NEW YORK, Oct. 19 /PRNewswire-FirstCall/ -- The McGraw-Hill Companies
(NYSE: MHP) today reported diluted earnings per share increased by 6% to
$1.06 in the third quarter of 2006 compared to the same period last year. The
2006 diluted earnings per share for the third quarter include charges of
$0.06: $0.03 for incremental stock-based compensation and $0.03 for
restructuring business operations.
"The $15.4 million pre-tax restructuring charge ($9.7 million after tax)
was primarily for employee severance costs for the previously announced
integration of our elementary and secondary basal publishing operations and
the outsourcing of some information technology functions. Approximately 600
positions were eliminated in the third quarter.
"Net income for the third quarter was $382.3 million. Revenue was up 0.8%
to $2.0 billion versus the same period last year.
"Record results at Financial Services and stringent cost management in the
face of a softer education market this year were key factors in our third
quarter," said Harold McGraw III, chairman, president and chief executive
officer of The McGraw-Hill Companies.
"For the first nine months, diluted earnings per share were
$1.84, including a one-time charge of $0.04 for the elimination of the
restoration stock option program in the first quarter, $0.09 for incremental
stock-based compensation, and a $0.03 charge for restructuring. Net income for
the first nine months was $677.5 million. Revenue for the period was up 4.4%
to $4.7 billion.
"We will complete the restructuring this year in the fourth quarter,
resulting in an additional pre-tax charge of $16 million, or approximately
$0.03 per diluted share. The charge cannot be recognized until the fourth
quarter due to timing of actions that relate primarily to the vacating of some
facilities by the end of the year and the elimination of another 100
positions.
"Total restructuring charges for 2006 will be approximately $31.4 million,
or $0.06 per diluted share, primarily from the elimination of 700 positions.
These actions further streamline the organization and position us for a return
to double-digit earnings growth in 2007.
Education: "Revenue for the segment decreased by 6.3% to $l.1 billion in
the third quarter compared to the same period last year. Including incremental
expenses of $3.4 million for stock-based compensation, the segment's operating
profit declined 7.0% to $354.0 million.
"The segment also incurred a restructuring charge of $5.6 million in the
third quarter principally for the integration of its elementary and secondary
basal publishing business. The charge consisted primarily of employee
severance costs for the elimination of 400 positions across the segment.
"Revenue for the McGraw-Hill School Education Group declined by 12.0% to
$603.0 million in the third quarter. Revenue for McGraw-Hill Higher Education,
Professional and International Group increased by 2.2% to $467.2 million in
the third quarter compared to the same period last year.
"Tough comparisons and reduced market potential were major factors in the
McGraw-Hill School Education Group's third quarter performance this year. Our
success in a robust state new adoption market last year helped produce an
l8.9% increase in revenue in the third quarter of 2005. With the state new
adoption market declining by approximately 30% this year, our opportunities
were more limited.
"We benefited this year from the depth and breadth of our product line for
the elementary-high school market which may finish 2006 flat to down 4% after
growing by 10.5% in 2005.
"In the secondary market this year, we had strong performances in the
Florida science and California social studies adoptions. We successfully
introduced Treasures, a new elementary basal reading program in the open
territory. Our alternative basal, Everyday Mathematics, produced good results
as did a growing lineup of reading and math intervention products for students
performing two or more years below grade-level expectations.
"A disappointment this year was the performance of our elementary products
in the Florida and California adoptions. We took only 4% of the elementary
science adoption in Florida. However, we won an estimated 39% share of the
Florida secondary market, where the dollar volume is greater.
"In the California social studies adoption, we captured about 15% of the
available elementary market, less than we had hoped, but we did win 32% of the
middle school market and 43% of the high school market for a leading share
overall in the state.
"We continue to experience softness in the testing market because of
decreased off-the-shelf sales of norm-referenced tests and reduced custom
contract work in the third quarter. This softness was partially offset by new
revenue from our innovative personalized study guides, which have been adopted
by Texas and Arizona to help high school students pass their exit exams.
"The Higher Education, Professional and International Group produced
third-quarter gains in the U.S. college and university, professional, and
overseas markets.
"In the U.S. college and university market, we had good results in
Science, Engineering and Math. There were modest declines in Humanities,
Social Sciences and Languages and the Business and Economics imprints.
"Best-sellers in the third quarter included Ober, Keyboarding, 10th
edition; Terrell, Dos Mundos, 6th edition; Shier, Hole's Essentials of Human
Anatomy and Physiology, 9th edition; Lucas, The Art of Public Speaking, 9th
edition; and Saladin's Anatomy and Physiology, 4th edition.
