Graham Holdings Co - Quarter Report: 2008 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the Quarterly Period Ended March 30, 2008

or

Commission File Number 1-6714

THE WASHINGTON POST COMPANY

(Exact name of registrant as specified in its charter)

(202) 334-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Shares outstanding at April 30, 2008:

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THE WASHINGTON POST COMPANY

Index to Form 10-Q

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PART I. FINANCIAL INFORMATION

The Washington Post Company

Condensed Consolidated Statements of Income (Unaudited)

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The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

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The Washington Post Company

Condensed Consolidated Balance Sheets

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The Washington Post Company

Condensed Consolidated Statements of Cash Flows (Unaudited)

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The Washington Post Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

Results of operations at the Kaplan education division, when examined on a quarterly basis, reflect the volatility of Kaplan stock compensation charges, as well as other seasonal effects. Results of operations, when examined on a quarterly basis, also reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. All adjustments reflected in the interim financial statements are of a normal recurring nature.

The Washington Post Company (the “Company”) generally reports on a 13 week fiscal quarter ending on the Sunday nearest the calendar quarter-end. With the exception of the newspaper publishing operations, subsidiaries of the Company report on a calendar-quarter basis.

Certain amounts in previously issued financial statements have been reclassified to conform with the current year presentation.

Note 1: Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The provisions of SFAS 157 related to financial assets and liabilities are effective as of the beginning of the Company’s 2008 fiscal year. The adoption of these provisions did not have any impact on the Company’s financial statements, as the Company’s existing fair value measurements are consistent with the guidance of SFAS 157. The FASB deferred the effective date of SFAS 157 for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis, until the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact that SFAS 157 will have on its pension related financial assets and nonfinancial assets and liabilities that are not valued on a recurring basis (at least annually). See Note 10 for additional disclosures about fair value measurements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at such subsequent reporting dates. The provisions of SFAS 159 are effective as of the beginning of the Company’s 2008 fiscal year. The adoption of SFAS 159 in the first quarter of 2008 did not have any impact on the Company’s financial statements as the Company did not elect this fair value option.

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (SFAS 141R), and SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,” to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS 141R and SFAS 160 are effective as of the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact of adopting SFAS 141R and SFAS 160 on the Company’s financial statements.

Note 2: Investments.

Investments in marketable equity securities at March 30, 2008 and December 30, 2007 consist of the following (in thousands):

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In the first quarter of 2008, the Company purchased $65.8 million in the common stock of Corinthian Colleges, Inc, a publicly traded education company. There were no investments made in marketable equity securities during the first quarter of 2007. Unrealized losses at March 30, 2008, consisted of securities whose cost exceeded fair value for less than three months.

As of March 30, 2008 and December 30, 2007, the Company had money market investments of $5.6 million and $5.1 million, respectively, that are classified as “cash and cash equivalents” on the Company’s consolidated balance sheet.

In the first quarter of 2007, $8.9 million of the equity in earnings of affiliates is due to a gain on the sale of land at the Company’s Bowater Mersey Paper Company Limited affiliate.

Note 3: Acquisitions.

In the first quarter of 2008, Kaplan acquired two businesses in their professional and test preparation divisions totaling $31.4 million. In addition, the cable division acquired subscribers in the Winona, Mississippi area for $15.4 million. Most of the purchase price for these acquisitions has been allocated to goodwill and other intangibles on a preliminary basis.

In 2007, Kaplan purchased a 40% interest in ACE Education, a provider of education in China that provides preparation courses for entry to U.K. universities, along with degree and professional training programs at campuses throughout China. In the first quarter of 2008, Kaplan exercised an option to increase its investment in ACE Education to a majority interest. This transaction is expected to close in the second quarter.

In the first quarter of 2007, Kaplan acquired two businesses in their professional division totaling $115.8 million. These acquisitions included EduNeering Holdings, Inc., a Princeton, N.J. based provider of knowledge management solutions for organizations in the pharmaceutical, medical device, healthcare, energy and manufacturing sectors. In addition, the cable division acquired subscribers in the Boise, Idaho area for $4.1 million.

