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| Economic growth and job creation. 21st century skills. Greater transparency. That’s our vision for this new decade. It is a vision for creating a smarter, better world — one where individuals, markets and countries have the knowledge and insights they need to develop and grow. In the pages that follow, we share the stories of how we at McGraw-Hill are laying the foundation for that future today. The McGraw-Hill Companies Contents 2009 ANNUAL REPORT 2 Letter to Shareholders Growth. . .Purpose. . .Passion by Harold McGraw III, Chairman, President and CEO 6 Standard & Poor’s Credit Ratings Growth, Jobs...and Credit Ratings 8 McGraw-Hill Higher Education Adapting to Learning in the 21st Century 10 Platts Why Is Platts Important to the Global Energy Markets? 11 J.D. Power and Associates J.D. Power: #1 in China 12 Center for Digital Innovation in Education Personalized Education Focused on Better Results 14 S&P Indices S&P Indices: Seeing What Others Can’t 15 Capital IQ Capital IQ’s Unfair Advantage for Smart People 16 Sustainability A Green Thumb for Business IN DEPTH 9 How Education Becomes e-learning by Andi Pascarella, Ph.D., Director of Development — Digital Content and Pedagogy, McGraw-Hill Higher Education 11 Satisfaction in the Face of Adversity by Finbarr O’Neill, President, J. D. Power and Associates 13 College and Career Readiness: Preparing All High School Students for Success by Jeff Livingston, Senior Vice President, College & Career Readiness, McGraw-Hill Education 15 Never Out of Style: Innovation, Integration Drive Capital IQ’s Success by D. Randall Winn, Executive Managing Director, Capital IQ 17 Investing in Carbon Efficiency by Alka Banerjee, Vice President, S&P Indices 18 McGraw-Hill At-a-Glance 20 Helping to Create a Smarter, Better World |
| Growth... Purpose... Passion Harold McGraw III Chairman, President and CEO TO OUR SHAREHOLDERS: With this year’s annual report, we present our vision for the new decade ahead. It is a vision for a smarter, better world — one where individuals, markets and countries have unprecedented access to the knowledge and insights needed to adapt, grow and prosper. In the pages that follow, we share the stories of how we at McGraw-Hill are working with our partners and customers around the globe to build this future together. Individually, these stories span the breadth of our business — from the credit ratings and investment services of Standard & Poor’s, to the financial data and analytics of Capital IQ, to the pedagogical and professional programs of McGraw-Hill Education, to the information services of brands such as J.D. Power and Platts. Taken together, these stories form a portrait of a company on the cutting edge of globalization and digitization. At a time when these forces are reshaping the economic landscape, we are providing information and knowledge for the common good in ways never before possible. Through this commitment to innovation, the employees of McGraw-Hill are promoting new opportunities for growth at every level. Academic growth for students. Career growth for workers. Economic growth for markets and nations. And above all, strong and enduring financial growth for you, our shareholders. RENEWED MOMENTUM FOR GROWTH I am pleased to report that your company ended 2009 with renewed momentum after successfully managing through a period of unprecedented turbulence in the global economy. While diluted earnings per share fell 7.2percent for the year as a whole, they rose an impressive 43.2percent in the fourth quarter. In January, we announced plans to resume our share repurchasing program and increase our annual dividend for the 37th consecutive year. Since 1974, our annual dividend has grown at an average compound rate of 9.9percent. And since 1996, we have returned approximately $9.4billion to shareholders through dividends and stock buybacks. After a strong finish to 2009, we enter 2010 with many reasons for confidence. We anticipate a year of strong growth as we innovate digitally around the world. With the continuing recovery of the global economy, we believe a smarter, better world will need the financial, education and business information services we provide more than ever. In all three of these key markets, the trends for our business are pointing in one direction — up. Financial Services During the financial crisis, the world saw why healthy credit markets require transparency and accountability. At their most basic level, these markets connect capital with those who need it for development and growth. When entrepreneurs and small businesses cannot access financing through these channels, job creation and economic growth can be seriously damaged. Fortunately, conditions have improved dramatically since the credit crunch brought the global economy to a virtual standstill in 2008 and early 2009. A combination of low 2The McGraw-Hill Companies 2009 Annual Report |
| interest rates, narrowing spreads and government stimulus programs has pumped new life into corporate and municipal debt markets. As Standard & Poor’s Chief Credit Officer Mark Adelson explains on page 6, credit ratings play an important role in the bond markets by helping investors assess risk. Thus, with the revival of these markets has come renewed demand for our credit ratings. Despite this progress in the corporate and municipal debt markets, the securitization market has recovered far more slowly. This is understandable given the prominent role that mortgage-backed securities played in the recent financial crisis. Yet in the long run, we believe a growing economy will continue to need securitization to meet the global demand for borrowing. As investors return to this market, we have taken significant steps to improve our ratings in response to the lessons of the financial crisis. These steps include measures to better account for the impact of periods of severe economic stress. For example, before giving a security our highest rating of AAA, we consider what would happen if the country faced an economic crisis on par with the Great Depression. As we have made these internal reforms, we have also worked closely with governments around the world on new regulations for the financial industry as a whole. We have supported strengthening regulations for credit ratings in ways that increase accountability and transparency, preserve analytical independence, foster competition in the industry, and achieve a globally consistent standard to prevent regulatory arbitrage. In the year ahead, we hope the U.S. Congress will complete a financial reform package that accomplishes these goals and others designed to make a more stable and sustainable global financial system. New digital technologies are creating significant opportunities for education in the 21st century. In the fall of 2009, McGraw-Hill Education launched Connect, an advanced all-digital teaching and learning exchange for higher education. To mark the occasion, Harold McGraw III and students from New York City’s Baruch College rang the opening bell at the New York Stock Exchange. Today, more than 1.2million students and professors use Connect. On both the credit ratings side and the investment services side — which I discuss more later—Standard & Poor’s employees ultimately measure their success by the value their insights bring to investors. While the global financial system has changed in many ways during Standard & Poor’s 150years of operation, our focus on serving all investors will always be paramount. Education It is a cruel fact that unemployment often remains high long after economic recovery begins. In today’s tight job market where candidates outnumber openings, education can make all the difference between landing a new position and losing out. As a result, more students and workers are returning to school with a common goal: to learn the skills to succeed. In the United States, college enrollments surged last year. For McGraw-Hill Higher Education, these dynamics produced a year of robust growth. While college enrollments will likely not increase as quickly in 20I0, we expect the division’s momentum to continue. As McGraw-Hill Education Senior Vice President Jeff Livingston explains on page 13, higher education and postsecondary training are no longer a luxury for some; they are a necessity for all. In the elementary-high school market, state budget woes continue to constrain spending in the United States. Yet even during these lean times, education is an investment in the future that no country can afford to postpone. As a result, we see governments at all levels making new investments in education. At the state level, the market for new textbook adoptions will be nearly twice as large this year as last. At the federal level, meanwhile, the American Recovery and Reinvestment Act set aside an extraordinary amount of funding for education — more than $100billion in all. In the year ahead, the administration will release more of these funds to states and districts. In this changing educational environment, we have reorganized our pre-K-12 business into four new centers: intervention and special needs; college and career readiness; literacy and the humanities; and STEM (science, technology, engineering and math). These centers mirror the priorities driving education reform today. And together with our assessment services, they will provide personalized and effective pedagogical programs for equipping students and educators for the 21st century. |
| The McGraw-Hill Companies’ commitment to serving enduring global needs for knowledge, capital and business information is helping to build a stronger foundation for the global economy. In his former role as Chairman of the Business Roundtable, Mr. McGraw facilitated a discussion with President Barack Obama and a group of CEOs about issues such as economic stimulus, education and trade. pedagogical programs for equipping students and educators for the 21st century. Business Information At a time of increasing competition among companies and nations, leaders around the world are asking: Which industries will provide the foundation for enduring growth in this new decade? At McGraw-Hill, our business information brands are on the frontlines of answering this question with cutting-edge analysis of the fields that will define the future of the global economy — energy, automobiles, aviation, construction and more. In all these fields, we have moved from simply providing information to customers to using digital technology to embed our insights into their workflows. With advertising now accounting for less of our total revenue — only about two percent — we made the difficult decision to sell BusinessWeek last year. For 80years, the magazine’s writers and editors embodied McGraw-Hill’s commitment to integrity and independence, and we will always take pride in our history together. DIGITAL AND GLOBAL INNOVATION As we help create a smarter, better world in each of these areas — financial services, education and business information— we are also becoming a smarter, better company. Across our company, our employees are improving business processes by designing new digital platforms and raising standards for customer service. In all, they are transforming McGraw-Hill into a more digital, more global and more sustainable business. More digital While America’s economy experienced little growth during the first decade of the 21st century, the same cannot be said of the Web. As the graphic on page 18 shows, digital data will have multiplied fivefold in the four years leading up to 2012. In a world producing such unprecedented quantities of data, individuals and businesses need quality benchmarks, analysis and authoritative educational programs more than ever. To meet this growing demand, McGraw-Hill has moved to the forefront of the digital world. For the energy market, Platts offers an advanced Web-based eWindow that enables buyers and sellers to submit their trading positions with the click of a mouse. In turn, the company uses the real-time data from this system to provide the market with important price assessments. At Standard & Poor’s, meanwhile, subscribers for Capital IQ’s Web-based financial tools increased by nearly 10percent last year. On page 15, Executive Managing Director Randall Winn explains how Capital IQ has developed one of the world’s fastest-growing fundamental research operations. Nowhere is the digital revolution clearer than in education. In short, the digitization of education is the opportunity of the century for personalizing and improving learning for students regardless of distance and time. Last year, we introduced McGraw-Hill Connect®—an all-digital course manager that already counts more than a million college students and professors among its users. This year, we are taking digital learning to the next level. For college students, we are developing new editions of McGraw-Hill LearnSmart™—our all-digital, adaptive study program. As this program makes students smarter by tailoring study materials around their individual needs, we are also making the program smarter by learning from the performance data it gathers. For college faculty members, we are launching McGraw-Hill Create™ for digital, custom publishing. Using this Web-based platform, instructors can build custom course materials from a selection of nearly 4,000 McGraw-Hill books and thousands of articles, case studies and other resources. While these new technologies are changing the way we provide education, they will not change the underlying philosophy that drives our business. We firmly believe scientifically proven content matters most, as do the teachers and students who rely on our work in 65 different languages. Our business is not just a matter of publishing textbooks and computer programs from different sources of information. It is a matter of adding value by understanding the instructional science of what students need to know, when they need to know it, and the different ways they learn it best. And no one understands this new learning frontier better than the editors, authors and digital innovators of McGraw-Hill Education. More global In the wake of the financial crisis, some have questioned the future of globalization. Yet ultimately the benefits of global trade and investment have been undeniable. 4The McGraw-Hill Companies 2009 Annual Report |
| They have opened new markets for businesses and created good jobs for millions in the developing and developed worlds alike. Instead of retreating from globalization, we must now ensure that these benefits accrue for every segment of society, in every country. For McGraw-Hill, the benefits of global trade and investment have also been undeniable. In total, over the past eight years, revenue growth from abroad has outpaced our domestic performance. Last year, foreign sources accounted for 29percent of our revenue, with emerging markets growing in importance. Outside the United States, India has become our third largest market thanks to the rapid growth of our financial services and education businesses in the country. For example, we recently announced a new joint venture with Tata to work with industry experts in creating a professional development program for India’s growing retail industry. In November, I spent a week meeting with government and business leaders in another critical emerging market — China. During my trip, I announced three new ventures to support the country’s transition from a mostly export-driven manufacturing economy toward a more service-based knowledge economy. First, McGraw-Hill Education will partner to launch a new English-language professional development program for Chinese engineers, so we can help them acquire the skills to compete in an increasingly global field. Second, J.D. Power will partner to develop a first-of-its-kind index for evaluating Chinese cities as destinations for business process outsourcing, so they can better showcase their capabilities to multinational companies. Finally, in recognition of Shanghai’s growing stature as a center of global finance, Standard & Poor’s announced plans to open a new Greater China headquarters in the city. The Corporation has made expansion into key global markets like China a strategic priority. During a visit to China, Mr.McGraw met with Dr.Jin Huang, Chief Executive Officer of Ambow Education, one of China’s leading providers of vocational training. Ambow is partnering with McGraw-Hill Education to develop new English-language training programs in China for engineers in information technology, and with J.D. Power and Associates to assess the competitiveness of Chinese cities as business process outsourcing centers. More sustainable Around the world, environmental concerns are driving a new market for sustainability. As businesses and consumers increasingly factor the environment into their decisions, this market will continue to expand, and so will the need for consistent standards, financial models and training programs. At McGraw-Hill, our brands are uniquely positioned to provide these services. By drawing on their expertise, we are building a growing business around sustainability. For example, the increasingly diverse S&P Indices brand offers new investment tools that balance financial performance with environmental responsibility. Most recently, we partnered with the World Bank’s International Financial Corporation to develop a carbon efficiency index for emerging market companies. As we help lay the foundation for a greener economy around the globe, we are also working to become a greener company at home. This year, our Corporate Responsibility and Sustainability report will include significant targets for reducing our environmental footprint. In 2010, we look forward to all these elements coming together to produce a year of global growth and innovation. I have confidence in the future of this company because I have confidence in the character and caliber of our employees. They are our greatest asset. Their integrity builds trust for our brands. Their insights set our analysis apart in a world awash with choices. And their passion drives our commitment to joining with our partners, customers and communities in creating a smarter, better world. The stories that follow are the stories of our work together. We are fortunate to be part of a company where we can serve the interests of our shareholders by serving the needs of our world. On behalf of all my colleagues at McGraw-Hill, I thank our distinguished and dedicated Board of Directors for giving us that opportunity. Most important, I thank you, our shareholders, for your continuing support. Sincerely, Harold McGraw III February24, 2010 |
| Growth, Jobs... and Credit Ratings Mark Adelson Chief Credit Officer, Standard & Poor’s Credit ratings are a valuable benchmark for investors that helps the global bond market work better. That’s important because governments issue bonds to pay for building roads, schools and hospitals. In the private sector, companies issue bonds to start and expand businesses. The resulting financing helps create economic growth and jobs. At S&P, we believe the bond market works better when investors have more relevant information which can help them distinguish for themselves the relative risk of investment opportunities and price those opportunities as they see appropriate. Credit ratings and their accompanying analysis help investors do this by providing an independent view of the creditworthiness of particular investments and issuers. At S&P, we view likelihood of default as the centerpiece of creditworthiness. However, we also consider secondary factors like payment priority, potential recovery and credit stability. Many investors around the world use credit ratings as part of their own analytic efforts. Ratings are provided free of charge to investors and give them a benchmark that can help them streamline their analysis. In the past two years, we have made a number of improvements to increase the quality and transparency of our ratings. With more than 1,300 analysts around the world, S&P’s commitment to the comparability of our ratings across sectors and geographies really distinguishes us. We intend for each ratings symbol (e.g., AAA) to connote a comparable overall view of creditworthiness wherever and whenever it appears. Comparability is important because many investors (and others) use ratings as a common vocabulary in discussing credit risk. 6The McGraw-Hill Companies 2009 Annual Report |
| I 7^^ I p^^ A few short years ago, “recovery To address that demand, Standard & analysis” was one of the least talked Poor’s is enhancing and introduc- about parts of credit risk research. ing new analytics and ratings tools. ^^^h ^^m Lenders, creditors, bondholders The CreditPro ® Web-based plat- and the broad range of fixed income form offers default and recovery ~\/[£*£*-t-i-nrr investors focused primarily on data covering more than 13,000 -LV-LCC Llll^ the probability of default before it companies, 115,000 securities, ,1 -vy 1 C occurred, rather than on the value 130,000 structured finance issues L11C -L CCUo \J\. they could receive once it did. and 100 Sovereign ratings. t It is fully integrated with S&P’s lllVCStOrS But given the recent financial tur- LossStats database, which con- moil, investors — as well as regula- tains comprehensive credit loss ^^^^^^^^^^^^^^^^^^^^™ tors, academics and other market and recovery analytics. CreditPro ® At Standard & Poor , s our focus practitioners — are more and more enables credit professionals to is Qn investors and meedng their interested m knowing what actual benchmark and refine their own needs ___Over ^ , ast twQ ^^ losses might be it there is a default. credit risk assessments based we naye takgn many stgps ^ make It’s now seen by some as an essential on comparable historical trends Qur ratings bettgr and tQ make ^ component of assessing bank capital over specified time periods. radngs process mQre transparent . levels, determining expected rates We enhanced and published the of return and pricing credit risk. In addition, Standard & Poor’s crkeria wg usg ^ ratg residential otters Recovery Ratings on an mortgage-backed bonds, com- CreditPro offers default and recovery expanding list ot fixed income ^^ ^ ^^ bonds ^ data on more than : instruments, including leveraged collateralized debt obligations. 13,000 compares loans ‘ high-yield bonds, and senior Our reyised ^^ enab , e inyes . ^H I IS 000 secur.t.es and subordinated debt. The goal tors to better understand our * nnn is t0 P r ° vide market P rotessionals view regarding the credit risk 130,000 -UCTUKEB ^ wkh greater msight mto the value assoc . ated wkh ^^ ^^^ T ___ot such instruments through opin- securities, and improve the com- rat™ ions a S ainSt C0mm ° n ^nchmarks parability of these ratings with regarding potential recovery. those Qn Qtner types q£ securkies In addition, we introduced new tools such as the Risk-Adjusted II X 1 ^,’ Capital (RAC) ratio for banks. This . ^\v. ^JJJJt aims to provide a complementary, ” I) “ Vy \V___globally consistent and independent Jl . ^ - • f\ .4jC&i view of capital adequacy for each of «p^\ inp these financial institutions that we ^^^^^^ m? V ‘ ‘ \ rate. In 2010, we will continue to ^^^ ^^J ff| V- \ develop new ways of strengthening “^^^^^^ ^^^^^^^ ff ’ ‘ A \ v our ratings and the process we use r 5»^""^r ^ I • . .m v^ i//i\ , S\m—^— 7 |
| are expected to grow 13% by 2018. Adapting to Learning in the 2I st Century Ask Ed Stanford about innovation in higher ^flBfiHU^BEH^fe ‘^^HBB about something called “adaptive learning.” J*^ I^H ^f/ ^v^&^ife^B “Adaptive learning is about combining education, assessment ^^ / / ^^m&^r and technology to customize and dynamically adapt “v ^ A content based on individual performance and needs,” says • • ^^^ * Mr. Stanford, who heads McGraw-Hill Higher Education. ^X^Vv^st ^ ^flB) “It’s here, it’s now and it’s working.” ^^^Bjk^^^ ^»’k-?W recorded lectures, browse notes, take practice exams and get B*KNff^£L instant feedback online. It reflects one of the most extensive ff^*’"* f^^H ^ ^^ In creating Connect, a team of cultural anthropologists ; • observed student behavior firsthand in classrooms, dorms, [ ^i^ftii*’ ; homes, cars and hang-out spots. Field trips and intensive /W^t—jf -O’rt^L j r^ focus groups were conducted to see how instructors prepare *^9ftr^ ji '' for and teach their courses. Thousands of students were ^^k f^^ surveyed. The effort is paying off: More than 1.2 million JjH ^^ students and professors are using Connect since its fall /, ^ i 2009 launch. It currently covers 26 academic disciplines Iw^B^P ^’’ and about 15 more will be added in 2010. * —— "~^f | For more information and to demo Connect, visit connect.mcgraw-hill.com 8 The McGraw-Hill Companies 2009 Annual Report |
