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McGraw-Hill Posts Third Quarter Decline

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October 29 – November 5, 2009 Edition

McGraw-Hill Posts Third Quarter Decline

NEW YORK, NY/Authorlink News/10/28/09–The McGraw-Hill Companies Monday reported a 13.9% drop in net income for the third quarter to $336.1 million versus the same period last year. Revenue declined 8.4% to $1.9 billion.

“Our third quarter was marked by sharp contrasts in key markets,” said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies.

With respect to publishing, the company saw good growth in the U. S. college and university market while the elementary-high school market declined.

“Cost containment remains a priority. In the third quarter, including the impact of a $23.4 million pre-tax restructuring charge last year, we reduced total costs and expenses by 5.4% despite a $68 million increase in incentive compensation after substantial reductions in 2008.”

Education: Revenue for this segment in the third quarter declined by 11.6% to $1.0 billion compared to the same period last year. Operating profit decreased by 15.9% to $298.1 million versus $354.7 million last year, which included a restructuring charge of $5.4 million. Foreign exchange rates reduced revenue by $11.4 million and operating profit by $4.9 million.

Revenue for the McGraw-Hill School Education Group declined 19.6% to $501.3 million. Revenue for the McGraw-Hill Higher Education, Professional and International Group decreased by 1.8% to $498.7 million compared to the same period last year.

Based on sales results through the third quarter, when most ordering for the fall term has been completed, McGraw-Hill School Education expects to capture more than 30% of the total available dollars in a 2009 state new adoption market that deteriorated all year as budgetary pressures led a growing number of school districts to postpone purchases. The major postponements occurred in California’s first-year K-8 reading adoption and second-year K-8 math adoption, which together had represented this year’s largest potential. However, postponements also had a significant impact on revenue opportunities in Florida’s 6-12 literature and K-12 music adoptions and in several smaller states including Kentucky and Oregon.

Although the California market for new materials was much smaller than originally anticipated, McGraw-Hill School Education has captured very substantial shares of the available dollars there with its two K-5 reading programs, two K-5 math programs, and its 6-8 math titles. Other significant shares are projected for K-12 science in Tennessee, K-12 social studies in Indiana and K-5 math in South Carolina.

McGraw-Hill School Education has also done well in health and Spanish and with materials for business and vocational courses in the adoption states. Arkansas, Mississippi, North Carolina, Oklahoma and Tennessee all purchased instructional materials for career-oriented courses in 2009.

Although harder to quantify, postponements also affected third quarter purchasing by school districts in the open territory. Nevertheless, McGraw-Hill School Education captured available business across a wide range of subjects. Large open territory adoptions include reading in Philadelphia; science in Providence; math in Wichita, Kansas; and health in Newark, New Jersey. Residual sales were uneven across the country and across product lines, but there was solid ordering for Everyday Math consumable materials in the open territory and for Open Court Reading components in California.

McGraw-Hill School Education also achieved healthy increases for intervention materials such as Reading Mastery, an elementary series that is part of the Direct Instruction line, and Number Worlds. However, sales of the supplemental products, which are largely made up of older print titles, continued to decline.

The Federal stimulus funding for education may have made a modest contribution to the elementary-high school instructional materials market in the third quarter and could result in more fourth quarter ordering. Still, the elementary-high school market is now expected to decline between 20% to 25% in 2009. The state new adoption market is now projected at $500 million to $510 million, down from the original $550 million to $600 million forecast at the beginning of the year and the $980 million achieved in 2008.

In the testing market, the third quarter is seasonally light, but Acuity, the award-winning formative assessment program, continues to win new business. Growth by Acuity could not offset a decline in custom and

off-the-shelf products and services in the third quarter.

For the McGraw-Hill Higher Education, Professional and International Group, growth in the U.S. college and university market was offset by foreign exchange, softness in international markets and continued weakness at book stores for professional products.

The U.S. college and university market is benefiting this year from a surge in enrollments. A 4.8% increase for post-secondary school enrollments in 2009 had been projected by the National Center for Education Statistics, but there are indications now that the overall increase this year may be closer to 10%. Many two-year schools and career colleges are reporting double-digit enrollment growth. As a result, the U.S. college and university market could grow by 8% to 10% this year.

Surging fall enrollments, successful digital initiatives and the solid performance of major imprints fueled growth for McGraw-Hill Higher Education in the third quarter.

Online study tools for students, which include McGraw-Hill Connect(TM), the industry’s most advanced interactive platform; e-books; and online courses all produced double-digit increases.

McGraw-Hill Higher Education’s best sellers in the third quarter included:

McConnell, Brue and Flynn, Economics, 18th Edition Lucas, The Art of Public Speaking, 10th Edition Shier, Butler and Lewis, Hole’s Human Anatomy and Physiology, 12th Edition Saladin, Anatomy and Physiology, 5th Edition Garrison, Managerial Accounting, 13th Edition

Although professional markets were soft at retail, subscriptions for digital products in science, medicine and technology continue to grow at a double-digit rate here and abroad. There also is a growing lineup of

revenue-generating products available for downloading on MP3 devices; approximately 50 medical, technical and test prep titles for the iPhone will have been released before the end of the year.

International revenue decreased in the third quarter, with strong demand for higher education products across most markets offset by lower school sales in some regions as well as softness in professional sales and the unfavorable impact of foreign exchange.

The Outlook: “With market conditions continuing to weaken in school education and advertising, we now expect revenue for 2009 to decline by approximately 7%,” Mr. McGraw said. “We had previously forecasted a decrease of 5.5% to 6.5%.

“But with stringent cost controls, we now expect to achieve the top end of our $2.20 to $2.25 earnings per share guidance for 2009. At the end of the second quarter, we had anticipated coming in at the low end of that range.

“The new earnings per share guidance excludes the second quarter restructuring charge of $0.03, a $0.03 loss on the divestiture of Vista Research in May and a projected $0.02 gain ($9.3 million pre-tax and $5.9 million after-tax) on the sale of BusinessWeek in the fourth quarter.”

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, Platts, Capital IQ, J.D. Power and Associates, McGraw-Hill Construction and Aviation Week. The Corporation has more than 280 offices in 40 countries. Sales in 2008 were $6.4 billion. Additional information is available at www.mcgraw-hill.com.