television stations located in Houston, TX; Detroit, MI; Orlando, FL; San Antonio, TX; Jacksonville, FL; and Roanoke, VA, as well as SocialNewsDesk, a provider of social media management tools designed to connect newsrooms with their users. Revenue at the television broadcasting division increased 25% to $145.4 million in the third quarter of 2024, from $116.1 million in the same period of 2023. The revenue increase is due to a $34.5 million increase in political advertising revenue, increases from summer Olympics-related advertising revenue at the Company’s NBC stations and an increase in digital advertising revenue, partially offset by a $3.4 million decrease in retransmission revenue and a decline in local advertising revenue. Operating income for the third quarter of 2024 was up 94% to $61.9 million, from $31.9 million in the same period of 2023, due to higher revenues and lower network fees, partially offset by increased pension expense.

Revenue at the television broadcasting division was up 8% to $374.0 million in the first nine months of 2024, from $347.8 million in the same period of 2023. The revenue increase is due to a $40.8 million increase in political advertising revenue, increases from summer Olympics-related advertising at the Company’s NBC stations and an increase in digital advertising revenue, partially offset by a decline in local advertising revenue and a $6.1 million decrease in retransmission revenue. Operating income for the first nine months of 2024 was up 31% to $122.7 million, from $93.7 million in the same period of 2023, due to higher revenues and lower network fees, partially offset by increased pension expense. While per subscriber rates from cable, satellite and OTT providers have grown, overall cable and satellite subscribers are down due to cord cutting, resulting in retransmission revenue net of network fees in 2024 expected to decline compared with 2023, and this trend is expected to continue.

In the second quarter of 2024, the Company offered a VRIP to certain employees at the television broadcasting division. The early retirement program expense for this program was funded by the assets of the Company’s pension plan; $14.3 million in related non-operating pension expense was recorded in the second quarter of 2024.

Manufacturing

A summary of manufacturing’s operating results is as follows:

(in thousands)

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

Manufacturing revenues decreased 13% and 12% in the third quarter and first nine months of 2024, respectively. The revenue decline in the third quarter of 2024 is due to largely to lower revenues at Hoover, along with declines at Dekko, partially offset by increased revenues at Forney. The revenue decline in the first nine months of 2024 is due largely to lower revenues at Hoover, and declines at Dekko and Joyce. The revenue decline at Hoover is due largely to a decrease in overall product demand, particularly for multi-family housing. Revenues declined at Dekko due to lower product demand. Overall, Hoover results included wood gains on inventory sales in the first nine months of 2024 and 2023, with gains in the first nine months of 2024 much lower than the prior year. For the third quarter of 2024, Hoover results included modest wood gains on inventory sales compared with higher wood gains on inventory sales in the third quarter of 2023. Manufacturing operating results improved in the third quarter and first nine months of 2024 due to a $47.8 million goodwill impairment charge at Dekko recorded in the third quarter 2023. Excluding this goodwill impairment charge, manufacturing results were down in the third quarter and first nine months of 2024, due largely to significant declines at Hoover and Dekko, along with declines at Joyce and Forney.

In the third quarter of 2024, the Company offered a SIP to certain employees at Dekko, which was funded by the assets of the Company’s pension plan; $0.1 million in related non-operating pension expense was recorded in the third quarter of 2024.

Healthcare

A summary of healthcare’s operating results is as follows:

(in thousands)

Graham Healthcare Group (GHG) provides home health and hospice services in seven states. GHG also provides nursing care and prescription services for patients receiving in-home infusion treatments through its 86.7% interest in CSI Pharmacy Holding Company, LLC (CSI), and other healthcare services. Healthcare revenues increased 34% and 30% for the third quarter and first nine months of 2024, respectively, due largely to significant growth at CSI from an expansion of infusion treatment offerings and patient service areas; revenues also grew in home health and hospice services and at the other healthcare businesses. The increase in GHG operating results in the third quarter and first nine months of 2024 is due to substantially higher operating results at CSI from significant revenue growth, along with improved results at home health, partially offset by increased pension expense. In January 2022, GHC implemented a pension credit retention program offering a pension credit up to $50,000 per employee, cliff vested after three years of continuous employment for certain existing employees and new employees. Effective April 1, 2024, this program is no longer being offered to new employees.

