McGraw-Hill Q3 net income down 4.0% year-over-year to US$373.9M with 2.5% decrease in sales to US$1.91B; results driven by decline in education market, global credit markets
October 20, 2011
– The McGraw-Hill Companies (NYSE:MHP - News) today reported diluted earnings per share of $1.21 from continuing operations in the third quarter of 2011 versus adjusted earnings per share of $1.21 for the same period last year.
Net income from continuing operations in the third quarter declined 2.1% to $366.7 million, as compared to the prior year's adjusted results primarily due to a decline in the education market and a decrease in global credit markets. Revenue was off 2.5% to $1.9 billion in the third quarter compared to the same period last year.
Third quarter results in 2011 and 2010 reflect the reclassification of the Broadcasting Group as a discontinued operation. The company announced on October 3 that it had signed a definitive agreement to sell the Broadcasting Group to E.W. Scripps for $212 million in cash. The deal is expected to close in 2012.
"Overall, the business performed well despite challenging market conditions in global credit markets and historically low funding levels in the U.S. elementary-high school market. We are still on track for another year of growth in 2011, but we remain cautious over the balance of the year," said Harold McGraw III, chairman, president, and chief executive officer of The McGraw-Hill Companies. "We now expect to achieve diluted earnings per share from continuing operations of $2.81 to $2.86 compared to adjusted earnings per share of $2.68 in 2010.
"Our third quarter results highlight the logic of the recent decision to separate The McGraw-Hill Companies into two public companies as part of our Growth and Value Plan. McGraw-Hill Markets continues to show strong top line and operating profit growth based in the capital and commodity markets and McGraw-Hill Education is making a transition from traditional products to a more profitable, subscription-based digital learning and services model. For the first nine months of 2011, the businesses in McGraw-Hill Markets produced an 11.7% increase in revenue and 12.1% growth in adjusted operating profit."
Commenting on the Growth and Value Plan announced last month, Mr. McGraw said, "We are making excellent progress on the separation of The McGraw-Hill Companies into two powerful, independent publicly-traded companies and we are focused on completing the separation as quickly as possible in the coming year.
"We are also making significant headway on our extensive cost reduction program as we disaggregate shared services and establish two appropriately sized corporate centers. Based on our initial analysis, we are targeting at least $100 million in cost reductions over the next 15 months to ensure that both Markets and Education have appropriate cost structures to drive margin expansion and invest selectively in accretive growth opportunities.
"In the third quarter, we also accelerated the pace of share repurchases, buying back 9.0 million shares for $355 million. For the first nine months of 2011, we repurchased 16.7 million shares for $655 million. We expect to repurchase the remainder of the $1 billion target in the fourth quarter, subject to market conditions."
McGraw-Hill Financial: The segment, which was launched in January, produced its strongest quarterly revenue and operating profit growth of the year in the third quarter. Revenue increased 18.4% to $348.5 million and operating profit grew by 31.2% to $112.6 million in the third quarter compared to the same period last year. Excluding the September 2010 acquisition of TheMarkets.com, revenue grew by 14.6%. Foreign exchange rates increased revenue by $2.2 million.
Volatility in financial markets contributed to more than a 30% increase in S&P Indices' revenue in the third quarter as volume soared for the major exchange-traded derivative contracts based on S&P Indices, which now account for approximately 25% of the segment's revenue. The average daily volume of more than 4,865,000 contracts represents a 58.5% year-over-year increase. Assets under management in exchange-traded funds linked to S&P Indices grew by 6.8% to $278.2 billion at the end of the third quarter. Eleven new exchange-traded funds based on S&P Indices were launched in the third quarter, bringing the total net number now trading on S&P Indices to 359.
The growth of Capital IQ, the Global Credit Portal and the acquisition of TheMarkets.com all contributed to the improvement of Integrated Desktop Solutions Group and a 15.6% increase in subscription revenue to $251.8 million in the third quarter versus last year. Subscriptions account for 72.3% of McGraw-Hill Financial's third quarter revenue. With new platform enhancements and expansion overseas, Capital IQ continues to add new clients, ending the third quarter with more than 3,800, a 17.7% increase from the prior year. The Global Credit Portal, which includes Ratings Direct, also added new subscribers in the third quarter.
