Graham Holdings Co (GHC) FY 2021 MD&A

OVERVIEW

Graham Holdings Company (the Company) is a diversified education and media company whose operations include educational services; television broadcasting; online, podcast, print and local TV news and other content; social-media advertising services; manufacturing; automotive dealerships; restaurants and entertainment venues; custom framing; home health and hospice care; and a consumer internet company. Education is the largest business, and through its subsidiary Kaplan, Inc., the Company provides extensive worldwide education services for individuals, schools and businesses. The Company’s second largest business is television broadcasting. In 2021, the Company completed an acquisition of a consumer internet company. The Company’s business units are diverse and subject to different trends and risks.

The Company’s education division is the largest operating division of the Company, accounting for 43% of the Company’s consolidated revenues in 2021. The Company has devoted significant resources and attention to this division for many years, given its geographic and product diversity; the investment opportunities and growth prospects during this time; and challenges related to government regulation. Kaplan is organized into the following three operating segments: Kaplan International, Kaplan Higher Education (KHE) and Supplemental Education.

Kaplan International reported revenue increases for 2021 due largely to growth at UK Professional and Pathways, partially offset by declines at Languages. Kaplan International operating results improved in 2021 due to a reduction in losses at Languages and improved results at Pathways and UK Professional.

KHE’s revenue grew in 2021, due to an increase in the Purdue University Global (Purdue Global) fee recorded and an increase in revenue from other higher education institutions. KHE recorded $34.8 million and $31.6 million in fees from Purdue Global in its Higher Education operating results in 2021 and 2020, respectively, based on an assessment of its collectability under the Transition and Operations Support Agreement (TOSA).

Supplemental Education revenues decreased in 2021 due to a decline in retail comprehensive test preparation demand and classroom-based course offerings, offset in part by growth in securities, insurance and real estate programs. Supplemental Education operating income improved in 2021 due to savings from restructuring activities implemented in 2020.

Kaplan made two acquisitions in 2021; two acquisitions in 2020; and one acquisition in 2019.

The Company’s television broadcasting division reported lower revenues and operating income in 2021, due to significant decreases in political advertising, partially offset by increased local and national advertising revenues, which were adversely impacted in 2020 by reduced demand related to the COVID-19 pandemic, increased retransmission revenues, and increased revenue from summer Olympics-related advertising revenue at the Company’s NBC affiliates. In recent years, the television broadcasting division has consistently generated significantly higher operating income amounts and operating income margins than the education division and other businesses.

The Company’s manufacturing division has provided meaningful operating cash flow over the last few years, despite reduced demand due to the COVID-19 pandemic at certain businesses. The Company’s healthcare business has grown substantially over the last few years due to internal growth and acquisitions, with a meaningful increase in operating results in the past two years.

With the recent acquisitions of Leaf, Framebridge, three automotive dealerships and Clyde’s Restaurant Group, and recent acquisitions at healthcare and manufacturing, the Company has invested in new lines of business in the last few years.

The Company generates a significant amount of cash from its businesses that is used to support its operations, pay down debt and fund capital expenditures, share repurchases, dividends, acquisitions and other investments.

RESULTS OF OPERATIONS

Net income attributable to common shares was $352.1 million ($70.45 per share) for the year ended December 31, 2021, compared to $300.4 million ($58.13 per share) for the year ended December 31, 2020.

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The COVID-19 pandemic and measures taken to prevent its spread significantly impacted the Company’s results for 2020 and 2021, largely from reduced demand for the Company’s products and services. This significant adverse impact is expected to continue into 2022, although at a reduced level. The Company’s management has taken a variety of measures to reduce costs and to implement changes to business operations. The Company cannot predict the severity or duration of the pandemic, the extent to which demand for the Company’s products and services will be adversely affected or the degree to which financial and operating results will be negatively impacted.

Items included in the Company’s net income for 2021 are listed below:

•a $3.9 million net credit related to fair value changes in contingent consideration from prior acquisitions ($0.78 per share);

•a $1.0 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the Federal Communications Commission (FCC) (after-tax impact of $0.8 million, or $0.16 per share);

•$31.6 million in goodwill and other long-lived asset impairment charges (after-tax impact of $26.0 million, or $5.19 per share);

•$12.6 million in net earnings of affiliates whose operations are not managed by the Company (after-tax impact of $9.3 million, or $1.86 per share);

•$4.1 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $4.0 million, or $0.80 per share);

•$1.1 million in expenses related to a non-operating Separation Incentive Program (SIP) at manufacturing (after-tax impact of $0.8 million, or $0.16 per share);

•$243.1 million in net gains on marketable equity securities (after-tax impact of $179.7 million, or $35.96 per share);

•Non-operating gains, net, of $13.6 million from write-ups, sales and impairments of cost and equity method investments (after-tax impact of $10.1 million, or $2.02 per share);

•$0.2 million in non-operating foreign currency losses (after-tax impact of $0.1 million, or $0.03 per share); and

•a $17.2 million deferred tax benefit arising from a change in the estimated deferred state income tax rate related to the Company’s pension and other postretirement plans ($3.45 per share).

Items included in the Company’s net income for 2020 are listed below:

•$27.9 million in goodwill and other long-lived asset impairment charges (after-tax impact of $20.2 million, or $3.92 per share);

•$16.1 million in restructuring charges at the education division (after-tax impact of $11.9 million, or $2.31 per share);

•$5.7 million in accelerated depreciation at other businesses (after-tax impact of $4.1 million, or $0.80 per share);

•a $2.9 million reduction to operating expenses from property, plant and equipment gains in connection with the spectrum repacking mandate of the FCC (after-tax impact of $2.3 million, or $0.44 per share);

•$2.1 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $1.6 million, or $0.31 per share);

•$8.5 million in interest expense in the fourth quarter to adjust the fair value of the mandatorily redeemable noncontrolling interest ($1.64 per share);

•$11.5 million in expenses related to non-operating SIP activity at the education division and other businesses (after-tax impact of $8.5 million, or $1.64 per share);

•$60.8 million in net gains on marketable equity securities (after-tax impact of $44.7 million, or $8.64 per share);

•a fourth quarter gain of $209.8 million on the sale of Megaphone (after-tax impact of $154.2 million, or $29.84 per share);

•Non-operating losses, net, of $1.5 million from impairments, sales and write-ups of cost and equity method investments (after-tax impact of $1.1 million, or $0.21 per share);

•$2.2 million in non-operating foreign currency losses (after-tax impact of $1.6 million, or $0.31 per share); and

•$2.9 million in income tax expense related to stock compensation ($0.56 per share).

