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McGraw-Hill-Shows Dramatic-Declines in 2008

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MAIN NEWS HEADLINES
January 29 – February 6, 2009 Edition

McGraw-Hill
Shows Dramatic
Declines in 2008

NEW YORK, NY (Authorlink News, January 27, 2009)–McGraw-Hill today reported 2008 reported a 21.1% decline in net income to $799.5 million and a 6.2% decline in revenues for 2008 to $6.4 billion. The sharp declines included a pre-tax restructuring charge of 473.4 million ($45.9 million after tax). The company reduced employee incentives and took serious steps to restructure, thus cutting expenses for 2008 by 2.5% or $126.2 million.

“Cost containment was a priority for us in 2008 and will be again in 2009,” said Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies. “The 2008 results reflect cost reduction actions and the strategic value of a resilient portfolio of products and services in the midst of a recession.

“S&P Investment Services produced a double-digit revenue gain in 2008 to help cushion the impact of the year-long credit crunch on Financial Services. A very good fourth quarter in the U.S. college and university business and a stellar performance in the state new adoption market were offsetting factors in a softening school education market. In the business-to-business market, we clearly benefited from the strength of our news and pricing services for global energy markets.

“In the fourth quarter of 2008, diluted earnings per share of $0.37 reflected a pretax restructuring charge of $26.3 million ($16.4 million after tax, or $0.05 per diluted share) and a $66.5 million reduction in

incentive compensation. In the fourth quarter of 2007, diluted earnings per share of $0.43 included an $0.08 restructuring charge.

“Total expenses in the fourth quarter of 2008 decreased by 8.9%, or $118.3 million. The $66.5 million reduction in incentive compensation, savings from ongoing restructuring activities, and a $17.4 million reduction in restructuring charges as well as favorable foreign exchange were the primary drivers.

“Net income for the fourth quarter of 2008 declined 17.6% to $115.9 million. Revenue decreased 9.8% to $1.4 billion.

The company’s overall Education segment decreased by 2.5% to $2.6 billion compared to 2007, while the McGraw-Hill School Education Group’s declined by 5.4% and the Higher Education, Professional and International Group saw a slight revenue increase of 0.9% to $1.3 billion for the year.

“The bright spot,” said McGraw, “was in the elementary-high school business in 2008 with the state new adoption market, which exceeded our earlier projection of $925 to $950 million and grew by approximately 20% over 2007 to an estimated $980 million. The McGraw-Hill School Education Group captured approximately 30% of the total dollars available in this market during 2008, helped by strong performances from our K-5 reading and math programs in key adoption states.

“Despite the excellent results in the state new adoption market, the McGraw-Hill School Education Group’s overall revenue performance was blunted by declines in residual sales across both the adoption states and the open territory and by weakness in the supplemental market.

“The softness that hit the school market last August continued into the fourth quarter, as school districts postponed scheduled adoptions of new instructional programs, cut back orders for residual materials, and reduced or eliminated purchasing of other products and services, especially those in the supplemental category. Worsening economic conditions facing large urban school districts were exacerbated by a sharp reduction in Federal funding for Reading First programs. As a result, we expect to see a decline of about 4% in the total school market when industry sales statistics for 2008 are released.

“Our testing business was particularly challenged as custom contract revenue decreased for the year and the fourth quarter due to lower volumes of work on several contracts as well as the discontinuation of two contracts that had contributed income in 2007. The decrease in custom contract revenue in the fourth quarter and for 2008 was partially offset by growing sales for our new generation of non-custom or “off-the-shelf” products, notably Acuity, our formative testing program; LAS Links, our assessment series for English-language learners; and our TABE assessments and instructional resources for adult students.

“In the McGraw-Hill Higher Education, Professional and International Group, growth in the US college and university market and a modest gain internationally offset a decline in professional markets during 2008.

“A pick up in our college sales that started in September continued into the fourth quarter. Although we outperformed the industry in the fourth quarter, our improved performance did not match the college market’s estimated 3.0% gain in 2008.

“Best sellers for higher education in the fourth quarter were:

Lucas, The Art of Public Speaking, 10/e, Garrison, Managerial Accounting, 12/e, Nickels, Understanding Business, 8/e, Ober, Keyboarding, 10/e, Knorre, Puntos de Partida, 8/e.

“In both the higher education and professional markets, digital products and services produced double-digit gains for the year and the fourth quarter. Homework management products and eBooks contributed to the increase in higher education revenue. At the end of 2008, we had 741 titles available on CourseSmart, the industry’s eBook Web site. In professional markets, our digital business benefited from strong renewals, increased subscriptions from international customers and new product releases.

“In the professional market, our success in producing several best-sellers and the growth of our digital product revenue was offset by reduced ordering of new and backlist titles by major national booksellers in response to cutbacks in consumer spending.

“Bestsellers in the professional market for the fourth quarter:

Current Medical Diagnosis & Treatment, 2009, 48/e, First Aid for the USMLE Step 1, 2009, Crucial Conversations by Kerry Patterson et al, Grown Up Digital by Don Tapscott, Harrison’s Principles of Internal Medicine, 17th edition.

“The shortfall in international sales in the fourth quarter was mainly due to weakening economic conditions in our Spanish-language markets. For 2008, the increase in international sales was primarily driven by our success with English-language products, particularly for the higher education market, in India, Asia, Europe, and the Middle East.

The Outlook: “2008 was a challenging year. We expect 2009 also to be challenging, given the tight credit markets, budget pressures on the state and local governments, reduced state new adoption opportunities and a weak advertising market. The diversity and breadth of our portfolio leaves us well positioned for when the economic environment improves.

“We expect consolidated 2009 revenue to decline 1% to 2% from 2008 and 2009 earnings per diluted share to range from $2.20 to $2.30,” McGraw concluded.