The Company also holds interests in four home health and hospice joint ventures managed by GHG, whose results are included in equity in earnings of affiliates in the Company’s Condensed Consolidated Statements of Operations. The Company recorded equity in earnings of $3.4 million and $1.9 million for the third quarter of 2024 and 2023, respectively, from these joint ventures. The Company recorded equity in earnings of $10.2 million and $6.9 million for the first nine months of 2024 and 2023, respectively.

Automotive

A summary of automotive’s operating results is as follows:

(in thousands)

Automotive includes eight automotive dealerships in the Washington, DC metropolitan area and Richmond, VA: Ourisman Lexus of Rockville, Ourisman Honda of Tysons Corner, Ourisman Jeep Bethesda, Ourisman Ford of Manassas, Toyota of Woodbridge, Ourisman Chrysler-Dodge-Jeep-Ram (CDJR) of Woodbridge and Ourisman Toyota of Richmond, which was acquired on September 27, 2023 from McGeorge Toyota. The automotive group was awarded a Kia Open Point dealership in Bethesda, MD, which commenced operations at the end of December 2023. Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships, and his team of industry professionals operate and manage the dealerships; the Company holds a 90% stake.

Revenues for the third quarter of 2024 increased 6% due largely to the Toyota of Richmond acquisition and the addition of the Kia dealership, as well as sales growth for services and parts, partially offset by a decline in new and used vehicle sales and a decline in sales of finance and insurance product offerings. Revenues for the first nine months of 2024 increased 18% due largely to the Toyota of Richmond acquisition and the addition of the Kia dealership, as well as sales growth for services and parts, partially offset by a decline in used vehicle sales and a decline in sales of finance and insurance products offerings. Operating results increased for the third quarter of 2024 due largely to earnings from the Toyota of Richmond acquisition and higher overall gross profit on services and parts, partially offset by lower overall gross margins on new vehicles and a decline in finance and insurance product sales. Operating results increased modestly for the first nine months of 2024 due largely to earnings from the Toyota of Richmond acquisition and higher overall gross profit on services and parts, partially offset by lower overall gross margins on new and used vehicles and a decline in finance and insurance product sales.

Other Businesses

A summary of revenue by category for other businesses:

(in thousands)

(1) Includes Society6 and Saatchi Art (formerly Leaf Marketplace) and Framebridge

(2) Includes World of Good Brands (formerly Leaf Media), Code3, Slate, Foreign Policy, Pinna and City Cast

(3) Includes Clyde’s Restaurant Group, Decile and Supporting Cast

Overall, revenue from other businesses declined 4% and 6% in the third quarter and first nine months of 2024, respectively. Retail revenue declined in the first nine months of 2024 largely due to lower revenue at Society6, partially offset by revenue growth at Saatchi Art and Framebridge. Media revenue declined in the first nine months of 2024 due to lower revenue at WGB and Code3, partially offset by revenue growth at Slate, Foreign Policy and City Cast. Specialty revenue increased in the first nine months of 2024 due to revenue growth at Clyde’s Restaurant Group (CRG), Decile and Supporting Cast. Excluding the former Leaf businesses, revenue from other businesses grew in the third quarter and first nine months of 2024.

Overall, operating results at other businesses improved in the first nine months of 2024 due to $26.3 million in goodwill and intangible asset impairment charges at WGB in 2024 compared to $50.2 million in goodwill impairment charges at WGB in 2023. Excluding these impairment charges and increased pension expense, operating losses at other businesses in the first nine months of 2024 were similar to the prior year.

Leaf Group

On June 14, 2021, the Company acquired Leaf Group Ltd. (Leaf), a consumer internet company headquartered in Santa Monica, CA, that builds enduring, creator-driven brands that reach passionate audiences in large lifestyle categories, including fitness and wellness (Well+Good and Livestrong.com), and home, art and design (Saatchi Art and Society6).

In the second quarter of 2023, the Company restructured Leaf into three stand-alone businesses: Society6 (formerly included in Leaf Marketplace), Saatchi Art (formerly included in Leaf Marketplace) and WGB (formerly Leaf Media). The transition process for this restructuring has involved various cost reduction initiatives, including elimination of shared services costs and functions; transitioning financial and human resources systems; and rationalizing physical facilities and data centers. In the first and second quarters of 2023, Leaf implemented a SIP to reduce the number of employees, which was funded by the assets of the Company’s pension plan; $2.9 million and $3.9 million in related non-operating pension expense was recorded in the first and second quarters of 2023, respectively. Each of Society6, Saatchi Art and WGB has continued with the transition and cost reduction process, which was largely complete at the end of the second quarter of 2024. In the third quarter of 2024, the Company implemented an additional SIP at Society6, Saatchi Art and WGB, which was funded from the assets of the Company’s pension plan; $0.5 million in related non-operating pension expense was recorded.