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Revenue for 2021 was $3,186.0 million, up 10% from $2,889.1 million in 2020. Revenues increased at education, manufacturing, healthcare, automotive and other businesses, partially offset by a decrease at television broadcasting. Operating costs and expenses for the year increased to $3,108.6 million in 2021, from $2,788.7 million in 2020. Expenses in 2021 increased across all divisions. The Company reported operating income for 2021 of $77.4 million, compared to $100.4 million in 2020. Operating results declined at television broadcasting and manufacturing, partially offset by improvements at education and automotive.

Division Results

Education

Education division revenue in 2021 totaled $1,361.2 million, up 4% from $1,305.7 million in 2020. Kaplan reported operating income of $50.6 million for 2021, an increase from $11.6 million in 2020. The COVID-19 pandemic adversely impacted Kaplan’s operating results beginning in February 2020 and continued through 2021.

Kaplan serves a large number of students who travel to other countries to study a second language, prepare for licensure, or pursue a higher education degree. Government-imposed travel restrictions and school closures arising from COVID-19 had a significant negative impact on the ability of international students to travel and attend Kaplan’s programs, particularly Kaplan International’s Language programs. In addition, most licensing bodies and administrators of standardized exams postponed or canceled scheduled examinations due to COVID-19, resulting in a significant number of students deciding to defer their studies, negatively impacting Kaplan’s exam preparation education businesses. Overall, if COVID-19 restrictions persist, then Kaplan’s revenues and operating results in 2022 could be adversely impacted, particularly at Kaplan International Languages.

To help mitigate the adverse impact of COVID-19, Kaplan implemented a number of cost reduction and restructuring activities across its businesses. Related to these restructuring activities, for 2021, Kaplan recorded $3.3 million in lease impairment charges (including $1.9 million in property, plant and equipment write-downs). In 2020, Kaplan recorded $13.5 million in lease restructuring costs (including $3.6 million of accelerated depreciation expense) and $6.2 million in severance restructuring costs. Kaplan also recorded $12.3 million in lease impairment charges in connection with these plans in 2020 (including $2.2 million in property, plant and equipment write-downs). Further, Kaplan recorded $12.8 million in non-operating pension expense in 2020 related to workforce reductions completed in the second and third quarters.

In 2020, Kaplan also accelerated the development and promotion of various online programs and solutions, rapidly transitioned most of its classroom-based programs online and addressed the individual needs of its students and partners, substantially reducing the disruption from COVID-19 while simultaneously adding important new product offerings and operating capabilities. Further, in the fourth quarter of 2020, Kaplan combined its three primary divisions based in the United States (Kaplan Test Prep, Kaplan Professional, and Kaplan Higher Education) into one business known as Kaplan North America (KNA). This combination was designed to enhance Kaplan’s competitiveness by better leveraging its diversified academic and professional portfolio, as well as its relationships with students, universities and businesses. For financial reporting purposes, KNA is reported in two segments: Higher Education and Supplemental Education (combining Kaplan Test Prep and Kaplan Professional (U.S.) into one reporting segment).

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

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Kaplan International includes postsecondary education, professional training and language training businesses largely outside the United States. Kaplan International revenue increased 11% in 2021 (5% on a constant currency basis). The increase is due largely to growth at UK Professional and Pathways, partially offset by declines at Languages. Kaplan International reported operating income of $33.5 million in 2021, compared to $15.2 million in 2020. The increase in operating results is due to a reduction in losses at Languages and improved results at Pathways and UK Professional. Overall, Kaplan International’s operating results were negatively impacted by $43 million and $55 million in losses, respectively, incurred at Languages from continued significant COVID-19 disruptions in 2021 and 2020. In addition, Kaplan International’s 2020 results include $4.5 million of lease restructuring costs (including $1.6 million in accelerated depreciation expense) and $4.4 million of severance restructuring costs. If a continuation of travel restrictions imposed as a result of COVID-19 persists, Kaplan expects the disruption of its Languages business operating environment to continue into 2022.

Higher Education primarily includes the results of Kaplan as a service provider to higher education institutions. In 2021, Higher Education revenue increased 1% due to an increase in the Purdue Global fee recorded and an increase in revenue from other higher education institutions. In 2021 and 2020, Kaplan recorded a portion of the fee with Purdue Global based on an assessment of its collectability under the TOSA. The Company will continue to assess the collectability of the fee with 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 make adjustments to fee amounts recognized in earlier periods. During 2021 and 2020, Kaplan recorded $34.8 million and $31.6 million, respectively, in fees from Purdue Global in its Higher Education operating results. Kaplan Higher Education recorded $3.6 million in lease restructuring costs in 2020, of which $0.2 million was accelerated depreciation expense.

Supplemental Education includes Kaplan’s standardized test preparation programs and domestic professional and other continuing education businesses. In November 2021, Supplemental Education acquired two small businesses. Supplemental Education revenue decreased 6% in 2021 due to a decline in retail comprehensive test preparation demand and classroom-based course offerings, offset in part by growth in securities, insurance and real estate programs. Operating results increased 87% in 2021 due to savings from restructuring activities implemented in 2020, and $5.4 million of lease restructuring costs ($1.8 million of which was accelerated depreciation) and $1.8 million in severance restructuring costs incurred in 2020.

Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities. Overall, Kaplan corporate and other expenses increased in 2021 due to normalization of compensation costs compared to 2020, which included salary abatements and reduced incentive compensation accruals.

Television Broadcasting

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

Revenue at the television broadcasting division decreased 6% to $494.2 million in 2021, from $525.2 million in 2020. The revenue decrease is due to an $89.0 million decline in political advertising revenue, partially offset by increased local and national advertising revenues, which were adversely impacted in 2020 by reduced demand related to the COVID-19 pandemic, a $12.3 million increase in retransmission revenues, and increased revenue from summer Olympics-related advertising revenue at the Company’s NBC affiliates. The increase in local and national television advertising was from growth in the home products, health and fitness, and sports betting categories. In 2021 and 2020, the television broadcasting division recorded $1.0 million and $2.9 million, respectively, in reductions to operating expenses related to property, plant and equipment gains due to new equipment received at no cost in connection with the spectrum repacking mandate of the FCC. Operating income for 2021 was down 23% to $149.4 million, from $194.5 million in 2020, due to reduced revenues and higher network fees. While per subscriber rates from cable and satellite providers have grown, overall cable and satellite subscribers are down due to cord cutting, resulting in low growth in retransmission revenue net of network fees in 2021, which is expected to continue in the future.

Operating margin at the television broadcasting division was 30% in 2021 and 37% in 2020.