"In professional markets, both print products and digital products sold by
subscription were up in the third quarter. Best-sellers for the third quarter
included:
- Chase's Calendar of Events 2007
- Harrison's Principles of Internal Medicine, 16th edition
- Pharmacotherapy, 6th edition
- MD Anderson Manual of Medical Oncology
- The Ultimate New York Diet Plan
"Solid gains in Spanish-language markets and a pick up in higher education
sales in Canada were key to the improvement in international publishing in the
third quarter.
Financial Services: "Revenue for this segment increased 11.4% to $675.1
million compared to the same period last year. Excluding the prior year's
revenue of $33.0 million from Corporate Value Consulting, which was sold at
the end of September 2005, revenue for the third quarter grew by 17.9% on a
non-GAAP basis. Of the non-GAAP revenue growth, 48.3% was produced by
structured finance and 21.6% came from corporate and government ratings.
"Including the incremental expenses of $8.0 million for stock-based
compensation in the third quarter, the segment's operating profit increased
17.3% to $295.7 million. Corporate Value Consulting had no material effect on
operating profit in the third quarter.
"Solid growth in debt and equity markets produced record results at
Standard & Poor's. International credit ratings and services continued to
expand rapidly and accounted for 39.0% of ratings revenue in the third
quarter, up from 36.7% for the same period last year.
"The global pacesetter again was structured finance. Growth in cash flow
and synthetic Collateralized Debt Obligations, increases in Commercial
Mortgage-Backed Securities due to favorable interest rates, strength in
commercial mortgage originations and strong leveraged loan activity were key
factors in the structured finance market.
"Dollar volume issuance in the U.S. Residential Mortgage-Backed Securities
market fell again, declining 11.2% in the third quarter after slipping by 1.2%
in the second quarter. But we continued to benefit from an increase in the
number of deals, up 1.7% in the third quarter, and from more active
Residential Mortgage-Backed Securities issuance in international markets.
"Corporate ratings, buoyed by a flurry of financing and merger and
acquisition activity, also produced solid growth in the third quarter. Public
finance softened as refunding volume continued to decline.
"New issue dollar volume increased in the U.S. and European bond markets
in the third quarter versus the same period last year, according to reports
from Securities Data Corporation and Harrison Scott Publications/S&P
estimates.
"In the U.S., total new issue dollar volume was up 9.0% in the third
quarter as corporate new issuance climbed by 25.9%. Public finance declined by
12.9%. Mortgage-Backed Securities were off 8.0%. Asset-Backed Securities were
up 4.2%. Collateralized Debt Obligations were up 118.7%. In Europe, new issue
dollar volume was up 51.8%.
"S&P continued to benefit from ratings and services that are not tied to
the new issue market. They accounted for 23.4% of ratings revenue in the third
quarter, up from 21.6% for the same period last year. Driving the growth was a
surge in bank loan ratings and solid increases in counterparty risk,
derivatives and structured finance models and assessments.
"In equity markets, we again expanded and grew our index services. Twenty-
five new exchange-traded funds based on S&P indexes have been launched in the
U.S. market so far this year by four different sponsors. At the end of
September, assets under management in exchange-traded funds based on S&P
indexes increased 23.5% to $147.1 billion. Contract trading volume of
derivatives based on S&P indexes also increased substantially at the option
exchanges.
"S&P also benefited from strong demand for its data and information
products in both fixed income and equity markets here and abroad. Since
acquiring Capital IQ in 2004, our goal has been to add data from S&P to its
web-based platform, create more tools and improve usability for our clients.
We started with Compustat data and last month we took another major step by
adding Standard & Poor's credit ratings and research content to Capital IQ's
platform. Other recent upgrades include the addition of global macroeconomic
data, real-time market data and news, and detailed ownership data on public
companies.
Information & Media: "Revenue for this segment in the third quarter grew
by 8.0% to $247.3 million compared to the same period last year. Including
incremental expenses of $2.7 million for stock-based compensation, the
segment's operating income increased by 10.3% to $13.7 million in the third
quarter.
"This segment also incurred a restructuring charge of $5.7 million in the
third quarter mainly for employee severance costs for the elimination of 100
positions. Favorable developments with respect to certain disputed billings
benefited the third quarter comparison by $8 million.
"Business information products and services were the key drivers in the
segment's improvement in the third quarter. The segment also benefited from a
pick-up in business-to-business advertising, which helped offset a decline of
$1.6 million, or 5.9%, in the Broadcasting Group's third quarter revenue.
"For the third quarter of 2006, the Broadcasting Group reported revenue of
$26.0 million as declines in national and local-time sales offset increases in
political advertising.