Revenues at Society6 and WGB declined substantially in the third quarter and first nine months of 2024. Revenue declines at Society6 are due to declines in traffic, largely driven by a significant decrease in advertising spend, as well as softer demand in the home decor category. Revenue declines at WGB are due to reduced traffic and the soft digital advertising market for programmatic. Revenues at Saatchi Art grew in the first nine months of 2024. Overall, the Leaf businesses reported significant operating losses in each of the third quarters and first nine months of 2024 and 2023.

As a result of the substantial digital advertising revenue declines and continued significant operating losses at WGB, the Company recorded a $50.2 million goodwill impairment charge in the third quarter of 2023. In the second quarter of 2024, the Company recorded an additional $26.3 million in goodwill and intangible asset impairment charges at WGB. Excluding these impairment charges, losses increased at the Leaf businesses in the third quarter and first nine months of 2024.

Clyde’s Restaurant Group

CRG owns and operates 13 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton. In July 2024, CRG opened Rye Street Tavern, a new restaurant in Baltimore, MD. Revenue increased in the third quarter and first nine months of 2024 due to the new restaurant opening and modest price increases. Operating results declined in the third quarter and first nine months of 2024. Excluding pre-opening expenses incurred for new restaurants, operating results improved modestly for the third quarter and first nine months of 2024. CRG reported an operating loss in each of the third quarters of 2024 and 2023, while CRG reported an operating profit in each of the first nine months of 2024 and 2023.

CRG plans to open new restaurants in Washington, DC and Reston, VA in late 2024 and late 2025, respectively.

Framebridge

Framebridge is a custom framing service company, headquartered in Washington, DC, with 26 retail locations, and two manufacturing facilities in Kentucky and Virginia. In the third quarter of 2024, Framebridge opened three new retail stores. Framebridge plans to open six additional retail stores in the fourth quarter of 2024 and continues to actively explore other opportunities for further store expansion.

Revenues increased in the third quarter and first nine months of 2024 due to an increase in retail revenue from same-store sales growth and operating additional retail stores compared to the same periods in 2023. Framebridge is an investment stage business and reported significant operating losses in the first nine months of 2024 and 2023. Excluding increased pension expense, operating losses at Framebridge for the first nine months of 2024 were similar to the prior year.

In the first and second quarters of 2024, Framebridge implemented a SIP, which was funded by the assets of the Company’s pension plan; $0.4 million and $1.0 million in related non-operating pension expense was recorded in the first and second quarters of 2024, respectively.

Other

Other businesses also include Code3, a performance marketing agency focused on driving performance for brands though three core elements of digital success: media, creative and commerce; Slate and Foreign Policy, which publish online and print magazines and websites; and three investment stage businesses, Decile, City Cast and Supporting Cast. Slate, Supporting Cast, City Cast, Foreign Policy and Decile reported revenue growth in the first nine months of 2024, while Code3 reported a revenue decline. Losses from City Cast, Decile, Code3, Supporting Cast and Foreign Policy in the first nine months of 2024 adversely affected operating results, while Slate reported an operating profit during this period.

Other businesses also included Pinna, which was sold in June 2023 when the Company entered into a merger agreement with Realm of Possibility, Inc. (Realm), a provider of audio entertainment services, to merge Pinna with Realm in return for a noncontrolling financial interest in the merged entity. In connection with the merger, the Company recorded a $10.0 million non-cash, non-operating gain related to the transaction. The Company’s investment in Realm is reported as an equity method investment.

In the third quarter of 2024, Slate and Decile implemented SIPs to reduce the number of employees, which were funded by the assets of the Company’s pension plan; $0.3 million in related non-operating pension expense was recorded in the third quarter of 2024. In the second quarter of 2024, Code3 implemented a SIP to reduce the number of employees, which was funded by the assets of the Company’s pension plan; $0.6 million in related non-operating pension expense was recorded in the second quarter of 2024. In the first and second quarters of 2023, Code3 implemented a SIP to reduce the number of employees, which was funded by the assets of the Company’s pension plan; $1.2 million and $0.6 million in related non-operating pension expense was recorded in the first and second quarters of 2023.

