Bloomberg News

McGraw-Hill Third-Quarter Profit Falls as S&P Revenue Drops

October 20, 2011

(Updates with closing share price in fifth paragraph.)

Oct. 20 (Bloomberg) -- McGraw-Hill Cos., the finance and publishing company that’s splitting in two, said third-quarter profit fell 3.8 percent as demand for Standard & Poor’s credit ratings dropped.

Net income declined to $365.6 million, or $1.21 a share, from $379.9 million, or $1.23, a year earlier, the New York company said today in a statement. That trailed the $1.23 average of analysts’ estimates compiled by Bloomberg. The company lowered the top end of its full-year profit forecast.

Sales from the textbook division dropped for a fourth quarter, while credit-ratings revenue fell amid a decline in corporate bond issuance. McGraw-Hill said Sept. 12 it will break into two companies, one focused on financial information and the other on educational publishing.

“It’s unusual that their two biggest engines are weak at the same time,” Douglas Arthur, an analyst at Evercore Partners Inc. in New York, said in an interview. “In the past, you had better balance, in the sense that when the ratings market slows down, you typically get a big boost in education.”

McGraw-Hill fell 0.4 percent to close at $42.91 in New York trading. The shares have climbed 18 percent this year.

Arthur rates the shares “overweight” and doesn’t own any. McGraw-Hill hired Evercore this year as a financial adviser.

Third-quarter sales declined 2.5 percent to $1.91 billion, McGraw-Hill said. Analysts on average projected $2.04 billion.

‘Remain Cautious’

Full-year earnings per share from continuing operations will rise to $2.81 to $2.86, from $2.68 in 2010, the company predicted. In July, McGraw-Hill forecast $2.79 to $2.89.

S&P’s revenue decline is a result of a falloff in bond offerings, Chief Executive Officer Harold “Terry” McGraw III said on a conference call with analysts and investors.

“The contraction obviously is disappointing, but it’s very, very reflective of current economic conditions,” he said.

McGraw-Hill began a strategic review last year of the company’s businesses. On Aug. 22, Jana Partners LLC, a New York- based hedge fund and investor in McGraw-Hill, proposed a plan to break up the company to boost shareholder value. The stock had declined about 28 percent since March of 2006 through yesterday.

The split into McGraw-Hill Markets and McGraw-Hill Education is scheduled to be completed by the end of 2012, although the company would like to finalize it sooner, McGraw said today.

Stock Repurchases

The company, which last month announced plans to buy back shares, said it repurchased $355 million in stock in the third quarter and plans to spend $1 billion on shares this year. It also plans to cut administrative expenses by at least $100 million by the end of 2012, McGraw said.

Earlier this month, McGraw-Hill agreed to sell nine television stations to E.W. Scripps Co. for $212 million.

Revenue at Standard & Poor’s fell 1.8 percent to $409.9 million. The unit makes money by charging companies, cities and banks when they issue bonds, meaning its revenue falls when debt issuance declines, according to Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco.

Corporate-bond issuance around the world fell 40 percent to $556.1 billion in the third quarter, down from $919.9 billion in the second quarter, according to data compiled by Bloomberg. With Greece teetering on the edge of default and investors avoiding risky bonds, companies put off selling debt.

“Debt issuance fell off a cliff,” Appert said in a telephone interview before the results were announced. “The debt markets are not going to get healthy again until we have a stabilization of the situation in Europe.”

Education publishing sales fell 11 percent to $937.3 million. Textbook purchases in Texas, one of the largest markets, declined, McGraw-Hill said.

(The company held a conference call today to discuss earnings. To access a replay of the Webcast, click on: investor.mcgraw-hill.com/phoenix.zhtml?c=96562&p=irol- irhome

--With assistance from Zeke Faux in New York. Editors: Lisa Wolfson, Cecile Daurat

To contact the reporter on this story: Oliver Staley in New York at ostaley@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net


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