| How Education Becomes e-learning ,^^ Imagine you’re in master a concept. Then, we provide /S^f^^^ school, taking your students multimedia materials they • ^D^ toughest class and can use to address their learning needs. ^H^ VI hoping for an ‘A’. This smart, adaptive technology ^L ‘^7 m Now imagine having targets students’ weak points, helping • ^1 t^y a smart, adaptive study tool that them focus on and reach their ideal ? • • My will help you earn that ‘A’. A tool grade for a class. A^ [ • ! so smart it seems to know your **~"^!^Jl^ I^HH^^^S. strengths and weaknesses — even At McGraw-Hill Education, our ^K \, better than you do. It adapts expertise in academic research on f \ itself to your individual learning student learning and our focus \ j s “*<: ‘J needs. It knows what concepts on applying it across the product ^^ 4 h (^ you’re struggling with and focuses development cycle set us apart, on those concepts until you master McGraw-Hill LearnSmart™ is a Andi Pascarella, Ph.D. them. That’s what we’re building great example. It’s a wonderful Director of Development — at McGraw-Hill Education. online tool that monitors students’ Digital Content and Pedagogy, learning as it teaches, and adapts McGraw-Hill Higher Education In developing these digital, adaptive instantly based on their perfor- tools, we use sophisticated algorithms mance. Think about how teaching ^___H that take into account past student and learning become more targeted, performance and maps that describe more efficient and more LyJ3B pj how the course concepts fit together. effective. Now, stop rrtnj|i CUUUClllUll We can predict what students need to imagining and go learn to successfully move along and earn that ‘A’! INDIA fci-qqiq {ifofltl* “tidiTdfLd the youth in India’s labor force Retail Sales and Service in India. The retail training program are underemployed,” says Ajay The 100-hour digital, video and is part of a larger initiative by In Hindi it means “thank Shukla, managing director, Tata in-person instructional program McGraw-Hill Education that ,, i • laneuaee it’s McGraw-Hill, the Corporation’s combines real-world role- addresses the need for industry- how people express courtesy joint venture in India. “It’s playing and problem-solving, specific, end-to-end education and eratitude Nowhere are essential to address and close this on-the-job training, job place- solutions. Twelve other profes- these Qualities more imoortant ^ a P — ^ or our y° un 8 workers ment assistance and continuous sional certification programs are than in the comoetitive world an( ^ more broadly for the devel- assessment. By ensuring that planned in India across several of retailine opment of our nation and other participants will be “job ready” growing industries — including emerging economies.” upon completion, the program financial services, hospitality But too often customer service has won the support of leading and insurance. Other programs skills are lacking — leaving jobs McGraw-Hill Education is cap- retailers such as Tata’s Westside, are planned in China and the unfilled. “That’s one of the luring this opportunity through Landmark, Titan, Pizza Hut Middle East, reasons over 50 percent of its new Certificate Course in and Adidas. |
| Why Is Platts Important to the Global Energy Markets? One word: transparency. Platts provides information and insights that enable the commodities markets to operate with greater transparency. Unlike stocks, which trade on exchanges that report minute-by-minute price movements, most energy trading occurs privately among market participants. So how is the price of oil and other energy commodities assessed? According to Larry Neal, president, Platts, “Every day, Platts collects details on bids, offers and completed trades from market participants. Platts then uses clearly defined methodologies to assess and publish prices for the markets it serves. Those price assessments are the basis for billions of dollars of transactions annually in the physical and futures markets.” OLLOW US ON TWITTER @PlattsOil @PlattsPower @PlattsGas @PlattsMetals @PlattsPetchems For Platts, transparency is the product of editorial independence, structured analytical processes and constant engagement with market participants. Platts’ news, commentary and price information are transmitted to clients via real-time news alerts, end-of-day data feeds and dozens of newsletters, serving the needs of traders, brokers, risk managers, treasury professionals and others for timely, reliable data and analysis. “Platts was founded more than 100years ago on the conviction that energy markets work efficiently only when all participants have access to trustworthy information,” says Mr.Neal. “Today, when markets are volatile and commodities are viewed as a financial asset class, transparency takes on heightened importance as the essential ingredient for market confidence and efficiency. Platts’ century of expertise and its reputation for integrity uniquely enable it to fulfill this vital function.” Platts Goes to Russia The energy market is global, and Platts provides insight to more customers internationally than in the U.S. Key developments during 2009 underscore the company’s global focus. First and foremost is that Platts began publishing daily official price assessments for the new ESPO crude oil, Russia’s first petroleum flow from the Eastern Siberian Pacific Ocean pipeline targeted for Asian markets. The move followed more than a year of consultation with Russian Energy Ministry officials, producers, consumers and transportation and other industry experts. Also during the year, Platts signed an agreement with JYD Commodities Hub, China’s leading commodities information and e-trade service, to distribute Platts’ real-time information service in the Chinese market. The move leverages Platts’ status as the global leader in energy information with JYD’s strength as a cutting-edge information and trading platform in the domestic market. 10 The McGraw-Hill Companies 2009 Annual Report |
| J.D. Power: #1 in China Guess which country is the largest auto market in the world. With light-vehicle sales of nearly 13million, it’s China. The nation’s size, economic growth and emerging middle class are fueling tremendous demand and competition. Now guess which McGraw-Hill business is best positioned to seize this market. It’s J.D. Power and Associates, a leading global marketing information company known for its customer satisfaction, product quality and buyer behavior benchmarks. J.D. Power’s 50 associates in Beijing and Shanghai are working with nearly all of the global and local automotive brands in China. The Power of J.D Power A recent story in a Chinese publication underscores the value of J.D. Power’s services. Beijing-based Tianda Auto Sales and Service Co. — a.Volkswagen dealership — was selected by the manufacturer to receive training by J.D. Power to improve customer service. Customer satisfaction improved by more than 30percentage points, and recommendations from customers helped sales jump and profits triple. The dealer became one of the first five car sellers in China to receive a J.D. Power Dealer of Excellence Award. Satisfaction in the Face of Adversity “How do companies in the current business environment position themselves for profitable growth as the tide begins to turn? As auto manufacturers and retailers compete for share in a diminished market, listening to the voice of the customer becomes even more critical. Manufacturers can better match their products to markets with real-time demand data, new-vehicle launch pricing and volume metrics; and independent quality measures are needed to help predict consumer demand patterns and competitive market changes. Getting the sales and service process at dealerships aligned with customer expectations is just as important. Industry research suggests that about 80percent of the people who visit an auto dealership intending to buy end up walking away. The same dynamic is true for other industries. Guest satisfaction with a hotel stay is correlated with spending on ancillary services. J.D. Power research shows that a delighted hotel guest tends to spend 12.5percent more on ancillary services than dissatisfied and indifferent guests. Hotel properties with consistently high satisfaction scores tend to generate $440,000 more in room rate revenue on an annual basis than similar properties with consistently low scores. Finbarr O’ Neill President, J.D. Power and Associates When companies actively engage and delight their customers, they are rewarded with significant tangible benefits including premium pricing, increased share of wallet, loyalty and advocacy — all the ingredients needed for profitable growth.” |
| CENTER FOR DIGITAL INNOVATION IN EDUCATION: Personalized Education Focused on Better Results User interface designers and developers. Teachers and technologists. Illustrators and software architects. They’re all working together at McGraw-Hill Education’s Center for Digital Innovation (GDI), where the future of education is being shaped right now. Based in Bothell, WA, GDI is a first-of-its-kind research and digital development center for pre-K-I2 learning solutions. It’s a place, says Bill Oldsey, MHE executive vice president, that showcases our expertise in 2I st century learning and teach- ing. “We’re taking technology, communications and social media tools and combining them with the company’s century of educa- tion expertise,” says Mr. Oldsey. “It’s about getting and keeping kids engaged in learning by using the same technology that they love outside the classroom.” A case in point: The GDI team is developing digital gaming technologies that instantly reward student success with awards and greater levels of challenge. This promotes sustained learning on a self-directed basis and builds problem-solving skills. According to Mr. Oldsey, digital innovation has a huge role to play in “individualizing” education. This ensures that learning, teaching, assessment and remediation are paced and provided according to each student’s individual abilities. GDI has already launched three offerings: Planet Turtle™ (see sidebar); CINCH™ Mathematics, a digital, K-6 math curriculum that uses the power of interactive whiteboards to engage students; and CINCH™ Project, a collaborative learning tool for students in grades 6-I2 that uses the latest Web 2.0 technologies. “We’ve seen an incredible amount of excitement,” says Dave Eisenmann, director of Instructional Technology and Media Services for Minnetonka Public Schools. “I have witnessed kids begging their teachers to let them take part...and heard cheering from classes that are told they will get to use the program. Teachers are also excited...” What’s causing all the fuss among the 2,000 K-3 elementary students in this Minnesota school district? It’s Planet Turtle™, I McGraw-Hill Education’s virtual world for engaging, interactive math practice. Developed by the company’s Center for Digital Innovation, Planet Turtle™ is a serious educational offering using the same technologies that keep children glued to their video games at home. It rivets their attention through avatars, head-to-head multiplayer games and collaborative exploration while boosting their math education and their computational fluency. It makes learning fun... and it works. 12 The McGraw-Hill Companies 2009 Annual Report |
| COLLEGE AND CAREER READINESS: Preparing All High School Students for Success “Ninety percent of the fastest-growing jobs in the global ‘knowledge economy’ of the 21st century will require education or training after high school. So it’s very good news that more and more U.S. high school seniors plan to go on to college after graduation. But here’s the bad news: A large and growing number of those seniors are not adequately prepared. The percentage of incoming students at two- and four-year colleges who require remedial instruction is alarmingly high. And the level of college dropouts is unacceptable: Half of all community college students — and up to a quarter of freshmen at four-year institutions — do not come back for their second year. What can we do to close the gap? At McGraw-Hill Education, we believe high school can and should provide students with a foundation for learning that will support their lifelong education and career goals — whether they continue at a four-year university, a two-year community college or a one-year training program for a specific trade. That’s why we’re focused on creating programs that teach students critical skills, like problem-solving and teamwork, to ensure they are successful down the road. These skills are not generally taught in high school. Particularly now, in the 21st century, when more students must complete some postsecondary education to have an economically secure life, the need for improved transitions from high school to college is urgent. Jeff Livingston Senior Vice President, College & Career Readiness, McGraw-Hill Education In the knowledge economy of the 21st century, learning never stops.” Read Jeff Livingston’s entire position paper at www.mbsegsolutions.com EARNING POTENTIAL Workers with a high school degree earned an average of $31,286 in 2007, while those with a bachelor’s degree earned an average of $57,181. Source: U.S. Census Bureau 2008 |
| S&P INDICES: Seeing What Others Can’t In the midst of a vicious bear market, double-digit inflation, an oil embargo and the Watergate crisis, the launch of the first fund modeled on the S&P 500® almost went unnoticed. But this development would fundamentally transform the world of investing over the next 35years. Today, says Alex J. Matturri, Jr., executive managing director, S&P Indices continues to lead the world as the index provider of choice for passive equity investing. Approximately $1 trillion is directly indexed to the S&P 500® and $3.5 trillion is benchmarked to it. With more than 90 indices launched in 2009 alone, S&P’s indices have rapidly expanded to become widely used, global benchmarks across asset classes and geographic regions. Driven by growing investor demand for flexibility, diversification and transparency, the firm’s index products now cover not only equities, but fixed income, commodities and real estate, as well as other investing strategies and themes. Exchange-traded funds are a case in point: ETFs based on S&P Indices totaled $247billion assets under management at year-end 2009, with those on the S&P 500® accounting for more than 49percent, or $122billion. Global expansion in Asia is also underscored by S&P Indices’ award as Most Innovative Index Provider in Structured Products magazine’s 2009 Asia Awards. ETFs BASED ON: •s&p 500® • Other S&P Indices S&P Indices’ growing licenses come from a diverse product mix. Adding Transparency to Fixed Income Markets STANDARD &POOR’S From Eurozone government bonds to commercial paper to leveraged loans to credit default swaps, investors in the global fixed income markets are looking for greater transparency, flexibility and performance benchmarking. To meet this growing demand, Standard & Poor’s expanded its offerings and launched a broad range of fixed income indices during 2009. Take S&P’s new Eurozone Government Bond Index, a big step forward in the growth of its global government bond index series. “The Eurozone government bond market is a bit smaller than the U.S. Treasury market,” says James Rieger, vice president, Fixed Income Indices, “but we believe it is much more complex, because there are I6 separate issuers.” By measuring the performance of the “developed” European government bond market as a whole, the index further opens the market for institutional investors. Also new in 2009: S&P Indices became the first major index provider to launch indices on commercial paper and pioneered four new indices on the $29 trillion (notional)credit derivatives market. More expansion lies ahead in the global fixed income market. 14 The McGraw-Hill Companies 2009 Annual Report |
| I * Never Out of Style: INNOVATION, INTEGRATION DRIVE CAPITAL IQ’S SUCCESS D. Randall Winn Executive Managing Director, Capital IQ assets of Capital IQ, Compustat, ClariFI and SystematlQ to better serve our 4,200 investment bank, hedge fund, private equity and corporate clients. We now have what we believe to be the largest and most advanced fundamental research operation in the world, with 3,000 employees focused purely on building data products that can also be used in quantitative research. Clients can access our content through a variety of analytical tools, data feeds and Web services specific to their investment styles. One notable trend that has accelerated in the wake of the recent crisis is that I fundamental and I quantitative investment strategies are becoming more integrated. I More investment managers are utilizing quantitative disciplines I to refine their investment theses. A well-informed equity fund manager nowadays must be aware of both fundamental and technical drivers of value. In response to this trend, we merged the complementary By reorganizing our business in 2009, we were able to significantly broaden our value proposition. Quantitative clients now have access to a host of data sets that have been historically used by the stock-picking community, but were virtually untouched for quantitative research. Our clients have access to a simplified suite of powerful portfolio attribution, backtesting and optimization tools to enhance investment research efforts. A Standard & Poor’s Business Try Capital IQ ai.www.capitaliq.com FOLLOW US ON TWITTER @capitallQ Capital IQ’s Unfair Advantage for Smart People During one of the most difficult years in the financial markets, how did Capital IQ continue to increase its Wall Street customer base? By offering powerful, easy-to-use tools — desktop research, screening, real-time market data, back-testing, portfolio management, financial modeling and quantita- tive analysis — tnat help customers reduce risk, work more efficiently and make smarter decisions. Since its inception, Capital IQ has constantly upgraded and enhanced its capabilities to meet the changing needs of its market. It’s this commitment to understanding, meeting and anticipating the needs of its customers that form the foundation of the firm’s “Unfair Advantage.” During 2009, that’s what drove the launch of a new offering called SystematlQ. SystematlQ offers access to a team of quantitative analysts, a Web-based stock trading signals library, and proprietary stock selection models. It reflects the growing demand by investment firms and dealers to develop value-added trading strategies based on quantitative data and research analytics. |
| A Green Thumb for Business Don’t tell Vickie Tillman that sustainability isn’t the next engine for global growth. “It’s a market with huge potential,” says Ms.Tillman, senior vice president, Global Sustainability Business Development. According to Bloomberg New Energy Finance, the $125 billion market in carbon trading is projected to grow significantly. Around the world, governments have allocated more than $5I2billion in fiscal stimulus to climate change investment themes and “green” infrastructure within the last year. Ms.Tillman also outlined how McGraw-Hill is helping customers unlock and capture the potential that lies ahead. “At Standard & Poor’s, we’re providing investors with research and benchmarks so they can make investment decisions based not only on a company’s financial performance, but also on its environmental performance. McGraw-Hill Education is enabling students to succeed in the global economy and wisely steward global resources. And we’re giving business leaders and professionals around the world the knowledge and tools they need to succeed in the green economy.” STANDARD &POOR’S Benchmarking Performance In finance, the surest way to reduce carbon emissions is by rewarding companies that do their part. According to Mike Wilkins, managing director, Carbon Markets, S&P Ratings Services, that’s why Standard & Poor’s is developing benchmarks that track a company’s financial and environmental performance. Recently launched indices include the S&P U.S. Carbon Efficient Index, the S&P/IFCI Emerging Markets Carbon Efficient Index, the S&P Global Clean Energy Index and the S&P Global Eco Index. The new indices were launched by Standard & Poor’s and International Finance Corporation (IFC), a member of the World Bank Group, at the U.N. Climate Change Conference in Copenhagen. Walking the Walk McGraw-Hill Education is incorporating sustainability into lesson plans for students at all levels, including higher education. It recently developed a new pre-composition course book on environmental themes that’s available either as a digital text or as a printed textbook made from 10percent postconsumer waste paper and soy-based ink. 16 The McGraw-Hill Companies 2009 Annual Report |
| BUILDING GREEN McGraw-Hill’s Information & Media businesses are also advancing revenue-generating ideas related to the green economy. McGraw-Hill Construction is helping lead the industry toward an era of more energy-efficient commercial and residential buildings through products ranging from GreenSource magazine to the Sweets Green Collection. FOLLOW US ON TWITTER @GreenSourceMag Investing in Carbon Efficiency Alka Banerjee Vice President, S&P Indices The concept of sustainability has come into its own in recent years as a force to drive competitiveness. Integrating environmental, social and governance factors, popularly known as ESG, into business strategy and product design is now becoming the norm. Within ESG, the concept of carbon footprint has taken center stage; in particular, the amount of carbon a company’s products and processes emit, and the carbon efficiency of a company relative to its peers, have become key inputs for global investment strategies. This concept of carbon efficiency is encapsulated in our new family of indices, which seeks to reflect broad market returns while simultaneously reducing exposure to carbon emissions. To date, we have launched the S&P U.S. Carbon Efficient Index, as well as the S&P/IFCI Emerging Markets Carbon Efficient Index. U.S. companies were already making corporate governance a high priority, but they have also developed as leaders in green innovation. Emerging markets, which had hitherto been viewed as laggards, are very rapidly coming up to speed on the inherent risks posed to their own progress by global warming. S&P has several other environment-focused indices in development to help companies, investors and other market participants navigate the seas of climate change. |
| The McGraw-Hill Companies AT-A-GLANCE As a global leader in financial services, education and business information. McGraw-Hill works with its partners and customers to help create a smarter, better world. The company’ s leading brands, such as Standard & Poor’s, McGraw-Hill Education, Capital IQ, Platts and J.D. Power and Associates, promote the growth of the global economy, the improvement of business services and the advancement of education. In a world producing unprecedented quantities of data, the McGraw-Hill brands help society and business master this data with quality benchmarks, analysis and authoritative educational programs. www.mcgraw-hill.com The number of digital “atoms” in the digital universe is already bigger than the number of stars in the universe. By 2012, the universe of digital data and information will be 5 TIMES the size it was in 2008. MCGRAW-HILL FINANCIAL SERVICES For 150years, the men and women of Standard & Poor’s have worked to bring greater transparency to the world’s capital markets. Today, with offices in 23 countries, S&P has become the premier provider of independent credit ratings, market indices, investment research, financial data and fixed income research and analysis. Through its credit market services, Standard & Poor’s provides investors with ratings to help assess credit risk across geographic regions and sectors. In 2009, the company’s 1,300 analysts published more than 850,000 ratings and rated approximately $5 trillion in new debt. S&P Indices has given the world some of its most famous financial benchmarks, including the S&P 500® and the S&P 1200. Globally, more than $1 trillion in assets are now directly tied to S&P Indices, and more than $3.5 trillion in assets are benchmarked to them. Through Capital IQ, Standard & Poor’s has one of the world’s fastest-growing fundamental research operations. This Web-based service delivers an unparalleled set of tools for analyzing the market, building financial models, and researching more than 58,000 global public companies and 1.7million private companies. Through its equity research, Standard & Poor’s licenses investment research to more than 1,000 financial institutions, including top securities firms, banks and life insurance companies. This research includes fundamental investment opinions on 1,900 global securities. Through its fixed income risk management services, Standard & Poor’s gives customers the analytics and research to aid in navigating the complexities of today’s debt, structured finance, derivatives and credit markets. www.standardandpoors.com Source: IDC White Paper sponsored by EMC, As the Economy Contracts, the Digital Universe Expands, May2009. 18 The McGraw-Hill Companies 2009 Annual Report |