Graham Media Group’s broadcast stations remained well-positioned and competitive in their markets, despite overall viewing declines from a heightened 2020. On average for the year, KSAT in San Antonio and WJXT in Jacksonville once again ranked number one in the key 6 a.m., 6 p.m. and late newscasts among the all-important 25 to 54 demographic. WDIV in Detroit ended the year as a dominant number one at 6 p.m. and in late news, while number two in the mornings. KPRC wrapped up 2021 as a solid number two in evening and late newscasts, third at

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6 a.m. with minimal separation from competitors. WKMG grew market position in morning and late news, finishing number two while remaining third at 6 p.m. WSLS remained third in key newscasts for the year, while syndication remained a strength for WCWJ in daytime and early fringe. Our local station’s websites finished another year as the number one media sites in their respective markets.

Manufacturing

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

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 increased 10% in 2021 due to significantly increased revenues at Hoover from substantially higher wood prices in 2021 and increased revenues at Joyce/Dayton, partially offset by lower revenues at Forney and declines at Dekko from lower product demand, particularly in the commercial office electrical products and hospitality sectors. Wood prices have been highly volatile in 2021 and 2020; overall, Hoover results include gains on inventory sales in 2021 and 2020 from generally increasing wood prices during these years. Manufacturing operating results declined in 2021 due to $28.0 million in goodwill and other long-lived asset impairment charges; $26.7 million of this charge was recorded at Dekko in the third quarter of 2021, due to continued weakness in demand for certain Dekko products related to the COVID-19 pandemic, increases in labor and commodity costs and related supply chain challenges. Excluding these impairment charges, manufacturing results were down modestly in 2021 due to declines at Dekko and Forney, partially offset by overall improved results at Hoover. The Company’s manufacturing businesses are operating in a highly competitive market for production labor, resulting in substantial wage increases and higher labor costs in 2021.

In the second quarter of 2021, Dekko announced a plan to relocate its manufacturing operations in Shelton, CT to other Dekko manufacturing facilities, which was substantially completed by the end of 2021. In connection with this activity, Dekko implemented a SIP for the affected employees, resulting in $1.1 million in non-operating SIP expense recorded in the second quarter of 2021, to be funded by the assets of the Company's pension plan.

Healthcare

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

The Graham Healthcare Group (GHG) provides home health and hospice services in four states. In December 2021, GHG acquired two small businesses, one of which expanded GHG’s home health operations into Florida. GHG provides other healthcare services, including nursing care and prescription services for patients receiving in-home infusion treatments through its 75% interest in CSI Pharmacy Holding Company, LLC (CSI). Healthcare revenues increased 13% in 2021, largely due to growth at CSI and home health services. The increase in GHG operating results in 2021 is due to improved results from CSI and home health services, partially offset by a decline in results from hospice services. GHG is operating in a highly competitive market for nurses and clinical staffing, resulting in substantial compensation increases in 2021. In certain cases, this challenging competitive market has adversely impacted GHG’s ability to meet existing customer demand.

In the second quarter of 2020, GHG received $7.4 million from the Federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Provider Relief Fund. GHG did not apply for these funds; they were disbursed to GHG as a Medicare provider under the CARES Act. Under the Department of Health and Human Services guidelines, these funds may be used to offset revenue reductions and expenses incurred in connection with the COVID-19 pandemic. Of this amount, GHG recorded $5.7 million in revenue in the second and third quarters of 2020, to partially offset the impact of revenue reductions due to the COVID-19 pandemic from the curtailment of elective procedures by health systems and other factors. The remaining amount of $1.7 million was recorded as a credit to operating costs in the

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second quarter of 2020 to partially offset the impact of costs incurred to procure personal protective equipment for GHG employees and other COVID-19 related costs.

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 Consolidated Statements of Operations. In 2021 and 2020, the Company recorded equity in earnings of $10.2 million and $9.7 million, respectively, from these joint ventures.

Automotive

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

Automotive includes four automotive dealerships in the Washington, D.C. metropolitan area: Ourisman Lexus of Rockville, Ourisman Honda of Tysons Corner, Ourisman Jeep Bethesda and Ourisman Ford of Manassas. On December 28, 2021, the Company acquired Ford of Manassas located in Manassas, VA from the Battlefield Automotive Group. Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships, and his team of industry professionals operates and manages the dealerships; the Company holds a 90% stake.

Revenues for 2021 increased 27% due to sales growth at each of the three legacy dealerships, due partly to significantly reduced demand for sales and service in the first half of 2020 at the onset of the COVID-19 pandemic in March 2020, and higher average new and used car selling prices as a result of strong consumer demand and inventory shortages related to supply chain disruptions and production delays at vehicle manufacturers. In the first quarter of 2020, the Company’s automotive dealerships recorded a $6.7 million intangible asset impairment charge as a result of the pandemic and the related recessionary conditions. Operating results for 2021 improved significantly from the prior year due to increased sales and margins, in addition to the impairment charge recorded in the first quarter of 2020.

Other Businesses

Leaf Group

On June 14, 2021, the Company closed on the acquisition of all outstanding shares of common stock of Leaf Group Ltd. (Leaf) at $8.50 per share in an all cash transaction valued at approximately $322 million. Leaf Group, headquartered in Santa Monica, CA, is a consumer internet company that builds enduring, creator-driven brands that reach passionate audiences in large and growing lifestyle categories, including fitness and wellness (Well+Good, Livestrong.com and MyPlate App), and home, art and design (Saatchi Art, Society6 and Hunker).

The Leaf operating results for the period June 14, 2021 to December 31, 2021 are included in other businesses. Leaf has three major operating divisions: Society6 Group and Saatchi Art Group (Marketplace businesses) and the Media Group. Overall, Leaf reported an operating loss for the second half of 2021.

Clyde’s Restaurant Group

Clyde’s Restaurant Group (CRG) owns and operates eleven restaurants and entertainment venues in the Washington, D.C. metropolitan area, including Old Ebbitt Grill and The Hamilton. As a result of the COVID-19 pandemic, CRG temporarily closed all of its restaurants and venues in March 2020 through mid-June 2020, pursuant to government orders, maintaining limited operations for delivery and pickup. CRG recorded a $9.7 million goodwill and intangible assets impairment charge in the first quarter of 2020. In June 2020, CRG made the decision to close its restaurant and entertainment venue in Columbia, MD effective July 19, 2020, resulting in accelerated depreciation of property, plant and equipment totaling $5.7 million recorded in the second and third quarters of 2020. In December 2020, CRG temporarily closed its restaurant dining rooms in Maryland and the District of Columbia for the second time, reopening again for limited indoor dining service in mid-February 2021. Dining restrictions from government orders were substantially lifted for all of CRG’s operations by the end of the second quarter of 2021.

Overall, CRG incurred significant operating losses in 2021 and 2020 due to limited revenues and costs incurred to maintain its facilities and support its employees; however, the losses incurred in 2021 were significantly lower than the losses in 2020. While CRG operations have been adversely impacted as a result of the pandemic, both revenues and operating results improved substantially in 2021 as the year progressed.

