The McGraw-Hill Companies Reports Second Quarter EPS of $0.61

NEW YORK, July 23 /PRNewswire-FirstCall/ -- The McGraw-Hill Companies (NYSE: MHP) today reported diluted earnings per share of $0.61 for the second quarter of 2010, a 17.3% increase compared to $0.52 for the same period in 2009. The 2009 diluted earnings per share included a total of $0.06 per diluted share for a net restructuring charge and a loss on a divestiture.

Net income for the second quarter of 2010 increased by 16.4%, or $27.0 million, to $191.1 million. Revenue in the second quarter was up 0.6% to $1.5 billion.

"Solid results in the U.S. college and university market, a strong performance by Standard & Poor's indices, and strength in the global energy information market helped offset some softening in credit market services in the second quarter," said Harold McGraw III, Chairman, President and Chief Executive Officer of The McGraw-Hill Companies. "Our operating margin improved by 340 basis points to 24.7%."

Education:  Revenue for this segment increased by 1.8% to $565 million in the second quarter compared to the same period last year. The operating profit for the second quarter grew to $51.6 million compared to $21.0 million last year, which included a net pre-tax restructuring charge of $11.6 million. Foreign exchange rates increased revenue by $3.3 million and operating profit by $2.3 million.

Revenue for the McGraw-Hill School Education Group declined by 4.0%, or $13.7 million, in the second quarter to $324.9 million. The results were influenced by the timing of some Texas K–12 orders, which will be shipped during the third quarter.

Revenue for the McGraw-Hill Higher Education, Professional and International Group grew by 10.8% to $240.1 million.

A solid performance in the Texas K–12 reading and literature market, this year's biggest state new adoption opportunity at more than $400 million, was key to McGraw-Hill School Education Group's second quarter results. Texas did not adopt new materials in 2009. This year the McGraw-Hill School Education Group expects to capture about 40% of the Texas K–5 reading market and approximately 18% of the 6–12 literature market.

The McGraw-Hill School Education Group also will benefit from solid performances in K–5 reading and reading intervention in other adoption states, from a strong showing in the Florida 6–12 math market, and from excellent capture rates in non-core disciplines such as business and computer education and family and consumer sciences.

The gain in the state new adoption market was partially offset by lower sales in California, South Carolina and Indiana — adoption states with reduced opportunities in 2010 compared to 2009. California is in the second year of its K–8 reading and literature adoption and the third year of its math adoption. But as the market leader there in reading, the McGraw-Hill School Education Group has been especially hard hit by the cut back in ordering by local school districts in response to the state's budget deficit and poor economic outlook.

South Carolina did not fund its scheduled high school math adoption and Indiana is buying math over two years in contrast to its fully implemented science adoption in 2009.

Open territory sales were off in the second quarter. A major contributor to the decline was Illinois's suspension of its textbook loan program for 2010. This state program funded many district orders in 2009.

In view of these recent trends, the McGraw-Hill School Education Group is trimming its estimate for the year's state new adoption market to a range of $825 million to $875 million. The previous range was $875 million to $925 million. The McGraw-Hill School Education Group still expects to capture about 30% of the state new adoption market. Growth in the state new adoption market is key to the 4% to 6% increase now forecasted this year for the total elementary-high school market. Previously, a growth rate of 6% to 7% had been forecasted.

In testing, growth in the formative market was offset by the planned phase out of statewide custom contracts in Florida and Arizona. McGraw-Hill Education's Acuity, a leader in the formative assessment market, added new programs in Philadelphia, Omaha, Indiana and New Mexico and won renewals in Denver, Colorado, Corpus Christi, Texas and Mesa, Arizona.

For the McGraw-Hill Higher Education, Professional and International Group, the continuing impact of higher enrollments, which surged last fall, and double-digit growth in digital products and services produced an outstanding performance in the U.S. college and university market.

Online homework management, assessment and tutoring products for students, including McGraw-Hill Connect, e-books and online courses all recorded double-digit revenue increases in the second quarter. The newly announced partnership with Blackboard Inc. will significantly expand student and faculty access to McGraw-Hill Connect by allowing them to use their Blackboard login for the full suite of McGraw-Hill Connect content and tools. Scores of McGraw-Hill Connect assignments, quizzes and tests will post directly to the Blackboard grade book, eliminating the need for students and instructors to manage access and updates in two separate systems.