| MCGRAW-HILL EDUCATION McGraw-Hill Education is a global education company that spans the full spectrum of lifelong learning — from early childhood development to professional development. With offices in 33 countries and materials in 65 different languages, the company partners with schools and universities around the world. Through both textbooks and advanced digital platforms, the company provides students and professionals with the instructional framework and pedagogy to learn effectively and achieve better results. Through its School Education Group, McGraw-Hill provides a wide range of teaching and learning materials for pre-kindergarten through secondary school. The group includes the first-of-its-kind Center for Digital Innovation, which researches and develops new programs for learning. At the group’s other specialized learning centers, experts and scholars partner with educators to address critical challenges such as college and career readiness and dropout prevention. McGraw-Hill Higher Education meets the growing demand for postsecondary instruction. In addition to publishing some of the world’s most respected textbooks, it has also developed McGraw-Hill Connect® and other digital learning platforms that customize learning around the needs of individual students. McGraw-Hill Professional gives workers at all stages of their careers the opportunity to enhance their skills for success. Bestsellers in 2009 include: How to Make Money in Stocks, 4e by William J. O’Neil; Current Medical Diagnosis and Treatment, 2010 by Stephen J. McPhee and Maxine A. Papadakis; and CISSP All-in-One Certification Exam Guide, 4e by Shon Harris. CTB/McGraw-Hill is a leading provider of assessment services for evaluating student achievement in three critical markets — early learning, K-T2, and adult education. It continues to pioneer new innovations in areas such as automated scoring and assembly of assessments. In total, CTB/McGraw-Hill serves more than 18million students in 46 countries. MCGRAW-HILL INFORMATION & MEDIA In a rapidly changing global economy, McGraw-Hill’s information brands provide business leaders and entrepreneurs with the insights and analysis they need to stay competitive. These brands are serving the industries that will define the future of the global economy — fields ranging from energy and construction to automobiles and aviation. For more than a century, Platts has been the leading provider of information for the energy and metals markets. Now in more than 150 countries around the globe, Platts works to bring transparency to these markets by producing critical benchmarks, including more than 8,500 price assessments each day. www.platts.com As a marketing information company, J.D. Power and Associates has built a reputation as the world’s leading authority on customer satisfaction. With customers in 60 countries, J.D. Power provides consumer research for industries including automobiles, financial services, healthcare, insurance, telecom and travel. www.jdpower.com McGraw-Hill Construction is the premier source of information, industry news, market research and forecasts for the $5.6 trillion global construction and design industry. www.construction.com In 185 countries around the globe, Aviation Week provides strategic news and information for the $2 trillion aviation, aerospace and defense industries. www.aviationweek.com On both television and the Web, the McGraw-Hill Broadcasting Group delivers breaking news, award-winning analysis and local expertise. The group includes four ABC-affiliated TV stations —KMGH (Denver), WRTV (Indianapolis), KGTV (San Diego) and KERO (Bakersfield, California) — as well as Azteca America Spanish-language TV affiliates. www.mheducation.com |
| HELPING TO CREATE A Smarter, Better World Across our businesses, inside our offices and within the communities in which we live, three core Corporate Responsibility values — transparency, integrity and sus-tainability — shape and define The McGraw-Hill Companies. We are committed to responsible business practices that enhance the economic, social and environmental well-being of the communities where we work and live. As a testament to our commitment, we will be publishing new environmental performance targets in our Corporate Responsibility and Sustainability report this year. Our initiatives have earned us global recognition, including in the 2009 Newsweek Green Rankings as well as placement on indices that require the highest standards, including the FTSE4Good Index Series and the 2009 CSR Index 50. A case in point: In 2009, we reduced paper consumption by more than 3.5million pounds in our book publications, and invested in more efficient technologies, engineering and space planning. Additionally, we have increased partnerships with environmentally responsible service providers and commercial real estate companies. In recognition of our family-friendly policies, in 2009 The McGraw-Hill Companies was once again named among the Top 10 Best Companies by Working Mother magazine and one of the 100 Best Adoption-Friendly Workplaces in America by the Dave Thomas Foundation for Adoption. At The McGraw-Hill Companies, we are focused not only on enabling a smarter, better world through our solutions and services, but also through fostering innovation in education. Chairman Emeritus Harold W. McGraw, Jr. (seated)and Harold McGraw 111 (far right) celebrate the winners of The 2009 Harold W. McGraw, Jr. Prize in Education: (standing from left) Dr.Joseph S. Renzulli, Distinguished Professor, Educational Psychology, Neag School of Education, University of Connecticut; Sarita E. Brown, President, Excelencia in Education; and Dr.Linda Darling-Hammond, Charles E. Ducommun Professor of Education, Stanford University. Our ongoing commitment to corporate responsibility and Sustainability is seen in many ways around our company. During our annual Global Volunteer Day, more than 4,500 employees participated in more than 220 projects around the world, forming ongoing sustainable partnerships with local nonprofits and community groups. An employee in St. Leonard’s, Australia (left)created a dog run for the Royal Society for the Prevention of Cruelty to Animals, while a team of employees partnered with the German nonprofit AWO in Frankfurt (right)to refurbish a playground. Consumer financial literacy continues to be a key focus area for The McGraw-Hill Companies. We expanded our support for programs that help people navigate the maze of complex financial decisions they face when taking out mortgages, starting small businesses or saving for college. In 2009, McGraw-Hill launched Financial Literacy Now, a campaign which partners the Corporation with several nonprofit organizations, including the New York Public Library, wise (Working in Support of Education), the Council for Economic Education and Literacy Partners to raise awareness of the importance of financial literacy; provide greater access to training, services and information; and enhance professional development opportunities for teachers so they are equipped to teach financial literacy to students of all ages. We believe it is critically important to assure that students have access to the skills needed to both enter and succeed in college — and to succeed in life. In 2009, the Harold W. McGraw, Jr. Prize in Education honored three leaders (see photo) for their work in driving innovations in our schools and for working to ensure that all students have access to the knowledge and skills necessary for 21st century jobs. Additionally, we continued to engage policymakers around the world on key issues such as the positive impact of digital delivery on the future of education, reform of financial services and the protection of intellectual property. 20 The McGraw-Hill Companies 2009 Annual Report |
| • | Revenue and income from operations decreased 6.3% and 8.7%, respectively, in 2009. Results from operations decreased due to declines in the McGraw-Hill Education segment, driven by lower state adoption sales at our School Education Group, as well as the Financial Services segment, primarily due to continued weakness in structured finance and reductions in investment research products. Foreign exchange rates had a $70.4 million and a $9.5 million unfavorable impact on revenue and operating profit, respectively. | |
| • | In 2009, we initiated a restructuring plan that included a realignment of select business operations within the McGraw-Hill Education segment to further strengthen their position in the market by creating a market focused organization that enhances its ability to address the changing needs of their customers. Additionally, we continued to implement restructuring plans to contain costs and mitigate the impact of the current and expected future economic conditions. We recorded a net pre-tax restructuring charge of $15.2 million pre-tax ($9.7 million after-tax, or $0.03 per diluted share). | |
| • | Diluted earnings per share decreased 7.2% to $2.33 from $2.51 in 2008. | |
| • | Cash flows provided from operations was $1.3 billion for 2009. Cash levels increased from $471.7 million in the prior period to $1.2 billion. During 2009, we paid dividends of $281.6 million and made capital expenditures of $269.3 million. Capital expenditures include prepublication costs, property and equipment and additions to technology projects. | |
| • | Cash levels were impacted by reduced share repurchased, decreased incentive compensation payments, lower inventory purchases and reduced investments in property and equipment and prepublications costs. |
23
| • | Leveraging existing capabilities to create new services. | |
| • | Continuing to make selective acquisitions that complement our existing business capabilities. | |
| • | Expanding and refining the use of technology in all segments to improve performance, market penetration and productivity. | |
| • | Continuing to contain costs. |
| • | Lower educational funding as a result of budget concerns. | |
| • | Prolonged difficulties in the credit markets. | |
| • | A change in the regulatory environment affecting our businesses. | |
| • | A change in educational spending. | |
| • | A change in the ratings process. |
| 1. | Management is responsible for establishing and maintaining adequate internal control over financial reporting. | |
| 2. | Management has evaluated the system of internal control using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. Management has selected the COSO framework for its evaluation as it is a control framework, recognized by the SEC and the Public Company Accounting Oversight Board, that is free from bias, permits reasonably consistent qualitative and quantitative measurement of our internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting. | |
| 3. | Based on management’s evaluation under this framework, management has concluded that our internal controls over financial reporting were effective as of December 31, 2009. There are no material weaknesses in our internal control over financial reporting that have been identified by management. | |
| 4. | Our independent registered public accounting firm, Ernst & Young LLP, has audited our consolidated financial statements for the year ended December 31, 2009, and has issued their reports on the financial statements and the effectiveness of internal controls over financial reporting. These reports are located on pages 83 and 84 of the 2009 Annual Report to Shareholders. |
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| • | Discount rate assumptions are based on current yields on high-grade corporate long-term bonds. | |
| • | Salary growth assumptions are based on our long-term actual experience and future outlook. | |
| • | Healthcare cost trend assumptions are based on historical market data, the near-term outlook and an assessment of likely long-term trends. | |
| • | Long-term return on pension plan assets is based on a calculated market-related value of assets, which recognizes changes in market value over five years. |
| January 1 | 2010 | 2009 | 2008 | |||||||||
|
Discount rate
|
5.95 | % | 6.10 | % | 6.25 | % | ||||||
|
Return on asset assumption
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
| January 1 | 2010 | 2009 | 2008 | |||||||||
|
Discount rate
|
5.30 | % | 5.95 | % | 6.00 | % | ||||||
|
Healthcare cost trend rate
|
8.00 | % | 8.00 | % | 8.50 | % | ||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Risk-free average interest
rate
|
0.4—4.1 | % | 1.4—4.4 | % | 3.6—6.3 | % | ||||||
|
Dividend yield
|
3.3—3.7 | % | 2.0—3.4 | % | 1.2—1.7 | % | ||||||
|
Volatility
|
33—75 | % | 21—59 | % | 14—22 | % | ||||||
|
Expected life (years)
|
5.6—6.0 | 6.7—7.0 | 7.0—7.2 | |||||||||
|
Weighted-average grant-date
fair value
|
$ | 5.78 | $ | 9.77 | $ | 15.80 | ||||||
| (in millions) | 2009 (a) | 2008 (b) | 2007 (c) | |||||||||
|
Revenue
|
$ | 5,951.8 | $ | 6,355.1 | $ | 6,772.3 | ||||||
|
% (decrease)/increase
|
(6.3 | )% | (6.2 | )% | 8.3 | % | ||||||
|
Operating profit
*
|
$ | 1,382.8 | $ | 1,483.8 | $ | 1,836.8 | ||||||
|
% (decrease)/increase
|
(6.8 | )% | (19.2 | )% | 15.5 | % | ||||||
|
% operating margin
|
23 | % | 23 | % | 27 | % | ||||||
| * | Operating profit is income from operations before corporate expense. | |
| (a) | Operating profit includes a pre-tax gain on the sale of Business Week , a pre-tax loss on the sale of Vista Research, Inc. and a pre-tax restructuring charge. | |
| (b) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. | |
| (c) | Operating profit includes a pre-tax gain on the sale of our mutual fund business and a pre-tax restructuring charge. |
| • | In 2009, revenue declined for all three operating segments and operating profit declined at our McGraw-Hill Education and Financial Services segments. |
| • | McGraw-Hill Education revenue and operating profit declined 9.5% and 14.1%, respectively, primarily due to lower state adoption sales at our School Education Group. Reduced potential in the state new adoption market and reduced spending in the open territory occurred as schools tightened their budgets in response to the continuing decline of state and local tax revenues in most regions. The declines were partially offset by growth at Higher Education. | ||
| • | Financial Services revenue and operating profit declined 1.7% and 5.3%, respectively. Revenue declines were largely due to continued weakness in structured finance and reductions in investment research products. The declines were partially offset by growth in corporate ratings, credit-ratings related information products such as RatingsXpress and RatingsDirect, other credit risk solutions products and growth in Capital IQ, our data and information offerings and index services. Operating profit includes the impact of a pre-tax loss on the divestiture of Vista Research, Inc. in the second quarter of 2009. | ||
| • | Information & Media revenue declined 10.2% and operating profit improved 0.7%. Revenue declines were driven by advertising weakness across all of our media properties and reduced sales in our automotive studies. Partially offsetting the decline was an increase in our global energy and other commodities products and services. Operating profit includes the impact of a pre-tax gain on the divestiture of BusinessWeek in the fourth quarter of 2009. | ||
| • | Foreign exchange rates had an unfavorable impact of $70.4 million on revenue and $9.5 million on operating profit. |
| • | During 2009, we initiated a restructuring plan that included a realignment of select business operations within the McGraw-Hill Education segment to further strengthen their position in the market by creating a market focused organization that enhances its ability to address the changing needs of their customers. Additionally, we continued to implement restructuring plans related to a limited number of our business operations to contain costs and mitigate the impact of the current and expected future economic conditions. We recorded a pre-tax restructuring charge of $24.3 million, consisting primarily of employee severance costs related to a workforce reduction of approximately 550 positions as follows: |
| • | McGraw-Hill Education: $14.0 million and approximately 340 positions | ||
| • | Financial Services: $4.5 million and approximately 85 positions | ||
| • | Information & Media: $5.8 million and approximately 125 positions |
| • | During 2008, we restructured a limited number of business operations to contain costs and mitigate the impact of the current and expected future economic conditions. We incurred pre-tax restructuring charges of $73.4 million ($45.9 million after-tax, or $0.14 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 1,045 positions as follows: |
| • | McGraw-Hill Education: $25.3 million and approximately 455 positions | ||
| • | Financial Services: $25.9 million and approximately 340 positions | ||
| • | Information & Media: $19.2 million and approximately 210 positions | ||
| • | Corporate: $3.0 million and approximately 40 positions |
| • | On December 1, 2009, we sold BusinessWeek , which was part of our Information & Media segment. We recognized a pre-tax gain of $10.5 million ($6.7 million after-tax or $0.02 per diluted share), recorded as other (loss)/income — net. This business was selected for divestiture as it no longer fit within our strategic plans. The impact of this divestiture on comparability of results is immaterial. | |
| • | In May 2009, we sold our Vista Research, Inc. business which was part of the Financial Services segment. The sale |
| resulted in a pre-tax loss of $13.8 million ($8.8 million after-tax or $0.03 per diluted share), recorded as other (loss)/income — net. This business was selected for divestiture as it no longer fit within our strategic plans. This divestiture enables our Financial Services segment to focus on its core business of providing independent research, ratings, data indices and portfolio services. The impact of this divestiture on comparability of results is immaterial. | ||
| • | During 2008, no significant acquisitions or divestitures were made. | |
| • | Product revenue and expenses consist of educational and information products, primarily books, magazine circulations and syndicated study programs in the McGraw-Hill Education and the Information & Media segments. |
| • | Product revenue decreased 8.5% or $220.3 million, primarily driven by lower state adoption sales and reduced spending in the open territory. Revenue was also impacted unfavorably by foreign exchange. | ||
| • | Product operating expenses decreased 4.1% or $49.0 million, primarily due to decreased sales. | ||
| • | Product selling and general expenses decreased 10.1% or $101.0 million, primarily due to ongoing cost saving initiatives. | ||
| • | Product margin decreased 150 basis points to 14.1% primarily due to the decline in revenues at our School Education Group and the unfavorable impact of foreign exchange. |
| • | Revenue declines were partially offset by reduced expenses due to lower sales and cost saving initiatives. |
| • | Service revenue and expenses consist of the Financial Services segment, service assessment contracts of the McGraw-Hill Education segment and information-related services and advertising of the Information & Media segment. |
| • | Service revenue decreased 4.8% or $183.0 million. |
| • | The decrease was primarily due to continued weakness in structured finance, reductions in investment research products, and advertising weakness across our media properties as well as the impact of foreign exchange rates. | ||
| • | The decline was partially offset by growth in corporate industrial ratings, sovereign and international public finance ratings, credit-ratings related information products such as RatingsXpress and RatingsDirect, credit risk solutions products, growth in Capital IQ, our data and information offerings, index services and growth in our global energy and other commodities services. |
| • | Service operating expenses decreased 6.2% or $83.4 million, primarily due to cost reduction initiatives. | ||
| • | Service selling and general expenses decreased 3.2% or $41.3 million, primarily due to the benefit of cost reduction initiatives. | ||
| • | Service margin decreased 10 basis points to 30.4% primarily due to cost saving initiatives at all three segments. |
| • | In 2008, revenue and operating profit declined at our McGraw-Hill Education and Financial Services segments and increased at our Information & Media segment. |
| • | McGraw-Hill Education revenue and operating profit declined 2.5% and 20.3%, respectively, principally due to softness in the School Education Group. | ||
| • | Financial Services revenue and operating profit declined 12.9% and 21.9%, respectively, largely due to weakness in Credit Market Services. | ||
| • | Information & Media revenue and operating profit increased 4.1% and 45.0%, respectively, driven by the Business-to-Business Group. | ||
| • | Reductions to reflect a change in the projected payout of restricted performance stock awards and reductions in other incentive compensation projections reduced expenses and helped mitigate the operating profit decline as follows: |
| • | McGraw-Hill Education incentive compensation expense declined $29.3 million compared to prior year. | ||
| • | Financial Services incentive compensation expense declined $166.0 million compared to prior year. | ||
| • | Information & Media incentive compensation expense declined $22.6 million compared to prior year. | ||
| • | Corporate incentive compensation expense declined $55.8 million compared to prior year. |
| • | In 2008, foreign exchange rates positively affected both revenue and operating profit by $10.8 million and $38.2 million, respectively. |
| • | During 2008, we restructured a limited number of business operations to contain costs and mitigate the impact of the current and expected future economic conditions. We incurred pre-tax restructuring charges of $73.4 million ($45.9 million after-tax, or $0.14 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 1,045 positions as follows: |
| • | McGraw-Hill Education: $25.3 million and approximately 455 positions | ||
| • | Financial Services: $25.9 million and approximately 340 positions | ||
| • | Information & Media: $19.2 million and approximately 210 positions | ||
| • | Corporate: $3.0 million and approximately 40 positions |
| • | In 2007, we restructured a limited number of business operations to enhance our long-term growth prospects. We incurred a 2007 restructuring charge of $43.7 million pre-tax ($27.3 million after-tax, or $0.08 per diluted share), which consisted mostly of severance costs related |
| to a workforce reduction of approximately 600 positions as follows: |
| • | McGraw-Hill Education: $16.3 million and approximately 300 positions | ||
| • | Financial Services: $18.8 million and approximately 170 positions | ||
| • | Information & Media: $6.7 million and approximately 110 positions | ||
| • | Corporate: $1.9 million and approximately 20 positions |
| • | During 2008, no significant acquisitions or divestitures were made. | |
| • | In March 2007, we sold our mutual fund data business, which was part of the Financial Services segment. The sale resulted in a $17.3 million pre-tax gain ($10.3 million after-tax, or $0.03 per diluted share), recorded as other (loss)/income — net. The divestiture of the mutual fund data business was consistent with our Financial Services segment’s strategy of directing resources to those businesses which have the best opportunities to achieve both significant financial growth and market leadership. The divestiture enables our Financial Services segment to focus on its core business of providing independent research, ratings, data, indices and portfolio services. The impact of this divestiture on comparability of results is immaterial. | |
| • | Product revenue and expenses consist of educational and information products, primarily books, magazine circulations and syndicated study programs in the McGraw-Hill Education and the Information & Media segments. |
| • | Product revenue decreased slightly as compared to the prior year as declines in residual sales and open territory were partially offset by increases in state adoption sales at the McGraw-Hill Education segment and increases at the Information & Media segment. | ||
| • | Product operating-related expenses increased 4.6% or $51.8 million, primarily due to the growth in expenses at McGraw-Hill Education, related to major product launches in a strong 2008 state adoption market, partially offset by lower cost of sales as a result of decreased revenues. Amortization of prepublication costs increased $30.3 million or 12.6% driven by spending associated with the state adoption cycles. | ||