As Enterprise Solutions increases its breadth of coverage by integrating Standard & Poor's, McGraw-Hill Financial and third-party data and information for financial markets, the number of clients buying multiple services through Global Data Solutions continues to grow.
Standard & Poor's: Revenue for the segment decreased by 1.8% to $409.9 million in the third quarter compared to the same period last year, as growth in international and non-transaction revenue largely offset a steep global decline in credit markets. Excluding a $7.3 million gain on the sale of certain equity interests in India last year, expenses grew by 1.4% in the third quarter compared to a 19.3% increase in the first half of 2011. Operating profit declined by 6.1% to $169.1 million compared to the adjusted results for the same period last year.
Non-transaction revenue, which includes annual contracts, surveillance fees, and a royalty from McGraw-Hill Financial for the right to use and distribute S&P content, grew by 9.5% to $278.7 million in the third quarter compared to the same period last year. Non-transaction revenue also benefited from growth in new corporate credits under surveillance; gains at CRISIL, S&P's majority-owned company in India; and in non-issue based analytical services, which offset a decline in structured finance surveillance. Non-transaction revenue represented 68.0% of Standard & Poor's total revenue in the third quarter of 2011 compared to 60.9% for the same period last year.
Transaction revenue at Standard & Poor's declined 19.5% in the third quarter to $131.2 million compared to the same period last year as global debt issuance (excluding sovereigns) fell by 37.7% in the face of widening credit spreads, the European sovereign crisis, and a slow economic recovery. In the United States, corporate issuance declined by 44.7%. Investment-grade dollar volume fell by 36.1%. New-issue dollar volume in the high-yield market dropped by 68.1% in the third quarter, the lowest since the first quarter of 2009. In Europe, corporate issuance was down by 59.5% and high-yield issuance dropped by 76.4%.
International revenue grew by 9.1% to $202.6 million in the third quarter and represented 49.4% of Standard & Poor's total revenue in the third quarter versus 44.5% last year. U.S. revenue declined 10.6% to $207.3 million in the third quarter.
Favorable foreign exchange rates, a strong bank loan rating market, and gains at CRISIL contributed to the growth of international revenue at Standard & Poor's. Foreign exchange rates increased revenue by $11.3 million and operating profit by $16.3 million in the third quarter.
Information & Media: Based on continuing operations, revenue for this segment increased 11.9% to $228.5 million and operating profit grew by 17.1% to $51.3 million in the third quarter compared to the same period last year. The third quarter results reflect the reclassification of the Broadcasting Group as a discontinued operation. The segment includes the following brands: Aviation Week, J.D. Power and Associates, McGraw-Hill Construction and Platts.
Volatility in energy prices continues to drive demand for Platts' proprietary content, including news and pricing assessments that enable trading decisions in commodity markets. Platts' revenue, including the 2011 acquisitions of BENTEK and Steel Business Briefing, grew by more than 25% in the third quarter. Platts produced nearly 50% of the segment's total revenue in the third quarter.
The segment also benefited from solid international growth for automotive services. The construction business was affected by weak market conditions, but the product continues to shift to a more digital offering.
McGraw-Hill Education: Revenue for the segment declined 11.1% to $937.3 million and adjusted operating profit decreased 11.0% to $314.7 million in the third quarter compared to the same period last year. Foreign exchange rates increased revenue by $6.9 million and operating profit by $6.0 million.
Revenue for the McGraw-Hill School Education Group decreased 21.4% to $420.4 million in the third quarter, a decline mainly driven by lower state new adoption sales. The total 2011 state new adoption market, reflecting low school district implementation rates in the face of state and local budget pressure, is now estimated at approximately $720 million, a decline of about 17% from last year. There also was softness in the open territory.
A reduced participation rate in the 2011 state new adoption market and a sales decline in Texas after a strong performance there in 2010 were key factors in McGraw-Hill School Education's third quarter performance. In 2010, the McGraw-Hill School Education Group competed for 97% of the available dollars in an $850 million to $875 million state new adoption market and took a 30% share. In 2011, the McGraw-Hill School Education Group participated in approximately 75% of the total state new adoption market opportunities. The McGraw-Hill School Education Group expects to capture about 25% of the total available dollars and about 33% of the available dollars in the state new adoption markets it entered.