"Revenue for the Business-to-Business Group increased by 9.9% to $221.3
million. The group includes J.D. Power and Associates, BusinessWeek, as well
as products and services for the construction, aviation and energy industries.
"J.D. Power and Associates grew domestically and in both Europe and Asian
markets, reflecting a mix of new products, additional services and the timing
of study releases.
"Platts added new customers and expanded real-time services with existing
clients for news and information in the volatile energy market. In the
construction market, the McGraw-Hill Construction Network and advertising-
based products produced growth.
"Advertising pages in BusinessWeek's global edition were up 7.6% in the
third quarter, according to the Publishers Information Bureau, but could not
offset the impact of a lower circulation base, a related advertising rate
reduction and the shut down of the international editions in Europe and Asia.
In the third quarter of 2005, these international editions produced revenue of
$4.2 million. BusinessWeek.com continues to grow rapidly, producing more than
13% of BusinessWeek's total advertising revenue in the third quarter.
"Aviation Week & Space Technology benefited from the Farnborough Air Show,
which is held in the third quarter of even-numbered years, and the
Maintenance, Repair and Overhaul conference in Asia, which was held last year
in the fourth quarter.
Corporate Expense: "Including an incremental $0.5 million for stock-based
compensation expense, corporate expense increased $11.9 million, or 33.7%, to
$47.2 million in the third quarter. A restructuring charge of $4.1 million,
primarily for employee severance related to Global Resource Management
initiatives focused on outsourcing select information management and business
process functions, was also taken in the third quarter.
The Outlook: "Based on our record of achievement for the first nine
months, we are raising our guidance for the full year.
"Our previous guidance called for diluted earnings per share of $2.44 to
$2.49 excluding the incremental impact of all stock-based compensation. That
excluded $0.13 for stock-based compensation and $0.04 for the one-time charge
for the elimination of the restoration stock option program in the first
quarter.
"The new guidance calls for diluted earnings per share of $2.53 to $2.55
excluding the incremental impact of all stock-based compensation and
restructuring charges. The incremental impact of stock-based compensation has
been revised to $0.11, down from $0.13 estimated at the start of the year. For
2007, we fully expect to achieve double-digit earnings growth."
Conference Call/Webcast Details: The Corporation's senior management will
review the third quarter 2006 earnings results on a conference call scheduled
for this morning, October 19th, 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
www.mcgraw-hill.com/investor_relations. To participate by telephone, please
dial-in by 8:20 AM Eastern Time and register before the start of the call.
Domestic participants may call toll-free (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.
The conference call will also be Webcast. Go to the Corporation's Investor
Relations website and click on the Earnings Announcement link under Investor
Presentation Webcasts. At the Event Details screen, select the Webcast link.
You will need Windows Media Player. The prepared remarks and slides will be
available for downloading from the Investor Relations website's Investor
Presentations archive several hours after the end of the call and a Webcast
replay will be available until October 26, 2006.
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, political and regulatory conditions;
the health of capital and equity markets, including possible future interest
rate changes, the pace of recovery in the economy and in advertising; the
level of expenditures 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 leading global information services provider meeting worldwide
needs in the financial services, education and business information markets
through leading brands such as Standard & Poor's, McGraw-Hill Education,
BusinessWeek and J.D. Power and Associates. The Corporation has more than 240
offices in 36 countries. Sales in 2005 were $6.0 billion. Additional
information is available at http://www.mcgraw-hill.com.