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Framebridge

On May 15, 2020, the Company acquired Framebridge, Inc., a custom framing service company, headquartered in Washington, D.C., with two retail locations in the D.C. metropolitan area and a manufacturing facility in Richmond, KY. At the end of 2021, Framebridge had fifteen retail locations in the Washington, D.C., New York City, Atlanta, GA, Philadelphia, PA, Boston, MA and Chicago, IL areas and three manufacturing facilities in Kentucky and New Jersey. Framebridge expects to open four additional stores in the first half of 2022. Framebridge revenues in 2021 increased from the prior year; however, revenues were down modestly in the fourth quarter of 2021 due to limited production capacity related to the challenging labor market and COVID-19 related workforce absences. In the fourth quarter of 2021, Framebridge prioritized the production of holiday guaranteed orders successfully and continue to manage a significant backlog of orders into the first quarter of 2022. Framebridge is an investment stage business and reported significant operating losses in 2021.

Code3

Code3 is a performance marketing agency focused on driving performance for brands through three core elements of digital success: media, creative and commerce. Code3 revenues were relatively flat in 2021 compared to 2020, with strong growth in creative and commerce revenues, offset by a decline in marketing spending by some advertising clients. Code3 reported overall operating losses in 2021 and 2020. In the second quarter of 2021, Code3 recorded a $1.6 million lease impairment charge (including $0.4 million in property, plant and equipment write-downs). Excluding this impairment charge, Code3 reported operating income for 2021. In the second quarter of 2020, Code3 recorded a $1.5 million lease impairment charge (including $0.1 million in property, plant and equipment write-downs) in connection with a restructuring plan that included other cost reduction initiatives. These initiatives included the approval of a SIP that reduced the number of employees at Code3, resulting in $1.0 million in non-operating pension expense in the second quarter of 2020.

Megaphone

Megaphone was sold by the Company to Spotify in December 2020.

Other

Other businesses also include Slate and Foreign Policy, which publish online and print magazines and websites; and four investment stage businesses, CyberVista, Decile and Pinna, as well as City Cast, a local daily podcast business that began operations in 2021. All of these businesses reported revenue increases in 2021. Losses from each of these six businesses in 2021 adversely affected operating results.

Overall, for 2021, operating revenues for other businesses increased due largely to increases from the Leaf and Framebridge acquisitions and increases at CRG, partially offset by declines due to the sale of Megaphone in December 2020. Operating results declined in 2021 due to increased losses at Framebridge and losses at Leaf, partially offset by improvements at CRG, in addition to the goodwill and other long-lived asset impairment charges recorded in the first quarter of 2020 at CRG.

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 increased in 2021 due primarily to higher compensation costs, offset by a credit related to the fair value change in contingent consideration related to the Framebridge acquisition.

Equity in Earnings of Affiliates

At December 31, 2021, the Company held an approximate 12% 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. 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. The Company recorded equity in earnings of affiliates of $17.9 million and $6.7 million for 2021 and 2020, respectively. These amounts include $12.6 million in net earnings for 2021 and $2.1 million in net losses for 2020 from affiliates whose operations are not managed by the Company; this includes losses from the Company’s investment in Intersection for 2021. The Company also recorded $6.4 million in write-downs in equity in earnings of affiliates related to one of its investments in the third quarter of 2021 and $3.6 million in write-downs in equity in earnings of affiliates related to two of its investments in the first quarter of 2020.

The recessionary environment resulting from the COVID-19 pandemic adversely impacted the underlying businesses of Intersection due to lower marketing spending by advertising clients. The decline in revenues adversely impacted the operating results and liquidity of the business since the onset of the COVID-19 pandemic.

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The Company concluded that these events are not indicative of an other than temporary decline in the value of its investment to an amount less than its carrying value. Given the uncertain economic impact of the COVID-19 pandemic, it is possible that an other than temporary impairment charge could occur in the future should Intersection fail to execute on its operating strategy to address the decline in revenues and operating results. Further, the Company recorded a $30.5 million loss in equity earnings related to Intersection in 2021 and expects to record additional losses in 2022.

Net Interest Expense and Related Balances

In October 2021, the automotive subsidiary of the Company borrowed $24.75 million and entered into an interest rate swap to fix the interest rate on the debt at 4.118% per annum; the proceeds from this borrowing were used to repay the outstanding balance of the automotive subsidiary debt that was due on January 31, 2029. The automotive subsidiary is required to repay the loan over a 10-year period by making monthly installment payments and one final payment on October 1, 2031. Additionally, in connection with the Ford automotive dealership acquisition, in December 2021, the automotive subsidiary borrowed $22.5 million, which bears interest at SOFR plus 2.05% per annum. The automotive subsidiary is required to repay the loan over a 10-year period by making monthly installment payments.

The Company incurred net interest expense of $30.5 million in 2021, compared to $34.4 million in 2020. The Company recorded net interest expense of $4.1 million in 2021 to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG. The Company recorded interest expense of $8.5 million to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG in the fourth quarter of 2020.

At December 31, 2021, the Company had $667.5 million in borrowings outstanding at an average interest rate of 4.3%, and cash, marketable securities and other investments of $983.3 million. At December 31, 2021, the Company had $209.6 million outstanding on its $300 million revolving credit facility. At December 31, 2020, the Company had $512.6 million in borrowings outstanding at an average interest rate of 5.1%, and cash, marketable securities and other investments of $1,010.6 million.

Non-Operating Pension and Postretirement Benefit Income, Net

The Company recorded net non-operating pension and postretirement benefit income of $109.2 million in 2021, compared to $59.3 million in 2020.

In the second quarter of 2021, the Company recorded $1.1 million in expenses related to a non-operating SIP at manufacturing. In the third quarter of 2020, the Company recorded $7.8 million in expenses related to a non-operating SIP at the education division. In the second quarter of 2020, the Company recorded $6.0 million in expenses related to a non-operating SIP at the education division and other businesses.

Gain on Marketable Equity Securities, Net

The Company recognized $243.1 million and $60.8 million in net gains on marketable equity securities in 2021 and 2020, respectively.

Other Non-Operating Income

The Company recorded total other non-operating income, net, of $32.6 million in 2021, compared to $214.5 million in 2020. The 2021 amounts included $11.8 million in fair value increases on cost method investments; $9.4 million in gains on sales of cost method investments; $3.8 million in gains related to sales of businesses and contingent consideration and other items. The 2020 amounts included $213.3 million in net gains related to sales of businesses and contingent consideration; $4.2 million in fair value increases on cost method investments; $3.7 million gain on acquiring a controlling interest in an equity affiliate; $1.4 million net gain on sales of equity affiliates and other items; partially offset by $7.3 million in impairments on cost method investments; and $2.2 million in foreign currency losses.

