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McGraw-Hill Income and Profits Decline In Second Quarter

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July 24 – July 31, 2008 Edition

McGraw-Hill Income

and Profits Decline

In Second Quarter

NEW YORK/7/29/08–McGraw-Hill Companies’ net income for the second quarter fell by 23.4% to $212.3 compared to the same period last year. Revenue declined by 2.6% to $1.7 billion for the period. The results included a pre-tax restructuring charge of $23.7 million ($14.8 million after tax), due primarily to severance costs relating to 395 job cuts.

"An encouraging start in the elementary-high school business that underscores our outstanding third quarter prospects in this year’s state new adoption market, the double-digit growth of Standard & Poor’s Investment Services that helped cushion the downturn in credit markets, and strength in news and pricing services for global energy markets were important factors in our second quarter performance," said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies.

"For Information & Media, we still anticipate revenue growth of 6% to 8% and operating margin improvement. Year-over-year comparisons get easier in the second half. Excluding second quarter restructuring charges and related benefits, we still expect earnings per share in the $2.65 to $2.75 range for 2008," he said.

McGraw then pointed to several bright spots:

Education: "Revenue for this segment increased 3.6% in the second quarter to $670.8 million compared to the same period last year. Reflecting a pretax restructuring charge of $8.5 million in the second quarter, operating profit declined $10.9 million, or 13.5% to $69.5 million compared to last year. Foreign exchange rates favorably affected revenue by $5.3 million and had an immaterial impact on operating profit for the second quarter.

"Revenue for the McGraw-Hill School Education Group increased by 6.9% in the second quarter to $438.2 million. Revenue for the McGraw-Hill Higher Education, Professional and International Group decreased by 2.1% to $232.6 million.

"Despite concerns about the economy in many states, a robust state new adoption market is shaping up this year, and we are now on course to capture about one-third of the total available dollars. We estimate that the total state new adoptions this year will be worth $900 million to $950 million compared with about $820 million in 2007.

"Two critical state new adoption markets this year are for K-5 reading in Florida and K-5 math in Texas. Ordering in June from both states was a key to the McGraw-Hill School Education Group’s second quarter performance and an early sign of the success we are experiencing in adoption markets. In the open territory, which is predominantly a third-quarter market, we benefited from a substantial second-quarter order from New York City for Everyday Mathematics.

"The supplemental market remains sluggish, although sales of our intervention products are growing. These include Number Worlds, Reading Triumphs and Jamestown Reading Navigator, which recently won a major adoption in Florida’s Miami-Dade County.

"Based on the trends and performance so far this year, the McGraw-Hill School Education Group expects to gain share in an elementary-high school market that is forecasted to grow 4% to 5% this year.

"Revenue in testing improved as gains in Acuity, our new formative testing program; LAS Links, our new assessments for English-language learners; and TABE, diagnostic assessments and instructional support for adult students, offset declines in older products and custom contract work.

"In the McGraw-Hill Higher Education, Professional and International Group, revenue in the second quarter softened in U.S. college and professional markets. The Group’s international revenue increased in most markets served by the English-Language Group, notably India and Asia. In the markets served by the Latin/Hispanic-Language Group, gains in Latin America were offset by a decline in the Ibero/Italian region.

"In the US college and university market, second-quarter sales were affected when some textbook distributors shifted the timing of their orders for the fall semester from late June into July. Still, sales of our digital, custom and career product lines, which target three important emerging markets within higher education, all showed solid growth during the quarter.

"Softness in retail markets and challenging comparisons created by the first-year sales success of the Encyclopedia of Science and Technology in the second quarter of 2007 were factors in our performance in professional markets. However, key titles continued to perform well despite challenging conditions. When Markets Collide by Mohamed A. El-Erian, named one of the 10 must-read summer investing and business books by J.P. Morgan’s Private Client Group, climbed by early July to the No. 1 position on The Wall Street Journal’s list of best-selling business books. Digital subscription products for professional markets also continued to show good growth in the second quarter.

Financial Services: "Revenue for this segment declined 10.4% to $735.5 million in the second quarter compared to the same period last year. Including a pretax restructuring charge of $15.2 million in the second quarter, operating profit decreased by 25.4% to $299.2 million. A reduction in incentive compensation mitigated the decline in operating profit in the second quarter. Foreign exchange rates positively impacted revenue by $16.8 million and operating profit by $7.9 million.