In the U.S. college and university market in the second quarter, there also was double-digit growth in the following imprints:  Science, Engineering and Math; Humanities, Social Sciences and Languages; and Business and Economics.

Without the benefit of another enrollment surge this fall, the U.S. college and university market is expected to grow 5% to 7% this year.

McGraw-Hill Higher Education best sellers in second quarter included:

• Shier, Hole's Essentials of Human Anatomy and Physiology, 12th Edition
• Sanderson, Computers in the Medical Office, 6th Edition
• Nickels, Understanding Business, 9th Edition
• Knorre, Puntos de Partida, 8th Edition
• Lucas, The Art of Public Speaking, 10th Edition

In professional publishing, the e-book market continued to expand and there were indications of an improving trend in traditional retail channels. As part of the digital transformation, the number of professional titles available to customers as e-books increased again in the second quarter and now stands at 5,000. The number of new iPhone applications was also increased in the second quarter. There are now more than 115 mobile apps available through various licensing partners.

In professional markets, McGraw-Hill's best sellers in the second quarter included:

• Harrison's Principles of Internal Medicine, 17th Edition
• The Why of Work by David Ulrich and Wendy Ulrich
• Crucial Conversations: Tools for Talking When Stakes are High by Kerry Patterson, et al
• Wooden: A Lifetime of Observations On and Off the Court by John Wooden and Steve Jamison
• COMPTIA A+ Certification All-in-One Exam Guide, 7th Edition

Reflecting the impact of favorable foreign exchange rates, revenue increased modestly in international markets. Higher education sales in Southeast Asia, South Korea and Mexico contributed to the performance.

Financial Services:  Revenue for this segment increased by 1.6% to $684.8 million in the second quarter compared to the same period last year. Operating profit declined by 4.2% to $264.7 million. In the second quarter of 2009, the operating profit of $276.4 million reflected a pre-tax loss of $13.8 million from the divestiture of Vista Research and a pre-tax net benefit of $0.4 million from restructuring charges. Foreign exchange rates had an immaterial impact on revenue and increased the growth of operating profit by $5.2 million.

Revenue for Standard & Poor's Credit Market Services, which provides independent credit ratings, credit risk evaluations and ratings-related information and products, was up 0.1% to $457.9 million compared to the same period last year.

Revenue for Standard & Poor's Investment Services, which provides comprehensive value-added financial data, information, investment indices and research, grew by 4.9% to $227 million in the second quarter compared to the same period last year.

Non-transaction revenue at S&P Credit Market Services declined by 1.1% to $307 million in the second quarter compared to the same period last year. Timing of contract renewals was the primary reason for the $3.6 million decline in non-transaction revenue which includes annual contracts, surveillance fees and subscriptions. In the second quarter of 2010, non-transaction revenue accounted for 67.1% of S&P Credit Market Services revenue compared to 67.9% for the same period last year.

Transaction revenue at S&P Credit Market Services increased 2.7%, or $4 million, to $150.8 million on the strength of a surging syndicated leveraged bank loan market.  Transaction revenue includes ratings of publicly-issued debt, bank loan ratings and corporate credit estimates.

After strong new issuance in April, the market stalled and credit spreads began to widen in the face of uncertainty about the pace of economic recovery and growing concern over European sovereign debt.

As a result, new issue volume in the United States declined 40.0% in the second quarter and Europe issuance dropped by 56.3% compared to the same period last year, according to S&P estimates and information from Thomson Financial and Harrison Scott Publications. In the U.S., corporate new issue dollar volume declined by 52.9%. Public finance was off 10.9%. Mortgage-backed securities decreased by 48.2%. Asset-backed securities fell by 44.3%. Collateralized debt obligations were up 46.2% off a very small base.

In Europe, corporate issuance declined by 61.1%, but the high-yield market grew by 364%. The $17.6 billion in high-yield issuance in the second quarter of 2010 in Europe compares with $3.8 billion for the same period last year.

