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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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Graham Holdings Company (the Company), is a diversified education and media company. The Company’s Kaplan subsidiary provides a wide variety of educational services, both domestically and outside the United States. The Company’s media operations comprise the ownership and operation of seven television broadcasting stations, several websites and print publications, and a marketing solutions provider. The Company’s other business operations include manufacturing, automotive dealerships, restaurants and entertainment venues and home health and hospice services.

Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with: (i) generally accepted accounting principles in the United States of America (GAAP) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, for financial statements required to be filed with the Securities and Exchange Commission (SEC). They include the assets, liabilities, results of operations and cash flows of the Company, including its domestic and foreign subsidiaries that are more than 50% owned or otherwise controlled by the Company. As permitted under such rules, certain notes and other financial information normally required by GAAP have been condensed or omitted. Management believes the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three months ended March 31, 2020 and 2019 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Use of Estimates in the Preparation of the Condensed Consolidated Financial Statements – The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported herein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information, in context with the information reasonably available to the Company and the unknown future impacts of the novel coronavirus (COVID-19) pandemic as of March 31, 2020 and through the date of this filing. The accounting matters assessed included, but were not limited to, the Company’s carrying value of goodwill and other long-lived assets, allowance for doubtful accounts, inventory valuation and related reserves, fair value of financial assets, valuation allowances for tax assets and revenue recognition. Other than the goodwill and indefinite-lived impairment charges (see Note 6), there were no other impacts to the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2020 resulting from our assessments. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s condensed consolidated financial statements in future reporting periods.

Reclassifications – Certain amounts in previously issued condensed consolidated financial statements have been reclassified to conform with the presentation for the period ended March 31, 2020. This includes the reclassification of $25.9 million from operating to selling, general and administrative in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019.

Recently Adopted and Issued Accounting Pronouncements – In June 2016, the FASB issued new guidance that requires financial assets measured at amortized cost, including accounts receivable, to be measured using the current expected credit losses model (CECL). CECL requires current expected credit losses to be measured upon the initial recognition of a financial asset by considering all available relevant information, including information about past events, current conditions and reasonable and supportable forecasts of future economic conditions. The standard was adopted by the Company in the first quarter of 2020 and did not have a significant impact on its Condensed Consolidated Financial Statements.

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Acquisitions.  In the first three months of 2020, Kaplan acquired two small businesses; one in its professional (U.S.) division and one in its international division.

During 2019, the Company acquired eight businesses, one in education, three in healthcare, one in manufacturing, and three in other businesses for $211.8 million in cash and contingent consideration and the assumption of $25.8 million in floor plan payables. The assets and liabilities of the companies acquired were recorded at their estimated fair values at the date of acquisition.

On January 31, 2019, the Company acquired an interest in two automotive dealerships for cash and the assumption of floor plan payables (see Note 5). In connection with the acquisition, the automotive subsidiary of the Company borrowed $30 million to finance the acquisition and entered into an interest rate swap to fix the interest rate on the debt at 4.7% per annum (see Note 7). The Company has a 90% interest in the automotive subsidiary. The Company also entered into a management services agreement with an entity affiliated with Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships. Mr. Ourisman and his team operate and manage the dealerships. The Company paid a fee of $2.3 million for the year ended December 31, 2019 in connection with the management services provided under this agreement. In addition, the Company advanced $3.5 million to the minority shareholder, an entity controlled by Mr. Ourisman, at an interest rate of 6% per annum. The minority shareholder has the option to acquire up to an additional 10% interest in the automotive subsidiary. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.

In July 2019, Graham Healthcare Group (GHG) acquired a 100% interest in a small business which is expected to provide certain strategic benefits in the future and is included in healthcare. On July 11, 2019, Kaplan acquired a 100% interest in Heverald, the owner of ESL Education, Europe’s largest language-travel agency and Alpadia, a chain of German and French language schools and junior summer camps. The acquisition is expected to provide synergies within Kaplan’s International English business and is included in Kaplan’s international division.

