TO OUR SHAREHOLDERS

Well, that was something.
We could do without more years like 2008. Great companies (and major advertisers) fell like boulders; more shakiness is obviously in store as 2009 starts.

Poking our heads up from the rubble, we at The Washington Post Company would like to say: prospects look reasonably good going forward at our largest businesses, but 2009 will be another very rough year at the media companies.

The Company’s stock price was dramatically affected by the financial crisis of 2008. The effect on business results was less dramatic. Advertising declined still further at our media businesses; certain Kaplan businesses (mostly smaller) were hurt badly.

But Kaplan’s largest business should get a bit of a tailwind from a declining economy, and Cable ONE, our second-largest profit center, should hold up far better than most businesses (Cable ONE recorded an outstanding 2008).

Two big questions face the Company:
1. How large and how successful can Kaplan become?
2. What’s the future of the media business?

In past years, I have rattled on in these letters about our Company’s relationship to our shareholders. Generations of top managers at The Post Company have reiterated: we’re focused on the long run; we’re committed to building value for our shareholders. My own assets are more than 90% concentrated in the stock you own.

All of these remain true, but I am in the embarrassing position of writing you after a year in which Post Company stock declined by more than 50%. Comparative results (“you should see what happened to the other newspapers”) offer no solace.

While it feels foolish to say anything that sounds ironclad in today’s wildly unpredictable economy, our long-term view is: this Company is going to have to earn its way back to higher value for our shareholders. Our earnings should grow over the years because our two largest businesses are relatively recession-resistant and because they’ll get bigger with the years (and become a larger percentage of our Company).

We have to control the losses at the print media companies and eventually return them to profitability.

It’s central that you know this: in 1998, about 75% of the Company’s revenue came from The Post, Newsweek and our television stations. In 2008, almost 70% came from Kaplan and Cable ONE.

It is my job in these annual letters to give you information needed to value the Company. In the case of 2008 earnings, we recorded enough one-time charges that I should do my best to explain them for you:

• $111 million in early retirement program expense. The Company has implemented “buyout” programs frequently. They speed the rate of cost reduction at the media companies. Most of the funds from these programs come from our (still) overfunded pension plan and therefore don’t call on corporate operating funds.
• Goodwill and other intangibles impairment charges: $142 million. These non-cash charges cover the reduced value (as perceived by our accountants) of CourseAdvisor, as well as the Everett Herald, The Gazette and Southern Maryland Newspapers (including their commercial printing operations) and certain other businesses and affiliates.

Get used to impairment charges: accountants are required to assess whether acquisitions and investments we have made still have a value sufficient to justify the goodwill we carry on the balance sheet, or the value of the asset itself.

CourseAdvisor has not performed as well as we had expected. The Gazette and Southern Maryland papers made far less money in 2008. The accountants reduced our goodwill accordingly.

I have no quarrel with the decision. Impairment charges point to acquisitions that haven’t worked out as planned. But these charges can have curious results: in early 2006, we purchased $43 million in a publicly traded stock. The stock fell during the year; the accountants required a $14 million write-down charge in the fourth quarter.

The stock subsequently recovered to its purchase price and beyond. We sold it in the fourth quarter of 2008 for a gain of “$21 million.” I put the sum in quotation marks because that gain includes the $14 million recovery of the write-down in the stock—in other words, the Company received (pre-tax) $7 million more than we paid for the stock, but recorded a $21 million gain because of the earlier write-down. It is a curious feature of these non-cash charges that they only go one way: if the value of an asset recovers, you don’t write it back up through earnings.

Still, you won’t record write-downs if your acquisitions and investments are all home runs. Many CEOs’ annual reports will say more about their balance sheets than they have for years; this one is no exception. Our Company for many years has had $400 million of notes outstanding; unfortunately, these came due in February.

The Post has an A1 credit rating from Moody’s; we are told that ranks us in the top 10% of nonfinancial S&P 500 companies. Nonetheless, the coupon rate when we refinanced our debt was much higher: 7.25% in 2009, compared to 5.5% in 1999. We still have enough cash and marketable securities to cover the debt.

The Company can handle the added interest cost. But to have no debt at all—unless for a very compelling reason—seems wiser than ever. It should not have taken the 2008 financial crisis to make me tighten my definition of “very compelling” acquisitions—but it did.

Our Businesses
Education: Kaplan is a very strong business.
It has stronger and weaker businesses among its components. Its largest businesses, higher education and test prep, should be our most countercyclical (and higher education is by far Kaplan’s strongest business).

Our professional training business includes some wonderful assets, but we also have a considerable exposure to the U.S. real estate training market and the worldwide finance training markets.

Long run, we believe the Company will make money in those markets; in the U.S., we certainly did not in 2008 and won’t in 2009. Score also struggles, and its losses continue.

Despite these losses and investments, Kaplan recorded higher revenue and profit in 2008. The biggest change at Kaplan in 2008 was in management: Jonathan Grayer resigned after 17 outstanding years at Kaplan, 14 as CEO. Jonathan led Kaplan from a money-losing test prep business to a $2 billion-plus multidisciplinary, multinational company (and a highly profitable one). He shaped Kaplan as it is today, and it’s a sensational business.

The management team at Kaplan is as strong as the business. Kaplan has a most impressive number of smart, ambitious business people. At a time when many brilliant people are looking for work, Kaplan is focused on attracting and developing talent. (Very talented people passionate about education can apply to careers@kaplan.com.)