Corporate Office

Corporate office includes the expenses of the Company’s corporate office and certain continuing obligations related to prior business dispositions. Corporate office expenses in the first nine months of 2023 benefited from a $4.2 million net credit related to a fair value change in contingent consideration from a prior acquisition.

Employee Benefit Plan Changes

Effective January 1, 2024, the Company’s defined benefit pension plan was amended to provide many of the current employees who are current plan participants with an increased pension benefit, and to provide certain current employees from several business units with a new pension benefit offering. The increased and new pension benefits will be funded by the assets of the Company’s pension plan. As a result of these changes, the Company’s matching contribution to certain of its 401(k) Savings Plans was eliminated.

Equity in Earnings (Losses) of Affiliates

At September 30, 2024, the Company held an approximate 18% interest in Intersection Holdings, LLC (Intersection), a company that provides digital marketing and advertising services and products for cities, transit systems, airports, and other public and private spaces; and a 41.4% interest on a fully diluted basis in Realm. The Company also holds interests in several other affiliates, including a number of home health and hospice joint ventures managed by GHG and two joint ventures managed by Kaplan. Overall, the Company recorded equity in losses of affiliates of $13.4 million for the third quarter of 2024, compared to $0.8 million for the third quarter of 2023. These amounts include $2.3 million and $2.8 million in net losses for the third quarter of 2024 and 2023, respectively, from affiliates whose operations are not managed by the Company. The 2024 amount also includes a $14.4 million impairment loss on the Company’s investment in N2K Networks.

The Company recorded equity in losses of affiliates of $8.5 million for the first nine months of 2024, compared to $2.2 million for the first nine months of 2023. These amounts include $4.9 million and $9.7 million in net losses for the first nine months of 2024 and 2023, respectively, from affiliates whose operations are not managed by the Company. The 2024 amount also includes a $14.4 million impairment loss on the Company’s investment in N2K Networks.

Net Interest Expense and Related Balances

In September 2023, the automotive subsidiary of the Company entered into a credit agreement with Truist Bank to finance the acquisition of the Toyota of Richmond dealership and to repay the outstanding balance of the automotive subsidiary commercial notes that were maturing in 2031 and 2032. The related interest rate swaps were also terminated, resulting in a realized gain of $4.6 million recorded as a credit to interest expense during the third quarter of 2023.

The Company incurred net interest expense of $23.6 million and $130.0 million for the third quarter and first nine months of 2024, respectively, compared to $9.8 million and $33.1 million for the third quarter and first nine months of 2023, respectively.

The Company recorded interest expense of $9.7 million and $85.1 million in the third quarter and first nine months of 2024, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG. The significant adjustment recorded in the first nine months of 2024 is largely related to a substantial increase in the estimated fair value of CSI. The Company recorded interest expense of $1.1 million and $1.4 million in the third quarter and first nine months of 2023, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG.

Excluding these adjustments, the increase in net interest expense relates primarily to higher debt balances, higher interest rates on the Company’s variable debt, and increased floor plan interest expense.

At September 30, 2024, the Company had $765.2 million in borrowings outstanding at an average interest rate of 6.2%, and cash, marketable equity securities and other investments of $1,114.0 million. At September 30, 2024, the Company had $66.9 million outstanding on its $300 million revolving credit facility.

Non-operating Pension and Postretirement Benefit Income, net

The Company recorded net non-operating pension and postretirement benefit income of $38.3 million and $105.4 million for the third quarter and first nine months of 2024, respectively, compared to $35.7 million and $97.3 million for the third quarter and first nine months of 2023, respectively.

In the third quarter of 2024, the Company recorded $3.7 million in expenses related to non-operating SIPs at Kaplan, manufacturing and other businesses. In the second quarter of 2024, the Company recorded $14.8 million in expenses related to a VRIP at the television broadcasting division and the corporate office and $1.6 million in expenses related to non-operating SIPs at other businesses. In the first quarter of 2024, the Company recorded $0.4 million in expenses related to a non-operating SIP at other businesses.

In the second quarter of 2023, the Company recorded $5.5 million in expenses related to non-operating SIPs at other businesses and the education and television broadcasting divisions. In the first quarter of 2023, the Company recorded $4.1 million in expenses related to non-operating SIPs at other businesses.

