2013 ANNUAL REPORT REVENUE BY PRINCIPAL OPERATIONS n EDUCATION 62% n CABLE 23% n TELEVISION BROADCASTING 11% n OTHER BUSINESSES 4% FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) 2013 2012 Change Operating revenues $ 3,487,864 $ 3,455,570 1% Income from operations $ 345,565 $ 179,1 80 93% Net income attributable to common shares $ 236,010 $ 131,21 8 80% Diluted earnings per common share from continuing operations $ 25.78 $ 9.22 — Diluted earnings per common share $ 32.05 $ 17.39 84% Dividends per common share $ — $ 19.60 — Common stockholders’ equity per share $ 446.73 $ 348.1 7 28% Diluted average number of common shares outstanding 7,333 7,404 – 1 % OPERATING REVENUES INCOME FROM OPERATIONS ($ in millions) ($ in millions) 20 1 3 3,488 20 1 3 346 20 1 2 3,456 20 1 2 179 2 0 1 1 3,526 2 0 1 1 334 20 1 0 3,936 20 1 0 602 2009 3,563 2009 453 NET INCOME ATTRIBUTABLE TO COMMON SHARES RETURN ON AVERAGE COMMON ($ in millions) STOCKHOLDERS’ EQUITY* 20 1 3 236 20 1 3 9.0% 20 1 2 1 3 1 20 1 2 5.2% 2 0 1 1 1 16 2 0 1 1 4.4% 20 1 0 277 20 1 0 9.8% 2009 92 2009 3. 1% DILUTED EARNINGS PER COMMON SHARE DILUTED EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS ($) ($) 20 1 3 25.78 20 1 3 32.05 20 1 2 9.22 20 1 2 17.39 2 0 1 1 19.03 2 0 1 1 14.70 20 1 0 39.65 20 1 0 31.04 2009 28.16 2009 9.78 * Computed on a comparable basis, excluding the impact of the adjustment for pensions and other postretirement plans on average common stockholders’ equity. 1 | GRAHAM HOLDINGS COMPANY To Our Shareholders As you may have heard, we sold The Washington 3 3 3 Post to Jeff Bezos, the founder of Amazon.com, last year. Our Company owns three large businesses. The largest profit-earner in 2013 (narrowly) was Obviously, this was the most important thing Post–Newsweek Stations. our Company did in the past 12 months. But I’d like to spend most of this report on the future The year strengthened our belief that PNS has of the Company we own today, now known an excellent CEO in Emily Barr, who completed as Graham Holdings. Following this letter, I’ve her first full year. included the statement I made about the sale at the time it was announced. The only thing I’d Profits in local TV are much greater in even- add is that after four months, Jeff appears to numbered (election and Olympic) years than be as good an owner as I had hoped. The paper in odd-numbered years. But 2013, when PNS itself is excellent. made $171 million in operating income, far out- stripped 2011 ($117 million). And, 2014 should 3 3 3 be outstanding: our two largest stations are NBC affiliates and aired the Winter Olympics; The sale and a couple of related events had a Florida, Michigan and Texas will have contested positive impact on our balance sheet. At year- statewide elections. end we had almost $1.2 billion in cash and secu- rities against $451 million in debt. We welcomed Bert Medina, a longtime Miami broadcaster, to lead WPLG and to broaden This cash position will be strengthened some- its reach in the market. Our Detroit and San time in 2014: we’ve announced the sale of Antonio stations and our amazing Jacksonville the Post building at 1150 15th Street, NW, to independent continued to lead their markets in Carr Properties for $159 million pre-tax. The news. Houston and Orlando had genuine rat- cash should hit our balance sheet in the first ings momentum as the year ended. half of the year. We’ve also announced our intention to sell some land on the Alexandria, 3 3 3 Virginia, waterfront (less valuable than the Post site, but meaningful). This may take place in Headquartered in Phoenix and serving smaller 2014 as well. markets in the West, Midwest and South, Cable AS YOU MAY HAVE HEARD, WE SOLD THE WASHINGTON POST TO JEFF BEZOS, THE FOUNDER OF AMAZON.COM, LAST YEAR. 2 | GRAHAM HOLDINGS COMPANY MUCH OF THIS REPORT WILL FOCUS ON THE FUTURE OF KAPLAN AND, PARTICU- LARLY, ON WHAT SEEMS TO ME A TRULY ILLOGICAL AND UNREASONING THREAT TO OUR U.S. HIGHER EDUCATION BUSINESS. ONE continues to move astutely with rapidly could perform as well as “the big guys” all these changing times. years, when programming and technology costs always threaten to increase significantly. But We once had a monopoly in video program- with clever management who think outside the ming in our markets. Those days seem long box, Cable ONE has thrived without economies ago, but Cable ONE management has smartly of scale. The next couple of years look good. modified its strategy to stay ahead. 