McGraw-Hill Reports 3rd Quarter

MGH expect a 1-2% revenue decline in the performance of their education unit this year and a resulting erosion in the units operating margin. Typically the MGH press release summary contains a lot of detail and here is the relevant educational division explanation:

Education: "Revenue for this segment declined 3.8% to $1.1 billion in the third quarter compared to the same period last year. Reflecting a pre-tax restructuring charge of $5.4 million in the third quarter for a workforce reduction of approximately 90 positions and a $15.9 million decline in incentive compensation expense, operating profit decreased by 14.5% to $351.5 million. Foreign exchange rates had no material impact on revenue and operating profit for the third quarter.

"Revenue for the McGraw-Hill School Education Group declined by 9.1% to $623.5 million in the third quarter. Revenue for the McGraw-Hill Higher Education, Professional and International Group increased by 3.7% to $507.8 million.

"In the seasonally important third quarter for the elementary-high school market, the McGraw-Hill School Education Group captured 31% of the total available dollars in a robust state new adoption market. Strong performances in K-5 reading and math were key to our results in this year's state new adoption market, which is anticipated to be $925 to $950 million.

"In the Florida K-5 reading adoption, we expect to capture more than 70% of the market. We also expect to take more than 40% of the K-12 reading/literature state new adoption market, which includes Alabama, Indiana, Louisiana and Oklahoma. In math, we had solid results in Texas and California. We project a 31% capture rate in the K-5 math market in Texas and similar success in the first year of the K-8 math adoption in California, where purchasing will continue into 2009.

"A solid performance in the growing state new adoption market, however, could not offset lower residual and supplemental sales in both adoption states and the open territory. The supplemental market has been soft all year, but the sudden decline in residual sales did not hit the market until August, normally a peak sales period each year for the school business. The decline in residual sales reflects budgetary pressures that school districts are facing due to higher energy and commodity costs, lower tax revenue and higher pension and salary requirements. These higher costs drain resources that otherwise would be used for discretionary purchases such as instructional materials.

"The worsening economic conditions were particularly acute for school districts in large urban markets. A significant factor for many of these districts was reduced funding for the federally supported Reading First program, which was cut from $1 billion in prior years to $383 million in 2008. A portion of the Reading First funding would have been used to provide materials such as workbooks.

"As indicated by the 16.6% decline in the market's sales for August followed by a 17.6% drop in September that was reported by the Association of American Publishers, the reduction in residual ordering is an industry-wide phenomenon. As a result of this unprecedented development, sales for the total Pre-K-12 market will probably decline by 3% to 4% in 2008.

"In testing, a decrease in custom contract work and legacy products offset growing sales from Acuity, our new formative testing program; LAS Links, our assessments for English-language learners; and TABE diagnostic assessments and instructional support for adult students.

"In the McGraw-Hill Higher Education, Professional and International Group, growth in international and U.S. college and university markets offset softness in professional markets.

"A surge in ordering in September was key to our improvement in the U.S. college and university market. We produced gains in each of our three main areas of academic focus: Business and Economics; Science, Engineering and Mathematics; Humanities, Social Sciences and Languages. Growth in our digital and custom career product lines was especially strong.

"Based on the performance of the U.S. college and university market so far this year, we still expect the industry to grow between 4% and 6% in 2008.

"In the international marketplace, our third quarter revenue increase was led by higher education products in Europe and the Middle East as well as the continuing success of the 17th edition of Harrison's Principles of Internal Medicine in India. In our Spanish-language markets, we benefited from back-to- school sales in Spain and Mexico together with the third quarter release of Harrison's Principles of Internal Medicine in Spanish.

"In professional markets, economically challenged retailers cut back on orders and reduced inventory, so even though six of our new titles appeared on best-seller lists during the third quarter, there was a decline in overall revenue. However, our digital subscription products for professional markets continue to produce solid growth.