Gain on Marketable Equity Securities, net

Overall, the Company recognized $30.5 million and $154.3 million in net gains on marketable equity securities in the third quarter and first nine months of 2024, respectively, compared to $16.8 million and $113.4 million in net gains on marketable equity securities in the third quarter and first nine months of 2023, respectively.

Other Non-Operating Income (Expenses)

The Company recorded total other non-operating expenses, net, of $0.5 million for the third quarter of 2024, compared to income of $3.6 million for the third quarter of 2023. The 2024 amounts included $4.6 million in foreign currency losses; partially offset by a gain of $3.8 million on the sale of certain businesses and websites, and other items. The 2023 amounts included $1.7 million in foreign currency gains; $1.1 million in gains related to the sale of businesses and contingent consideration; a $0.1 million gain on sale of a cost method investment, and other items.

The Company recorded total other non-operating income, net, of $3.0 million for the first nine months of 2024, compared to $22.5 million for the first nine months of 2023. The 2024 amounts included a gain of $7.2 million on the sale of certain businesses and websites; $0.9 million in gains related to the sale of businesses and contingent consideration, and other items; partially offset by $5.6 million in foreign currency losses and a $0.7 million impairment on cost method investments. The 2023 amounts included a non-cash gain of $10.0 million on the sale of Pinna; $4.3 million in gains related to the sale of businesses and contingent consideration; a $3.1 million fair value increase on cost method investments; $1.8 million in foreign currency gains; a $1.0 million gain on sales of cost method investments, and other items.

Provision for Income Taxes

The Company’s effective tax rate for the first nine months of 2024 and 2023 was 32.2% and 31.1%, respectively. The Company’s effective tax rate for the first nine months of 2024 is based on the estimated full year 2024 effective tax rate, which includes the adverse impact of the permanent differences related to the interest expense recorded to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG and goodwill and intangible asset impairment charges.

Earnings (Loss) Per Share

The calculation of diluted earnings (loss) per share for the third quarter and first nine months of 2024 was based on 4,384,123 and 4,422,816 weighted average shares outstanding, respectively, compared to 4,601,521 and 4,700,304, respectively, for the third quarter and first nine months of 2023. At September 30, 2024, there were 4,347,533 shares outstanding. On September 12, 2024, 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 486,132 shares as of September 30, 2024.

Other

The Company continuously assesses relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In the second quarter of 2024, the Company performed an interim impairment review at the WGB reporting unit.

As a result of continued sustained weakness in digital advertising demand resulting in substantial revenue declines and continued significant operating losses at WGB, the Company recorded a $7.5 million goodwill impairment charge at WGB. After the impairment charge, no goodwill remains at the WGB reporting unit, which is included in other businesses. Additionally, the Company recorded a $18.8 million intangible asset impairment charge at WGB.

It is possible that impairment charges, which may be material, could occur in the future, given changes in market conditions and the inherent variability in projecting future operating performance.

Financial Condition: Liquidity and Capital Resources

The Company considers the following when assessing its liquidity and capital resources:

(In thousands)

Cash generated by operations is the Company’s primary source of liquidity. The Company maintains investments in a portfolio of marketable equity securities, which is considered when assessing the Company’s sources of liquidity. An additional source of liquidity includes the undrawn portion of the Company’s $300 million revolving credit facility, amounting to $233.1 million at September 30, 2024 and the undrawn $50.0 million delayed draw term loan at the automotive subsidiary.

During the first nine months of 2024, the Company’s cash and cash equivalents increased by $74.5 million, due to cash generated from operations, the net proceeds from the sale and purchase of marketable equity securities and net proceeds from the vehicle floor plan payable, which was offset by share repurchases, repayment of borrowings, capital expenditures, and dividend payments. In the first nine months of 2024, the Company’s borrowings decreased by $46.6 million, primarily due to repayments under the revolving credit facility, term loan and commercial notes at the automotive subsidiary.

As of September 30, 2024 and December 31, 2023, the Company had money market investments of $95.5 million and $5.6 million, that are included in cash and cash equivalents. At September 30, 2024, the Company held approximately $96 million in cash and cash equivalents in businesses domiciled outside the U.S., of which approximately $8 million is not available for immediate use in operations or for distribution. Additionally, Kaplan’s business operations outside the U.S. retain cash balances to support ongoing working capital requirements, capital expenditures, and regulatory requirements. As a result, the Company considers a significant portion of the cash and cash equivalents balance held outside the U.S. as not readily available for use in U.S. operations.