Provision for Income Taxes

The Company’s effective tax rate for 2021 was 21.4%. The Company’s effective tax rate for 2021 was favorably impacted by a $17.2 million deferred tax adjustment arising from a change in the estimated deferred state income tax rate attributable to the apportionment formula used in the calculation of deferred taxes related to the Company’s pension and other postretirement plans. Excluding this $17.2 million benefit, the overall income tax rate for 2021 was 25.2%.

The Company’s effective tax rate for 2020 was 26.3%. In 2020, the Company recorded income tax expense related to stock compensation of $2.9 million. Excluding this $2.9 million expense, the overall income tax rate for 2020 was 25.6%.

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FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES

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

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 five-year revolving credit facility, amounting to $90.4 million at December 31, 2021.

In March 2020, the U.S. government enacted legislation, including the CARES Act to provide stimulus in the form of financial aid to businesses affected by the COVID-19 pandemic. Under the CARES Act, employers could defer the payment of the employer share of FICA taxes due for the period beginning on March 27, 2020, and ending December 31, 2020. The Company deferred $21.5 million of FICA payments under this program, with $10.7 million of the deferred payments still payable at December 31, 2021. The remaining deferred balance is due by December 31, 2022.

The CARES Act also included provisions to support healthcare providers in the form of grants and changes to Medicare and Medicaid payments. In the second quarter of 2020, GHG received $7.4 million under the CARES Act as a general distribution from the Provider Relief Fund to provide relief for lost revenues and expenses incurred in connection with COVID-19. In addition to the above distribution, in April 2020, GHG applied for and received $31.5 million under the expanded Medicare Accelerated and Advanced Payment Program, modified by the CARES Act. The Department of Health and Human Services (HHS) started to recoup this advance in April 2021 by withholding a portion of the amount reimbursed for claims submitted for services provided after the beginning of the recoupment period. During 2021, an amount of $18.9 million was withheld by HHS and the Company expects the remaining balance of $12.6 million to be withheld from claims submitted in the first half of 2022.

Governments in other jurisdictions where the Company operates also provided relief to businesses affected by the COVID-19 pandemic in the form of job retention schemes, payroll assistance, deferral of income and other tax payments, and loans. For the years ended December 31, 2021, and 2020, Kaplan has recorded benefits totaling $4.7 million and $12.2 million, respectively, related to job retention and payroll schemes, mostly at Kaplan International.

During 2021, the Company’s cash and cash equivalents decreased by $268.1 million, due to the acquisition of Leaf and several other businesses, the purchase of marketable equity securities, deferred payments on previous acquisitions, capital expenditures, dividend payments and share repurchases, which was partially offset by cash generated from operations, the net proceeds from the sale of marketable equity securities and net issuance of borrowings. In 2021, the Company’s borrowings increased by $154.9 million, due to additional borrowings under the revolving credit facility and at the automotive subsidiary, which were partially offset by repayments.

The Company had no money market investments as of December 31, 2021, compared to $268.8 million at December 31, 2020, which are included in cash and cash equivalents. At December 31, 2021, the Company held approximately $119 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 December 31, 2021, the fair value of the Company’s investments in marketable equity securities was $810.0 million, which includes investments in the common stock of seven publicly traded companies. The Company purchased $48.0 million of marketable equity securities during 2021. During 2021, the Company sold marketable equity securities that generated proceeds of $65.5 million. At December 31, 2021, the net unrealized gain related to the Company’s investments totaled $536.8 million.

The Company had working capital of $680.8 million and $824.5 million at December 31, 2021 and 2020, 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 December 31, 2021 and 2020, the Company had borrowings outstanding of $667.5 million and $512.6 million, respectively. The Company’s borrowings at December 31, 2021 were mostly from $400.0 million of 5.75%

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unsecured notes due June 1, 2026, $209.6 million in outstanding borrowings under the Company’s revolving credit facility and commercial notes of $47.0 million at the Automotive subsidiary. The Company’s borrowings at December 31, 2020 were mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, £55 million in outstanding borrowings under the Company’s revolving credit facility and a commercial note of $25.3 million at the Automotive subsidiary. The interest on $400.0 million of 5.75% unsecured notes is payable semiannually on June 1 and December 1.

During 2021 and 2020, the Company had average borrowings outstanding of approximately $545.2 million and $512.4 million, respectively, at average annual interest rates of approximately 4.8% and 5.1%, respectively. The Company incurred net interest expense of $30.5 million and $34.4 million, respectively, during 2021 and 2020. Included in the 2021 and 2020 interest expense is an amount of $4.1 million and $8.5 million, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest (see Note 11).

On June 3, 2021, Moody’s affirmed the Company’s credit rating and revised the outlook from Negative to Stable. On April 27, 2021, Standard & Poor’s affirmed the Company’s credit rating and revised the outlook from Negative to Stable.

The Company’s current credit ratings are as follows:

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 December, 31, 2021, the Company had $209.6 million outstanding under the $300 million revolving credit facility, which borrowing was used to purchase land and buildings at Kaplan International’s sixth-form college in London, U.K. and at the automotive division in the third quarter of 2021, to repay the £60 million Kaplan UK credit facility that matured at the end of June 2020 and, to a lesser extent, to repurchase stock and fund various acquisitions during the fourth quarter of 2021. 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:

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:

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 2021 compared to 2020, the decrease in net cash provided by operating activities is primarily due to changes in operating assets and liabilities, partially offset by higher net income, net of non-cash adjustments. Changes in operating assets and liabilities were driven by a decrease in the collection of accounts receivable and partial

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repayment of advances related to the CARES Act, partially offset by other increases in accounts payable and accrued liabilities and deferred revenue.

For 2020 compared to 2019, the increase in net cash provided by operating activities is primarily due to changes in operating assets and liabilities. Changes in operating assets and liabilities were driven by the collection of accounts receivable, the advance received by GHG under the expanded Medicare Accelerated and Advanced Payment Program as modified by the CARES Act, and the deferral of FICA payments under the CARES Act.

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

Acquisitions. During 2021, the Company acquired six businesses: two small businesses in its education division, two small businesses in healthcare, one new auto dealership in automotive, and all the outstanding shares of Leaf for cash and the assumption of $9.2 million in liabilities related to their pre-acquisition stock compensation plan, which will be paid in the future. Leaf is included in other businesses. During 2020, the Company acquired three businesses: two small businesses in its education division and an additional interest in Framebridge, Inc., which is included in other businesses. The Framebridge purchase price included $54.3 million in deferred payments and contingent consideration based on the acquiree achieving certain revenue milestones in the future. During 2019, the Company acquired eight businesses: one in education, three in healthcare, one in manufacturing, two in automotive, and one in other businesses for $211.8 million in cash and contingent consideration and the assumption of $25.8 million in floor plan payables.

