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The McGraw-Hill Companies Inc. , a publisher and provider of financial information and media services, recently posted healthy fourth-quarter 2011 results. The quarterly earnings of 63 cents a share came way ahead of the Zacks Consensus Estimate of 57 cents, and jumped 17% from the prior-year quarter’s earnings of 54 cents.

The company stated that the strong performance of S&P Indices, S&P Capital IQ, Platts and healthy performance in U.S. higher education boosted the quarterly profits.

However, on a reported basis, including one-time items, earnings decreased 4% to 47 cents a share compared with 49 cents in the year-ago quarter.

Buoyed by healthy results, the company now expects earnings of $3.25 to $3.35 in fiscal 2012 on a consolidated basis.

McGraw-Hill’s total revenue inched up 2% to $1,520 million compared with $1,496 million in the prior-year quarter. However, the reported revenue fell short of the Zacks Consensus Estimate of $1,536 million.

Segment Details

S&P Capital IQ/S&P Indices (Earlier McGraw-Hill Financial) segment revenue grew 8% to $348 million, driven by an increase of 7% in subscription revenue to $256 million and 10% in non-subscription revenue to $92 million.

The acquisition of TheMarkets.com by Capital IQ strengthened its position in the highly competitive financial data provider sector.The acquisition facilitates Capital IQ to provide a comprehensive research package to its buy-side clients, which not only include fundamental and quantitative research as well as analysis solutions but also cover equity and market research reports and earnings estimates with valuation models from leading brokers.

Revenue for S&P Capital IQ increased 8% to $268 million in the reported quarter. Capital IQ had a client base of over 3,800 at the end of the quarter, reflecting a growth of 14% from the prior-year.

The company also witnessed increase in the number of exchange-traded funds (ETFs) on S&P indices, which currently stands at 378, portraying a recovery in the worldwide market and fresh investments from investors as 14 new ETFs were launched during the quarter under review.

Standard & Poor’s Ratings (Earlier Standard & Poor's) segment revenue decreased 8% to $434 million during the quarter, reflecting sluggishness in global credit markets. Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, came down 26% to $148 million. McGraw-Hill notified that the lingering concerns over European sovereign crisis, increasing credit spreads and waning economy dented S&P’s transaction revenue.

Non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, grew 5% to $286 million, reflecting growth in the new corporate credits, gains at CRISIL and non-issue based analytical services.

Commodities & Commercial (Earlier Information & Media) segment revenue rose 8% to $239 million driven by strong performance in Platts’ revenue. The company stated that the reported quarter reflects the reclassification of the Broadcasting Group as discontinued operation.

McGraw-Hill completed the sale of its Broadcasting group to The E. W. Scripps Company (SSP - Snapshot Report) for $212 million during the quarter.

The divestiture is part of the company’s attempt to restructure its portfolio of businesses and concentrate more on global brands, thereby enhancing shareholder value through proper capital allocation.

McGraw-Hill Education segment experienced an increase of 4% in revenue to $516 million, reflecting 8% increase in revenue to $385 million in McGraw-Hill Higher Education, Professional and International Group. Revenue declined 5% to $131 million at McGraw-Hill School Education Group.

The higher education and professional market witnessed strong double-digit growth rate across digital products and services, and the increase in demand for online study tools.

Update on Growth and Value Plan

McGraw-Hill through its value plan will split into two independent entities, McGraw-Hill Financial and McGraw-Hill Education with optimal-size capital and cost arrangement for amplifying client commitment while improving strategic and economic flexibility.

McGraw-Hill Financial will focus on capital and commodities markets and will include the iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices, Platts and Commercial Markets.

Moreover, McGraw-Hill’s Education division will focus on education services and digital learning while speeding up and supplementing its growth through digital services and buyouts.

In addition, the company will focus on abridging costs drastically to ensure competent operating channels. Moreover, McGraw-Hill intends to save approximately $100 million through cost-reduction programs.

McGraw-Hill reduced approximately 800 jobs in the quarter under review including 10% or 550 jobs at its education division. The company plans to develop its education division more into a subscription-based model through capitalizing on growth opportunities and developing education services and digital products and solutions.

Moreover, to restrict its future liabilities and better forecast its costs related to retirement plan, McGraw-Hill will be altering its pension program to bring its retirement program at par with market practice. The company will freeze its defined-benefit pension plan as of April 1, 2012.

McGraw-Hill added that the above moves will generate approximately $50 million in annual cost savings, which will supplement the company to surpass its announced cost savings of $100 million. 

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $944 million, long-term debt of $798 million, and shareholders’ equity of $1,584 million. The company incurred capital expenditures of $119 million and generated free cash flow of $807 million during the fiscal 2011.

During the quarter under review, McGraw-Hill repurchased $845 million shares, including $500 million through an accelerated share repurchase transaction. In fiscal 2011, the company repurchased $1.5 billion shares.

Currently, we have a long-term Neutral rating on McGraw-Hill, which competes with Pearson plc (PSO - Snapshot Report). Moreover, the company holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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