International revenue declined by 3.9%, or $8.3 million, to $203.2 million in the second quarter and accounted for 44.4% of Standard & Poor's Credit Market Services' revenue in the period compared to 46.2% for the second quarter of 2009.

At Standard & Poor's Investment Services, which accounted for 33.1% of Financial Services' revenue in the second quarter, gains at S&P Indices and Capital IQ offset softness in investment research products and services for retail markets.

Thirty-two new exchange-traded funds based on S&P indices were launched in the second quarter bringing the total to 260. As global markets recovered, assets under management in exchange-traded funds linked to S&P indices hit $230.6 billion, a year-over-year increase of 21.5%. The average daily volume of contracts for major exchange-traded derivatives based on S&P indices increased in the second quarter by 26.2% to 3,976,000. S&P is paid a royalty each time a contract is traded.

Capital IQ continued to add new services, functionality and clients. At the end of June, Capital IQ had 3,200 clients, a year-over-year increase of 13.9%.

Information & Media:  Revenue for this segment in the second quarter declined by 5.1% to $224.2 million compared to the same period last year, but grew by 7.4% excluding the divestiture of BusinessWeek. Operating profit increased by $33.1 million to $47.5 million in the second quarter, reflecting growth in global energy products, the divestiture of BusinessWeek, and a pick up in television advertising. Operating profit of $14.4 million in the second quarter of 2009 included a net pre-tax restructuring charge of $4.0 million.  Foreign exchange rates had an immaterial impact on revenue and decreased operating profit by $0.7 million.

The Business-to-Business Group's revenue in the second quarter declined by 7.8% to $198.9 million, but grew by 5.6% excluding BusinessWeek, which was divested on December 1, 2009. The Business-to-Business Group includes the following brands:  Aviation Week, J.D. Power and Associates, McGraw-Hill Construction and Platts.

The Broadcasting Group's revenue grew by 24.0% to $25.3 million in the second quarter compared to the same period last year. Increases in national, local and political advertising all contributed to the improved performance.

The Outlook: "Our previous earnings per diluted share guidance for 2010 was $2.55 to $2.65.  Due to choppiness in some of our key markets, we now expect to finish the year at the low end of that range," said Mr. McGraw.

Conference Call/Webcast Details: The Corporation's senior management will review the second quarter earnings results on a conference call scheduled for this morning, July 23, at 8:30 AM Eastern Time. This call is open to all interested parties. Discussions may include forward-looking information. Additional information presented on the conference call may be made available on the Corporation's Investor Relations Website at http://www.mcgraw-hill.com/investor_relations.

The Webcast will be available live and in replay at http://investor.mcgraw-hill.com/phoenix.zhtml?c=96562&p=irol-EventDetails&EventId=3208170. (Please copy and paste URL into web browser.)

Telephone access is available. Domestic participants may call (888) 323-5423; international participants may call +1 (415) 228-5016 (long distance charges will apply). The passcode is McGraw-Hill and the conference leader is Harold McGraw III. A recorded telephone replay will be available approximately two hours after the meeting concludes and will remain available until August 23, 2010.  Domestic participants may call (866) 422-7922; international participants may call +1 (203) 369-0827 (long distance charges will apply). No passcode is required.

The forward-looking statements in this news release involve risks and uncertainties and are subject to change based on various important factors, including worldwide economic, financial, liquidity, political and regulatory conditions; the health of debt (including U.S. residential mortgage-backed securities and collateralized debt obligations) and equity markets, including possible future interest rate changes; the health of the economy and in advertising; the level of expenditures and state new adoptions and open territory sales in the education market; the successful marketing of competitive products; and the effect of competitive products and pricing.

About The McGraw-Hill Companies: Founded in 1888, The McGraw-Hill Companies is a global information and education company providing knowledge, insights and analysis in the financial, education and business information sectors through leading brands including Standard & Poor's, McGraw-Hill Education, Platts, and J.D. Power and Associates. The Corporation has more than 280 offices in 40 countries. Sales in 2009 were $5.95 billion. Additional information is available at http://www.mcgraw-hill.com.

Investor Relations: http://www.mcgraw-hill.com/investor_relations

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Release issued: July 23, 2010

SOURCE The McGraw-Hill Companies