"Revenue for Standard & Poor’s Credit Market Services, which provides independent global credit ratings, credit risk evaluations and ratings-related information and products, declined by 20.1% to $507.9 million in the second quarter 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, increased by 22.8% to $227.6 million in the second quarter compared to the same period last year.

"At S&P Credit Market Services, a 13.7% gain in revenue to $341.0 million from non-transaction products helped partially offset the substantial decline in structured finance and softness in corporates. Public finance improved in the second quarter. Non-transaction revenue, which includes surveillance fees, annual contracts and subscriptions, accounted for 67.1% of Credit Market Services’ revenue in the second quarter.

"The 50.3% decline in transaction revenue to $166.9 million for S&P Credit Market Services reflected the fall-off in new issue dollar volume in the US and European bond markets. Total new issue dollar volume in the US fell 44.4% in the second quarter compared to the same period last year, according to S&P estimates and reports from Thomson Financial and Harrison Scott Publications. In the US, corporate new issue dollar volume was off 15.1%. Public finance increased 18.7%. Mortgage-backed securities were off 94.5%. Asset-backed securities declined 19.1%. Collateralized debt obligations fell by 88.2%.

"In Europe, new issue dollar volume was down 24.4%.

"International revenue for S&P Credit Market Services was off 3.3%, or 9.4% excluding the impact of foreign exchange rates, to $235.5 million in the second quarter, reflecting softness in collateralized debt obligations, commercial mortgage-backed securities, and asset-backed securities primarily in Europe. US revenue decreased 30.6% to $272.4 million.

"Solid gains by index services and Capital IQ products were instrumental in Standard & Poor’s Investment Services’ 22.8% revenue increase in the second quarter. Capital IQ continued to add new customers in the second quarter in both domestic and international markets. Capital IQ now has more than 2,400 customers worldwide, a 23% increase compared to the second quarter of 2007.

"Assets under management in exchange-traded funds that track S&P indices increased 15.5% to $206.3 billion at the end of the second quarter compared to the same period last year. In the second quarter, 18 new exchange-traded funds using S&P indices were launched. There are now 175 exchange-traded funds based on S&P indices. S&P receives payments based on assets under management in these funds.

"The average daily volume for major exchange-traded derivatives based on S&P indices grew in the second quarter by 25% to more than 2.8 million contracts. The growth was primarily driven by E-mini, options on E-mini’s and Volatility Index contracts. S&P is paid a royalty each time a contract is traded.

Information & Media: "Revenue for this segment grew by 6.8% to $266.9 million in the second quarter compared to the same period last year. Operating profit increased by 68.2% to $24.8 million. Foreign exchange rates did not have a material impact on segment revenue or operating profit growth.

"Revenue in the second quarter increased 7.8% to $240.4 million for the Business-to-Business Group, which includes the following brands: Aviation Week, BusinessWeek, J.D. Power and Associates, McGraw-Hill Construction, and Platts. A key driver in the Group’s second quarter performance was Platts. In a volatile energy market, Platts’ critical oil, natural gas and petrochemical news and pricing products and services are attracting new subscribers both here and abroad. JD Power and Associates continued to increase its automotive market penetration in the Asia-Pacific market in the second quarter.

"Advertising pages in BusinessWeek’s global edition were down 11% in the second quarter, according to the Publishers Information Bureau.

"Revenue for the Broadcasting Group declined 1.0% to $26.5 million in the second quarter compared to last year as gains in political advertising were offset by softness in local and national advertising.

The Outlook: "Uncertainty in financial markets and the economy continue to have an impact on The McGraw-Hill Companies in 2008.

"Revenue for the Financial Services segment could be off 7% to 9% in 2008 if the decline we experienced in the first half in structured finance continues for the remainder of the year. Under these circumstances, we would also expect a 500 to 600 basis point pullback in the segment’s operating margin.

"Slower growth in our higher education, professional, and international operations may also reduce the rate of the increase in revenue this year for McGraw-Hill Education. We now estimate revenue growth of 4% to 6% for this segment in 2008. But we are not changing our estimate of a 50 to 100 basis point decline in the segment’s operating margin.

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 JD Power and Associates. The Corporation has more than 280 offices in 40 countries. Sales in 2007 were $6.8 billion.