On July 31, 2019, the Company announced the closing of its acquisition of Clyde’s Restaurant Group (CRG). CRG owns and operates 13 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton. In connection with the acquisition, the Company entered into several leases with an entity affiliated with some of CRG’s senior managers. The acquisition is expected to provide benefits in the future by diversifying the Company’s business operations and is included in other businesses.

In September 2019, Joyce/Dayton Corp. acquired the assets of a small business. The acquisition is expected to complement current product offerings and is included in manufacturing.

On December 1, 2019, GHG acquired 75% of the preferred shares of CSI Pharmacy Holding Company, LLC, (CSI). In connection with the acquisition, CSI entered into an $11.25 million Term Loan (see Note 7) to finance the acquisition. CSI is a specialty and home infusion pharmacy which provides intravenous immunoglobulin therapies to patients. The minority shareholders may put up to 50% of their preferred shares to GHG and the first put period begins in 2022. A second put period for another tranche of preferred shares begins in 2024. The fair value of the redeemable noncontrolling interest in CSI was $1.7 million at the acquisition date, determined using an income approach. The acquisition is expected to expand the product offerings of the healthcare division.

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Acquisition-related costs were expensed as incurred. The aggregate purchase price of the 2019 acquisitions was allocated as follows, based on acquisition date fair values to the following assets and liabilities:

Copy History

		Purchase Price Allocation
		Year Ended
(in thousands)		December 31, 2019
Accounts receivable		$	6,762
Inventory		34,134
Property, plant and equipment		56,391
Lease right-of-use assets		98,505
Goodwill		84,515
Indefinite-lived intangible assets		46,900
Amortized intangible assets		21,291
Other assets		8,308
Floor plan payables		(25,755		)
Other liabilities		(42,555		)
Deferred income taxes		(2,703		)
Current and noncurrent lease liabilities		(99,131		)
Redeemable noncontrolling interest		(1,715		)
Noncontrolling interest		(1,154		)
Aggregate purchase price, net of cash acquired		$	183,793

The 2019 fair values recorded were based upon preliminary valuations and the estimates and assumptions used in such valuations are subject to change within the measurement period (up to one year from the acquisition date). The values above reflect a measurement period adjustment related to the Lease Right-of-Use Assets and Current and noncurrent lease liabilities. The recording of deferred tax assets or liabilities, working capital and the final amount of residual goodwill and other intangibles are not yet finalized. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded due to these acquisitions is attributable to the assembled workforces of the acquired companies and expected synergies. The Company expects to deduct $70.7 million of goodwill for income tax purposes for the acquisitions completed in 2019.

The acquired companies were consolidated into the Company’s financial statements starting on their respective acquisition dates. The following unaudited pro forma financial information presents the Company’s results as if the current year acquisitions had occurred at the beginning of 2019. The unaudited pro forma information also includes the 2019 acquisitions as if they occurred at the beginning of 2018:

Copy History

	Three Months Ended   March 31
(in thousands)	2020				2019
Operating revenues	$	732,598			$	751,191
Net (loss) income	(36,414		)		78,896

These pro forma results were based on estimates and assumptions, which the Company believes are reasonable, and include the historical results of operations of the acquired companies and adjustments for depreciation and amortization of identified assets and the effect of pre-acquisition transaction related expenses incurred by the Company and the acquired entities. The pro forma information does not include efficiencies, cost reductions and synergies expected to result from the acquisitions. They are not the results that would have been realized had these entities been part of the Company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.

Sale of Businesses. In November 2019, Kaplan UK completed the sale of a small business which was included in Kaplan International.

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Other Transactions. During 2019, the Company established GHC One as a vehicle to invest in a portfolio of healthcare businesses together with a group of senior managers of GHG. As a holder of preferred units, the Company is obligated to contribute 95% of the capital required for the acquisition of portfolio investments with the remaining 5% of the capital coming from the group of senior managers. The operating agreement of GHC One requires the dissolution of the entity on March 31, 2026, at which time the net assets will be distributed to its members. As a preferred unit holder, the Company will receive an amount up to its contributed capital plus a preferred annual return of 8% (guaranteed return) after the group of senior managers has received a redemption of their 5% interest in net assets (manager return). All distributions in excess of the manager and guaranteed return will be paid to common unit holders, which currently comprise the group of senior managers of GHG. The Company may convert its preferred units to common units at any time after which it will receive 80% of all distributions in excess of the manager return, with the remaining 20% of excess distributions going to the group of senior managers as holders of the other common units.