Kaplan is now headed by the remarkable Andy Rosen, who has for years been the president of Kaplan and the CEO who built its largest and most successful business, Kaplan Higher Education. And in 2008, Kaplan Higher Education boomed; its revenues grew by 25% and its operating income by 34%. We couldn’t have a better successor to Jonathan than Andy. Jeff Conlon, who skillfully led the comeback of Kaplan Higher Education campuses, became president of Kaplan Higher Education.

In the long run, Kaplan has a chance to be substantially bigger and more profitable—and to help its multitude of students achieve very good outcomes. In the short run, we’ll continue to invest to build Kaplan for the future—well over $30 million will be invested in 2009 operations, starting new businesses and expanding familiar ones.

Cable ONE operates very differently from any other cable company we know. Its quality of service (very high) and its prices (relatively low) have ensured loyal customers. Our markets— smaller towns and cities not adjacent to large metro areas—have been great communities to operate in.

And our longtime CEO, Tom Might, and his management team continue to deliver among the best results in the cable business. Our percustomer operating and capital expense are among the lowest in the industry. Our revenue grew through increases in high-speed and telephone subscribers.

Operating income and free cash flow boomed in 2008. Results in 2009 may not be as strong, but Cable ONE is well positioned to weather the financial storm.

Virtually all of Post–Newsweek Stations’ revenue comes from advertising, and that revenue fell 4% in 2008. $24 million in political advertising and $6 million around the Olympics were not enough to break the decline in our core business, particularly in automotive.

Our capable CEO, Alan Frank, hired Marla Drutz as general manager of WDIV (NBC/Detroit); Marla brought a dose of energy and market knowledge to our second-largest station. KSAT (ABC/San Antonio) and WPLG (ABC/Miami) led their markets in ratings under general managers Jim Joslyn and Dave Boylan. Our independent station in Jacksonville, WJXT, had another strong year, and our largest station, KPRC (NBC/Houston), started to rebound. Henry Maldonado announced his retirement this summer after decades of service, most recently as general manager of WKMG (CBS/Orlando).

Local TV stations’ profits have deteriorated; they are still highly profitable and a valued part of our Company.

Able managements—Katharine Weymouth, Steve Hills and Marcus Brauchli at The Post; Ann McDaniel, Tom Ascheim, Jon Meacham and Fareed Zakaria at Newsweek—did not keep our two print media companies from sliding into the red in 2008. The Post’s numbers will get quite a bit worse in 2009.

We are willing to lose money (as we did at Kaplan from 1994 to 2001) if the losses are on a path to a healthy, profitable business. Newsweek management has a plan it hopes will change the direction of the business and put the magazine on a better and more profitable course.

The Post has a harder challenge this year. The familiar problems of the newspaper industry— declining readership and the loss of classified— are now made worse by bankrupt advertisers. The newspaper will lose substantial money in 2009. Some will be non-cash accelerated depreciation because we will be closing a printing plant. Most will be real losses. Post management knows that losses must diminish in 2010.

So what’s the future of the newspaper and newsmagazine businesses? I have no answer to this question. Post and Newsweek audiences grew hugely during 2008; Internet audience volume grew by 30% to 40% during the peak months of the Presidential campaign and remained strong afterward.

Millions more people read our journalism than ever before, but many of them read casually, dropping in for an article or two and moving on. (Daily newspaper readers average a half-hour with their paper. Can we deepen readers’ involvement?) Ads on the Internet work, but not in the same way and not with the power of newspaper ads that have driven retail and national results for years. (Can we help advertisers make their web ads more effective?)

Among the large metropolitan papers, The Post had the best daily circulation results (but we lost 1.9% for the six-month period ending September 30). The paper, in print and online, also had the best advertising revenue results (but lost 13.7% of ad revenue for the year). If you could bank relative results, we’d be in great shape.

Today, it isn’t obvious that even the best-run, most successful newspaper can be consistently profitable. But The Post will get every chance. The paper itself seems to me to be very strong. Outstanding coverage of the election, of the financial crisis, of the metro area and of sports was obvious to readers. Six Pulitzer prizes awarded in the spring testified to the strength of the staff; Katharine Weymouth succeeded Bo Jones as publisher; Marcus Brauchli became executive editor after Len Downie.

One important talent was added in early 2009: Vijay Ravindran, a longtime Amazon veteran who later was chief technology officer at a political listbuilding/ data-mining company, joined us as chief digital officer of the corporation.

Are we investing in The Post and Newsweek as a public service or because we feel their business models can be fixed? Emphatically the latter: it is universally understood that we must move toward profitability at The Post and Newsweek after what we hope will be a low point in 2009.

But how we’ll get there is not clear. We must cut costs; but we must (and will) continue producing excellent newspapers and magazines. Then, we have to continue to find new sources of revenue (at a time when some of our customers will be cutting back because of their own financial problems).

Ten years from now, it is highly likely that customers will be getting news from profitable institutions staffed by talented reporters and editors. We’re going to try to show a way.

The end of the year saw one major change in our corporate staff. Jay Morse retired after 19 years as chief financial officer. Jay’s careful, old-fashioned honesty in keeping our books would have served any company well.

We were fortunate he worked here. Hal Jones is a successor from the same school.
Donald E. Graham
Chairman of the Board and Chief Executive Officer
February 24, 2009

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The Washington Post Company (WPO) 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 consist of the ownership and operation of cable television systems, newspaper publishing (principally The Washington Post), television broadcasting (through the ownership and operation of six television broadcast stations) and magazine publishing (principally Newsweek).

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