The market decline was exacerbated in Texas by a new funding allotment system, enacted in June, that had a dampening effect on local district ordering. Under the new system, districts can choose not to purchase materials in all adopted subjects and save the unspent funds for future needs. As a result, local Texas school districts may spend significantly less than the $399 million they were provided in the 2011 adoption.
In testing, increases in custom work and Acuity, the market-leading program in formative assessment, offset declines in off-the-shelf products.
The McGraw-Hill Higher Education, Professional and International Group's revenue was essentially flat at $516.9 million in the third quarter compared to the same period last year.
After two strong years of growth, enrollments in the U.S. higher education market were projected to be flat in two- and four-year schools and down sharply at the for-profit post secondary schools. Still, sales increased for McGraw-Hill Higher Education's Career Education imprint in the third quarter, but could not offset a decline in its Humanities, Social Studies and Language product line.
Strong double-digit growth of digital products and services mitigated softness in traditional products in the third quarter in the U.S. higher education and professional markets.
In higher education, the market response to McGraw-Hill Connect, the industry's most advanced homework management and study system, has been significant. A new study shows use of McGraw-Hill Connect dramatically improves students' overall performance as measured by test scores, course grades, and attendance. By year-end, approximately 2.9 million students and faculty will be registered to use McGraw-Hill Connect and McGraw-Hill's other homework management products.
Revenue increased in international markets, primarily due to the favorable impact of foreign exchange rates and the introduction of the 18th edition of Harrison's Principles of Internal Medicine, the world's best-selling medical title.
Corporate expense: In the third quarter, corporate expense decreased $3.5 million compared to the same period last year, primarily due to decreased incentive compensation and tight cost controls. For the first nine months of the year, corporate expense increased by $1.6 million, or 1.3%.
Balance sheet and cash flow: Cash and short-term investments at the end of the third quarter were approximately $1.5 billion, a $74 million decline from December 31, 2010. Share repurchases and acquisitions were largely funded by free cash flow.
Comparison of Adjusted Information to U.S. GAAP Information: Adjusted earnings per share, adjusted net income, adjusted operating profit and adjusted revenue are non-GAAP financial measures contained in this earnings release that are derived from the Company's continuing operations. This information is provided in order to allow investors to make meaningful comparisons of the Company's operating performance between periods and to view the Company's business from the same perspective as Company management. Our non-GAAP measures may be different than similar measures used by other companies. Reconciliations for the differences between non-GAAP measures used in this earnings release and comparable financial measures calculated in accordance with U.S. GAAP are attached as Exhibits 5, 8 and 9.
Conference Call/Webcast Details: The Corporation's senior management will review the third quarter earnings results on a conference call scheduled for this morning, October 20, at 8:30 AM Eastern Time. This call is open to all interested parties. Discussions may include forward-looking information. Additional information presented on the conference call may be made available on the Corporation's Investor Relations Website at http://www.mcgraw-hill.com/investor_relations.
The Webcast will be available live and in replay at http://investor.mcgraw-hill.com/phoenix.zhtml?p=irol-eventDetails&c=96562&eventID=4214014. (Please copy and paste URL into Web browser.)
Telephone access is available. Domestic participants may call (888) 391-6568; international participants may call +1 (415) 228-4733 (long distance charges will apply). The passcode is McGraw-Hill and the conference leader is Harold McGraw III. A recorded telephone replay will be available approximately two hours after the meeting concludes and will remain available until November 20, 2011. Domestic participants may call (800) 933-9003; international participants may call +1 (402) 530-8096 (long distance charges will apply). No passcode is required.
About The McGraw-Hill Companies: McGraw-Hill is a leading global financial information and education company that helps professionals and students succeed in the Knowledge Economy. Leading brands include Standard & Poor's, S&P Capital IQ, S&P Indices, Platts energy information services and McGraw-Hill Education. With sales of $6.2 billion in 2010, the Corporation has approximately 21,000 employees across more than 280 offices in 40 countries. On September 12, 2011, the Corporation announced its intention to separate into two public companies — McGraw-Hill Markets (working name), primarily focused on global capital and commodities markets and McGraw-Hill Education, focused on digital learning and education services worldwide. Additional information is available at http://www.mcgraw-hill.com/.
Industry Intelligence Editor's Note: In an omitted table, The McGraw-Hill Companies reported Q3 net income of US$373.9 million. For the same period a year ago, the company recorded Q3 net income of US$389.7 million.