As of March 31, 2020, the Company held a controlling financial interest in GHC One and therefore includes the assets, liabilities, results of operations and cash flows in its consolidated financial statements. GHC One acquired CSI and another small business during 2019. The Company accounts for the minority ownership of the group of senior managers as a mandatorily redeemable noncontrolling interest.

In March 2019, a Hoover minority shareholder put some shares to the Company, which had a redemption value of $0.6 million. Following the redemption, the Company owns 98.01% of Hoover.

Money Market Investments. As of March 31, 2020 and December 31, 2019, the Company had money market investments of $93.7 million and $45.2 million, respectively, that are classified as cash and cash equivalents in the Company’s Condensed Consolidated Balance Sheets.

Investments in Marketable Equity Securities. Investments in marketable equity securities consist of the following:

Copy History

	As of
	March 31, 2020				December 31, 2019
(in thousands)
Total cost	$	232,096			$	282,349
Gross unrealized gains	204,108				302,731
Total Fair Value	$	436,204			$	585,080

There were no purchases of marketable equity securities during the first three months of 2020. The Company purchased $7.5 million of marketable equity securities during the first three months of 2019.

During the first three months of 2020, the gross cumulative realized losses from the sales of marketable equity securities were $2.0 million. The total proceeds from such sales were $48.0 million. During the first three months of 2019, the gross cumulative realized gains from the sales of marketable equity securities were $9.7 million. The total proceeds from such sales were $17.2 million.

The net (loss) gain on marketable equity securities comprised the following:

Copy History

	Three Months Ended   March 31
(in thousands)	2020				2019
(Loss) gain on marketable equity securities, net	$	(100,393	)		$	24,066
Less: Net losses (gains) in earnings from marketable equity securities sold and donated	8,774				(2,982		)
Net unrealized (losses) gains in earnings from marketable equity securities still held at the end of the period	$	(91,619	)		$	21,084

Investments in Affiliates. As of March 31, 2020, the Company held an approximate 12% interest in Intersection Holdings, LLC, and in several other affiliates; GHG held a 40% interest in Residential Home Health Illinois, a 42.5% interest in Residential Hospice Illinois, a 40% interest in the joint venture formed between GHG and a Michigan hospital, and a 40% interest in the joint venture formed between GHG and Allegheny Health Network (AHN). For the three months ended March 31, 2020 and 2019, the Company recorded $2.5 million and $2.3 million, respectively, in revenue for services provided to the affiliates of GHG.

In the first quarter of 2020, the Company recorded impairment charges of $3.6 million on two of its investments in affiliates as a result of the challenging economic environment for these businesses, of which $2.7 million relates to the Company’s investment in Framebridge. The Company records its share of the earnings or losses of its affiliates from their most recent available financial statements. In some instances, the reporting period of the affiliates’

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financial statements lags the Company’s financial reporting period, but such lag is never more than three months. It is possible that the Company’s results of operations for the three months ended March 31, 2020 does not capture the impact of the COVID-19 pandemic on the earnings or losses of the affiliates whose financial results are recorded on a lag basis.

The Company had $29.0 million and $25.6 million in its investment account that represents cumulative undistributed income in its investments in affiliates as of March 31, 2020 and December 31, 2019, respectively.

In the second quarter of 2019, the Company made an investment in Framebridge, a custom framing service company based in Washington, DC. The Company accounts for this investment under the equity method, and included it in Investments in Affiliates on the Condensed Consolidated Balance Sheet. Timothy J. O’Shaughnessy, President and Chief Executive Officer of Graham Holdings Company, is a personal investor in Framebridge and serves as Chairman of the Board.

In February 2019, the Company sold its interest in Gimlet Media. In connection with this sale, the Company recorded a gain of $29.0 million in the first quarter of 2019. The total proceeds from the sale were $33.5 million.