| • | Product related selling and general expenses decreased 1.5% primarily as a result of cost reduction actions and reduced 2008 incentive compensation costs. | ||
| • | Product margin decreased 212 basis points to 15.6%, as compared to prior year, primarily due to the growth in expenses at McGraw-Hill Education related to major product launches in a strong 2008 state adoption market. |
| • | Service revenue and expenses consist of the Financial Services segment, service assessment contracts of the McGraw-Hill Education segment and information-related services and advertising of the Information & Media segment. |
| • | Service revenue decreased 9.5% primarily due to Financial Services. |
| • | Financial Services revenue decreased primarily due to Credit Market Services which was adversely impacted by turbulence in the global financial markets resulting from challenged credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets. | ||
| • | McGraw-Hill Education service revenue declined due to softness in the assessments market. | ||
| • | Growth in the Information & Media segment partially offset this revenue decline. |
| • | Service operating-related expenses decreased 4.4%, primarily due to the lower direct costs related to revenues and reduced 2008 incentive compensation costs. | ||
| • | Service related selling and general expenses decreased 8.9% primarily due to reduced 2008 incentive compensation costs. | ||
| • | The service margin decreased 212 basis points to 30.5% as compared to prior year primarily due to the decline in Credit Market Services, partially offset by reduced 2008 incentive compensation expense. |
| 2009 | 2008 | |||||||||||||||||||||||
| (in millions) | Operating Profit (a) | % Total | % Margin | Operating Profit (b) | % Total | % Margin | ||||||||||||||||||
|
McGraw-Hill Education
|
$ | 276.0 | 20 | % | 12 | % | $ | 321.4 | 22 | % | 12 | % | ||||||||||||
|
Financial Services
|
1,014.1 | 73 | % | 39 | % | 1,070.4 | 72 | % | 40 | % | ||||||||||||||
|
Information & Media
|
92.7 | 7 | % | 10 | % | 92.0 | 6 | % | 9 | % | ||||||||||||||
|
Total
|
$ | 1,382.8 | 100 | % | 23 | % | $ | 1,483.8 | 100 | % | 23 | % | ||||||||||||
| (a) | Operating profit includes a pre-tax gain on the sale of Business Week , a pre-tax loss on the sale of Vista Research, Inc. and a pre-tax restructuring charge. | |
| (b) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. |
| • | In 2009, operating profit declined at our McGraw-Hill Education and Financial Services segments and improved at our Information & Media segment. Operating margin at McGraw-Hill Education was consistent with prior year, at Financial Services declined and at Information & Media improved. |
| • | McGraw-Hill Education operating profit declined primarily due to reduced potential in the state new adoption market and reduced spending in the open territory markets at School Education Group as schools tightened their budgets in response to the continuing decline of state and local tax revenues. Cost containment activities contributed to an operating margin consistent with prior year. |
| • | Pre-tax restructuring charges of $11.6 million and $25.3 million affected the MHE segment’s operating profit for 2009 and 2008, respectively. |
| • | Financial Services operating profit and margin declined primarily due to continued weakness in structured finance, reductions in our investment research products and the impact of foreign exchange rates. |
| • | Growth in corporate industrial ratings, sovereign and international public finance ratings, credit ratings-related information products such as RatingsXpress and RatingsDirect and other credit risk related products as well as growth in Capital IQ, our data and information offerings and index services helped mitigate the impact of the declines on operating profit and margin. | ||
| • | A net pre-tax restructuring benefit of $0.4 million in 2009 and a pre-tax restructuring charge of $25.9 million in 2008 impacted operating profit and margin. | ||
| • | A pre-tax loss of $13.8 million on the sale of Vista Research, Inc. also impacted operating profit and margin. |
| • | Information & Media operating profit and margin increase was driven by the following: |
| • | A pre-tax gain of $10.5 million on the sale of Business Week in 2009. | ||
| • | Pre-tax restructuring charges of $4.0 million and $19.2 million impacted the Information & Media segment’s operating profit for 2009 and 2008, respectively. | ||
| • | Growth in the Business-to-Business Group, oil, natural gas and power news and pricing products as a result of the increased demand for market information due to volatility in the price of crude oil and other commodities, offset by revenue declines in broadcasting. |
| 2008 | 2007 | |||||||||||||||||||||||
| (in millions) | Operating Profit (a) | % Total | % Margin | Operating Profit (b) | % Total | % Margin | ||||||||||||||||||
|
McGraw-Hill Education
|
$ | 321.4 | 22 | % | 12 | % | $ | 403.1 | 22 | % | 15 | % | ||||||||||||
|
Financial Services
|
1,070.4 | 72 | % | 40 | % | 1,370.2 | 75 | % | 45 | % | ||||||||||||||
|
Information & Media
|
92.0 | 6 | % | 9 | % | 63.5 | 3 | % | 6 | % | ||||||||||||||
|
Total
|
$ | 1,483.8 | 100 | % | 23 | % | $ | 1,836.8 | 100 | % | 27 | % | ||||||||||||
| (a) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. | |
| (b) | Operating profit includes a pre-tax gain on the sale of our mutual fund business and a pre-tax restructuring charge. |
| • | In 2008, operating profit and operating margin percentages declined at our McGraw-Hill Education and Financial Services segments and improved at our Information & Media segment. |
| • | McGraw-Hill Education operating profit and margin decreased primarily due to declines in residual sales in the adoption states as well as lower new and residual sales in the open territory markets at School Education Group. These declines were partially offset by a strong performance in the state new adoption market. |
| • | Increased amortization of prepublication costs of $30.3 million as a result of the investments made in prior years in anticipation of the strong 2008 state adoption market. | ||
| • | Reductions to reflect a change in the projected payout of the restricted performance stock awards and reductions in other incentive compensation helped mitigate the operating profit decline by $29.3 million. | ||
| • | Pre-tax restructuring charges of $25.3 million and $16.3 million affected the MHE segment’s operating profit for 2008 and 2007, respectively. |
| • | Financial Services operating profit and margin decreased primarily due to significant declines in structured finance ratings as well as decreases in corporate ratings. |
| • | Demand for credit ratings-related information products such as RatingsXpress and RatingsDirect helped mitigate the impact of declines in structured finance and corporate ratings on operating profit and margin. |
| • | Reductions to reflect a change in the projected payout of the restricted performance stock awards and reductions in other incentive compensation helped mitigate the operating profit decline by $166.0 million. | ||
| • | Pre-tax restructuring charges of $25.9 and $18.8 million impacted the Financial Services segment’s operating profit for 2008 and 2007, respectively. |
| • | Information & Media operating profit and margin increased primarily due to growth in the Business-to- Business Group, oil, natural gas and power news and pricing products as a result of the increased demand for market information due to volatility in the price of crude oil and other commodities. |
| • | Reductions to reflect a change in the projected payout of the restricted performance stock awards and reductions in other incentive compensation had a positive impact on operating profit of $22.6 million. | ||
| • | Pre-tax restructuring charges of $19.2 million and $6.7 million impacted the Information & Media segment’s operating profit for 2008 and 2007, respectively. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating-related expenses
|
$ | 2,386.0 | $ | 2,518.5 | $ | 2,527.6 | ||||||
|
% (decrease)/growth
|
(5.3 | )% | (0.4 | )% | 5.9 | % | ||||||
|
Selling and general expenses
|
2,141.2 | 2,283.6 | 2,424.1 | |||||||||
|
% (decrease)/growth
|
(6.2 | )% | (5.8 | )% | 6.4 | % | ||||||
|
Other operating costs
and expenses
|
165.5 | 178.3 | 161.0 | |||||||||
|
% (decrease)/growth
|
(7.2 | )% | 10.8 | % | — | % | ||||||
|
Total expense
|
$ | 4,692.7 | $ | 4,980.4 | $ | 5,112.7 | ||||||
|
% (decrease)/growth
|
(5.8 | )% | (2.6 | )% | 5.9 | % | ||||||
| • | In 2009, total expenses decreased 5.8% while total revenue decreased 6.3%. |
| • | During 2009 and 2008, we restructured a limited number of business operations to enhance our longterm growth prospects. Included in selling and general expense for 2009 are pre-tax restructuring charges of $24.3 million, which consisted primarily of severance costs related to a workforce reduction of approximately 550 positions. In addition, during 2009, we revised our estimate for previously recorded restructuring charges and reversed approximately $9.1 million. The net pretax charge recorded was $15.2 million ($9.7 million after-tax, or $0.03 per diluted share). Included in selling and general expenses for 2008 are pre-tax restructuring charges of $73.4 million ($45.9 million after-tax, or $0.14 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 1,045 positions. | ||
| • | During 2008, we reduced the projected payout percentage of our outstanding restricted performance stock awards. During 2009, we further reduced the projected payout percentage of our outstanding restricted performance stock awards, although to a much lesser extent than 2008. Accordingly, we recorded an adjustment to reflect the current projected payout percentages for the awards which resulted in stock-based compensation having a beneficial impact on our 2008 expenses. |
| • | Total product-related expenses decreased 6.9% while product revenue decreased 8.5%. |
| • | Product operating-related expenses, which includes amortization of prepublication costs, decreased $49.0 million or 4.1%, primarily due to cost containment activities partly offset by increased incentive compensation and increased amortization of prepublication costs. |
| • | For 2009, combined printing, paper and distribution prices for manufacturing, which represented 17.2% of total operating-related expenses, decreased 0.4% versus 2008. | ||
| • | Printing prices declined 0.6% versus 2008 primarily due to successful negotiations with major U.S. printing and multi-media packaging suppliers and more cost effective product assignments to low-cost providers globally. | ||
| • | Paper prices were limited to an increase of 0.2% due to successful negotiations and long-term agreements currently in place. | ||
| • | Overall distribution prices decreased 0.2% as savings from changes in distribution delivery methods and negotiations with ground carriers offset U.S. Postal Service, international postage and airfreight rate increases. |
| • | Product-related selling and general expenses decreased 10.1%, primarily due to cost containment initiatives at McGraw-Hill Education. | ||
| • | The product margin deteriorated 150 basis points mainly due to decreased revenue and increased amortization of prepublication costs at McGraw-Hill Education. |
| • | Total service-related expenses decreased 4.8% and service revenue decreased 4.8%. |
| • | Service operating-related expenses decreased 6.2% primarily due to the lower direct costs related to revenues partly offset by increased incentive compensation. | ||
| • | Service selling and general expenses decreased 3.2% primarily due to ongoing cost containment activities. | ||
| • | The service margin deteriorated 10 basis points primarily due to revenue declines at Financial Services. |
| • | Other operating costs and expenses, which include depreciation and amortization of intangibles, decreased 7.2% primarily due to lower purchases of equipment in 2009 and assets that became fully depreciated or amortized resulting in a lower expense in 2009 compared to 2008. |
| • | In 2008, total expenses decreased 2.6% while total revenue decreased 6.2%. |
| • | During 2008 and 2007, we restructured a limited number of business operations to enhance our long-term growth prospects. Included in selling and general expenses for 2008 are pre-tax restructuring charges of $73.4 million ($45.9 million after-tax, or $0.14 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 1,045 positions. Included in selling and general expenses for 2007 are pre-tax restructuring charges of $43.7 million ($27.3 million after-tax, or $0.08 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 600 positions. | ||
| • | In 2008, we reduced the projected payout percentage of our outstanding restricted performance stock awards. Accordingly, we recorded an adjustment to reflect the current projected payout percentages for the awards which resulted in stock-based compensation having a beneficial impact on our expenses. |
| • | Total product-related expenses increased 1.7% while product revenue decreased 0.8%. |
| • | Product operating-related expenses, which includes amortization of prepublication costs, increased $51.8 million or 4.6%, primarily due to the growth in expenses at McGraw-Hill Education. The growth in expenses is primarily due to increases in direct expenses relating to product development, partially offset by cost containment efforts. |
| • | Amortization of prepublication costs increased by $30.3 million or 12.6%, as compared with the same period in 2007, as a result of adoption cycles. | ||
| • | For 2008, combined printing, paper and distribution prices for manufacturing, which represented 23.2% of total operating-related expenses, decreased 1% versus 2007. | ||
| • | Printing prices declined 2.5% versus 2007 primarily due to successful negotiations with major U.S. printing and multi-media packaging suppliers and more cost effective product assignments to low-cost providers globally. | ||
| • | Paper prices were limited to an increase of 3.7% due to successful negotiations and long-term agreements currently in place. | ||
| • | Overall distribution prices increased 2.5% due to U.S. Postal Service, international postage and airfreight rate increases, offset by savings resulting from changes in distribution delivery methods and negotiations with ground carriers. |
| • | Product-related selling and general expenses decreased 1.5%, primarily due to cost containment initiatives at McGraw-Hill Education. | ||
| • | The product margin deteriorated 212 basis points mainly due to increased amortization of prepublication costs at McGraw-Hill Education. |
| • | Total service-related expenses decreased 6.6% while service revenue decreased 9.5%. |
| • | Service operating-related expenses decreased 4.4% primarily due to the lower direct costs related to revenues and reduced 2008 incentive compensation costs. | ||
| • | Service selling and general expenses decreased 8.9% primarily due to reduced 2008 incentive compensation costs. | ||
| • | The service margin deteriorated 212 basis points primarily due to revenue declines at Financial Services. |
| • | Other operating costs and expenses, which include depreciation and amortization of intangibles, increased 10.8% reflecting amortization on intangibles from recent acquisitions and depreciation on our new information technology data center. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Other (loss)/income — net
|
$ | (3.3 | ) | $ | — | $ | 17.3 | |||||
| • | In 2009, other (loss)/income — net includes a pre-tax loss on the sale of Vista Research, Inc. of $13.8 million and a pretax gain of $10.5 million on the sale of BusinessWeek . | |
| • | In 2007, other (loss)/income — net includes a pre-tax gain on the sale of our mutual fund data business of $17.3 million. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Interest expense — net
|
$ | 76.9 | $ | 75.6 | $ | 40.6 | ||||||
| • | In 2009, interest expense — net increased slightly compared with 2008 primarily due to reduced interest income on foreign investments. | |
| • | In November 2007, we issued $1.2 billion of senior notes as follows: |
| • | $400 million of 5.375% senior notes due in 2012; | ||
| • | $400 million of 5.900% senior notes due in 2017; and | ||
| • | $400 million of 6.550% senior notes due in 2037. | ||
| • | Included in the years ended 2009, 2008 and 2007 is $71.5 million, $71.5 million and $11.7 million, respectively, of interest and debt discount amortization related to the senior notes. |
| • | Average total short-term borrowings consisted of commercial paper in 2009 and 2008. In 2007, average total short-term borrowings consisted of commercial paper, extendible commercial notes (“ECNs”) and promissory note borrowings. |
| • | Average short-term borrowings outstanding during the years ended 2009, 2008 and 2007 were $44.4 million at an average interest rate of 0.4%, $239.2 million at an average interest rate of 2.2%, and $674.8 million at an average interest rate of 5.4%, respectively. |
| • | In 2008, interest expense — net increased compared with 2007 primarily due to the full year impact of our outstanding senior notes, which were issued in November 2007 combined with lower interest income earned on lower investment balances and lower interest rates. | |
| • | Included in 2009, 2008 and 2007 was approximately $7.6 million, $8.1 million and $8.5 million, respectively, of non-cash interest expense related to the accounting for the sale-leaseback of our headquarters building in New York City. | |
| • | In 2010, interest expense is projected to remain consistent with 2009. |
| 2009 | 2008 | 2007 | ||||||||||
|
Provision for income taxes as
% of income from operations |
36.4 | % | 36.9 | % | 37.2 | % | ||||||
| • | The effective tax rates include the impact of a new accounting rule adopted on January 1, 2009 for noncontrolling interests in subsidiaries (see Note 1 to our consolidated financial statements), which resulted in a change to the calculated effective tax rates for 2008 and 2007. | |
| • | The decrease in the effective tax rate for 2009 as compared to 2008 is primarily attributable to a decrease in state and local income taxes. | |
| • | During 2009, we effectively completed the U.S. federal tax audit for 2008. The years 2007 and 2008 remain open pending the appeal of certain unresolved issues. In 2009, we also completed various state and foreign tax audits and, with few exceptions, we are no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before 2002. The favorable impact to tax expense in 2009 was $8.7 million. | |
| • | During 2008, we completed various federal, state and local, and foreign tax audits. The favorable impact to tax expense in 2008 was $15.9 million. This favorable impact to the tax provision was offset by additional requirements for the repatriation of cash from international operations. | |
| • | During 2007, we completed the U.S. federal tax audits for the years ended December 31, 2004, 2005 and 2006 and also completed various state and foreign tax audits. The favorable impact to tax expense was $20.0 million which was offset by additional tax requirements for the repatriation of cash from foreign operations. | |
| • | On January 1, 2007, we implemented new accounting rules for unrecognized tax benefits. The total amount of federal, state and local, and foreign unrecognized tax benefits as of December 31, 2009 and 2008 was $37.8 million and $27.7 million, respectively, exclusive of interest and penalties. Included in the balance at December 31, 2009 and 2008, are $0.7 million and $2.2 million, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, |
| the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. In addition to the unrecognized tax benefits, as of December 31, 2009 and 2008, we had $8.7 million and $13.5 million, respectively, of accrued interest and penalties associated with uncertain tax positions. |
| • | We expect the 2010 effective tax rate to be approximately 36.4% absent the impact of numerous factors including intervening audit settlements, changes in federal, state or foreign law and changes in the geographical mix of our income. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Net income
|
$ | 730.5 | $ | 799.5 | $ | 1,013.6 | ||||||
|
% (decrease)/growth
|
(8.6 | )% | (21.1 | )% | 14.9 | % | ||||||
| • | In 2009, net income decreased as compared with 2008 as a result of the decreased revenue performance across all three operating segments. |
| • | 2009 includes a $9.7 million after-tax restructuring charge, a $8.8 million after-tax loss on the sale of Vista Research, Inc. and a $6.7 million after-tax gain on the sale of BusinessWeek . |
| • | In 2008, net income decreased as compared with 2007 primarily as a result of the decreased revenue performance in the Financial Services and McGraw-Hill Education segments. |
| • | 2008 includes a $45.9 million after-tax restructuring charge. | ||
| • | 2007 includes a $27.3 million after-tax restructuring charge and a $10.3 million after-tax gain on the divestiture of our mutual fund data business. |
| 2009 | 2008 | 2007 | ||||||||||
|
Diluted earnings per
common share
|
$ | 2.33 | $ | 2.51 | $ | 2.94 | ||||||
|
% (decrease)/growth
|
(7.2 | )% | (14.6 | )% | 22.5 | % | ||||||
| • | In 2009, the decrease in diluted earnings per share compared to 2008 was due to decreased net income partially offset by the full year impact of 2008 share repurchases. | |
| • | In 2008, the decrease in diluted earnings per share compared to 2007 was due to decreased net income, partially offset by share repurchases of 10.9 million in 2008. |
| • | 2008 includes a $0.14 after-tax restructuring charge. | ||
| • | 2007 includes a $0.03 after-tax benefit of the divestiture of the Financial Services’ mutual fund data business and a $0.08 after-tax restructuring charge. |
| (in millions) | 2009 (a) | 2008 (b) | 2007 (c) | |||||||||
|
Revenue
|
$ | 2,387.8 | $ | 2,638.9 | $ | 2,705.9 | ||||||
|
% (decrease)/increase
|
(9.5 | )% | (2.5 | )% | 7.2 | % | ||||||
|
Operating profit
|
$ | 276.0 | $ | 321.4 | $ | 403.1 | ||||||
|
% (decrease)/increase
|
(14.1 | )% | (20.3 | )% | 21.4 | % | ||||||
|
% operating margin
|
12 | % | 12 | % | 15 | % | ||||||
| (a) | Operating profit includes a pre-tax restructuring charge. | |
| (b) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. | |
| (c) | Operating profit includes a pre-tax restructuring charge. |
| • | In 2009, revenue from the McGraw-Hill Education segment decreased from prior year. |
| • | SEG’s revenue decline was driven primarily by lower state adoption sales. Reduced potential in the state new adoption market and reduced spending in the open territory occurred as schools tightened their budgets in response to the continuing decline of state and local tax revenues in most regions. K—12 basal sales declined significantly in the adoption states. In the testing market, an increase in formative assessment revenue was driven by the success of SEG’s Acuity program in expanding its subscription base. Custom testing revenue declined due primarily to the anticipated discontinuation of several state contracts. Non-custom or “shelf” revenue also declined, reflecting budget concerns among the school districts for which these products tend to be discretionary purchases. | ||
| • | HPI’s revenue was flat to prior year as growth in the higher education market was offset by declines in the professional market driven by weakness in the retail environment and declines in the international markets. | ||
| • | Foreign exchange rates had a $26.6 million unfavorable impact on revenue and an immaterial impact on operating profit in 2009. |
| • | In 2009, operating profit for the McGraw-Hill Education segment declined primarily due to the decrease in SEG revenue, although that decrease was largely offset by a reduction in operating expenses due to cost-saving initiatives. |
| • | During 2009, McGraw-Hill Education initiated a restructuring plan that included a realignment of several business operations within the segment, introducing market-focused organizational approaches that will enhance their ability to address the changing needs of their customers. The restructuring charge consisted primarily of employee severance costs related to the reduction of approximately 340 positions. In addition, during 2009, the McGraw-Hill Education segment reversed accruals for previously recorded restructuring charges due to revised estimates. The net pre-tax restructuring charge recorded was $11.6 million. | |
| • | During 2008, the McGraw-Hill Education segment incurred a pre-tax restructuring charge of $25.3 million consisting of employee severance costs related to the reduction of approximately 455 positions. | |
| • | 2008 included reductions in incentive compensation expense, as further described in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| • | In 2008, revenue for the McGraw-Hill Education segment decreased from the prior year. |
