This summary is based on the fourth quarter fiscal 2006 earnings call conducted by The McGraw-Hill Co. (MHP: chart) on January 25, 2007.

Management:

- Chairman, President and CEO: Harold McGraw, III
- EVP, CFO: Bob Bahash
- Investor Relations: Donald Rubin

Key Investors Issues

- Earnings were up 8.6% to $882 million or $2.40 a share.
- Revenues marginally rose to $6.3 billion.
- A total of $1.8 billion was returned to shareholders through dividends and repurchases.

Fourth Quarter Highlights:

- Earnings increased 8.2% to $205 million or 58 cents a share.
- Revenue rose 3.5% to $1.6 billion, from $1.54 billion in the prior year.
- Revenue in the education was off by 11% to $528.1 million while operating profit dropped by 88% to $4.4 million.

Full Year Highlights

Earnings increased by 8.6% to $882 million or $2.40 a share from $844 million or $2.21 in the prior year following a 4.2% increase in revenue to $6.3 billion.

- During the year, the firm returned $1.8 billion to shareholders through dividends and repurchases.
- The board of directors reduced the dividend and the share repurchase program going forward.
- The firm is debt-free, with a cash position of $353 million, $395 million lower than the prior year and this was sufficient to fund all operating investments, capital expenditures, pre-publication investments and return to shareholders in the form of dividends and increased share repurchases.

Corporate expense increased $38 million to $163 million and includes the $21.4 million incremental stock-based compensation.

- Prepublication investments were $277 million, which is $19 million higher than in 2005, but lower than the original projection for 2006 due to timing, as well as some efficiencies from the global resource management program.
- Purchases of property and equipment were $6 million higher than the prior year at $127 million, despite the postponement of the primary construction phase for the new data center to 2007.

Operational Highlights:

- In McGraw-Hill Education bookings were growth in the higher education, professional and international markets which produced 47% of the segment’s revenue and a decline in the school education group, which is attributable to a weaker elementary/high school market.
- Revenue declined by 5.5% to $528 million resulting in a 19.8% drop in operating profit and that includes incremental expenses of $19.6 million for stock-based compensation and a charge for the elimination of the restoration stock option program.
- As part of the restructuring, the firm vacated some facilities and eliminated 450 positions.
- In a weaker year for state new adoptions, the company reduced the segment’s costs and expenses by nearly 3%.

The school education group outperformed the competition in open territories, benefiting from a very strong showing from Treasures, the new elementary reading basal.

- Although the secondary science and social studies programs were very successful, the firm underperformed in the state new adoption market.
- In testing, there was a continued decline in the sales of norm-referenced shelf tests which are being displaced by the state-specific standards-based assessments required under the Federal No Child Left Behind legislation.
- The company discontinued some low-margin custom contracts, service revenue for state assessment contracts declined from $246.1 million in 2005 to $214.4 million in 2006.
- Management remained upbeat about the future prospects of the school education group given the growing market and participation in more of the addressable market in 2007.

In 2007, the firm has timed the introduction and enhancements of new products to pursue bigger growth opportunities in a more robust market.

- In science, new elementary and secondary programs which have been customized for major adoption state.
- Real math, a skills-oriented elementary program, won a number of small and medium-size adoptions last year and is well-positioned for more growth in 2007 in both open territories and adoption states where it has been submitted.
- Student tests were positive in schools that piloted the program last year and that will add to the momentum for this research-based program in 2007.
- Every Day mathematics, the best-selling program in the reform-oriented segment of the K-6 market, is continuing to win new business and the brand will be extended into the secondary grades with a new program in 2007.

Reading with purpose for middle schools and the Readers Choice for high schools are a new series for the important secondary reading and literature market following early success with these programs in the open territory.

- Treasures, the new basal reading program for the elementary schools will build on the good start that it made in open territory last year.
- The firm is adding middle school components to the successful Numbers World and Kaleidoscope programs; Jamestown Reading Navigator, a subscription-based reading program for grades 6 through 12 was piloted with more than 100,000 students in 2006.
- The new program had early adoptions last year in Massachusetts, Texas and Florida and recently won state level approval for purchase in 2007 by districts in California, Tennessee, and West Virginia.
- The company entered 2007 with a stronger organization to compete in the core basal market by combining the elementary and secondary basal publishing groups, which will improve cost efficiencies from product development through sales and marketing.

In the college and university market, the firm is getting some traction with Homework Manager and similar digital products in accounting, math and world languages.