Release issued: October 19, 2006
The McGraw-Hill Companies
Statements of Income
Periods ended September 30, 2006 and 2005
(in thousands, except per share data)
(unaudited) Three Months Nine Months
---------------------------- ----------------------------
% %
2006 2005 Change 2006 2005 Change
---------- ---------- ------ ---------- ---------- ------
Revenue $1,992,570 $1,977,041 0.8 $4,660,792 $4,462,324 4.4
Expenses, net 1,376,341 1,367,086 0.7 3,568,486 3,412,722 4.6
---------- ---------- ---------- ----------
Income from
operations 616,229 609,955 1.0 1,092,306 1,049,602 4.1
Interest expense 7,515 2,808 N/M 13,561 7,018 93.2
---------- ---------- ---------- ----------
Income from
operations
before taxes
on income 608,714 607,147 0.3 1,078,745 1,042,584 3.5
Provision for
taxes on
income 226,441 225,858 0.3 401,291 387,590 3.5
---------- ---------- ---------- ----------
Net Income $ 382,273 $ 381,289 0.3 $ 677,454 $ 654,994 3.4
========== ========== ========== ==========
Earnings per
common share:
Basic $ 1.09 $ 1.02 6.9 $ 1.89 $ 1.75 8.0
========== ========== ========== ==========
Diluted $ 1.06 $ 1.00 6.0 $ 1.84 $ 1.71 7.6
========== ========== ========== ==========
Dividend per
common share $ 0.1815 $ 0.1650 10.0 $ 0.5445 $ 0.4950 10.0
========== ========== ========== ==========
Average number
of common
shares
outstanding:
Basic 351,139 373,552 357,704 375,318
Diluted 360,935 381,163 367,853 382,615
N/M - not meaningful
Exhibit 1
The McGraw-Hill Companies
Operating Results by Segment
Periods ended September 30, 2006 and 2005
(dollars in thousands)
Revenue
(unaudited) Three Months
---------------------------------------------
% Favorable
2006 2005 (Unfavorable)
------------ ------------ -------------
McGraw-Hill Education $1,070,238 $1,142,331 (6.3)
Financial Services 675,063 605,751 11.4
Information & Media 247,269 228,959 8.0
------------ ------------
Total revenue $1,992,570 $1,977,041 0.8
============ ============
Revenue
(unaudited) Nine Months
---------------------------------------------
% Favorable
2006 2005 (Unfavorable)
------------ ------------ -------------
McGraw-Hill Education $1,996,034 $2,078,278 (4.0)
Financial Services 1,952,376 1,750,398 11.5
Information & Media 712,382 633,648 12.4
------------ ------------
Total revenue $4,660,792 $4,462,324 4.4
============ ============
The McGraw-Hill Companies
Operating Results by Segment
Periods ended September 30, 2006 and 2005
(dollars in thousands)
Operating Profit
(unaudited) Three Months
---------------------------------------------
% Favorable
2006 2005 (Unfavorable)
------------ ------------ -------------
McGraw-Hill Education (a) $354,038 $380,847 (7.0)
Financial Services (b) 295,650 251,945 17.3
Information & Media (a) 13,717 12,437 10.3
------------ ------------
Total operating segments 663,405 645,229 2.8
General corporate expense (a) (47,176) (35,274) (33.7)
Interest expense (7,515) (2,808) N/M
------------ ------------
Total operating profit (c) $608,714* $607,147* 0.3
============ ============
Operating Profit
(unaudited) Nine Months
---------------------------------------------
% Favorable
2006 2005 (Unfavorable)
------------ ------------ -------------
McGraw-Hill Education (a) $ 324,748 $ 373,764 (13.1)
Financial Services (b) 861,193 732,743 17.5
Information & Media (a) 28,366 30,791 (7.9)
------------ ------------
Total operating segments 1,214,307 1,137,298 6.8
General corporate expense (a) (122,001) (87,696) (39.1)
Interest expense (13,561) (7,018) (93.2)
------------ ------------
Total operating profit (c) $1,078,745* $1,042,584* 3.5
============ ============
N/M -not meaningful
* Income from operations before taxes on income
(a) 2006 includes a $15.4 million pre-tax restructuring charge as follows:
McGraw-Hill Education, $5.6 million
Information & Media, $5.7 million
Corporate, $4.1 million
(b) 2005 includes a $6.8 million pre-tax gain on the sale of Corporate
Value Consulting on September 30, 2005.
(c) The following table presents the amount of stock-based compensation
expense included in operating profit above:
(dollars in thousands)
Stock-based Compensation
Expense Three Months ended Nine Months ended
(unaudited) September 30 September 30
--------------------- ------------------
2006 2005 2006 2005
--------- -------- -------- --------
McGraw-Hill Education $ 7,175 $ 3,796 $ 24,157 $ 8,588
Financial Services 9,431 1,393 29,129 5,893
Information & Media 5,227 2,498 17,380 3,341
General corporate expense 7,393 6,889 35,576 10,523
--------- -------- -------- --------
Total Company $29,226 $14,576 $106,242** $28,345
========= ======== ======== ========
** Includes a one-time charge of $23.8 million ($14.9 million after-tax,
or $0.04 per diluted share) from the elimination of the Company's
restoration stock option program.
Exhibit 2
SOURCE The McGraw-Hill Companies
Contact: Media Relations Contact: Steven H. Weiss Vice President, Corporate Communications (212) 512-2247 (office) (917) 699-9389 (mobile) weissh@mcgraw-hill.com Investor Relations Contact: Donald S. Rubin Senior Vice President, Investor Relations (212) 512-4321 (office) (212) 512-3840 (fax) donald_rubin@mcgraw-hill.com