| • | SEG’s revenue declined due to lower residual sales in the adoption states and lower new and residual sales in the open territory market partially offset by an increase in state new adoption basal sales. |
| • | The decline in open territory and residual sales, which are typically ordered in the second half of the year, reflected lower discretionary spending by schools, many of which were operating on tighter budgets as state and local tax revenues declined while other costs, especially energy costs, increased. | ||
| • | In testing, revenue declined owing to a decrease in custom contract revenues, partially offset by increased sales of non-custom or “off the shelf” products, notably Acuity formative assessments, LAS Links assessments for English-language learners, and TABE assessments for adult learners. |
| • | HPI’s revenue increased, reflecting growth in U.S. and international sales of higher education titles that was partially offset by declines in sales of professional and reference products. |
| • | Higher education revenue increased for digital products. | ||
| • | Sales of professional books, especially those intended for the consumer market, declined as retailers reduced their inventories through lower orders in response to weak customer demand. | ||
| • | International revenue increased, led by success in India and Asia that was partially offset by sales declines in Latin America and Australia. |
| • | Foreign exchange rates adversely impacted revenue by $7.3 million and did not have a material impact on operating profit. |
| • | In 2008, operating profit for the McGraw-Hill Education segment declined primarily due to decreased SEG revenues coupled with increased prepublication amortization, technology investment and marketing expenses. | |
| • | Reductions in 2008 incentive compensation helped mitigate the operating profit reduction, as further described in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| • | In 2008, the McGraw-Hill Education segment incurred pre-tax restructuring charges totaling $25.3 million. These charges consisted primarily of employee severance costs resulting from a workforce reduction of approximately 455 positions, driven by continued cost containment and cost reduction activities as a result of current economic conditions. | |
| • | In 2007, the McGraw-Hill Education segment incurred pre-tax restructuring charges totaling $16.3 million. These charges consisted of employee severance costs resulting from to a workforce reduction of approximately 300 positions across the segment. The 2007 restructuring activities related primarily to the reallocation of certain resources to support continued digital evolution and productivity initiatives at HPI and SEG. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 1,112.3 | $ | 1,362.6 | $ | 1,441.0 | ||||||
|
% (decrease)/increase
|
(18.4 | )% | (5.4 | )% | 6.7 | % | ||||||
| • | SEG revenue declined, driven primarily by lower state adoption sales. Reduced potential in the state new adoption market and reduced spending in the open territory occurred as schools tightened their budgets in response to the continuing decline of state and local tax revenues in most regions. |
| • | K-12 basal sales declined significantly in the adoption states. In 2008, SEG realized strong sales of K—5 reading in Florida, K—8 math and science in California, K—5 math in Texas, and various subjects in smaller states such as Alabama. The 2009 state new adoption market was smaller because Texas was not scheduled to buy new materials and because other states, including Alabama, adopted in categories offering less revenue potential for the industry. The biggest opportunities were expected to be offered by 6—12 literature in Florida and K—8 reading and math in California, but economic problems sharply limited 2009 purchasing in both states. | ||
| • | K—12 sales in the open territory declined to a lesser extent, as reduced opportunities in many parts of the country were partially offset by gains over the prior year in areas such as Illinois, where SEG’s secondary products captured a strong share of the state’s annual textbook purchasing program and contributed significantly to full-year results. |
| • | K—12 supplementary sales also declined, with strong growth in intervention products being offset by lower demand for SEG’s extensive list of older products, many of which are being phased out. | ||
| • | Non-custom or “shelf” testing declined for all product lines, led by declines for the TerraNova line of normreferenced assessments. | ||
| • | Formative assessment increased, driven by new adoptions, renewals, and expanded implementations of SEG’s successful Acuity program. | ||
| • | Custom testing declined due to the anticipated discontinuation of contracts for work in California, Florida, and Arizona and declines in the scope of work on other contracts in comparison to the prior year. |
| • | Total U.S. PreK—12 enrollment for 2009—2010 is estimated at nearly 56 million students, up 0.2% from 2008—2009, according to the National Center for Education Statistics (“NCES”). | ||
| • | According to statistics compiled by the Association of American Publishers (“AAP”), total net basal and supplementary sales of elementary and secondary instructional materials decreased 13.8% through December 2009. Basal sales in adoption states and open territory for the industry decreased 21.4% compared to prior year. In the supplemental market, industry sales were up 14.9% versus prior year, driven largely by an increase in demand for intervention products in reading and math. |
| • | SEG revenue declined, as an increase in state new adoption basal sales was more than offset by lower residual sales in the adoption states and by lower new and residual sales in the open territory market. The decline in open territory and residual sales, which are typically ordered in the second half of the year, reflected lower discretionary spending by schools, many of which were operating on tighter budgets as state and local tax revenues declined while other costs, especially energy costs, increased. |
| • | In the K—5 market for balanced basal programs, sales increased due to higher adoption state sales in Texas, California, and Florida. Open territory sales for these programs were also higher because of increased sales in several states, particularly for reading. K—5 residual and supplemental sales declined in both the adoption states and open territory as schools reduced discretionary spending. | ||
| • | 6—12 basal sales decreased due primarily to a reduction in adoption state opportunities for secondary materials that was driven by Texas, which moved from 6—12 math purchasing in 2007 to K—5 math purchasing in 2008, and by Florida, which purchased for a number of 6—12 courses in 2007 but purchased K—5 reading in 2008. Open territory sales of 6—12 products increased due to higher orders for math and science in New York. As was true in the K—5 market, residual sales of 6—12 materials declined in adoption states and open territory as schools reduced discretionary spending. | ||
| • | Formative assessment and Non-custom or “shelf” testing revenue increased driven by higher Acuity revenues in New York City, sales of the LAS series for English-language learners and sales of the TABE series. These gains were partially offset by declines in older shelf products. | ||
| • | Custom testing revenue declined due to reductions in the volume of work performed in 2008 on three state contracts. The expiration of several contracts that produced revenue in 2007 also contributed to the variance. |
| • | Total U.S. PreK—12 enrollment for 2008—2009 was estimated at nearly 56 million students, up 0.3% from 2007—2008, according to the National Center for Education Statistics (“NCES”). |
| • | According to statistics compiled by the Association of American Publishers (“AAP”), total net basal and supplementary sales of elementary and secondary instructional materials decreased 4.4% through December 2008. Basal sales in adoption states and open territory for the industry decreased 2.7% compared to prior year. In the supplemental market, industry sales were down 11.4% versus prior year, part of a continuing trend reflecting lower demand for traditional supplementary materials. In recent years basal programs have become increasingly comprehensive, offering integrated ancillary materials that reduce the need for schools to buy separate supplemental products. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 1,275.5 | $ | 1,276.3 | $ | 1,264.8 | ||||||
|
% (decrease)/increase
|
(0.1 | )% | 0.9 | % | 7.8 | % | ||||||
| • | Higher Education sales increased for both print and digital product, driven by strong new publication lists at all four imprints (SEM, B&E, HSSL and Career Education), new digital offerings to support print sales, improved sales coverage in key regions and higher enrollments in the current academic year. |
| • | Key titles contributing to 2009 performance included McConnell, Economics, 18/e; Lucas, The Art of Public Speaking, 10/e; Sanderson, Computers in the Medical Office, 6/e; Shier, Hole’s Essentials of Human Anatomy and Physiology, 10/e; and Saladin, Anatomy and Physiology, 5/e. | |||
| • | Digital growth was driven by the continued success of the Homework Management product line, which included new releases on the improved and enhanced Connect platform. | |||
| • | Revenue in the professional market declined versus 2008 as weakness in the consumer environment had a negative effect on sales of some print product lines. Digital subscriptions had a favorable impact on 2009 results. |
| • | International sales decreased in 2009, with strong demand for higher education products across most markets offset by lower school sales in some regions, by softness in professional sales related to economic conditions, and by the unfavorable impact of foreign exchange. |
| • | The U.S. college new textbook market is approximately $4.3 billion and is expected to grow about 5%—7% in 2010. In 2010, all our higher education imprints will have large, competitive lists of new titles and we anticipate that we will hold or grow our market position in the industry. As technology continues to be the key trend in higher education for course management and content delivery, the HPI Group will aggressively pursue a variety of e-initiatives , including electronic books, homework support for students and online faculty training and support. |
| • | The median projected increase in U.S. college enrollments is a rise of 13% to 20.6 million between 2007 and 2018, according to the National Center for Educational Statistics (“NCES”). The economic recession and related weak job market is leading more individuals to seek |
39
| additional education and training. In 2009, this trend was strengthened by provisions in the American Recovery and Reinvestment Act (“ARRA”) that raised the maximum Pell Grant award available to eligible students and increased the maximum tax credit allowable to students or their families for college tuition and other defined expenses. During 2009, the federal government also enacted the Post 9/11 G.I. Bill, which provides educational stipends for eligible veterans attending postsecondary institutions. Through September, a first wave of about 24,500 veterans had been approved for 2009 enrollments under the program. The recent extension of unemployment benefits by the U.S. Congress for individuals who have exhausted their federal unemployment benefits is expected to continue to fuel this trend in 2010. |
| • | In 2010, the professional market is expected to be challenging as consumer-oriented product lines decline but this will be largely offset by increased demand for medical and engineering product lines, both print and digital. The migration of customers to alternate delivery channels such as e-books and online digital delivery will continue to impact print sales at traditional retailers and wholesalers. |
| • | HPI’s revenue increased by 0.9% reflecting growth in U.S. sales of higher education titles, as well as expansion of international sales of higher education, professional and references products. |
| • | Higher Education revenue increased, led by growth in the Career and Business & Economics (“B&E”) imprints. The Humanities, Social Science and Languages (“HSSL”) imprint showed a slight increase, while the Science, Engineering, Mathematics (“SEM”) imprint showed a slight decline. Homework Management products and electronic books drove digital product growth. |
| • | Key titles contributing to 2008 performance included Knorre, Puntos de partida, 8/e; Nickels, Understanding Business, 8/e; McConnell, Economics, 17/e; Garrison, Managerial Accounting, 12/e; and Ober, Keyboarding, 10/e. |
| • | Revenue in the professional market declined versus the prior year due to lower book sales, particularly titles intended for the consumer market, in a weak retail environment and strong prior year sales of McGraw-Hill Encyclopedia of Science and Technology , which was published in May 2007, partially offset by current year sales of the new edition of Harrison’s Principles of Internal Medicine . Growth in digital subscriptions and digital licensing had a favorable impact for the year. | ||
| • | International revenue increased, led by success in India and Asia, partially offset by sales declines in other regions, particularly Latin America. |
| (in millions) | 2009 (a) | 2008 (b) | 2007 (c) | |||||||||
|
Revenue
|
$ | 2,610.1 | $ | 2,654.3 | $ | 3,046.2 | ||||||
|
% (decrease)/increase
|
(1.7 | )% | (12.9 | )% | 10.9 | % | ||||||
|
Operating
profit
|
$ | 1,014.1 | $ | 1,070.4 | $ | 1,370.2 | ||||||
|
% (decrease)/increase
|
(5.3 | )% | (21.9 | )% | 13.4 | % | ||||||
|
% operating margin
|
39 | % | 40 | % | 45 | % | ||||||
| (a) | Operating profit includes a pre-tax restructuring charge and a pre-tax loss on the sale of Vista Research, Inc. | |
| (b) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. | |
| (c) | Operating profit includes a pre-tax gain on the sale of our mutual fund data business and a pre-tax restructuring charge. |
| • | In 2009, Financial Services revenue and operating profit decreased over prior year: |
| • | Credit Market Services revenue decreased slightly as a result of continued weakness in structured finance and the impact of foreign exchange rates. The revenue decline was partially offset by revenue increases in corporate industrial ratings, sovereign and international public finance ratings, credit ratings-related information products such as RatingsXpress and RatingsDirect and other credit risk solutions products. | ||
| • | Investment Services revenue decreased as a result of reductions in investment research products and the impact of foreign exchange rates. The revenue decline was partially mitigated by growth in Capital IQ, and to a lesser extent by our data and information offerings and index services. |
| • | Foreign exchange unfavorably impacted revenue by $43.4 million and operating profit by $15.4 million. | ||
| • | 2008 included reductions in incentive compensation expense, as further described in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| • | In May 2009, we sold our Vista Research, Inc. business. The sale resulted in a $13.8 million pre-tax loss ($8.8 million after-tax, or $0.03 per diluted share). This business was selected for divestiture as it no longer fit within our strategic plans. The divestiture enables our Financial Services segment to focus on its core business of providing independent research, ratings, data, indices and portfolio services. The impact of this divestiture on comparability of results is immaterial. | |
| • | During 2009, the Financial Services segment incurred a restructuring charge consisting of employee severance costs related to the reduction of approximately 85 positions which, net of reversal of accruals for previously recorded restructuring charges due to revised estimates, resulted in a pre-tax benefit of $0.4 million. | |
| • | During 2008, the Financial Services segment incurred a pre-tax restructuring charge of $25.9 million consisting of employee severance costs related to the reduction of approximately 340 positions, driven by continued cost containment activities as a result of the current credit market environment and economic conditions. |
| • | In 2008, Financial Services revenue and operating profit decreased over prior year primarily driven by declines at Credit Market Services: |
| • | Credit Market Services revenue and operating profit were adversely impacted by the turbulence in the global financial markets resulting from challenged credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets. | ||
| • | Strength in Investment Services mitigated decreases experienced in Credit Market Services and was driven by demand for both the Capital IQ and index products. | ||
| • | Foreign exchange positively impacted revenue growth by $16.9 million and operating profit by $35.4 million. |
41
| • | Reductions in 2008 incentive compensation helped mitigate the operating profit reduction, as further described in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| • | During 2008, the Financial Services segment incurred a pre-tax restructuring charge of $25.9 million consisting of employee severance costs related to the reduction of approximately 340 positions, driven by continued cost containment activities as a result of the current credit market environment and economic conditions. | |
| • | In March 2007, we sold our mutual fund data business. The sale resulted in a $17.3 million pre-tax gain ($10.3 million after-tax, or $0.03 per diluted share), recorded as other (loss)/income – net, and had an immaterial impact on the comparison of the segment’s operating profit. The divestiture of the mutual fund data business was consistent with our Financial Services segment’s strategy of directing resources to those businesses which have the best opportunities to achieve both significant financial growth and market leadership. The divestiture enables our Financial Services segment to focus on its core business of providing independent research, ratings, data, indices and portfolio services. |
42 The McGraw-Hill Companies 2009 Annual Report
43
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 1,748.2 | $ | 1,754.8 | $ | 2,264.1 | ||||||
|
% (decrease)/increase
|
(0.4 | )% | (22.5 | )% | 9.2 | % | ||||||
44 The McGraw-Hill Companies 2009 Annual Report
| • | Credit Market Services revenue decreased as a result of continued weakness in structured finance and the impact of foreign exchange rates. The revenue decline was partially mitigated by revenue increases in corporate industrial ratings, sovereign and international public finance ratings, credit ratings-related information products such as RatingsXpress and RatingsDirect and other credit risk solutions products. |
| • | Declines in issuance across all structured finance asset classes other than U.S. RMBS and European CMBS contributed to our revenue declines. These declines were partially offset by revenue increases in U.S. and European corporate industrial issuance and sovereign issuance. | ||
| • | Growth in our information products was driven by increased customer demand for value-added solutions. | ||
| • | Revenue derived from non-transaction related sources includes surveillance fees, annual contracts, subscription, and rating fees earned relating to cancelled transactions (“breakage fees”). In 2009, our non-transaction related revenue decreased slightly compared to 2008 primarily as a result of lower breakage fees. Non-transaction related revenue represented 69.2% of total Credit Market Services revenue for 2009 compared to 69.3% for 2008. |
| Structured Finance | U.S. | Europe | ||||||
|
Residential Mortgage-Backed Securities (RMBS)
|
73.3 | % | –54.7 | % | ||||
|
Commercial Mortgage-Backed Securities (CMBS)
|
–54.3 | % | 13.4 | % | ||||
|
Collateralized Debt Obligations (CDO)
|
–82.1 | % | –95.6 | % | ||||
|
Asset-Backed Securities (ABS)
|
–37.1 | % | –56.3 | % | ||||
|
Total New Issue Dollars (Structured Finance)
|
–31.6 | % | –63.3 | % | ||||
| • | U.S. RMBS issuance reflects the increased restructuring of existing mortgage-backed securities (re-REMIC issuance) and compares to low levels of issuance in 2008. European RMBS issuance decreased as it did not experience similar re-REMIC activity. | |
| • | Both CMBS and CDO asset classes continue to experience little investor demand and relatively illiquid secondary trading markets in both the U.S. and Europe. Although Europe CMBS issuance experienced a gain compared to prior year, issuance levels remain very low. | |
| • | ABS issuance has declined as consumers continue to deleverage resulting in lower consumer loan balances to securitize. |
| Corporate Issuance | U.S. | Europe | ||||||
|
High Yield Issuance
|
251.3 | % | 215.8 | % | ||||
|
Investment Grade
|
–4.9 | % | 21.4 | % | ||||
|
Total New Issue Dollars (Corporate)
|
7.0 | % | 23.4 | % | ||||
| • | Corporate debt issuance was higher in the U.S. and Europe resulting from issuers seeking to increase their liquidity positions and to refinance debt. Tighter credit spreads created a more attractive financing environment for issuers and investors became more comfortable buying lower-rated bonds. | |
| • | U.S. and Europe high yield issuance experienced large gains compared to prior year as high yield grade companies took advantage of investors’ growing appetite for higher yield and the need to refinance. |
| • | Credit Market Services revenue was adversely impacted by turbulence in the global financial markets resulting from challenged credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets. Specifically, the decrease in revenue was attributed to the continuing significant decreases in structured finance as well as decreases in corporate ratings; partially offset by increases in public finance ratings and credit ratings-related information products such as RatingsXpress and RatingsDirect and credit risk evaluation products and services as well as moderate growth in revenue derived from non-transaction related sources. |
| • | Continued significant decreases in issuance volumes in the United States and Europe of RMBS, CMBS, CDO and ABS contributed to the decrease in revenue. | ||
| • | Corporate ratings decreases were driven by wider credit spreads and tighter lending standards in light of the weakening of the global economy and uncertainty in the world financial markets. | ||
| • | Growth in information products and credit risk evaluation products and services was driven by increased customer demand for value-added solutions. | ||
| • | Revenue derived from non-transaction related sources includes surveillance fees, annual contracts, subscription, and rating fees earned relating to cancelled transactions (“breakage fees”). In 2008, our non-transaction |
45
| related revenue increased moderately to $1.3 billion which represented approximately 73% of total Credit Market Services revenue in 2008 as compared to 54% in 2007. The increase of non-transaction related revenue as a proportion of total Credit Market Services revenue is attributable to the significant declines in transaction related revenue during 2008. |
| Compared to Prior Year | ||||||||
| Structured Finance | U.S. | Europe | ||||||
|
Residential Mortgage-Backed
Securities (RMBS)
|
-95.4 | % | -81.7 | % | ||||
|
Commercial Mortgage-Backed
Securities (CMBS)
|
-93.4 | % | -97.0 | % | ||||
|
Collateralized Debt Obligations (CDO)
|
-89.6 | % | -73.8 | % | ||||
|
Asset-Backed Securities (ABS)
|
-20.1 | % | -70.8 | % | ||||
|
Total New Issue Dollars
(Structured Finance)
|
-79.9 | % | -80.1 | % | ||||
| • | Continued deterioration in the subprime mortgage market, tighter lending standards and declining home prices have significantly impacted dollar volume issuance in the RMBS market. | |
| • | CMBS issuance decreased due to the market dislocation attributed to high credit spreads resulting in high interest rates which are not economical to borrowers. | |
| • | The large decline in CDO issuance resulted from continued lack of investor appetite for the complex deal structures and secondary market trading liquidity concerns. | |
| • | In Europe, widening credit spreads and weak secondary market trading have contributed to the decline in new issue ABS volume. |
| Compared to Prior Year | ||||||||
| Corporate Issuance | U.S. | Europe | ||||||
|
High Yield Issuance
|
-73.7 | % | -73.3 | % | ||||
|
Investment Grade
|
-28.4 | % | -9.5 | % | ||||
|
Total New Issue Dollars (Corporate)
|
-33.8 | % | -11.7 | % | ||||
| • | Corporate debt issuance declined as the result of insufficient investor demand despite widening credit spreads in both the investment grade and high yield sectors. | |
| • | New dollar issuance in the U.S. municipal market decreased 6.1% for 2008 compared to last year. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 861.9 | $ | 899.5 | $ | 782.1 | ||||||
