Business News

The McGraw-Hill Companies Reports 18.2% Increase in 1Q EPS

Wednesday 27. April 2011 - $0.39 diluted earnings per share in 1Q 2011

1Q 2011 Highlights:
– McGraw-Hill Financial: 16.2% revenue growth and margin expansion
– Standard & Poor’s: Record global high-yield corporate bond issuance key to 10.4% revenue growth
– McGraw-Hill Education: Double-digit increases in digital products despite revenue decline in seasonally slow quarter
– Information & Media: Upswing in global energy and automotive markets and growth in margin
– 3.3 million shares repurchased for $124 million at an average price of $37.44
The McGraw-Hill Companies (NYSE: MHP) today reported diluted earnings per share of $0.39 for the first quarter of 2011, an 18.2% increase compared to $0.33 reported for the same period in 2010. Net income for the period increased 16.2% to $120.0 million; revenue grew by 7.7% in the first quarter to $1.3 billion.
“A promising year is off to a solid start,” said Harold McGraw III, Chairman, President and Chief Executive Officer of The McGraw-Hill Companies. “We have started to realize the value of our newest segment, McGraw-Hill Financial, which produced strong growth and margin expansion in the first quarter. Significantly, we were able to achieve a solid increase in first quarter earnings while making investments to build on our growing digital presence in education and position Standard & Poor’s for stronger profit growth for the balance of the year.”
McGraw-Hill Financial: Revenue for this new segment grew by 16.2% to $324.0 million and operating profit increased by 35.3% to $96.3 million in the first quarter compared to the same period last year. Excluding TheMarkets.com, which was acquired in September 2010, revenue grew by 11.9%.
Revenue grew at a double-digit rate in both domestic and international markets as solid performances in the newly organized business groups — Integrated Desktop Solutions, Benchmarks, and Enterprise Solutions — substantially offset softness in Research and Analytics. International revenues increased by 14.7% to $93.1 million and represented 28.8% of sales. Subscriptions, which accounted for $240.2 million, or 74.2% of the segment’s first quarter revenue, produced 16.3% year-over-year growth.
Subscriber demand for data and content and the acquisition of TheMarkets.com helped drive growth at the Integrated Desktop Solutions group. Capital IQ again added to its client base, ending the first quarter with more than 3,600, a 23% year-over-year gain. Continued enhancements to the Capital IQ international database and improved navigation capabilities contributed to the first quarter increase. The Global Credit Portal benefitted from growing worldwide demand for S&P ratings information.
An increase in the number of exchange-traded funds (ETFs) based on S&P indices and double-digit growth in assets under management helped produce a solid gain for the Benchmark group. Assets under management in ETFs linked to S&P indices grew by 27% to $323 billion at the end of the first quarter. Thirty-two new ETFs based on S&P indices were launched in the first quarter, bringing the total currently trading on S&P indices to 333. The average daily volume of contracts for major exchange-traded derivatives based on S&P indices increased 6.5% in the first quarter to 3,454,000. The Benchmark group is paid a royalty each time a contract is traded.
The Enterprise Solutions group, created to integrate and streamline the delivery of McGraw-Hill Financial, S&P, and third-party data and information to financial markets, benefited from the growth of Global Data Solutions and CUSIP. New subscribers and expansion at existing accounts contributed to the increase at the Enterprise Solutions group.
Softness in legacy products and a fall off in the international research business led to a decline at the Research and Analytics Group.
Standard & Poor’s: Revenue for this segment grew by 10.4% to $442.9 million in the first quarter compared to the same period last year. Operating profit, which increased by 0.8% to $190.4 million, was negatively impacted by the timing of infrastructure and regulatory investments, staff increases led by India, which included the acquisition of Pipal Research last December, and softness in the U.S. structured finance market. Foreign exchange rates reduced operating profit by $6.1 million in the first quarter.
The search for yield, increased investor appetite for risk, the U.S. Federal Reserve’s second round of quantitative easing known as QE2, tightening spreads, and continued growth in refinancing fueled strong new issuance in the first quarter of 2011.
Record new issue dollar volume of $124.4 billion worldwide in high-yield corporate bonds, solid gains in the U.S. investment-grade corporate market, and a surge in bank loan ratings helped produce a 17.2% increase to $176.3 million in Standard & Poor’s transaction revenue in the first quarter despite a 52.2% decline in public finance issuance. Transaction revenue accounted for 39.8% of Standard & Poor’s first quarter revenue in 2011 versus 37.5% 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 6.3% to $266.6 million in the first quarter compared to the same period last year. Royalty revenue in the first quarter of 2011 was $15.2 million compared to $13.2 million for the same period in 2010. Non-transaction revenue also increased at CRISIL, S&P’s majority-owned company in India, and in non-issue based analytical services, which helped offset a decline in structured finance surveillance due to defaults and maturing deals. Non-transaction revenue represented 60.2% of total Standard & Poor’s revenue in the first quarter of 2011 compared to 62.5% for the same period last year.