Capital Expenditures. The 2021 capital expenditures are higher than 2020 and 2019 primarily due to land and building purchases at Kaplan International’s sixth-form college in London, U.K. and at the automotive division. The 2020 and 2019 capital expenditures include spending in connection with spectrum repacking at the Company’s television stations in Detroit, MI, Jacksonville, FL, and Roanoke, VA, as mandated by the FCC; these spectrum repacking expenditures were largely reimbursed to the Company by the FCC. The 2020 capital expenditures are lower than 2019 due to the completion of the construction of an academic and student residential facility in connection with Kaplan’s Pathways program in Liverpool, U.K. The amounts reflected in the Company’s Statements of Cash Flows are based on cash payments made during the relevant periods, whereas the Company’s capital expenditures for 2021, 2020 and 2019 disclosed in Note 19 to the Consolidated Financial Statements include assets acquired during the year. The Company estimates that its capital expenditures will be in the range of $80 million to $90 million in 2022.

Net Proceeds from Sales of Investments and Businesses. During 2021, 2020 and 2019, the Company sold marketable securities that generated proceeds of $65.5 million, $93.8 million and $19.3 million, respectively. The Company purchased $48.0 million, $20.0 million and $7.5 million of marketable equity securities during 2021, 2020 and 2019, respectively. In December 2020, the Company completed the sale of Megaphone; the total net proceeds from the sale were $223.0 million. In November 2019, Kaplan UK completed the sale of a small business which was included in Kaplan International. The Company sold its interest in Gimlet Media during February 2019; the total proceeds from the sale were $33.5 million.

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

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Borrowings and Vehicle Floor Plan Payable. In 2021, the Company borrowed against the $300 million revolving credit facility, which borrowing was used to purchase land and buildings at Kaplan International’s sixth-form college in London, U.K. and at the automotive division and, to a lesser extent, to repurchase stock and fund various acquisitions during the fourth quarter of 2021. In addition, the automotive subsidiary borrowed $47.3 million, which was used to repay the outstanding balance of the term loan due on January 31, 2029 and fund the acquisition of an automotive dealership in the fourth quarter. In 2020, the Company borrowed £60 million against the $300 million revolving credit facility and used the proceeds to repay the £60 million outstanding balance under the Kaplan Credit Agreement that matured at the end of June 2020. The Company repaid £5 million of these borrowings in the fourth quarter of 2020. In 2019, the Company had cash inflows from borrowings to fund the acquisition of two businesses at automotive and healthcare and used floor vehicle plan financing to fund the purchase of new vehicles at its automotive subsidiary.

Common Stock Repurchases. During 2021, 2020, and 2019, the Company purchased a total of 93,969, 406,112, and 3,392 shares, respectively, of its Class B common stock at a cost of approximately $55.7 million, $161.8 million, and $2.1 million, respectively. On September 10, 2020, 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 December 31, 2021, the Company had remaining authorization from the Board of Directors to purchase up to 270,182 shares of Class B common stock.

Dividends. The annual dividend rate per share was $6.04, $5.80 and $5.56 in 2021, 2020 and 2019, respectively. The Company expects to pay a dividend of $6.32 per share in 2022.

Other. In 2021, the Company paid $30.9 million related to contingent consideration and deferred payments from prior acquisitions, mostly for the 2020 acquisition of Framebridge. In March 2021, Hoover’s minority shareholders put their remaining outstanding shares to the Company, which had a redemption value of $3.5 million. In 2020, the Company received $25.1 million in proceeds from the exercise of stock options. In March 2019, a Hoover minority shareholder put some shares to the Company, which had a redemption value of $0.6 million.

Contractual Obligations. The following reflects a summary of the Company’s contractual obligations as of December 31, 2021:

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(1)    Includes commitments for the Company’s television broadcasting business that are reflected in the Company’s Consolidated Financial Statements and commitments to purchase programming to be produced in future years.

(2)    Includes purchase obligations related to employment agreements, capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the table above. Any amounts for which the Company is liable under purchase orders are reflected in the Company’s Consolidated Balance Sheets as accounts payable and accrued liabilities.

(3)    Primarily made up of multiemployer pension plan withdrawal obligations and postretirement benefit obligations other than pensions. The Company has other long-term liabilities excluded from the table above, including obligations for deferred compensation, long-term incentive plans and long-term deferred revenue.

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.

Other.  The Company does not have any off-balance-sheet arrangements or financing activities with special-purpose entities (SPEs).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the amounts reported in the financial statements. On an ongoing basis, the Company evaluates its estimates and assumptions. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

An accounting policy is considered to be critical if it is important to the Company’s financial condition and results and if it requires management’s most difficult, subjective and complex judgments in its application. For a summary of all of the Company’s significant accounting policies, see Note 2 to the Company’s Consolidated Financial Statements.

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Revenue Recognition, Trade Accounts Receivable and Allowance for Credit Losses. Education revenue is primarily derived from postsecondary education services, professional education and test preparation services. Revenue, net of any refunds, corporate discounts, scholarships and employee tuition discounts is recognized ratably over the instruction period or access period for higher education and supplemental education services.

At Kaplan International and Kaplan Supplemental Education, estimates of average student course length are developed for each course, along with estimates for the anticipated level of student drops and refunds from test performance guarantees, and these estimates are evaluated on an ongoing basis and adjusted as necessary. As Kaplan’s businesses and related course offerings have changed, including more online programs, the complexity and significance of management’s estimates have increased.

KHE provides non-academic operations support services to Purdue Global pursuant to a TOSA, which includes technology support, help-desk functions, human resources support for faculty and employees, admissions support, financial aid administration, marketing and advertising, back-office business functions, and certain student recruitment services. KHE is not entitled to receive any reimbursement of costs incurred in providing support services, or any fee, unless and until Purdue Global has first covered all of its operating costs (subject to a cap), received payment for cost efficiencies, if any, and during the first five years of the TOSA receive a priority payment of $10 million per year in addition to the operating cost reimbursements and cost efficiency payments. KHE will receive reimbursement for its operating costs of providing the support services after payment of Purdue Global’s operating costs, cost efficiency payments, and priority payment. If there are sufficient revenues, KHE may be entitled to a cost efficiency payment, if any, and additional fee equal to 12.5% of Purdue Global’s revenue. Subject to certain limitations, a portion of the fee that is earned by KHE in one year may be carried over to subsequent years for payment to Kaplan.

