McGraw-Hill Second Quarter Income Soars

July 26, 2007
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July 26- August 2, 2006 Edition

McGraw-Hill

Second Quarter

Income Soars

NEW YORK, NY/7/24/07–The McGraw-Hill Companies (NYSE: MHP) today reported diluted earnings per share increased 31.7% to $0.79 in the second quarter of 2007 compared to the same period last year. Net income for the second quarter grew by 25.4% to $277.1 million.

Revenue for the second quarter of 2007 increased by 12.5% to $1.7 billion compared to the same period in 2006. Foreign exchange rates positively affected the growth of revenue by $16.8 million, but had no material impact on operating profit growth.

"A very strong performance by Financial Services was a key factor in our second quarter," said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies. "We also benefited from the McGraw-Hill School Education Group’s strong start in this year’s state new adoption market and solid performances in higher education, professional and international markets.

"The operating margin improved in all three segments.

"In the first half of 2007, diluted earnings per share was $1.18, including a $0.03 per diluted share gain ($10.3 million after-tax) on the divestiture of a mutual fund data business in March. The $0.79 diluted earnings per share reported in the first half of 2006 included a one-time charge of $0.04 for the elimination of the Company’s restoration stock option program. Net income for the first half of 2007 was $420.9 million.

"Revenue for the first half grew to $3.0 billion, a 13.0% increase over the same period in 2006. Foreign exchange rates positively affected revenue growth by $28.4 million and negatively impacted operating profit growth by $5.0 million.

Education: "Revenue for this segment increased 5.8% in the second quarter to $647.3 million compared to the same period last year. Operating profit grew by 18.6% to $80.4 million. Foreign exchange rates added $4.5 million to the growth in revenue, but had an immaterial effect on operating profit growth.

"Revenue for the McGraw-Hill School Education Group increased by 3.3% to $403.3 million in the second quarter. Revenue for the Higher Education, Professional and International Group grew by 10.3% to $244.0 million.

"A fast start in this year’s very promising state new adoption market offset a slower performance in the open territory and supplemental markets in the second quarter.

"We produced solid results in the key adoptions: Math (grades 6-12 in Texas) and science (K-12 in California and K-8 in South Carolina). In most state adoption campaigns we now expect the McGraw-Hill School Education Group to finish first or a close second. We continue to project that the state new adoption market will grow 10% to 15% this year.

"In the open territory, most small- and medium-sized districts typically order in the third quarter so visibility in this part of the market tends to develop more slowly. The McGraw-Hill School Education Group has won some significant open territory adoptions in large urban markets, including science programs in New York City and Washington, D.C., math in Boston and New York City and music in St. Louis and Prince George’s County, Maryland. We still expect the industry’s open territory sales to increase by about 4% this year.

"In the supplemental market, the industry is seeing a decline in non- standards-aligned print and computer-based materials. We are succeeding with targeted skills-based intervention materials, including Number Worlds, Corrective Reading, Kaleidoscope and Language for Learning. Orders for supplemental products tend to grow in the third and even the fourth quarter.

"Based on the trends and the performance so far this year, the McGraw-Hill School Education Group expects to gain share in an elementary-high school market that will grow 5% to 7% in 2007.

"In the testing market, following the discontinuation of the Kentucky and Maryland contracts, we saw some slippage in custom revenue. Volume also decreased in "shelf" or non-custom products. A new contract in Georgia and increased business in Tennessee, Missouri, Indiana and the State of Qatar partially offset the decline.

"In the Higher Education, Professional and International Group, we benefited from growth in higher education products here and abroad and a solid performance in professional markets.

"In the U.S. college and university market, our three major imprints – Science, Engineering and Math; Humanities, Social Science and Languages; and Business and Economics – all performed well in the second quarter. Best- sellers included:

* McConnell, Economics, 16th Edition

* Sabin, Gregg Reference Manual, 10th Edition

* Knorre, Puntos De Partida, 7th Edition

* Lucas, The Art of Public Speaking, 9th Edition

"Digital products continue to gain traction in both college and university and professional markets. Homework management, assessment and tutoring products are attracting new customers in higher education.

"We expect to achieve our goal of double-digit earnings growth in 2007 even though the growth rate will probably slow during the second half of the year as compared to our very strong first half performance," said McGraw. Although we expect low double-digit growth from Financial Services in the second half, tougher comparisons will make the fourth quarter more challenging. Some operating margin compression may occur in our segments in the second half, but we still expect improved operating margins in all three segments for the full year."

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