3 3 3 We now focus on the lifetime value of subscribers more than on the absolute number of subscrib- Much of this report will focus on the future of ers. Today, Cable ONE carefully targets marketing Kaplan and, particularly, on what seems to me and service at customers who produce the great- a truly illogical and unreasoning threat to our est free cash flow. They are more likely to buy U.S. higher education business. Internet service than video service, they churn away less and they pay on time. Cable ONE now Absent such a regulatory threat, the outlook for installs 75% more new Internet customers each Kaplan and for each of Kaplan’s businesses would month than new video customers. Bad debt is be bright. I’ll deal with the regulatory issues last. down 30% compared to 2012. Sales to business customers is our other focus—and for good rea- Kaplan Test Prep came back after down years sons. Business sales were up more than 20% for in 2011 and 2012. You couldn’t have had a much the fourth straight year. With higher revenue and worse test-taking climate—the decline in LSAT lower churn than residential customers, business test-takers was widely written about, and GMAT customers also have superior lifetime value. test-takers fell, too. But KTP improved its posi- tion this year—another strong performance by Cable ONE is changing, rapidly and dramati- veteran CEO John Polstein and his team, who cally, along with its industry. There’s no telling promised improvement and came through. what all the changes will mean to Cable ONE long term, but so far, so good. Since 1993, when Meanwhile, Kaplan International, a division made CEO Tom Might moved there, the company has up of many businesses in many countries, had evolved at speed and as needed to stay ahead. It another strong year. One disappointing 2011 acqui- seems unreasonable that such a small company sition in Australia has cost us $65 million. Those 2013 ANNUAL REPORT | 3 THE U.S. SHOULD BECOME NUMBER ONE IN THE WORLD AGAIN IN THE PERCENT- AGE OF ADULTS WHO GRADUATE FROM COLLEGE. costs are done with, and Kaplan International, I agree with all these, and so do Andy Rosen and under David Jones, looks good as 2014 begins. We Tom Leppert, Kaplan’s top executives. We’d dif- see plenty of room for growth ahead, and we start fer from the administration with the measure- with a platform of high-quality programs. Kaplan’s ment of the last item only. The administration institutions received top rankings in three of our would like to measure the salaries of recent key international markets: Singapore, for most- graduates. Since this means that the measured preferred private higher education institution; value of a degree would vary with the econ- the U.K., for student satisfaction in online higher omy (the salaries of recent graduates at every education; and Ireland, for best business school. university were better in 2007 than in 2009), it seems to make more sense to measure what Our U.S. higher education business is in ques- students actually learn while they are enrolled. tion, not because Kaplan doesn’t offer good But this is a small difference. programs or because students don’t want them. Lower cost. More access for low-income stu- To begin with, the Obama administration’s broad dents. Better learning outcomes. Kaplan is policy on higher education seems to me exactly working on all these things. And, we’d love to right. It’s also clear: the U.S. should become work collaboratively with the administration. number one in the world again in the percent- age of adults who graduate from college. Here’s the problem: the administration’s agenda is different when it comes to private-sector The administration argues: (“for-profit”) higher education. Their agenda does not focus on helping students if they 3 To achieve this, colleges have to control their choose private-sector institutions. It seems to tuition costs. focus on punishing companies in the sector, and on punishing them no matter how good a 3 All colleges should focus on enrolling more job they do at educating low-income students. lower-income students and on seeing to it that they graduate. In 2010, the administration proposed drastic new regulations for colleges like Kaplan—regulations 3 The degree itself should be valuable. that applied, for the most part, only to colleges 4 | GRAHAM HOLDINGS COMPANY in the private sector. These regulations sought 3.