In connection with certain 2007 acquisitions, additional purchase consideration of approximately $22 million is contingent on the achievement of certain future operating results; such amounts have largely been funded in escrow and are not included in the Company’s purchase accounting as of March 30, 2008. Any additional purchase consideration related to these contingencies is expected to be recorded as goodwill.

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Note 4: Goodwill and Other Intangible Assets.

The Company’s intangible assets with an indefinite life are principally from franchise agreements at its cable division, as the Company expects its cable franchise agreements to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon, and the Company’s cable division historically has obtained renewals and extensions of such agreements for nominal costs and without any material modifications to the agreements. Amortized intangible assets are primarily mastheads, customer relationship intangibles, non-compete agreements, trademarks and databases, with amortization periods up to ten years.

The Company’s goodwill and other intangible assets as of March 30, 2008 and December 30, 2007 were as follows (in thousands):

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Activity related to the Company’s goodwill and other intangible assets during the three months ended March 30, 2008 was as follows (in thousands):

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Activity related to the Company’s goodwill and other intangible assets during the three months ended April 1, 2007 was as follows (in thousands):

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Note 5: Borrowings.

The Company’s borrowings consist of the following (in millions):

The Company’s commercial paper borrowings at March 30, 2008 and December 30, 2007 were at average interest rates of 2.3 percent and 4.5 percent, respectively. The commercial paper borrowings have various maturities through the second quarter of 2008.

The Company’s $399.8 million unsecured notes that are due February 15, 2009 are now classified as current liabilities at March 30, 2008.

The Company’s other indebtedness at March 30, 2008 and December 30, 2007 is at interest rates of 5% to 8% and matures from 2008 to 2010.

During the first quarter of 2008 and 2007, the Company had average borrowings outstanding of approximately $490.8 million and $404.9 million, respectively, at average annual interest rates of approximately 5.0 percent and 5.5 percent, respectively. During the first quarter of 2008 and 2007, the Company incurred net interest expense of $4.4 million and $2.6 million, respectively.

Note 6: Earnings Per Share.

The company’s earnings per share (basic and diluted) for the first quarters of 2008 and 2007, are presented below:

The first quarter 2008 and 2007 diluted earnings per share amount excludes the effects of 11,875 stock options outstanding and 7,500 stock options outstanding, respectively, as their inclusion would be antidilutive.

Note 7: Pension and Postretirement Plans.

The total cost (income) arising from the Company’s defined benefit pension plans for the first quarters ended March 30, 2008 and April 1, 2007, consists of the following components (in thousands):

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The total cost arising from the Company’s postretirement plan for the first quarters ended March 30, 2008 and April 1, 2007, consists of the following components (in thousands):

Newsweek offered a Voluntary Retirement Incentive Program to certain employees in February 2008 and 115 employees have accepted the offer. The early retirement program expense is estimated at $33.0 million, which will be funded primarily from the assets of the Company’s pension plans. Of this amount, $24.6 million was recorded in the first quarter of 2008 and the remainder will be recorded in the second quarter of 2008.

The Company offered a Voluntary Retirement Incentive Program in March 2008 to some employees of The Washington Post newspaper and the corporate office. The early retirement program will be completed in the second quarter of 2008, and the related cost will be funded primarily from the assets of the Company’s pension plans.

Note 8: Other Non-Operating Income (Expense).

During the first quarter of 2008 and 2007, the Company recorded other non-operating income, net, of $4.1 million and $0.8 million, respectively.

A summary of non-operating income (expense) for the thirteen weeks ended March 30, 2008 and April 1, 2007, is as follows (in millions):

Note 9: Contingencies.

As previously disclosed in the 2007 Annual Report, in February 2008, Kaplan, Inc. was served with a purported class action lawsuit alleging similar claims as a previously settled lawsuit. The putative class is said to include all persons who purchased a bar review course from BAR/BRI in the United States since 2006 and all potential future purchasers of bar review courses. In April 2008, the case was dismissed by the U.S. District Court for the Central District of California.

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Note 10: Fair Value Measurements.

In accordance with SFAS 157, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. SFAS 157 also established a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2008 were as follows (in thousands):

For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.

Note 11: Business Segments.

The following table summarizes financial information related to each of the Company’s business segments. The 2008 and 2007 asset information is as of March 30, 2008 and December 30, 2007, respectively.

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First Quarter Period

(in thousands)