In the domestic market, Standard & Poor’s revenue increased by 12.3% to $238.7 million, or 53.9% of the first quarter total. International revenue, benefiting from record first quarter high-yield issuance in Europe, and strong corporate issuance in Asia-Pacific, grew by 8.2% to $204.2 million.
Education: Revenue for this segment decreased by 4.6% to $302.7 million in the first quarter of 2011 compared to the same period last year. The operating loss increased by 22.2% to $75.5 million, reflecting the decline in revenue and ramped up investments for digital infrastructure and product development. Foreign exchange rates added $2.6 million to the operating loss for the first quarter.
The McGraw-Hill School Education Group’s revenue declined by 4.8% to $106.2 million in the first quarter.
In the elementary-high school market, residual orders account for most of the sales in adoption states in the first quarter, although several districts in California purchased new K-5 reading programs. As a result, sales in adoption states increased in the first quarter, but were offset by a drop in the open territory which had benefited in 2010 from large orders in Maryland, Illinois, and New Jersey.
In testing, growth in the formative market was offset by a decline in custom and shelf products. Acuity, a leader in the formative assessment market, benefited from the addition of new customers.
The McGraw-Hill Higher Education, Professional and International Group’s revenue was down by 4.5% to $196.5 million in the first quarter. In this Group, sales of digital products and services were the bright spot, growing at a double-digit rate in a seasonally slow period.
The continued success of McGraw-Hill Connect, the industry’s most advanced homework management system, and other interactive study, assessment and tutoring products helped to produce a modest gain in the U.S. college and university market.
In professional publishing, double-digit growth for digital products and services were offset by lackluster results in the traditional retail channel.
The best-selling e-books from professional publishing during the first quarter of 2011 were:
— Educational Testing Service, The Official Guide to the TOEFL
— Fabozzi, The Handbook of Fixed Income Securities
— Patterson, Grenny, McMillan, Switzler, Crucial Conversations
— McPhee, Papadakis, Rabow, Current Medical Diagnosis and Treatment 2011,
50th Edition
— Lowndes, How to Talk to Anyone, 2nd Edition
Revenue declined in international markets primarily as a result of shortfalls in the Middle East and Africa that were related to unsettled conditions in key countries within the region in the first quarter.
Information & Media: Revenue for this segment increased by 10.3% to $227.5 million and operating profit grew by 34.5% to $37.4 million in the first quarter compared to the same period last year. Foreign exchange rates unfavorably affected operating profit by $1.1 million in the first quarter.
The Business-to-Business Group’s revenue increased by 10.3% to $206.9 million in the first quarter. The Business-to-Business Group brands include Aviation Week, J.D. Power and Associates, McGraw-Hill Construction, and Platts.
Strong demand for Platts’ proprietary content in volatile global energy markets and an upswing in both automotive and non-automotive markets for J.D. Power’s syndicated studies, tracking and consulting services offset softness in construction and aviation. Also contributing to revenue growth was the acquisition of BENTEK Energy by Platts on January 3, 2011.
The Broadcasting Group’s revenue grew by 10.2% to $20.6 million in the first quarter compared to the same period last year. Growth in automotive and service time sales and an increase in retransmission revenue offset the anticipated decline in political advertising in a non-election year.
Corporate expense: Benefiting from a reduction in real estate costs and tight expense controls, corporate expense declined by 4.2% in the first quarter to $34.2 million.
Balance sheet: Cash and short-term investments at the end of the first quarter was approximately $1.3 billion, a $250 million decline from December 31, 2010. Acquisitions and share repurchases were primarily responsible for the decline. Inthe first quarter, the corporation repurchased 3.3 million shares for $123.6 million, at an average price of $37.44.
The outlook: “We are pleased with our solid start to the year,” said Mr. McGraw, “but keep in mind that the first quarter is seasonally small. We continue to maintain our guidance of diluted earnings per share of $2.79 to $2.89 for the year.”
Comparison of Adjusted Information to U.S. GAAP Information:Adjusted revenue is a non-GAAP financial measure contained in this earnings release that is derived from the Company’s continuing operations. This information is provided in order to allow investors to make meaningful comparisons of the Company’soperating performance between periods and to view the Company’s business from the same perspective as Company management. Ournon-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 Exhibit 7.