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McGraw-Hill Net Income Rises Education Unit Down

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February 1 – February 8, 2007 Edition

McGraw-Hill
Net Income Rises
Education Unit Down NEW YORK, NY/1/25/07—The McGraw-Hill Companies (NYSE: MHP) reported 2006 diluted earnings per share of $2.40, an increase of 8.6% versus $2.21 in 2005. The 2006 results include the following charges: $0.04 for the elimination of the restoration stock option program, $0.11 for incremental stock-based compensation and $0.06 in charges for restructuring started in the third quarter and completed in the fourth quarter. The 2005 results include the following: a $0.04 restructuring charge in the fourth quarter, a $0.03 increase in income taxes for the repatriation of funds and a $0.01 gain on the sale of Corporate Value Consulting. Net income for 2006 increased 4.5% to $882.2 million. Revenue for 2006 grew by 4.2% to $6.3 billion.

For the fourth quarter of 2006, diluted earnings per share increased 12.0% to $0.56 compared to the same period last year. The results include $0.01 for incremental stock-based compensation, a $0.03 restructuring charge and $0.04 for a change in revenue recognition for the transformation of Sweets from a primarily print catalog to a bundled print and online service. This shift in timing reduced Sweets’ revenue by $23.8 million and operating profit by $21.1 million. The 2005 results include a $0.04 restructuring charge and a $0.03 increase in income taxes for the repatriation of funds.

Net income for the fourth quarter increased 8.2% to $204.8 million. Revenue grew by 3.4% to $1.6 billion.

“A strong finish to an outstanding year in Financial Services and effective cost controls in a softening education market were key to our performance in 2006,” said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies.

Education: “Revenue for this segment in 2006 declined by 5.5% to $2.5 billion. Including incremental expenses of $19.6 million for stock-based compensation and a one-time charge for the elimination of the restoration stock option program, the segment’s operating profit decreased in 2006 by 19.8% to $329.1 million with an operating margin of 13.0%.

“In the fourth quarter of 2006, revenue for the segment was off by 11.0% to $528.1 million while operating profit dropped by 88.0% to $4.4 million. Foreign exchange rates benefited revenue in 2006 by $6.6 million and operating results by $2.3 million, respectively.

“The segment incurred a pre-tax restructuring charge of $10.4 million in the fourth quarter to complete the previously announced integration of our elementary and secondary basal publishing units and the vacating of facilities at the end of 2006. Total restructuring charges for the segment in 2006 were $16.0 million; 450 positions were eliminated. In 2005, total restructuring charges for the segment were $9.0 million, all of which occurred in the fourth quarter.

“The McGraw-Hill School Education Group’s revenue decreased by 12.4% to $1.3 billion in 2006 and by 30.2% to $186.7 million in the fourth quarter.

“The McGraw-Hill Higher Education, Professional and International Group’s revenue increased 3.5% to $1.2 billion in 2006 and grew by 4.7% in the fourth quarter to $341.4 million.

“Tight cost controls helped mitigate reduced revenue potential and tough comparisons in the elementary-high school market. State new adoption opportunities plunged by approximately 30% in 2006 and the industry’s open territory sales declined by 0.3%. As a result, the elementary-high school market was off by 5.8% in 2006 after growing by 10.5% in 2005.

“The year-over-year swing in revenue was evident in the School Education Group’s fourth quarter results, which reflected the absence of new business after a very successful 2005 in Texas and softness in the testing market. In 2005, a delayed $44 million new adoption order from Texas helped boost the School Education Group’s fourth quarter revenue by 23.6%.

“Revenue drivers for the full year included products for the expanding intervention market, such as Number Worlds; Everyday Mathematics, an alternative basal; Treasures, the new basal for the elementary school reading market and strong performances in Florida science (a 39% share of the secondary market) and California social studies (32% of the middle school and 40% of the high school markets). The secondary science list also performed well in New Mexico, Oklahoma and West Virginia. But these positive results were offset by weak performances from our elementary products in Florida science (a 5% share) and California social studies (a 15% share).

“In a continuation of a trend driven by the federal No Child Left Behind Act, sales of norm-referenced shelf tests declined again in the fourth quarter. The shortfall was exacerbated in the fourth quarter by lower volume from custom contracts as states reduced the scope of required work.

“The Higher Education, Professional and International Group benefited from cost control efforts and strong finishes in international and professional markets in the fourth quarter to end the year on an upswing.

“In the U.S. college and university market, our Science, Engineering and Math imprint produced an increase for the year. Our Humanities, Social Sciences and Languages and the Business and Economics imprints were essentially flat in 2006. Sales of Business and Economics increased in the fourth quarter while the other two imprints showed declines.

“Our growing array of digital products contributed incremental revenue for the fourth quarter and the year. In the U.S. college and university market, there is growing usage of Homework Manager, Math Zone and similar electronic products, particularly in accounting, mathematics and world languages. In professional markets, our digital subscription services and business and education products produced solid gains in the fourth quarter and for the year.

“Best-sellers in the fourth quarter included: Current Medical Diagnosis and Treatment 2007, 46th edition First Aid for the USMLE Step 1: 2007, 17th edition The Starbucks Experience Basic and Clinical Pharmacology, 10th edition Crucial Conversations

“Internationally, we produced gains in both English- and Spanish-language markets in the fourth quarter and for the year, said Harold McGraw. “With continued strength in Financial Services and a rebounding education market, we are poised for double-digit earnings growth in 2007.”