The support fee and reimbursement for KHE support costs are entirely dependent on the availability of cash at the end of Purdue Global’s fiscal year (June 30), and therefore, all consideration in the contract is variable. The Company uses significant judgment to forecast the operating results of Purdue Global, the availability of cash at the end of each fiscal year, and the consideration it expects to receive from Purdue Global annually. Key assumptions used in the forecast model include student census and degree enrollment data, Purdue Global and KHE expenses, changes to working capital, contractually stipulated minimum payments, and lead conversion rates. The forecast is updated as uncertainties are resolved. The Company reviews and updates the assumptions regularly, as a significant change in one or more of these estimates could affect revenue recognized. Changes to the estimated variable consideration were not material for the year ended December 31, 2021.

A Kaplan International business has a contract with an examination body through August 2032 comprised of two performance obligations, one to build and create a professional exam and another to manage the delivery of that exam to qualified candidates. The first obligation was completed in 2021. The second obligation began after the first obligation was completed and is expected to continue through the end of the contract term. Revenues are recognized for both of these obligations using forecasted financial results and the use of a market-based profit margin applied to costs incurred during the financial reporting period. This profit margin is different for each obligation as a result of the different value created by each distinct obligation. The forecast, including key assumptions such as expected candidate volumes and related exam-management expenses, is updated as future uncertainties are resolved, which may result in changes to the profit margin associated with each performance obligation. The Company reviews and updates the assumptions regularly, as a significant change in one or more of these estimates could affect revenue recognized. Changes to the estimated variable consideration were not material for the year ended December 31, 2021.

The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company acts as a principal or an agent in the transaction. In certain cases, the Company is considered the agent, and the Company records revenue equal to the net amount retained when the fee is earned. In these cases, costs incurred with third-party suppliers is excluded from the Company’s revenue. The Company assesses whether it obtained control of the specified goods or services before they are transferred to the customer as part of this assessment. In addition, the Company considers other indicators such as the party primarily responsible for fulfillment, inventory risk and discretion in establishing price.

Accounts receivable have been reduced by an allowance that reflects the current expected credit losses associated with the receivables. This estimated allowance is based on historical write-offs, current macroeconomic conditions, reasonable and supportable forecasts of future economic conditions and management’s evaluation of the financial condition of the customer. The Company generally considers an account past due or delinquent when a student or customer misses a scheduled payment. The Company writes off accounts receivable balances deemed uncollectible against the allowance for credit losses following the passage of a certain period of time, or generally when the account is turned over for collection to an outside collection agency.

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Goodwill and Other Intangible Assets.  The Company has a significant amount of goodwill and indefinite-lived intangible assets that are reviewed at least annually for possible impairment.

The Company performs its annual goodwill and intangible assets impairment test as of November 30. Goodwill and other intangible assets are reviewed for possible impairment between annual tests if an event occurred or circumstances changed that would more likely than not reduce the fair value of the reporting unit or other intangible assets below its carrying value.

Goodwill

The Company tests its goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially performs an assessment of qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment test. The Company quantitatively tests goodwill for impairment if, based on its assessment of the qualitative factors, it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if it decides to bypass the qualitative assessment. The quantitative goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

In the third quarter of 2021, as a result of the emergence of the COVID-19 Delta variant and continued weak product demand in the commercial office electrical products and hospitality sectors caused by the COVID-19 pandemic, the Company performed an interim review of the goodwill and indefinite-lived intangibles of the Dekko reporting unit. As a result of the impairment review, the Company recorded a $26.7 million goodwill impairment charge. The Company estimated the fair value of the reporting unit by utilizing a discounted cash flow model. The carrying value of the reporting unit exceeded the estimated fair value, resulting in a goodwill impairment charge for the amount by which the carrying value exceeded the estimated fair value after taking into account the effect of deferred income taxes. Dekko is included in manufacturing.

The Company had 20 reporting units as of December 31, 2021. The reporting units with significant goodwill balances as of December 31, 2021, were as follows, representing 89% of the total goodwill of the Company:

As of November 30, 2021, in connection with the Company’s annual impairment testing, the Company decided to perform the quantitative goodwill impairment process at all of the reporting units with the exception of Framebridge, for which it performed a qualitative assessment. The Company’s policy requires the performance of a quantitative impairment review of the goodwill at least once every three years. The Company used a discounted cash flow model, and, where appropriate, a market value approach was also utilized to supplement the discounted cash flow model to determine the estimated fair value of its reporting units. The Company made estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. The methodology used to estimate the fair value of the Company’s reporting units on November 30, 2021, was consistent with the one used during the 2020 annual goodwill impairment test.

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The Company made changes to certain of its assumptions utilized in the discounted cash flow models for 2021 compared with the prior year to take into account changes in the economic environment, regulations and their impact on the Company’s businesses. The key assumptions used by the Company were as follows:

•    Expected cash flows underlying the Company’s business plans for the periods 2022 through 2026 were used. The Company used expected cash flows for the periods 2022 through 2031 for the Hoover reporting unit. The expected cash flows took into account historical growth rates, the effect of the changed economic outlook at the Company’s businesses, industry challenges and an estimate for the possible impact of any applicable regulations.

•    Cash flows beyond 2026 were projected to grow at a long-term growth rate, which the Company estimated between 1.5% and 3% for each reporting unit.

•    The Company used a discount rate of 10% to 17% to risk adjust the cash flow projections in determining the estimated fair value.

The fair value of each of the reporting units exceeded its respective carrying value as of November 30, 2021.

The estimated fair value of the Dekko reporting unit at the manufacturing businesses exceeded its carrying value by a margin less than 25% following a goodwill impairment recorded in the third quarter of 2021. The total goodwill at this reporting unit was $47.8 million as of December 31, 2021, or 3% of the total goodwill of the Company. There exists a reasonable possibility that a decrease in the assumed projected cash flows or long-term growth rate, or an increase in the discount rate assumption used in the discounted cash flow model of this reporting unit, could result in an additional impairment charge.

The estimated fair value of the Company’s other reporting units with significant goodwill balances exceeded their respective carrying values by a margin in excess of 25%. It is possible that impairment charges could occur in the future, given changes in market conditions and the inherent variability in projecting future operating performance. Additional COVID-19 disruptions could result in future adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with fair value estimates and could lead to additional future impairments, which could be material.

Indefinite-Lived Intangible Assets

The Company initially assesses qualitative factors to determine if it is more likely than not that the fair value of its indefinite-lived intangible assets is less than its carrying value. The Company compares the fair value of the indefinite-lived intangible asset with its carrying value if the qualitative factors indicate it is more likely than not that the fair value of the asset is less than its carrying value or if it decides to bypass the qualitative assessment. The Company records an impairment loss if the carrying value of the indefinite-lived intangible assets exceeds the fair value of the assets for the difference in the values. The Company uses a discounted cash flow model, and, in certain cases, a market value approach is also utilized to supplement the discounted cash flow model to determine the estimated fair value of the indefinite-lived intangible assets. The Company makes estimates and assumptions regarding future cash flows, discount rates, long-term growth rates and other market values to determine the estimated fair value of the indefinite-lived intangible assets. The Company’s policy requires the performance of a quantitative impairment review of the indefinite-lived intangible assets at least once every three years.