At September 30, 2024, the fair value of the Company’s investments in marketable equity securities was $825.4 million, which includes investments in the common stock of four publicly traded companies. During the first nine months of 2024, the Company purchased $5.0 million of marketable equity securities and sold marketable equity securities that generated proceeds of $23.5 million. At September 30, 2024, the net unrealized gain related to the Company’s investments totaled $598.3 million.

In May 2024, the Company entered into a convertible promissory note agreement to loan N2K Networks $2.0 million. The convertible promissory note bears interest at a rate of 12% per annum and, subject to conversion provisions, all unpaid interest and principal are due by May 2027.

In April 2023, the Company entered into a term note agreement to loan Intersection $30.0 million at an interest rate of 9% per annum. The principal and interest on the note are payable in monthly installments over 5 years with the final payment due by May 2028. The outstanding balance on this loan was $26.7 million as of September 30, 2024.

The Company had working capital of $752.8 million and $619.6 million at September 30, 2024 and December 31, 2023, 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.

At September 30, 2024 and December 31, 2023, the Company had borrowings outstanding of $765.2 million and $811.8 million, respectively. The Company’s borrowings at September 30, 2024 were mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, $66.9 million in outstanding borrowings under the Company’s revolving credit facility, a term loan of $141.9 million, and real estate and capital term loans of $130.1 million at the automotive subsidiary. The Company’s borrowings at December 31, 2023 were mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, $97.9 million in outstanding borrowings under the Company’s revolving credit facility, a term loan of $147.5 million, and real estate and capital term loans of $137.6 million at the automotive subsidiary. The interest on the $400.0 million of 5.75% unsecured notes is payable semiannually on June 1 and December 1.

During the nine months ended September 30, 2024 and 2023, the Company had average borrowings outstanding of approximately $819.6 million and $737.1 million, respectively, at average annual interest rates of approximately 6.4% and 6.0%, respectively. During the nine months ended September 30, 2024 and 2023, the Company incurred net interest expense of $130.0 million and $33.1 million, respectively. Included in the interest expense for the nine months ended September 30, 2024 and 2023 is $85.1 million and $1.4 million, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest (see Notes 7 and 8).

On September 26, 2023, the Company’s automotive subsidiary entered into a credit agreement with Truist Bank to finance the acquisition of the Toyota of Richmond dealership and to repay the outstanding balances of the commercial notes maturing in 2031 and 2032. The related interest rate swap agreements maturing in 2031 and 2032 were also terminated resulting in realized gains of $4.6 million that reduced interest expense during the third quarter of 2023.

On August 19, 2024, Moody’s affirmed the Company’s credit rating and maintained the outlook as Stable. On April 2, 2024, Standard & Poor’s affirmed the Company’s credit rating and maintained the outlook as Stable.

The Company’s current credit ratings are as follows:

36

The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds, and, as needed, from borrowings under its revolving credit facility. As of September 30, 2024, the Company had $66.9 million outstanding under the $300 million revolving credit facility. In management’s opinion, the Company will have sufficient financial resources to meet its business requirements in the next 12 months, including working capital requirements, capital expenditures, interest payments, potential acquisitions and strategic investments, dividends and stock repurchases.

In summary, the Company’s cash flows for each period were as follows:

(In thousands)

Operating Activities. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The Company’s net cash flow provided by operating activities were as follows:

(In thousands)

Net cash provided by operating activities consists primarily of cash receipts from customers, less disbursements for costs, benefits, income taxes, interest and other expenses.

For the first nine months of 2024 compared to the first nine months of 2023, the increase in net cash provided by operating activities is primarily driven by the changes in operating assets and liabilities, partially offset by lower net income, net of non-cash adjustments. Changes in operating assets and liabilities were driven by a significant increase in the value of the mandatorily redeemable noncontrolling interest, decreases in vendor payments and purchases of inventory.

Investing Activities. The Company’s net cash flow used in investing activities were as follows:

(In thousands)

Capital Expenditures. The amounts reflected in the Company’s Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods, whereas the Company’s capital expenditures for the first nine months of 2024 and 2023 disclosed in Note 15 to the Condensed Consolidated Financial Statements include assets acquired during the period. The Company estimates that its capital expenditures will be in the range of $95 million to $105 million in 2024.