|
% (decrease)/increase
|
(4.2 | )% | 15.0 | % | 16.3 | % | ||||||
| • | Investment Services revenue decreased as a result of reductions in investment research products and the impact of foreign exchange rates. The revenue decline was partially mitigated by growth in Capital IQ, our data and information offerings and index services. |
| • | The decrease in investment research products was impacted by the expiration of the Independent Equity Research (IER) settlement at the end of July. Despite the expiration of the IER settlement, we have signed contracts with some of the large banks to continue providing research for their customers. | ||
| • | Revenue decline was partially offset by continued expansion of our customer base at Capital IQ and for other data and information offerings as well as growth in our index services as assets under management for exchange-traded funds (“ETFs”) rose 21.3% to $247.0 billion in 2009 from $203.6 billion in 2008. |
| • | The number of Capital IQ clients at December 31, 2009 increased 9.9% from the prior year. |
| • | In May 2009, the Vista Research, Inc. business was divested and we recognized a pre-tax loss of $13.8 million ($8.8 million after-tax or $0.03 per diluted share). This divestiture enables the Financial Services segment to focus on its core business of providing independent research, ratings, data indices and portfolio services. The impact of this divestiture on comparability of results is immaterial. |
| • | Investment Services revenue increased as a result of growth in index services and Capital IQ products. |
| • | Revenue related to Standard & Poor’s indices increased despite assets under management for ETFs decreasing 13.5% from December 31, 2007 to $203.6 billion at December 31, 2008. Although the assets under management decreased from the year-end 2007 levels they were higher for the first nine months of 2008 which drove the revenue increase for the year. The number of exchange - traded futures and option contracts based on S&P indices exhibited strong increases in 2008 compared to the same period of the prior year, thereby also contributing to the revenue growth. |
| • | The number of Capital IQ clients at December 31, 2008 increased 19.0% from the prior year. |
| (in millions) | 2009 (a) | 2008 (b) | 2007 (c) | |||||||||
|
Revenue
|
$ | 953.9 | $ | 1,061.9 | $ | 1,020.2 | ||||||
|
% (decrease)/increase
|
(10.2 | )% | 4.1 | % | 3.6 | % | ||||||
|
Operating
profit
|
$ | 92.7 | $ | 92.0 | $ | 63.5 | ||||||
|
% increase
|
0.7 | % | 45.0 | % | 27.2 | % | ||||||
|
% operating margin
|
10 | % | 9 | % | 6 | % | ||||||
| (a) | Operating profit includes a pre-tax gain on the sale of BusinessWeek and a pre-tax restructuring charge. | |
| (b) | Operating profit includes a pre-tax restructuring charge and the impact of reductions in incentive compensation. | |
| (c) | Revenue and operating profit include the impact of the Sweets transformation. Operating profit includes a pre-tax restructuring charge. |
| • | In 2009, revenue declines were driven primarily by advertising weakness across all of our media properties and reduced sales of our automotive studies. |
| • | The declines were partly offset by growth in our global energy and other commodities products and services. | ||
| • | During the first quarter of 2009, J.D. Power and Associates began transitioning a number of syndicated studies to an online service platform. This resulted in $11.4 million of revenue and $7.1 million of operating profit that would have been recognized in 2009 to be deferred and will be recognized over the service period. | ||
| • | Foreign exchange rates had an immaterial impact on revenue and a $7.3 million favorable impact on operating profit. |
| • | In 2009, the Information & Media segment incurred a pre-tax restructuring charge that reduced operating profit by $4.0 million consisting primarily of employee severance costs related to the reduction of approximately 125 positions, driven by continued cost containment and cost reduction activities. | |
| • | In 2008, the Information & Media segment incurred a pre-tax restructuring charge that reduced operating profit by $19.2 million consisting of employee severance costs related to the reduction of approximately 210 positions, driven by continued cost containment and cost reduction activities. | |
| • | On December 1, 2009, we sold BusinessWeek , which was part of our Information & Media segment. This business was selected for divestiture as it no longer fit within our strategic plans. We recognized a pre-tax gain of $10.5 million ($6.7 million after tax or $0.02 per diluted share). The impact of this divestiture on comparability of results is immaterial. | |
| • | 2008 included reductions in incentive compensation expense, as further discussed in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| • | In 2010, the Information & Media segment expects to invest in digital capabilities that will enable the businesses to become integrated, digital solutions providers and create a foundation for the development of new businesses and revenue streams. The segment will further expand its presence in selected markets and geographies to help drive growth. |
| • | The ongoing volatility of the oil and natural gas markets is expected to continue customer demand for news and pricing products, although at a slower pace than in 2009. | ||
| • | J.D. Power and Associates will focus on expanding its global automotive business and extend its product offering into new verticals and emerging markets, but expects to face challenges as the U.S. automotive market experiences significant challenges. | ||
| • | In the construction market, digital and Web-based products will provide expanded business information integrated into customer workflows. | ||
| • | In a political year, the Broadcasting stations expect growth in political advertising as base advertising continues to be impacted by the current economic conditions, particularly in the automotive and retail sectors. The Broadcasting stations will continue to develop and grow new digital businesses. | ||
| • | The Broadcasting Group has recently agreed on the terms of its affiliation renewal with ABC which will have an adverse, but immaterial, impact on the segment’s future revenue and profitability. |
47
| • | In 2008, revenue growth was driven primarily by the Business-to-Business Group. |
| • | The growth was driven by Platts, a leading provider of energy and other commodities information, as well as J.D. Power and Associates, partially offset by declines in BusinessWeek . | ||
| • | Foreign exchange rates had an immaterial impact on revenue and operating profit. |
| • | In 2008, the Information & Media segment incurred a pre-tax restructuring charge that reduced operating profit by $19.2 million consisting primarily of employee severance costs related to the reduction of approximately 210 positions, driven by continued cost containment and cost reduction activities. | |
| • | In 2007, the Information & Media segment incurred a pre-tax restructuring charge that reduced operating profit by $6.7 million consisting primarily of employee severance costs related to the reduction of approximately 100 positions across the segment. These restructuring activities related primarily to the reallocation of certain resources to support continued digital evolution and productivity initiatives. | |
| • | 2008 included reductions in incentive compensation expense, as further discussed in the “Consolidated Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 872.7 | $ | 954.8 | $ | 917.2 | ||||||
|
% (decrease)/increase
|
(8.6 | )% | 4.1 | % | 6.2 | % | ||||||
| • | Business-to-Business Group revenue decline was primarily driven by advertising weakness across all of our media properties and reduced sales of our automotive studies. Partially offsetting these declines was an increase in our global energy and other commodities products and services. |
| • | Current economic weakness continues to drive declines in the automotive industry, softness in advertising and decreases in the construction market. | ||
| • | According to the PIB, BusinessWee k’s advertising pages in the global edition through November 2009 were down 33.5% compared to the same period in 2008, with one less issue year to year for PIB purposes and two fewer issues for revenue recognition purposes. As discussed above, we sold BusinessWeek on December 1, 2009. | ||
| • | Global commodities products related to oil, natural gas and power experienced growth as the continued volatility in crude oil and other commodity prices drove the continued need for market information. |
| • | During the first quarter of 2009, J.D. Power and Associates began transitioning a number of syndicated studies to an online service platform. This resulted in $11.4 million of revenue and $7.1 million of operating profit that would have been recognized in 2009 to be deferred and will be recognized over the service period. |
| • | According to the International Energy Agency, oil demand in 2009 is expected to drop by 2.2%, following a drop of 0.2% in 2008 as a result of the financial and economic crisis. Energy investment worldwide has plunged in the face of a tougher financing environment, weakening demand for energy and falling cash flows. Global oil demand is expected to recover as the economy pulls out of recession, outpacing the growth in capacity which will exert upward pressure on energy prices which are likely to remain highly volatile. | |
| • | In 2009, the dollar value of total U.S. construction starts was down 26% against the prior year. Most of the decline was due to a 31% decrease in residential building activity, as well as a 33% decrease in non-residential construction from lower commercial and manufacturing building activities, while non-building construction was down 9%. | |
| • | In 2009, the dollar value of total U.S. light vehicle sales was down 19% on a 21% decline in total sales volume against the prior year. Flat incentive spend versus 2008, combined with slightly higher industry transaction prices in 2009 led to the relatively better performance on a dollar value versus sales volume basis. |
| • | Business-to-Business Group revenue growth was driven by Platts as well as J.D. Power and Associates, partially offset by declines in BusinessWeek . |
| • | Oil, natural gas and power news and pricing products experienced growth as the increased volatility in crude oil and other commodity prices drove the increased need for market information. | ||
| • | Improved market penetration in the international consumer research studies, particularly in Asia, positively influenced growth. |
| • | According to the Publishers Information Bureau (“PIB”), BusinessWeek ’s advertising pages in the global edition for 2008 were down 16.1% in 2008 versus 2007, with one less issue in 2008 for PIB purposes but comparable issues for revenue recognition purposes. | |
| • | In 2008, U.S. construction starts decreased 15% compared to 2007, as the housing correction outweighed growth for nonresidential building and public works. |
| • | Nonresidential building increased 1% relative to 2007. | ||
| • | Residential building decreased 39% compared to 2007, as the demand for single-family housing has been curtailed by tighter lending standards. | ||
| • | Nonbuilding construction grew 4% reflecting gains for highways, bridges, sewers and supply systems, offset by electrical utilities. |
| • | According to the PIB, advertising pages for all consumer magazine publications were down 11.7% for 2008 compared to 2007. |
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
$ | 81.1 | $ | 107.1 | $ | 103.0 | ||||||
|
% (decrease)/increase
|
(24.2 | )% | 4.0 | % | (14.6 | )% | ||||||
| • | In 2009, Broadcasting revenue declined compared to 2008. |
| • | Declines in base advertising were primarily due to economic weakness in key markets. | ||
| • | Political advertising declined significantly as 2009 was a non-political election year. |
| 2008 | COMPARED WITH 2007 |
| • | In 2008, Broadcasting revenue increased compared to 2007. |
| • | Strong political advertising due to the presidential election was offset by declines in base advertising due to economic weakness in key markets. | ||
| • | Time sales, excluding political advertising, declined driven by decreases in the automotive services, retail and consumer products sectors. |
| December 31 (in millions) | 2009 | 2008 | ||||||
|
Working capital
|
$ | 484.4 | $ | (228.0 | ) | |||
|
Total debt
|
$ | 1,197.8 | $ | 1,267.6 | ||||
|
Gross accounts receivable
|
$ | 1,245.8 | $ | 1,329.5 | ||||
|
% decrease
|
(6.3 | )% | (8.7 | )% | ||||
|
Inventories — net
|
$ | 301.2 | $ | 369.7 | ||||
|
% (decrease)/increase
|
(18.5 | )% | 5.4 | % | ||||
|
Investment in prepublication costs
|
$ | 177.0 | $ | 254.1 | ||||
|
% decrease
|
(30.3 | )% | (15.0 | )% | ||||
|
Purchase of property and equipment
|
$ | 68.5 | $ | 106.0 | ||||
|
% decrease
|
(35.3 | )% | (53.8 | )% | ||||
| • | No shares were repurchased in 2009; | |
| • | Decreased incentive compensation payments and inventory purchases; and | |
| • | Reduced investments in property and equipment and prepublication costs. |
49
| (in millions) | Principal Amount | |||
|
5.375% Senior Notes, due 2012
|
$ | 400.0 | ||
|
5.900% Senior Notes, due 2017
|
400.0 | |||
|
6.550% Senior Notes, due 2037
|
400.0 | |||
|
|
$ | 1,200.0 | ||
| Percent change | Projected annual pre-tax impact | ||||
| in interest rates | on operations | ||||
| (+/-) | (millions) | ||||
|
1%
|
$ | 7.3 | |||
| Less than | ||||||||||||||||||||
| (in millions) | Total | 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
|
Outstanding debt
(1)
|
$ | 1,200.2 | $ | — | $ | 400.2 | $ | — | $ | 800.0 | ||||||||||
|
Operating leases
(2)
|
1,584.3 | 194.1 | 339.1 | 288.4 | 762.7 | |||||||||||||||
|
Pension and postretirement obligations
(3)
|
427.6 | 18.2 | 38.2 | 40.6 | 330.6 | |||||||||||||||
|
Paper and other printing services
(4)
|
1,373.9 | 308.5 | 581.8 | 457.6 | 26.0 | |||||||||||||||
|
Purchase obligations
|
122.6 | 68.6 | 28.3 | 21.9 | 3.8 | |||||||||||||||
|
Other contractual obligations
(5,6)
|
34.4 | 17.2 | 14.9 | 2.3 | — | |||||||||||||||
|
Unconditional purchase obligations
(7)
|
70.4 | 38.4 | 30.1 | 1.9 | — | |||||||||||||||
|
Total contractual cash obligations
|
$ | 4,813.4 | $ | 645.0 | $ | 1,432.6 | $ | 812.7 | $ | 1,923.1 | ||||||||||
| (1) | Our long-term debt obligations are described in Note 3 to the consolidated financial statements. | |
| (2) | Our operating lease obligations are described in Note 6 to the consolidated financial statements. Amounts shown include taxes and escalation. | |
| (3) | Our pension and postretirement medical benefit plans are described in Notes 9 and 10 to the consolidated financial statements. | |
| (4) | Included in the category of paper and other printing services are contracts to purchase paper and printing services. While the contracts do have target volume commitments, there are no contractual terms that require us to purchase a specified amount of goods or services. If significant volume shortfalls were to occur over the long term during a contract period, then revised contractual terms may be renegotiated with the supplier. These obligations are not recorded in our consolidated financial statements until contract payment terms take effect. | |
| (5) | We have various contractual commitments for the purchase of broadcast rights for various television programming. | |
| (6) | Our commitments under creative talent agreements include obligations to producers, sports personnel, executives and television personalities. | |
| (7) | A significant portion of our unconditional purchase obligations represents a commitment for contracts with AT&T and Verizon for data, voice and optical network transport services and contractual obligations with Microsoft, IBM and Oracle for enterprise-wide IT software licensing and maintenance. |
53
| Years ended December 31 (in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Revenue
|
||||||||||||
|
Product
|
$ | 2,362,235 | $ | 2,582,553 | $ | 2,604,432 | ||||||
|
Service
|
3,589,547 | 3,772,502 | 4,167,849 | |||||||||
|
Total Revenue
|
5,951,782 | 6,355,055 | 6,772,281 | |||||||||
|
Expenses
|
||||||||||||
|
Operating – related
|
||||||||||||
|
Product
|
1,132,302 | 1,181,322 | 1,129,519 | |||||||||
|
Service
|
1,253,705 | 1,337,108 | 1,398,081 | |||||||||
|
Operating – related Expenses
|
2,386,007 | 2,518,430 | 2,527,600 | |||||||||
|
Selling and general (NOTE 14)
|
||||||||||||
|
Product
|
897,946 | 998,989 | 1,014,070 | |||||||||
|
Service
|
1,243,305 | 1,284,606 | 1,410,015 | |||||||||
|
Selling and General Expenses
|
2,141,251 | 2,283,595 | 2,424,085 | |||||||||
|
Depreciation
|
112,764 | 119,849 | 112,586 | |||||||||
|
Amortization of intangibles
|
52,720 | 58,497 | 48,403 | |||||||||
|
Total Expenses
|
4,692,742 | 4,980,371 | 5,112,674 | |||||||||
|
Other (loss)/income – net (NOTE 2)
|
(3,304 | ) | — | 17,305 | ||||||||
|
Income from Operations
|
1,255,736 | 1,374,684 | 1,676,912 | |||||||||
|
Interest expense – net
|
76,867 | 75,624 | 40,581 | |||||||||
|
Income before Taxes on Income
|
1,178,869 | 1,299,060 | 1,636,331 | |||||||||
|
Provision for taxes on income
|
429,108 | 479,695 | 608,973 | |||||||||
|
Net income
|
749,761 | 819,365 | 1,027,358 | |||||||||
|
Less: net income attributable to noncontrolling interests
|
(19,259 | ) | (19,874 | ) | (13,799 | ) | ||||||
|
Net income attributable to the McGraw-Hill Companies, Inc.
|
$ | 730,502 | $ | 799,491 | $ | 1,013,559 | ||||||
|
Earnings per Common Share
|
||||||||||||
|
Basic
|
$ | 2.34 | $ | 2.53 | $ | 3.01 | ||||||
|
Diluted
|
$ | 2.33 | $ | 2.51 | $ | 2.94 | ||||||
|
Average Number of Common Shares Outstanding
|
||||||||||||
|
Basic
|
312,223 | 315,559 | 336,210 | |||||||||
|
Diluted
|
313,296 | 318,687 | 344,785 | |||||||||
|
Dividend Declared Per Common Share
|
$ | 0.90 | $ | 0.88 | $ | 0.82 | ||||||
55
| December 31 (in thousands, except share data) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Current Assets
|
||||||||
|
Cash and equivalents
|
$ | 1,209,927 | $ | 471,671 | ||||
|
Short-term investments
|
24,602 | – | ||||||
|
Accounts receivable (net of allowances for doubtful accounts and
sales returns: 2009 – $276,110; 2008 – $268,685)
|
969,662 | 1,060,858 | ||||||
|
Inventories:
|
||||||||
|
Finished goods
|
290,415 | 349,203 | ||||||
|
Work-in-process
|
3,858 | 4,359 | ||||||
|
Paper and other materials
|
6,956 | 16,117 | ||||||
|
Total inventories
|
301,229 | 369,679 | ||||||
|
Deferred income taxes
|
278,414 | 285,364 | ||||||
|
Prepaid and other current assets
|
152,562 | 115,151 | ||||||
|
Total current assets
|
2,936,396 | 2,302,723 | ||||||
|
Prepublication Costs
(net of accumulated amortization: 2009 – $1,005,114; 2008 – $943,022)
|
460,843 | 552,534 | ||||||
|
Investments and Other Assets
|
||||||||
|
Assets for pension benefits
|
78,522 | 52,994 | ||||||
|
Deferred income taxes
|
24,072 | 79,559 | ||||||
|
Other
|
166,379 | 176,900 | ||||||
|
Total investments and other assets
|
268,973 | 309,453 | ||||||
|
Property and Equipment – At Cost
|
||||||||
|
Land
|
14,281 | 13,841 | ||||||
|
Buildings and leasehold improvements
|
598,472 | 575,850 | ||||||
|
Equipment and furniture
|
957,697 | 984,260 | ||||||
|
Total property and equipment
|
1,570,450 | 1,573,951 | ||||||
|
Less – accumulated depreciation
|
(990,654 | ) | (952,889 | ) | ||||
|
Net property and equipment
|
579,796 | 621,062 | ||||||
|
Goodwill and Other Intangible Assets
|
||||||||
|
Goodwill – net
|
1,690,507 | 1,703,240 | ||||||
|
Indefinite-lived intangible assets
|
202,065 | 202,065 | ||||||
|
Copyrights – net
|
146,239 | 162,307 | ||||||
|
Other intangible assets – net
|
190,431 | 226,758 | ||||||
|
Net goodwill and other intangible assets
|
2,229,242 | 2,294,370 | ||||||
|
Total Assets
|
$ | 6,475,250 | $ | 6,080,142 | ||||
| 2009 | 2008 | |||||||
|
Liabilities and Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Notes payable
|
$ | 22 | $ | 70,022 | ||||
|
Accounts payable
|
301,828 | 337,459 | ||||||
|
Accrued royalties
|
114,157 | 111,471 | ||||||
|
Accrued compensation and contributions to retirement plans
|
450,673 | 420,515 | ||||||
|
Income taxes currently payable
|
17,086 | 17,209 | ||||||
|
Unearned revenue
|
1,115,357 | 1,099,167 | ||||||
|
Deferred gain on sale leaseback
|
11,236 | 10,726 | ||||||
|
Other current liabilities
|
441,595 | 464,134 | ||||||
|
Total current liabilities
|
2,451,954 | 2,530,703 | ||||||
|
Other Liabilities
|
||||||||
|
Long-term debt
|
1,197,791 | 1,197,611 | ||||||
|
Deferred income taxes
|
9,965 | 3,406 | ||||||
|
Liability for pension and other postretirement benefits
|
511,683 | 606,331 | ||||||
|
Deferred gain on sale leaseback
|
147,838 | 159,115 | ||||||
|
Other non-current liabilities
|
226,842 | 230,105 | ||||||
|
Total other liabilities
|
2,094,119 | 2,196,568 | ||||||
|
Total liabilities
|
4,546,073 | 4,727,271 | ||||||
|
|
||||||||
|
Commitments and Contingencies
(NOTES 6 AND 15)
|
||||||||
|
|
||||||||
|
Equity
|
||||||||
|
Common stock, $1 par value: authorized – 600,000,000 shares;
issued 411,709,328 shares in 2009 and 2008
|
411,709 | 411,709 | ||||||
|
Additional paid-in capital
|
5,125 | 55,150 | ||||||
|
Retained income
|
6,522,613 | 6,070,793 | ||||||
|
Accumulated other comprehensive loss
|
(343,017 | ) | (444,022 | ) | ||||
|
Less – Common stock in treasury – at cost (96,368,589 shares in 2009
and 97,303,901 shares in 2008)
|
(4,749,143 | ) | (4,811,294 | ) | ||||
|
Total equity – controlling interests
|
1,847,287 | 1,282,336 | ||||||
|
Total equity – noncontrolling interests
|
81,890 | 70,535 | ||||||
|
Total equity
|
1,929,177 | 1,352,871 | ||||||
|
Total Liabilities and Equity
|
$ | 6,475,250 | $ | 6,080,142 | ||||
| Years ended December 31 (in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 749,761 | $ | 819,365 | $ | 1,027,358 | ||||||
|
Adjustments to reconcile net income to cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
112,764 | 119,849 | 112,586 | |||||||||
|
Amortization of intangibles
|
52,720 | 58,497 | 48,403 | |||||||||
|
Amortization of prepublication costs
|
270,469 | 270,442 | 240,182 | |||||||||
|
Provision for losses on accounts receivable
|
31,635 | 27,098 | 14,991 | |||||||||
|
Net change in deferred income taxes
|
5,688 | (17 | ) | (46,615 | ) | |||||||
|
Stock-based compensation
|
22,268 | (1,934 | ) | 124,692 | ||||||||
|
Loss/(gain) on disposition of businesses, net
|
3,304 | — | (21,432 | ) | ||||||||
|
Other
|
2,377 | (16,029 | ) | (1,160 | ) | |||||||
|
Change in operating assets and liabilities net of effect of acquisitions and dispositions:
|
||||||||||||
|
Accounts receivable
|
50,313 | 95,070 | 71,448 | |||||||||
|
Inventories
|
67,645 | (26,482 | ) | (11,601 | ) | |||||||
|
Prepaid and other current assets
|
(11,807 | ) | 1,702 | (4,717 | ) | |||||||
|
Accounts payable and accrued expenses
|
79 | (242,327 | ) | 34,840 | ||||||||
|
Unearned revenue
|
25,619 | 25,145 | 86,877 | |||||||||
|
Other current liabilities
|
(14,453 | ) | 26,317 | 71,636 | ||||||||
|
Net change in prepaid/accrued income taxes
|
(17,892 | ) | 7,354 | (36,940 | ) | |||||||
|
Net change in other assets and liabilities
|
(29,711 | ) | 4,703 | 6,403 | ||||||||
|
Cash provided by operating activities
|
1,320,779 | 1,168,753 | 1,716,951 | |||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Investment in prepublication costs
|
(176,996 | ) | (254,106 | ) | (298,984 | ) | ||||||
|
Purchase of property and equipment
|
(68,526 | ) | (105,978 | ) | (229,609 | ) | ||||||
|
Acquisition of businesses and equity interests
|
— | (48,261 | ) | (86,707 | ) | |||||||
|
Disposition of businesses and property and equipment
|
15,196 | 440 | 62,261 | |||||||||
|
Additions to technology projects
|
(23,764 | ) | (25,353 | ) | (16,654 | ) | ||||||
|
Change in short-term investments
|
(24,602 | ) | — | — | ||||||||
|
Cash used for investing activities
|
(278,692 | ) | (433,258 | ) | (569,693 | ) | ||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Dividends paid to shareholders
|
(281,553 | ) | (280,455 | ) | (277,746 | ) | ||||||
|
Proceeds from issuance of senior notes, net
|
— | — | 1,188,803 | |||||||||
|
Payments/additions on short-term debt, net
|
(70,000 | ) | 70,000 | (2,345 | ) | |||||||
|
Repurchase of treasury shares
|
— | (447,233 | ) | (2,212,655 | ) | |||||||
|
Exercise of stock options
|
25,174 | 41,420 | 146,867 | |||||||||
|
Excess tax benefit from share-based payments
|
329 | 3,981 | 35,849 | |||||||||
|
Cash used for financing activities
|
(326,050 | ) | (612,287 | ) | (1,121,227 | ) | ||||||
|
Effect of exchange rate changes on cash
|
22,219 | (47,633 | ) | 16,567 | ||||||||
|
Net change in cash and equivalents
|
738,256 | 75,575 | 42,598 | |||||||||
|
Cash and equivalents at beginning of year
|
471,671 | 396,096 | 353,498 | |||||||||
|
Cash and equivalents at end of year
|
$ | 1,209,927 | $ | 471,671 | $ | 396,096 | ||||||
|
See accompanying notes.