Additionally, Kaplan International Holdings Limited (KIHL) held a 45% interest in a joint venture formed with York University. KIHL loaned the joint venture £22 million, which loan is repayable over 25 years at an interest rate of 7% and guaranteed by the University of York.

Accounts receivable consist of the following:

Copy History

	As of
	March 31, 2020				December 31, 2019
(in thousands)
Receivables from contracts with customers, less estimated credit losses of $15,127 and $14,276	$	485,229			$	595,321
Other receivables	29,335				28,895
	$	514,564			$	624,216

Bad debt expense was $2.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.

Inventories and contracts in progress consist of the following:

Copy History

	As of
	March 31, 2020				December 31, 2019
(in thousands)
Raw materials	$	34,331			$	35,119
Work-in-process	11,105				10,775
Finished goods	68,400				58,696
Contracts in progress	3,604				4,338
	$	117,440			$	108,928

The Company finances all new vehicle inventory through a standardized floor plan facility (the “floor plan facility”) with SunTrust Bank. The new vehicle floor plan facility bears interest at variable rates that are based on LIBOR plus 1.15% per annum. The weighted average interest rate for the floor plan facility was 2.6% and 3.5% for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the aggregate capacity under the floor plan facility was $50 million, of which $42.6 million had been utilized, and is included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheet. Changes in the vehicle floor plan payable are reported as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.

The floor plan facility is collateralized by vehicle inventory and other assets of the relevant dealership subsidiary, and contains a number of covenants, including, among others, covenants restricting the dealership subsidiary with

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respect to the creation of liens and changes in ownership, officers and key management personnel. The Company was in compliance with all of these restrictive covenants as of March 31, 2020.

The floor plan interest expense related to the new vehicle floor plan arrangements is offset by amounts received from manufacturers in the form of floor plan assistance capitalized in inventory and recorded against operating expense in the Condensed Consolidated Statements of Operations when the associated inventory is sold. For the three months ended March 31, 2020 and 2019, the Company recognized a reduction in operating expense of $0.4 million related to manufacturer floor plan assistance.

In the first quarter of 2020, as a result of the uncertainty and challenging operating environment created by the COVID-19 pandemic, the Company performed an interim review of the goodwill, indefinite-lived intangibles and other long-lived assets of the CRG and automotive dealership reporting units and asset groups. As a result of the impairment reviews, the Company recorded a $9.7 million goodwill and indefinite-lived intangible asset impairment charge at CRG and a $6.7 million indefinite-lived intangible asset impairment charge at the auto dealerships. The Company estimated the fair value of the reporting units and indefinite-lived intangible assets by utilizing a discounted cash flow model. The carrying value of the CRG reporting unit and the indefinite-lived intangible assets exceeded the estimated fair value, resulting in a goodwill and indefinite-lived intangible asset impairment charge for the amount by which the carrying value exceeded the estimated fair value. CRG and the automotive dealerships are included in other businesses. 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.

Amortization of intangible assets for the three months ended March 31, 2020 and 2019, was $14.2 million and $13.1 million, respectively. Amortization of intangible assets is estimated to be approximately $41 million for the remainder of 2020, $50 million in 2021, $44 million in 2022, $36 million in 2023, $26 million in 2024 and $38 million thereafter. The changes in the carrying amount of goodwill, by segment, were as follows:

Copy History

(in thousands)	Education				Television Broadcasting				Manufacturing				Healthcare				SocialCode				Other Businesses				Total
Balance as of December 31, 2019
Goodwill	$	1,140,958			$	190,815			$	234,993			$	98,421			$	15,860			$	53,684			$	1,734,731
Accumulated impairment losses	(331,151		)		—				(7,616		)		—				—				(7,685		)		(346,452		)
	809,807				190,815				227,377				98,421				15,860				45,999				1,388,279
Acquisitions	13,151				—				—				—				—				—				13,151
Impairment	—				—				—				—				—				(6,878		)		(6,878		)
Foreign currency exchange rate changes	(32,361		)		—				—				—				—				—				(32,361		)
Balance as of March 31, 2020
Goodwill	1,121,748				190,815				234,993				98,421				15,860				53,684				1,715,521
Accumulated impairment losses	(331,151		)