The Company’s intangible assets with an indefinite life are principally from trade names, franchise rights and FCC licenses. The fair value of the indefinite-lived intangible assets exceeded their respective carrying values as of November 30, 2021. There is always a possibility that impairment charges could occur in the future, given the inherent variability in projecting future operating performance. Additional COVID-19 disruptions could result in future adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with fair value estimates and could lead to additional future impairments, which could be material.

Pension Costs.  The Company sponsors a defined benefit pension plan for eligible employees in the U.S. Excluding curtailment gains, settlement gains and special termination benefits, the Company’s net pension credit was $93.0 million, $55.4 million and $52.7 million for 2021, 2020 and 2019, respectively. The Company’s pension benefit obligation and related credits are actuarially determined and are impacted significantly by the Company’s assumptions related to future events, including the discount rate, expected return on plan assets and rate of compensation increases. The Company evaluates these critical assumptions at least annually and, periodically, evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover, and updates them to reflect its experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

The Company assumed a 6.25% expected return on plan assets for 2021, 2020 and 2019. The Company’s actual return on plan assets was 24.4% in 2021, 25.4% in 2020 and 23.9% in 2019. The 10-year and 20-year actual returns on plan assets on an annual basis were 13.7% and 10.0%, respectively.

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Accumulated and projected benefit obligations are measured as the present value of future cash payments. The Company discounts those cash payments using the weighted average of market-observed yields for high-quality fixed-income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and generally increase subsequent-year pension costs; higher discount rates decrease present values and decrease subsequent-year pension costs. The Company’s discount rate at December 31, 2021, 2020 and 2019, was 2.9%, 2.5% and 3.3%, respectively, reflecting market interest rates.

Changes in key assumptions for the Company’s pension plan would have had the following effects on the 2021 pension credit, excluding curtailment gains, settlement gains and special termination benefits:

•    Expected return on assets – A 1% increase or decrease to the Company’s assumed expected return on plan assets would have increased or decreased the pension credit by approximately $22.1 million.

•    Discount rate – A 1% decrease to the Company’s assumed discount rate would have decreased the pension credit by approximately $0.6 million. A 1% increase to the Company’s assumed discount rate would have increased the pension credit by approximately $18.0 million.

The Company’s net pension credit includes an expected return on plan assets component, calculated using the expected return on plan assets assumption applied to a market-related value of plan assets. The market-related value of plan assets is determined using a five-year average market value method, which recognizes realized and unrealized appreciation and depreciation in market values over a five-year period. The value resulting from applying this method is adjusted, if necessary, such that it cannot be less than 80% or more than 120% of the market value of plan assets as of the relevant measurement date. As a result, year-to-year increases or decreases in the market-related value of plan assets impact the return on plan assets component of pension credit for the year.

At the end of each year, differences between the actual return on plan assets and the expected return on plan assets are combined with other differences in actual versus expected experience to form a net unamortized actuarial gain or loss in accumulated other comprehensive income. Only those net actuarial gains or losses in excess of the deferred realized and unrealized appreciation and depreciation are potentially subject to amortization.

The types of items that generate actuarial gains and losses that may be subject to amortization in net periodic pension (credit) cost include the following:

•    Asset returns that are more or less than the expected return on plan assets for the year;

•    Actual participant demographic experience different from assumed (retirements, terminations and deaths during the year);

•    Actual salary increases different from assumed; and

•    Any changes in assumptions that are made to better reflect anticipated experience of the plan or to reflect current market conditions on the measurement date (discount rate, longevity increases, changes in expected participant behavior and expected return on plan assets).

Amortization of the unrecognized actuarial gain or loss is included as a component of pension credit for a year if the magnitude of the net unamortized gain or loss in accumulated other comprehensive income exceeds 10% of the greater of the benefit obligation or the market-related value of assets (10% corridor). The amortization component is equal to that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. At the end of 2018, the Company had no net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain was included in the pension credit for 2019.

During 2019, there were significant pension asset gains offset by a decrease in the discount rate and the purchase of a group annuity contract that resulted in no net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, no amortized gain amount was included in the pension credit for 2020.

During 2020, there were significant pension asset gains offset by a further decrease in the discount rate that resulted in net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, an amortized gain of $7.9 million was included in the pension credit for 2021.

During 2021, there were significant pension asset gains and an increase in the discount rate. The Company currently estimates that there will be net unamortized actuarial gains in accumulated other comprehensive income subject to amortization outside the 10% corridor, and therefore, an amortized gain amount of $68.9 million is included in the estimated pension credit for 2022.

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Overall, the Company estimates that it will record a net pension credit of approximately $179 million in 2022.

Note 15 to the Company’s Consolidated Financial Statements provides additional details surrounding pension costs and related assumptions.

Accounting for Income Taxes.

Valuation Allowances

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of assets and liabilities. In evaluating its ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about forecasts of future taxable income.

As of December 31, 2021, the Company had state income tax net operating loss carryforwards of $1,026.1 million, which will expire at various future dates. Also at December 31, 2021, the Company had $87.1 million of non-U.S. income tax loss carryforwards, of which $44.2 million may be carried forward indefinitely; $12.2 million of losses that, if unutilized, will expire in varying amounts through 2026; and $30.7 million of losses that, if unutilized, will start to expire after 2026. At December 31, 2021, the Company has established approximately $57.6 million in total valuation allowances, primarily against deferred state tax assets, net of U.S. Federal income taxes, and non-U.S. deferred tax assets, as the Company believes that it is more likely than not that the benefit from certain state and non-U.S. net operating loss carryforwards and other deferred tax assets will not be realized. The Company has established valuation allowances against state income tax benefits recognized, without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing deferred tax benefits recognized since these temporary differences are not likely to reverse in the foreseeable future. However, certain deferred state tax assets have an indefinite life. As a result, the Company has considered deferred tax liabilities for prepaid pension cost and goodwill as a source of future taxable income for realizing those deferred state tax assets. The valuation allowances established against state and non-U.S. income tax benefits recorded may increase or decrease within the next 12 months, based on operating results, the market value of investment holdings or business and tax planning strategies; as a result, the Company is unable to estimate the potential tax impact, given the uncertain operating and market environment. The Company will be monitoring future operating results and projected future operating results on a quarterly basis to determine whether the valuation allowances provided against state and non-U.S. deferred tax assets should be increased or decreased, as future circumstances warrant.

Recent Accounting Pronouncements.  See Note 2 to the Company’s Consolidated Financial Statements for a discussion of recent accounting pronouncements.

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