McGraw-Hill Ryerson Limited
TSX : MHR

McGraw-Hill Ryerson Limited

October 26, 2007 16:00 ET

McGraw-Hill Ryerson Reports Third Quarter Results

WHITBY, ONTARIO--(Marketwire - Oct. 26, 2007) -

Attention: Business/Financial Editors



Three Months to September 30, 2007 ($000) This Year Year Ago
----------------------------------

Sales, less returns $ 40,570 $ 37,026
Other 425 546
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Total revenue $ 40,995 $ 37,572

Net Income 9,819 5,385
Net Income per share $ 4.92 $ 2.70

Nine Months to September 30, 2007 ($000)
---------------------------------

Sales, less returns $ 68,356 $ 66,859
Other 1,629 1,487
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Total revenue $ 69,985 $ 68,346

Net Income 7,469 3,524
Net Income per share $ 3.74 1.76


Summary

Our revenues are typically more heavily weighted towards the second half of the calendar year. In the third quarter, McGraw-Hill Ryerson's revenues exceed the total of the first two quarters combined. This year's revenue in the third quarter is 9.1% higher than prior year, mainly driven by strong results in the Company's School Division. The Company also reported a $3.5 million (pre-tax) curtailment gain from an amendment to its post-retirement benefits plan. The increased sales and this one-time gain have generated a significant net income improvement compared to prior year.

Three Months Ended September 30, 2007

The net revenue of $41.0 million is a 9.1% increase over the third quarter in 2006. This increase is mainly a result of increases in School Division's sales for the quarter.

The Higher Education Division reported sales of $26.2 million, virtually unchanged from the prior year's $26.0 million.

The School Division reported sales of $10.9 million, a 47.0% increase from the $7.4 million reported in 2006. This Division reported strong results for many titles, including Ontario Math, British Columbia Science, and Alberta Socials.

The Professional Division sales of $2.7 million is down relative to the prior year's $2.8 million in the third quarter results.

During the third quarter, the Company reported a $3.5 million (pre-tax) gain from an amendment to its Employee Future Benefits Plan. This one-time gain helped to generate income before tax of $15.2 million, compared to $9.1 million during this third quarter of 2006.

Nine Months Ended September 30, 2007

Net revenue of $70.0 million increased by 2.4% compared to the prior year revenue of $68.3 million. The increase is driven by an increase in sales in the School Division, partially offset by a decrease in the Professional Division.

The Higher Education Division sales of $38.1 million are unchanged from the $38.0 million reported in 2006. This year-to-date result is slightly better than overall industry results, as provided by the Canadian Publishers Council (CPC).

School Division sales increased by 9.4% to $21.8 million compared to $20.0 million in 2006. The School division has reported strong results across many subject areas including Ontario Math and British Columbia Science and Alberta Social Studies. The School Division has gained significant market share this year, as overall industry results in 2007 (based on Canadian Education Resource Council information) show a 13% decline compared to 2006.

Professional sales decreased by $0.3 million to $7.2 million, as a result of increased product returns from several retailers.

Operating expenses, comprised of cost of product and royalties, have decreased by 5.2% to $28.1 million. Operating expenses as a percentage of net sales has improved so far this year (41.1% in 2007 vs. 44.4% last year). This is a function of two factors: change in product mix being sold (Canadian vs. imported product) and the benefits of producing some titles offshore.

For the first nine months of the year, editorial, selling, general and administrative expenses have increased 4.4% over the prior year. This increase is seen in staff-related costs (to support the increasing number of publications within our School Division), as well as an increase in information technology and support charges from The McGraw-Hill Companies, Inc.

Year to date income before tax is $11.9 million, compared to $6.4 million last year. The majority of this increased income is caused by the $3.5 million curtailment gain in the employee future benefits plan. The balance of the increase is a direct result of the increase in sales and decrease in operating expenses.

In business since 1944, McGraw-Hill Ryerson Limited is a leading Canadian publisher of educational resources, and information products and services for lifelong learning and enjoyment. Revenue in 2006 was $93 million. Additional information is available at http://www.mcgrawhill.ca.

The accompanying financial statements should be read in conjunction with the "Notes to Financial Statements" included in McGraw-Hill Ryerson's Annual Report.