|
||||||||||||
| Accumulated | Less- | |||||||||||||||||||||||||||
| Additional | other | common stock | Non- | |||||||||||||||||||||||||
| Common stock | paid-in | Retained | comprehensive | in treasury | controlling | |||||||||||||||||||||||
| (in thousands, except per share data) | $1 par | capital | income | loss | at cost | interests | Total | |||||||||||||||||||||
|
Balance
at December 31, 2006
|
$ | 411,709 | $ | 114,596 | $ | 4,821,118 | $ | (115,212 | ) | $ | 2,552,593 | $ | 50,425 | $ | 2,730,043 | |||||||||||||
|
Net income
|
— | — | 1,013,559 | — | 13,799 | 1,027,358 | ||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | 28,618 | — | 5,915 | 34,533 | |||||||||||||||||||||
|
Unrealized gain on investment, net of tax
|
— | — | — | 3,747 | — | — | 3,747 | |||||||||||||||||||||
|
Pension and other postretirement benefit
plans, net of tax
|
— | — | — | 70,224 | — | — | 70,224 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive Income
|
1,135,862 | |||||||||||||||||||||||||||
|
Adjustment to initially apply FIN 48
|
— | — | (5,174 | ) | — | — | — | (5,174 | ) | |||||||||||||||||||
|
Dividends
|
— | — | (277,746 | ) | — | — | (3,747 | ) | (281,493 | ) | ||||||||||||||||||
|
Share repurchases
|
— | — | — | — | 2,212,655 | — | (2,212,655 | ) | ||||||||||||||||||||
|
Employee
stock plans, net of tax benefit
|
— | 54,683 | — | — | (251,701 | ) | — | 306,384 | ||||||||||||||||||||
|
Other
|
— | (92 | ) | — | — | (167 | ) | 4,720 | 4,795 | |||||||||||||||||||
|
Balance
at December 31, 2007
|
411,709 | 169,187 | 5,551,757 | (12,623 | ) | 4,513,380 | 71,112 | 1,677,762 | ||||||||||||||||||||
|
Net income
|
— | — | 799,491 | — | 19,874 | 819,365 | ||||||||||||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | (96,683 | ) | — | (11,158 | ) | (107,841 | ) | ||||||||||||||||||
|
Unrealized loss on investment, net of tax
|
— | — | — | (3,443 | ) | — | — | (3,443 | ) | |||||||||||||||||||
|
Pension and other postretirement
benefit plans, net of tax
|
— | — | — | (331,273 | ) | — | 65 | (331,208 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive Income
|
376,873 | |||||||||||||||||||||||||||
|
Dividends
|
— | — | (280,455 | ) | — | — | (9,297 | ) | (289,752 | ) | ||||||||||||||||||
|
Share repurchases
|
— | — | — | — | 447,233 | — | (447,233 | ) | ||||||||||||||||||||
|
Employee
stock plans, net of tax benefit
|
— | (114,037 | ) | — | — | (149,319 | ) | — | 35,282 | |||||||||||||||||||
|
Other
|
— | — | — | — | — | (61 | ) | (61 | ) | |||||||||||||||||||
|
Balance
at December 31, 2008
|
411,709 | 55,150 | 6,070,793 | (444,022 | ) | 4,811,294 | 70,535 | 1,352,871 | ||||||||||||||||||||
|
Net income
|
— | — | 730,502 | — | 19,259 | 749,761 | ||||||||||||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | 43,023 | — | 3,596 | 46,619 | |||||||||||||||||||||
|
Unrealized gain on investment, net of tax
|
— | — | — | 1,655 | — | — | 1,655 | |||||||||||||||||||||
|
Pension and other postretirement
benefit plans, net of tax
|
— | — | — | 56,327 | — | (96 | ) | 56,231 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Comprehensive Income
|
854,266 | |||||||||||||||||||||||||||
|
Dividends
|
— | — | (278,682 | ) | — | — | (9,162 | ) | (287,844 | ) | ||||||||||||||||||
|
Employee
stock plans, net of tax benefit
|
— | (50,025 | ) | — | — | (62,151 | ) | — | 12,126 | |||||||||||||||||||
|
Other
|
— | — | — | — | — | (2,242 | ) | (2,242 | ) | |||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 411,709 | $ | 5,125 | $ | 6,522,613 | $ | (343,017 | ) | $ | 4,749,143 | $ | 81,890 | $ | 1,929,177 | |||||||||||||
|
See accompanying notes.
|
||||||||||||||||||||||||||||
61
63
65
67
69
71
73
75
77
78 The McGraw-Hill Companies 2009 Annual Report
79
80 The McGraw-Hill Companies 2009 Annual Report
81
(in millions)
2009
2008
2007
$
—
$
50.8
$
102.5
—
48.3
86.7
$
—
$
2.5
$
15.8
(in millions)
2009
2008
$
399.8
$
399.7
399.3
399.1
398.5
398.5
0.0
70.0
0.2
0.3
1,197.8
1,267.6
0.0
70.0
$
1,197.8
$
1,197.6
(in millions)
2010
2011
2012
2013
2014
Thereafter
$
38.4
$
24.3
$
5.8
$
1.9
$
0.0
$
0.0
McGraw-Hill
Financial
Information
Segment
Consolidated
(in millions)
Education
Services
& Media
Totals
Adjustments
Total
$
2,387.8
$
2,610.1
$
953.9
(a)
$
5,951.8
$
–
$
5,951.8
276.0
1,014.1
92.7
(a)
1,382.8
(203.9
)
1,178.9
4.3
6.5
3.1
13.9
8.4
22.3
349.0
53.8
26.7
429.5
6.5
436.0
2,582.2
1,249.0
846.2
4,677.4
1,797.9
6,475.3
203.2
31.5
8.8
243.5
2.0
245.5
11.4
11.9
—
23.3
0.5
23.8
$
2,638.9
$
2,654.3
$
1,061.9
$
6,355.1
$
–
$
6,355.1
321.4
1,070.4
92.0
1,483.8
(184.7
)
1,299.1
*
(1.6
)
(1.9
)
(0.5
)
(4.0
)
2.1
(1.9
)
351.0
60.2
31.1
442.3
6.5
448.8
2,859.4
1,247.6
926.9
5,033.9
1,046.2
6,080.1
298.7
38.8
18.4
355.9
4.1
360.0
7.2
10.9
7.3
25.4
–
25.4
$
2,705.9
$
3,046.2
$
1,020.2
$
6,772.3
$
–
$
6,772.3
403.1
1,370.2
63.5
1,836.8
(200.4
)
1,636.4
*
27.7
44.2
22.1
94.0
30.7
124.7
310.3
50.9
33.2
394.4
6.8
401.2
2,996.0
1,306.4
953.1
5,255.5
1,135.9
6,391.4
434.5
62.1
29.6
526.2
2.4
528.6
5.2
7.1
0.7
13.0
3.7
16.7
*
Income before taxes on income
(a)
The results of 2009 reflect a deferral of $11.4 million of revenue and $7.1 million of
operating profit related to the transitioning of a number of syndicated studies to an online
service platform, which will be recognized over the service period.
(b)
In 2008, the Company reduced its projected payout percentage for restricted performance stock
awards (see Note 8).
(c)
Includes amortization of intangible assets and prepublication costs.
(d)
Includes purchase of property and equipment and investments in prepublication costs.
2009
2008
2007
Long-lived
Long-lived
Long-lived
(in millions)
Revenue
Assets
Revenue
Assets
Revenue
Assets
$
4,226.4
$
2,881.5
$
4,579.4
$
3,107.7
$
5,008.5
$
3,175.8
963.7
220.4
1,020.5
220.5
1,030.9
246.3
467.8
133.2
438.8
117.9
426.1
126.8
293.9
77.1
316.4
70.2
306.8
74.4
$
5,951.8
$
3,312.2
$
6,355.1
$
3,516.3
$
6,772.3
$
3,623.3
(in millions)
2009
2008
2007
$
878.5
$
981.0
$
1,349.3
300.4
318.1
287.0
$
1,178.9
$
1,299.1
$
1,636.3
(in millions)
2009
2008
2007
$
281.0
$
319.6
$
455.7
(17.5
)
1.8
(59.7
)
263.5
321.4
396.0
101.6
77.8
96.8
6.6
3.8
8.1
108.2
81.6
104.9
46.0
78.7
122.3
11.4
(2.0
)
(14.2
)
57.4
76.7
108.1
$
429.1
$
479.7
$
609.0
2009
2008
2007
35.0
%
35.0
%
35.0
%
3.9
4.2
4.4
(2.5
)
(2.3
)
(2.2
)
36.4
%
36.9
%
37.2
%
(in millions)
2009
2008
$
329.4
$
349.6
306.9
343.6
63.5
68.7
4.2
—
65.1
78.9
769.1
840.8
(367.4
)
(380.7
)
(90.2
)
(76.5
)
—
(4.1
)
(457.6
)
(461.3
)
311.5
379.5
(19.0
)
(18.0
)
$
292.5
$
361.5
$
278.4
$
285.4
24.1
79.5
(10.0
)
(3.4
)
$
292.5
$
361.5
(in millions)
2009
2008
2007
$
27.7
$
45.8
$
75.1
9.5
8.5
12.0
16.1
1.3
1.5
(15.5
)
(27.9
)
(42.8
)
$
37.8
$
27.7
$
45.8
LEASE OBLIGATIONS
(in millions)
2009
2008
2007
$
236.8
$
241.0
$
228.2
(2.1
)
(2.4
)
(5.5
)
(18.4
)
(18.4
)
(17.6
)
$
216.3
$
220.2
$
205.1
(in millions)
$
183.4
167.9
149.4
136.4
130.1
695.3
$
1,462.5
(in millions, except average price)
2009
2008
2007
—
10.9
37.0
$
—
$
41.03
$
59.80
$
—
$
447.2
$
2,212.7
(in thousands)
2009
2008
2007
$
(61,734
)
$
(104,757
)
$
(8,074
)
1,959
304
3,747
(283,242
)
(339,569
)
(8,296
)
$
(343,017
)
$
(444,022
)
$
(12,623
)
(in thousands)
2009
2008
18,956
20,526
31,406
32,469
50,362
52,995
536
556
50,898
53,551
(in millions)
2009
2008
2007
$
2.0
$
7.0
$
56.6
$
25.2
$
41.4
$
146.9
2009
2008
2007
0.4—4.1
%
1.4—4.4
%
3.6—6.3
%
3.3—3.7
%
2.0—3.4
%
1.2—1.7
%
33—75
%
21—59
%
14—22
%
5.6—6.0
6.7—7.0
7.0—7.2
$
5.78
$
9.77
$
15.80
Weighted-
average
(in thousands of shares)
Shares
exercise price
32,469
$
39.89
2,955
$
23.13
(943
)
$
26.68
(3,075
)
$
38.16
31,406
$
38.88
27,341
$
40.50
Weighted-
average
grant-date
(in thousands of shares)
Shares
fair value
3,683
$
11.09
2,955
$
5.78
(2,167
)
$
11.60
(406
)
$
8.88
4,065
$
7.03
Weighted-average
Non-performance Awards
grant-date
(in thousands of shares)
Shares
fair value
21
$
44.66
65
$
22.64
(9
)
$
48.39
(2
)
$
52.01
75
$
26.01
Weighted-average
Performance Awards
grant-date
(in thousands of shares)
Shares
fair value
3,245
$
49.79
2,386
$
31.28
(1,421
)
$
57.37
(249
)
$
35.90
3,961
$
36.77
(in millions)
2009
2008
2007
$
22.3
$
(1.9
)
$
124.7
$
8.8
$
(0.8
)
$
50.5
(in millions)
2009
2008
$
1,395.8
$
1,380.8
58.1
58.3
86.4
86.0
0.6
0.9
63.6
(4.8
)
(55.7
)
(70.4
)
15.6
(55.0
)
5.0
—
$
1,569.4
$
1,395.8
(in millions)
2009
2008
$
972.3
$
1,493.9
268.1
(445.0
)
78.0
39.3
0.6
0.9
(55.7
)
(70.4
)
13.7
(46.4
)
1,277.0
972.3
$
(292.4
)
$
(423.5
)
(in millions)
2009
2008
$
1,398.7
$
1,235.3
(in millions)
2009
2008
$
1,288.3
$
1,180.3
$
1,158.1
$
1,055.2
$
930.6
$
725.6
2009
2008
5.95
%
6.10
%
5.50
%
5.50
%
(in millions)
2009
2008
$
281.3
$
343.9
(6.6
)
(6.9
)
$
274.7
$
337.0
(in millions)
2009
2008
2007
$
58.1
$
58.3
$
64.1
86.4
86.0
79.9
(105.0
)
(110.1
)
(98.9
)
—
—
0.1
5.5
3.1
13.6
(0.3
)
(0.4
)
(0.3
)
$
44.7
$
36.9
$
58.5
January 1
2009
2008
2007
6.10
%
6.25
%
5.90
%
5.50
%
5.50
%
5.50
%
8.00
%
8.00
%
8.00
%
(in millions)
2009
2008
2007
$
(59.1
)
$
324.8
$
(58.7
)
(3.5
)
(2.1
)
(8.5
)
—
—
(5.5
)
0.3
0.3
0.3
—
—
(0.1
)
$
(62.3
)
$
323.0
$
(72.5
)
(in millions)
$
30.3
(in millions)
$
59.9
62.7
65.7
69.1
75.7
455.2
(in millions)
2009
Fair value measurements
Quoted prices
in active
Significant
Significant
markets for
observable
unobservable
identical assets
inputs
inputs
Asset category
Total
(Level 1)
(Level 2)
(Level 3)
$
81.2
$
—
$
81.2
$
—
223.6
102.9
120.7
—
81.3
80.0
1.3
—
248.4
241.3
7.1
—
79.8
79.8
—
—
326.4
195.6
128.0
2.8
178.3
178.3
—
—
58.0
—
0.9
57.1
$
1,277.0
$
877.9
$
339.2
$
59.9
(in millions)
2008
Fair value measurements
Quoted prices
in active
Significant
Significant
markets for
observable
unobservable
identical assets
inputs
inputs
Asset category
Total
(Level 1)
(Level 2)
(Level 3)
$
6.2
$
—
$
6.2
$
—
214.0
34.1
179.9
—
62.9
60.0
2.9
—
206.2
196.8
9.4
—
48.3
48.3
—
—
221.0
128.3
89.0
3.7
213.7
213.7
—
—
$
972.3
$
681.2
$
287.4
$
3.7
(a)
This category includes securities that are tracked in the following indexes: S&P 500, S&P MidCap 400, S&P Midcap 400 Growth and
S&P Smallcap 600.
(b)
This category includes securities in accounts actively managed by investment managers who
invest primarily in U.S. companies with strong earnings growth potential.
(c)
This category includes securities in accounts actively managed by investment managers who
invest primarily in mature U.S. companies.
(d)
This category includes securities in accounts managed by investment managers who invest
primarily in U.K. companies
(e)
This category includes primarily equity securities that are domiciled in countries other than
the U.S.
(f)
This category includes primarily securities that are investment grade fixed income obligations
of U.S. and U.K. governments and companies.
(g)
This category includes primarily U.S. mortgage-backed securities that are not guaranteed by the
U.S. government.
(in millions)
2009
2008
$
150.6
$
142.4
2.4
2.4
8.3
8.4
5.2
4.3
8.6
12.7
(19.1
)
(20.6
)
1.0
1.0
$
157.0
$
150.6
(in millions)
2009
2008
$
12.3
$
7.1
(3.4
)
(4.1
)
$
8.9
$
3.0
(in millions)
2009
2008
2007
$
2.4
$
2.4
$
2.5
8.3
8.4
7.9
(1.2
)
(1.2
)
(1.2
)
$
9.5
$
9.6
$
9.2
(in millions)
2009
2008
2007
$
5.2
$
7.5
$
2.0
0.7
0.7
0.7
$
5.9
$
8.2
$
2.7
January 1
2009
2008
2007
5.95
%
6.00
%
5.75
%
8.00
%
8.50
%
9.00
%
One percentage
One percentage
(in millions)
point increase
point decrease
$
0.4
$
(0.3
)
$
7.0
$
(6.2
)
(in millions)
$
14.2
Gross
Medicare
Payments net
(in millions)
payments
subsidy
of subsidy
$
14.2
$
(1.0
)
$
13.2
$
14.3
$
(1.0
)
$
13.3
$
14.2
$
(1.0
)
$
13.2
$
13.9
$
(1.0
)
$
12.9
$
13.7
$
(0.9
)
$
12.8
$
62.8
$
(4.0
)
$
58.8
(in thousands)
2009
2008
2007
$
730,502
$
799,491
$
1,013,559
312,223
315,559
336,210
1,073
3,128
8,575
313,296
318,687
344,785
(in thousands)
2009
2008
$
1,703,240
$
1,697,621
(21,011
)
17,267
8,278
(11,648
)
$
1,690,507
$
1,703,240
(in thousands)
2009
2008
$
927,128
$
931,066
2,270
(3,938
)
$
929,398
$
927,128
$
487,539
$
487,877
(20,628
)
4,537
5,275
(4,875
)
$
472,186
$
487,539
$
288,573
$
278,678
(383
)
12,730
733
(2,835
)
$
288,923
$
288,573
$
1,690,507
$
1,703,240
(in thousands)
2009
2008
$
462,148
$
461,520
(315,909
)
(299,213
)
$
146,239
$
162,307
$
435,512
$
445,087
(245,081
)
(218,329
)
$
190,431
$
226,758
$
897,660
$
906,607
(560,990
)
(517,542
)
$
336,670
$
389,065
(in thousands)
2009
2008
$
164,000
$
164,000
$
38,065
$
38,065
(in millions)
$
169.8
(18.4
)
7.6
$
159.0
The McGraw-Hill Companies, Inc.
