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The McGraw-Hill Companies Inc. (MHP)

Q1 2010 Earnings Call

April 27, 2010 8:30 am ET

Executives

Donald Rubin - Senior Vice President of Investor Relations

Harold McGraw III - Chairman, President & Chief Executive Officer

Robert Bahash - Executive Vice President & Chief Financial Officer.

Analysts

Peter Appert - Piper Jaffray

William Bird - Bank of America

Craig Huber - Access 342

Brian Shipman - Jefferies

Sloan Bohlen - Goldman Sachs

Edward Atorino - The Benchmark Company

[Drew Figdor - Peterman & Co.]

Presentation

Operator

Good morning, and welcome to the McGraw-Hill Companies first quarter 2010 earnings call. I would like to inform you that the call is being recorded for broadcast, and that all participants are in a listen-only mode. We will open the conference to questions-and-answers after the presentation, and instructions will follow at that time.

To access the webcast and slides go to www.mcgraw-hill.com, and click on the link for the earnings announcement/conference call. At the bottom of the webcast page are three links. If you are listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select either windows media or real player. (Operator Instructions)

I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. Sir, you may begin.

Donald Rubin

Thank you, and good morning to our worldwide audience. We thank you everyone for joining us this morning for the McGraw-Hill Companies first quarter 2010 earnings call. I am Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. With me today are Harold McGraw III, Chairman, President and Chief Executive Officer; and Robert Bahash, Executive Vice President and Chief Financial Officer.

This morning, the company issued a news release with our results. We trust you’ve all had a chance to review the release, but if you need a copy of the release and financial schedules, they can be downloaded at www.mcgraw-hill.com.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events.

Any such statements are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in those forward-looking statements. In this regard we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the US Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call; however, this call is for investors and we would ask that questions from the media be directed to Mr. Frank Briamonte in our New York office at 212-512-4145 subsequent to this call. Today’s update will last approximately an hour. After our presentation we will open the meeting to questions-and-answers.

It’s now my pleasure to introduce the Chairman, President and CEO of the McGraw-Hill Companies, Terry McGraw.

Terry McGraw

Okay. Thank you Don, and good morning and welcome to our review of the first quarter earnings and the outlook for the year. With me today is Bob Bahash, Executive Vice President and Chief Financial Officer, and we are going to start today by reviewing our first quarter operating results and guidance for the segments and for the corporation. Bob will then provide an in-depth look at our financials, and after the formal presentation obviously we’ll be pleased to answer any questions or take comments that you may have about the McGraw-Hill Companies.

Earlier today we reported a 65% increase in diluted earnings per share for the first quarter. That’s $0.33 versus $0.20 for the same period last year. Revenue increased 3.7%, but excluding the divestitures of business week and investor research, revenue grew by 6.7% in the first quarter.

When the 43.2% increase in the fourth quarter earnings per share was announced at the end of January, we said those results set the stage for more growth in 2010. Although the first quarter is seasonally the smallest of the year, we are obviously clear off a good start.

The economy will continue to improve this year. GDP is expected to rise about 3% in 2010. We are encouraged by improvement in the financial markets. Interest rates are expected to remain low. Bond spreads narrowed again in the first quarter, and we still expect growth in our key education markets. With that as an over view, let’s now review operations and our prospects by each of the operating segments, and let’s begin with the McGraw-Hill Education Segment.

In higher education it is called the echo effect. Second semester ordering that echoes the pattern of the first semester orders from the previous summer. In it’s seasonally light first quarter for education, we saw the favorable side of the echo effect, as our higher education group once again reported solid results, including double-digit growth in digital products and services. Revenue for the McGraw-Hill higher education professional and international group grew by 8.3% in the first quarter, to $205.7 million.

Revenue for the McGraw-Hill School Education Group declined by 9%, to $111.6 million in the first quarter. For McGraw-Hill Education in the first quarter, revenue increased by 1.5% and the operating loss was cut by 19.3% to $61.8 million. The first quarter is typically a light one for McGraw-Hill School Education, because of the seasonality of the market that was accentuated this year in the State Adoption Market, because North Carolina did not order.

North Carolina is the only adoption state that usually makes substantial purchases of new materials before the end of March. It did so in 2008, again last year, but not in 2010. As a result, most of the orders from adoption states in the first quarter were for supplemental, residual or intervention products.

The adoption stakes were down slightly from last year, but were offset by stronger results in the open territory. We benefited from large orders from School Districts in Ohio, Maryland, South Dakota that initiated adoptions in 2009, but completed the purchasing earlier this year as funds became available.

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