BALANCE SHEETS
--------------

(In thousands of dollars)
As of September December September
(unaudited) 30, 2007 31, 2006 30, 2006
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(restated- (restated-
Note 2) Note 2)

ASSETS
Current
Cash and cash equivalents $ 19,589 $ 33,511 $ 21,230
Accounts receivable 27,550 17,948 26,624
Due from parent and affiliated companies 1,668 1,792 1,865
Inventories 9,302 8,066 9,846
Prepaid expenses and other assets 412 355 623
Future tax assets 2,195 2,485 2,282
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Total current assets 60,716 64,157 62,470

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Capital assets, net 17,505 18,359 18,304
Other assets, net 12,637 12,695 10,595
Future tax assets 849 1,336 1,254
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Total assets $ 91,707 $ 96,547 $ 92,623

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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued charges $ 10,508 $ 10,697 $ 8,383
Income taxes payable 653 511 324
Due to affiliated companies 5,175 7,291 8,209

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Total current liabilities 16,336 18,499 16,916

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Employee future benefits 1,983 4,821 4,462

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Total liabilities 18,319 23,320 21,378

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Shareholders' equity
Share capital
Authorized - 5,000,000 common shares
Issued and outstanding - 1,996,638
common shares 1,997 1,997 1,997
Retained earnings 71,391 71,230 69,248
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Total shareholders' equity 73,388 73,227 71,245

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Total liabilities and shareholders'
equity $ 91,707 $ 96,547 $ 92,623

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(See accompanying notes)



STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
(unaudited)

(In thousands of dollars except per share data)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
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(restated- (restated-
Note 2) Note 2)

Revenue
Sales, less returns $ 40,570 $ 37,026 $ 68,356 $ 66,859
Other 425 546 1,629 1,487

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Total revenue 40,995 37,572 69,985 68,346

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Expenses
Operating 16,802 16,604 28,127 29,685
Editorial, selling,
general, and
administrative 9,231 8,602 26,394 25,276
Amortization -
prepublication
costs 2,881 2,616 5,108 4,753
Amortization - capital
assets 348 345 1,028 1,015
Employee future benefits (3,511) 368 (2,777) 1,102
Foreign exchange loss
(gain) 6 (56) 222 130

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Total expenses 25,757 28,479 58,102 61,961

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Income before income
taxes 15,238 9,093 11,883 6,385

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Provision for/(recovery
of) income taxes
Current 6,011 5,097 3,636 3,060
Future (592) (1,389) 778 (199)

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5,419 3,708 4,414 2,861

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Net income for the period 9,819 5,385 7,469 3,524


Retained earnings,
beginning of period 62,021 64,282 71,230 66,952
Dividends declared to
shareholders to date
($3.66 per share; 2006 -
$0.615 per share) (449) (419) (7,308) (1,228)

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Retained earnings, end of
period $ 71,391 $ 69,248 $ 71,391 $ 69,248

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Earnings per share

Basic - net earnings for
the period $ 4.92 $ 2.70 $ 3.74 $ 1.76

Diluted - net earnings
for the period $ 4.92 $ 2.70 $ 3.74 $ 1.76

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(See accompanying notes)
Weighted average number of shares for basic and diluted earnings per share
for 2007 and 2006 is 1,996,638.



STATEMENTS OF CASH FLOW
-----------------------
(unaudited)

(In thousands of dollars)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
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(restated- (restated-
Note 2) Note 2)

OPERATING ACTIVITIES
Net income for the period $ 9,819 $ 5,385 $ 7,469 $ 3,524
Add/deduct charges to income
not affecting cash:
Amortization - prepublication
costs 2,881 2,616 5,108 4,753
Amortization - capital assets 348 345 1,028 1,015
Employee future benefits (3,541) 358 (2,838) 1,073
Future income taxes (593) (1,553) 777 (200)
Net change in non-cash working
capital balances related to
operations 1,757 (1,446) (13,214) (9,445)
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Cash provided by (used in)
operating activities 10,671 5,705 (1,670) 720

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INVESTING ACTIVITIES
Prepublication costs (1,598) (1,494) (4,770) (4,864)
Investment in capital assets (17) (219) (174) (604)
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Cash used in investing
activities (1,615) (1,713) (4,944) (5,468)

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FINANCING ACTIVITIES
Dividends paid to shareholders (449) (419) (7,308) (1,228)

Cash used in financing
activities (449) (419) (7,308) (1,228)

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Net increase (decrease) in
cash during period 8,607 3,573 (13,922) (5,976)
Cash and cash equivalents,
beginning of period 10,982 17,657 33,511 27,206

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Cash and cash equivalents, end
of period 19,589 21,230 19,589 21,230

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Supplemental cash flow
information
Income taxes paid $ 1,075 $ 523 $ 3,503 $ 2,518

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NOTES TO INTERIM FINANCIAL STATEMENTS

September 30, 2007 (unaudited)

1. General

The accompanying financial statements of McGraw-Hill Ryerson Limited (the "Company") do not meet the requirements of Canadian Generally Accepted Accounting Principles ("GAAP") for annual financial statements and these interim financial statements should be read in conjunction with the annual audited restated financial statements for the year ended December 31, 2006.