Chairman of the Board, President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
83
February 24, 2010
85
87
February 24, 2010
(in thousands, except per share data)
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
$
1,148,207
$
1,465,180
$
1,875,903
$
1,462,492
$
5,951,782
103,750
263,979
(b,c)
538,138
273,002
(d)
1,178,869
65,985
167,891
(b,c)
342,256
173,629
(d)
749,761
63,004
164,093
(b,c)
336,111
167,294
(d)
730,502
$
0.20
$
0.53
$
1.08
$
0.54
$
2.34
$
0.20
$
0.52
$
1.07
$
0.53
$
2.33
$
1,217,871
$
1,673,225
$
2,048,541
$
1,415,418
$
6,355,055
133,230
344,327
(e)
630,914
(f)
190,589
(g)
1,299,060
(h)
84,563
216,950
(e)
396,815
(f)
121,037
(g)
819,365
(h)
81,110
212,294
(e)
390,166
(f)
115,921
(g)
799,491
(h)
$
0.25
$
0.67
$
1.25
$
0.37
$
2.53
$
0.25
$
0.66
$
1.23
$
0.37
$
2.51
$
1,296,418
$
1,718,179
$
2,187,996
$
1,569,688
$
6,772,281
232,869
(j)
445,063
729,385
(j)
229,014
(k)
1,636,331
145,731
(j)
278,815
458,175
(j)
144,637
(k)
1,027,358
143,838
(j)
277,078
452,018
(j)
140,625
(k)
1,013,559
$
0.41
$
0.81
$
1.37
$
0.43
$
3.01
$
0.40
$
0.79
$
1.34
$
0.43
$
2.94
Note: Basic and diluted earnings per share are computed independently for
each quarter and full year presented. The number of weighted-average shares outstanding changes as common shares are issued pursuant to employee
stock plans, as shares are repurchased by us, and other activity occurs throughout the year. Accordingly, the sum of the quarterly earnings per share
data may not agree with the calculated full year earnings per share.
(a)
The results of 2009 reflect a deferral of $11.4 million of revenue and
$7.1 million of operating profit related to the transitioning of a number of syndicated studies to an online service platform, which will be recognized
over the service period.
(b)
Includes a $24.3 million pre-tax restructuring charge, in addition we
revised our estimate of previously recorded restructuring charges and reversed $9.1 million ($9.7 million net after-tax charge, or $0.03 per
diluted share).
(c)
Includes a $13.8 million pre-tax loss ($8.8 million after-tax, or $0.03 per
diluted share) on the divestiture of Vista Research, Inc.
(d)
Includes a $10.5 million pre-tax gain ($6.7 million after-tax, or $0.02 per
diluted share) on the divestiture of
BusinessWeek
.
(e)
Includes a $23.7 million pre-tax restructuring charge ($14.8 million after-tax
charge, or $0.05 per diluted share).
(f)
Includes a $23.4 million pre-tax restructuring charge ($14.6 million after-tax
charge, or $0.05 per diluted share).
(g)
Includes a $26.3 million pre-tax restructuring charge ($16.4 million after-tax
charge, or $0.05 per diluted share).
(h)
Includes a reduction to reflect a change in the projected payout of
restricted performance stock awards and reductions in other incentive compensation projections that resulted in a $273.7 million pre-tax decrease in
incentive compensation.
(i)
Fourth quarter 2006 includes a deferral of $23.8 million of revenue and
$21.1 million of operating profit ($13.3 million after-tax, or $0.04 per diluted share) related to the transformation of Sweets from a primarily print
catalog to bundled print and online services, which was recognized ratably throughout 2007.
(j)
Includes a $17.3 million pre-tax gain ($10.3 million after-tax, or $0.03 per
diluted share) on the divestiture of our mutual fund data business and a $4.1 million pre-tax gain on the divestiture of a product line, in the first and
third quarter, respectively.
(k)
Includes a $43.7 million pre-tax restructuring charge ($27.3 million after-tax
charge, or $0.08 per diluted share).
(l)
The 2008 and 2007 results reflect the impact of the new accounting rule
adopted on January 1, 2009 for noncontrolling interests in subsidiaries (see Note 1 to our consolidated financial statements), which resulted in a
change to previously reported amounts.
(in thousands, except per share data, operating statistics and number of employees)
2009
2008
2007
$
2,387,787
$
2,638,893
$
2,705,831
2,610,123
2,654,287
3,046,229
953,872
1,061,875
1,020,221
5,951,782
6,355,055
6,772,281
276,019
321,398
403,107
1,014,095
1,070,357
1,370,159
92,668
92,051
63,467
1,382,782
1,483,806
1,836,733
(127,046
)
(109,122
)
(159,821
)
(76,867
)
(75,624
)
(40,581
)
1,178,869
1,299,060
1,636,331
429,108
479,695
608,973
749,761
819,365
1,027,358
—
—
—
749,761
819,365
1,027,358
—
—
—
$
749,761
$
819,365
$
1,027,358
(19,259
)
(19,874
)
(13,799
)
$
730,502
$
799,491
$
1,013,559
$
2.34
$
2.53
$
3.01
—
—
—
$
2.34
$
2.53
$
3.01
—
—
—
$
2.34
$
2.53
$
3.01
$
2.33
$
2.51
$
2.94
—
—
—
$
2.33
$
2.51
$
2.94
—
—
—
$
2.33
$
2.51
$
2.94
$
0.90
$
0.88
$
0.82
45.7
%
54.1
%
46.6
%
19.8
%
20.4
%
24.2
%
12.6
%
12.9
%
15.2
%
$
484,442
$
(227,980
)
$
(314,558
)
$
6,475,250
$
6,080,142
$
6,391,376
$
1,197,813
$
1,267,633
$
1,197,447
$
1,929,177
$
1,352,871
$
1,677,762
21,077
21,649
21,171
(a)
In 2004, prior period revenues were reclassified in accordance with Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”) 605, “Revenue Recognition,”
resulting in an increase in revenue for all years presented.
(b)
In 2006 revenue of $23.8 million and operating profit of $21.1 million shifted to 2007 due to
the transformation of Sweets from a primarily print catalog to a bundled print and online service.
(c)
In 2009 J.D. Power and Associates began transitioning a number of syndicated studies to an
online service platform. This resulted in $11.4 million of revenue and $7.1 million of operating
profit that would have been recognized in 2009 to be deferred and will be recognized over the
service period.
(d)
2009 income from continuing operations before taxes on income includes a $13.8 million pre-tax
loss ($8.8 million after-tax, or $0.03 per diluted share) on the sale of Vista Research, Inc., a
$10.5 million pre-tax gain ($6.7 million after-tax, or $0.02 per diluted share) on the sale of
BusinessWeek
and a $15.2 million net pre-tax restructuring charge ($9.7 million after-tax, or $0.03
per diluted share) which is included in the following: McGraw-Hill Education of $11.6 million
pre-tax; Financial Services of $(0.4) million pre-tax and Information & Media of $4.0 million
pre-tax.
(e)
2008 income from continuing operations before taxes on income includes a $73.4 million pre-tax
restructuring charge ($45.9 million after-tax, or $0.14 per diluted share) which is included in the
following: McGraw-Hill Education of $25.3 million pre-tax; Financial Services of $25.9 million
pre-tax; Information & Media of $19.2 million pre-tax and Corporate of $3.0 million pre-tax, and
reductions to reflect a change in the projected payout of restricted performance stock awards and
reductions in other incentive compensation projections.
(f)
2007 income from continuing operations before taxes on income includes a $17.3 million pre-tax
gain ($10.3 million after-tax, or $0.03 per diluted share) on the sale of a mutual fund data business, and a $43.7 million pre-tax restructuring charge
($27.3 million after-tax, or $0.08 per diluted share) which is included in the following:
McGraw-Hill Education of $16.3 million pre-tax; Financial Services of $18.8 million pre-tax;
Information & Media of $6.7 million pre-tax and Corporate of $1.9 million pre-tax.
(g)
In 2006, as a result of a new accounting standard for
share-based payments, the
Company incurred stock-based compensation expense of $136.2 million ($85.5 million after-tax, or
$0.23 per diluted share) which was charged to the following: McGraw-Hill Education of $31.6 million
pre-tax; Financial Services of $38.3 million pre-tax; Information & Media of $22.9 million pre-tax;
and Corporate of $43.4 million pre-tax. Included in this expense is the impact of the elimination
of the Company’s restoration stock option program of $23.8 million ($14.9 million after-tax, or
$0.04 per diluted share) which impacted the segments by $4.2 million pre-tax to McGraw-Hill
Education, $2.1 million pre-tax to Financial Services, $2.7 million pre-tax to Information & Media
and the remainder to Corporate. Also included in the expense is restricted performance stock
expense of $66.0 million ($41.5 million after-tax, or $0.11 per diluted share) as compared with
$51.1 million ($32.1 million after-tax, or $0.08 per diluted share) in 2005. The breakout by
segment is as follows: McGraw-Hill Education, $16.8 million pre-tax in 2006 and $12.0 million
pre-tax in 2005; Financial Services, $20.2 million pre-tax in
2006 and $8.4 million pre-tax in 2005; Information & Media, $12.1 million pre-tax in 2006 and $8.8 million pre-tax in
2005; and Corporate, $16.9 million pre-tax in 2006 and $21.9 million pre-tax in 2005.
(h)
2006 income from continuing operations before taxes on income includes a $31.5 million pre-tax
restructuring charge ($19.8 million after-tax, or $0.06 per diluted share) which is included in the
following: McGraw-Hill Education of $16.0 million pre-tax; Information & Media of $8.7 million
pre-tax and Corporate of $6.8 million pre-tax.
(in thousands, except per share data, operating statistics and number of employees)
2006
2005
2004
2003
2002
2001
2000
1999
$
2,524,151
$
2,671,732
$
2,395,513
$
2,348,624
$
2,342,528
$
2,289,622
$
2,038,594
$
1,786,220
2,746,442
2,400,809
2,055,288
1,769,093
1,555,726
1,398,303
1,205,038
1,163,644
984,545
931,101
799,737
772,603
809,439
846,063
1,007,552
1,030,015
6,255,138
6,003,642
5,250,538
4,890,320
4,707,693
4,533,988
4,251,184
3,979,879
331,947
412,593
342,390
323,697
334,561
275,051
308,980
275,158
1,208,105
1,021,468
839,398
667,597
560,845
425,911
383,025
358,155
49,888
60,576
119,313
109,841
118,052
65,003
212,921
185,551
1,589,940
1,494,637
1,301,101
1,101,135
1,013,458
765,965
904,926
818,864
(162,848
)
(124,826
)
(124,088
)
38,185
(91,934
)
(93,062
)
(91,380
)
(83,280
)
(13,631
)
(5,202
)
(5,785
)
(7,097
)
(22,517
)
(55,070
)
(52,841
)
(42,013
)
1,413,461
1,364,609
1,171,228
1,132,223
899,007
617,833
760,705
693,571
522,592
515,656
412,495
442,466
325,429
238,436
292,367
269,911
890,869
848,953
758,733
689,757
573,578
379,397
468,338
423,660
—
—
(587
)
(161
)
4,794
(654
)
4,886
3,405
890,869
848,953
758,146
689,596
578,372
378,743
473,224
427,065
—
—
—
—
—
—
(68,122
)
—
$
890,869
$
848,953
$
758,146
$
689,596
$
578,372
$
378,743
$
405,102
$
427,065
(8,638
)
(4,647
)
(2,323
)
(1,946
)
(1,612
)
(1,712
)
(1,308
)
(1,491
)
$
882,231
$
844,306
$
755,823
$
687,650
$
576,760
$
377,031
$
403,794
$
425,574
$
2.47
$
2.25
$
1.99
$
1.81
$
1.48
$
0.97
$
1.21
$
1.07
—
—
—
—
0.01
—
0.01
0.01
$
2.47
$
2.25
$
1.99
$
1.81
$
1.49
$
0.97
$
1.22
$
1.08
—
—
—
—
—
—
(0.18
)
—
$
2.47
$
2.25
$
1.99
$
1.81
$
1.49
$
0.97
$
1.04
$
1.08
$
2.40
$
2.21
$
1.96
$
1.79
$
1.47
$
0.96
$
1.19
$
1.06
—
—
—
—
0.01
—
0.01
0.01
$
2.40
$
2.21
$
1.96
$
1.79
$
1.48
$
0.96
$
1.20
$
1.07
—
—
—
—
—
—
(0.17
)
—
$
2.40
$
2.21
$
1.96
$
1.79
$
1.48
$
0.96
$
1.03
$
1.07
$
0.73
$
0.66
$
0.60
$
0.54
$
0.51
$
0.49
$
0.47
$
0.43
30.3
%
27.6
%
27.2
%
29.0
%
28.6
%
20.8
%
23.6
%
26.9
%
22.6
%
22.7
%
22.3
%
23.2
%
19.1
%
13.6
%
17.9
%
17.4
%
14.2
%
14.1
%
14.4
%
14.1
%
12.3
%
8.4
%
11.1
%
10.7
%
$
(210,078
)
$
366,113
$
479,168
$
262,418
$
(100,984
)
$
(63,446
)
$
20,905
$
(14,731
)
$
6,042,890
$
6,395,808
$
5,841,281
$
5,342,473
$
4,974,146
$
5,098,537
$
4,865,855
$
4,046,765
$
2,681
$
3,286
$
5,126
$
26,344
$
578,337
$
1,056,524
$
1,045,377
$
536,449
$
2,730,043
$
3,153,740
$
3,006,606
$
2,575,782
$
2,181,265
$
1,867,913
$
1,774,008
$
1,660,834
20,214
19,600
17,253
16,068
16,505
17,135
16,761
16,376
(i)
2005 income from continuing operations before taxes on income includes the following
items: a $6.8 million pre-tax gain ($4.2 million after-tax, or $0.01 per diluted share) on the sale
of the Corporate Value Consulting business, a $5.5 million loss ($3.3 million after-tax) on the
sale of the Healthcare Information Group, and a $23.2 million pre-tax restructuring charge ($14.6
million after-tax, or $0.04 per diluted share).
(j)
2005 includes a $10.0 million ($0.03 per diluted share) increase in income taxes on the
repatriation of funds.
(k)
2004 includes a non-cash benefit of approximately $20 million ($0.05 per diluted share) as a
result of the Company’s completion of various federal, state and local, and foreign tax audit
cycles. In the first quarter of 2004 the Company accordingly removed approximately $20 million from
its accrued income tax liability accounts. This non-cash item resulted in a reduction to the
overall effective tax rate from continuing operations to 35.3%.
(l)
In 2003 the Company adopted the Discontinued Operations presentation, outlined in the FASB ASC
360, “Property, Plant, and Equipment/ASC 205 presentation of Financial Statements.” Revenue and
operating profit of S&P ComStock and the juvenile retail publishing business historically included
in the Financial Services and McGraw-Hill Education segments, respectively, were restated as
discontinued operations. 2003 discontinued operations include $87.5 million on the divestiture of
S&P ComStock ($57.2 million after-tax gain or $0.15 per diluted share), and an $81.1 million loss
on the planned disposition of the juvenile retail publishing business ($57.3 million after-tax loss
or $0.15 per diluted share), which was subsequently sold on January 30, 2004. Discontinued
operations in years 2002—2000 reflect net after-tax earnings/(loss) from the operations of S&P
ComStock and the juvenile retail publishing business and 1999—1998 reflect net after-tax earnings
/ (loss) from the operations of S&P ComStock. Discontinued operations in 2004 reflect the net
after-tax loss from the operations of the juvenile retail publishing business in January of 2004
before the sale of the business.
(m)
2003 income from continuing operations before taxes on income includes a pre-tax gain on sale
of real estate of $131.3 million ($58.4 million after-tax gain, or $0.15 per diluted share).
(n)
2002 income from continuing operations before taxes on income reflects a $14.5 million pre-tax
loss ($2.0 million after-tax benefit, or $0.01 per diluted share) on the disposition of MMS
International.
(o)
2001 income from continuing operations before taxes on income reflects the following items: a
$159.0 million pre-tax restructuring charge and asset write-down; an $8.8 million pre-tax gain on
the disposition of DRI; a $22.8 million pre-tax loss on the closing of Blue List, the contribution
of Rational Investors and the write-down of selected assets; and a $6.9 million pre-tax gain on the
sale of a building.
(p)
2000 income from continuing operations before taxes on income reflects a $16.6 million gain on
the sale of Tower Group International.
(q)
1999 income from continuing operations before taxes on income reflects a $39.7 million gain on
the sale of the Petrochemical publications.
(r)
The cumulative adjustment in 2000 reflects the
adoption of FASB ASC 605, “Revenue Recognition.”
(s)
In 2006, the Company adopted FASB ASC 715, “Compensation — Retirement Benefits,” which
resulted in a reduction of equity of $69.4 million, after-tax.
(t)
In 2009, the Company adopted FASB ASC 810-10-65-1, “Consolidation.” Accordingly, certain
amounts in prior year periods presented have been reclassified to reflect the adoption.
•
Dividend and stock split history
•
Stock quotes and charts
•
Investor Fact Book
•
Corporate Governance
•
Financial reports, including the annual report, proxy
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•
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COMMON STOCK ON THE NEW YORK STOCK EXCHANGE*
2009
2008
2007
$25.89—17.22
$44.76—33.91
$69.98—61.06
$34.09—22.46
$45.61—36.17
$72.50—60.16
$34.10—23.55
$47.13—29.08
$68.81—47.15
$35.24—24.46
$33.12—17.15
$55.14—43.46
$35.24—17.22
$47.13—17.15
$72.50—43.46
*
The New York Stock Exchange is the principal market on which the Corporation’s shares are traded.
DIRECTORS AND PRINCIPAL EXECUTIVES Design by Addison www.addison.com Front cover and executive photography by Brad Trent NYSE photo (page 3)
used with permission of NYSE Group, Inc. © 2009 Business Roundtable photo (page 4) by Lynn Dykstra-Focused Images Ambow Education photo
(page 5) by Xisheng Liu Prize in Education photo (page 20) by Steve Fenn BOARD OF DIRECTORS Harold McGraw III(E) Chairman, President and Chief
Executive Officer The McGraw-Hill Companies Pedro Aspe(C,N) Co-Chairman, Evercore Partners, Inc. Chief Executive Officer, Protego Sir Winfried
F. W. Bischoff(C,E,F) Chairman Lloyds Banking Group plc Douglas N. Daft(A,C) Retired Chairman and Chief Executive Officer The Coca-Cola Company
Linda Koch Lorimer(C,N) Vice President and Secretary Yale University Robert P. McGraw(F) Chairman and Chief Executive Officer Averdale Holdings,
LLC Hilda Ochoa-Brillembourg(A,F) President and Chief Executive Officer Strategic Investment Group Sir Michael Rake(A,E,F) Chairman BT Group plc
Edward B. Rust, Jr.(A,C,E,N) Chairman, President and Chief Executive Officer State Farm Insurance Companies Kurt L. Schmoke(F,N) Dean Howard
University School of Law Sidney Taurel(C,E,N) Chairman Emeritus Eli Lilly and Company Harold W. McGraw, Jr. Chairman Emeritus The McGraw-Hill
Companies (A)Audit Committee (C)Compensation Committee (E)Executive Committee (F)Financial Policy Committee (N)Nominating and Corporate Governance
Committee PRINCIPAL CORPORATE EXECUTIVES Harold McGraw III Chairman, President and Chief Executive Officer Robert J. Bahash Executive Vice President
and Chief Financial Officer Bruce D. Marcus Executive Vice President and Chief Information Officer David L. Murphy Executive Vice President Human
Resources D. Edward Smyth Executive Vice President, Corporate Affairs and Executive Assistant to the Chairman, President and Chief Executive Officer
Charles L. Teschner, Jr. Executive Vice President Global Strategy Kenneth M. Vittor Executive Vice President and General Counsel PRINCIPAL OPERATIONS
EXECUTIVES Peter C. Davis President McGraw-Hill Education Glenn S. Goldberg President McGraw-Hill Information & Media Deven Sharma President
McGraw-Hill Financial Services