Net proceeds from sale of marketable equity securities. During the first nine months of 2024 and 2023, the Company sold marketable equity securities that generated proceeds of $23.5 million and $62.0 million, respectively.

The Company purchased $5.0 million and $4.6 million of marketable equity securities during the first nine months of 2024 and 2023.

Acquisitions. During the first nine months of 2024, the Company acquired two small businesses. During the first nine months of 2023, the Company acquired four business: one in automotive, two small businesses in healthcare and one in other businesses for $82.3 million in cash and contingent consideration and the assumption of floor plan payables. In September 2023, the Company’s automotive subsidiary acquired a Toyota automotive dealership, including the real property for the dealership operations. In addition to a cash payment and the assumption of $2.2 million in floor plan payables, the automotive subsidiary borrowed $37.0 million to finance the acquisition.

Loan to related party. In May 2024, the Company entered into a convertible promissory note agreement to loan N2K Networks $2.0 million. The convertible promissory note bears interest at a rate of 12% per annum and, subject to conversion provisions, all unpaid interest and principal are due by May 2027. In April 2023, the Company entered into a term note agreement to loan Intersection $30.0 million at an interest rate of 9% per annum. The principal and interest on the note are payable in monthly installments over 5 years with the final payment due by May 2028. The outstanding balance on this loan was $26.7 million as of September 30, 2024.

Financing Activities. The Company’s net cash flow used in financing activities were as follows:

(In thousands)

Common Stock Repurchases. During the first nine months of 2024, the Company purchased a total of 133,276 shares of its Class B common stock at a cost of approximately $99.1 million, including commissions and accrued excise tax of $0.9 million. On September 12, 2024, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock. The Company did not announce a ceiling price or time limit for the purchases. At September 30, 2024, the Company had remaining authorization from the Board of Directors to purchase up to 486,132 shares of Class B common stock.

Borrowings and Vehicle Floor Plan Payable. In the first nine months of 2024, the Company repaid amounts borrowed under the $300 million revolving credit facility. In September 2023, the Company’s automotive subsidiary entered into a credit agreement with Truist Bank which includes (i) a $75.2 million real estate term loan, (ii) a $65.0 million capital term loan, (iii) a $50.0 million delayed draw term loan, and (iv) establishment of a revolving floor plan credit facility. The automotive subsidiary used the net proceeds from the real estate and capital term loans to acquire an automotive dealership, including the real property for the dealership operations, and to repay the outstanding balances of the commercial notes maturing in 2031 and 2032. On July 28, 2023, the Company entered into a $150 million term loan and used the proceeds to repay the U.S. dollar borrowings of the $300 million revolving credit facility. In the first nine months of 2024 and 2023, the Company used vehicle floor plan financing to fund the purchase of new, used and service loaner vehicles at its automotive subsidiary. The proceeds from the vehicle floor plan payable fluctuates with changes in the amount of vehicle inventory held by the automotive dealerships.

Dividends. The quarterly dividend rate per share was $1.72 and $1.65 for the first nine months of 2024 and 2023, respectively. The Company expects to pay a dividend of $6.88 per share in 2024.

Other. During the first nine months of 2024 and 2023, the Company paid $5.4 million and $3.8 million, respectively, related to deferred payments from prior acquisitions. During the first nine months of 2024 and 2023, the Company increased the borrowings under its cash overdraft facilities by $2.4 million and $3.8 million, respectively.

There were no other 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, 2023.

Forward-Looking Statements

All public statements made by the Company and its representatives that are not statements of historical fact, including certain statements in this report, in the Company’s Annual Report on Form 10-K and in the Company’s

2023 Annual Report to Stockholders, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by the Company’s management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ from those stated, including, without limitation, comments about expectations related to acquisitions or dispositions or related business activities, the Company’s business strategies and objectives, the prospects for growth in the Company’s various business operations, the Company’s future financial performance, and the risks and uncertainties described in Item 1A of the Company’s Annual Report on Form 10-K. Accordingly, undue reliance should not be placed on any forward-looking statement made by or on behalf of the Company. The Company assumes no obligation to update any forward-looking statement after the date on which such statement is made, even if new information subsequently becomes available.

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 2023 Annual Report filed on Form 10-K have not otherwise changed significantly.

(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 (principal executive officer) and the Company’s Chief Financial Officer (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 September 30, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer 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 Chief Financial Officer, 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 September 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.