The same accounting policies and methods are followed as in the annual audited restated financial statements for the year ended December 31, 2006.

2. Employee Future Benefits

As previously disclosed in the Company's results for the second quarter of 2007:

The Company has a post-retirement benefit plan for certain retirees covering extended health and dentals costs as well as basic life insurance. The premiums for this plan are paid by the Company. The Company accounted for the cost of this program since its inception in 2002 on a pay-as-you-go basis and did not correctly follow the guidance as required by CICA Section 3461 "Employee Future Benefits". Accordingly, during the second quarter of 2007, the Company filed restated December 31, 2006 financial statements that recorded an increase in operating expenses for years ended December 31, 2006 and 2005 of $1.4 million and $1.1 million, respectively. Expenses were increased by $0.4 million in each of the first quarter of 2006, the second quarter of 2006, the third quarter of 2006 and the first quarter of 2007. During the third quarter of 2007, the Company amended this plan and reported a curtailment gain of approximately $3.5 million (pre-tax) in its results. Long-term liabilities increased as of December 31, 2006 and 2005 in the amount of $4.8 million and $3.4 million, respectively and future tax assets increased by $1.5 million and $1.2 million respectively, to give effect to the proper accounting for this plan. An adjustment to decrease opening retained earnings by $1.5 million was recorded in 2005 for the correction of errors prior to 2005. As of the end of the third quarter of 2007, the liability associated with the benefit plan is $2.0 million and is reported on the Company's Balance Sheet as "Employee future benefits".



Earnings Per Share Impact
As Previously
Reported Restated
12 months ended December 31, 2005 $ 2.92 $ 2.57
12 months ended December 31, 2006 $ 3.51 $ 2.97
9 months ended September 30, 2006 $ 2.33 $ 1.76


3. Cyclicality

The Company's sales are cyclical based on the education industry's school terms for the School and Higher Education divisions. The Company earns a significant amount of its sales in the third quarter of each year.

4. Segmented Disclosure

The Company is structured on a market-focus basis and operates in three primary market areas: post secondary education, including universities, community colleges, and proprietary colleges ("Higher Education"); secondary and elementary schools ("School"); and professional and medical, including retailers, distributors, libraries, non-traditional booksellers, professionals, and the medical sector ("Professional"). The accounting policies of these operating segments are the same as those described in the annual audited restated financial statements for the year ended December 31, 2006:




For the 3 month period ended September 30, 2007

Warehouse
Higher Fulfillment
Education School Professional and Support Total
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Sales, less returns $ 26,235 $ 10,870 $ 2,661 $ 804 $ 40,570
Amortization -
prepublication costs 1,565 1,316 - - 2,881
Amortization -
capital assets 20 9 3 316 348
Divisional
contribution (loss)
before income taxes 9,898 4,727 592 21 15,238
Provision for
Income taxes - - - 5,419 5,419
Total expenditures
for additions to
capital assets - 2 2 13 17
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For the 3 month period ended September 30, 2006
(restated)
Warehouse
Higher Fulfillment
Education School Professional and Support Total
---------------------------------------------------------------------------
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Sales, less returns $ 25,969 $ 7,393 $ 2,839 $ 825 $ 37,026
Amortization -
prepublication costs 1,473 1,143 - - 2,616
Amortization -
capital assets 19 10 3 313 345
Divisional
contribution (loss)
before income taxes 9,650 2,157 681 (3,395) 9,093
Provision for
Income taxes - - - 3,708 3,708
Total expenditures
for additions to
capital assets 16 4 - 199 219
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For the 9 month period ended September 30, 2007

Warehouse
Higher Fulfillment
Education School Professional and Support Total
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Sales, less returns $ 38,126 $ 21,842 $ 7,158 $ 1,230 $ 68,356
Amortization -
prepublication costs 2,282 2,826 - - 5,108
Amortization -
capital assets 57 29 9 933 1,028
Divisional
contribution (loss
before income taxes 10,389 6,494 1,257 (6,257) 11,883
Provision for
(recovery of)
income taxes - - - 4,414 4,414
Total expenditures
for additions to
capital assets 100 14 2 58 174

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As at September 30, 2007
Segment assets 27,309 17,398 4,931 17,228 66,866



For the 9 month period ended September 30, 2006
(restated)

Warehouse
Higher Fulfillment
Education School Professional and Support Total
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Sales, less returns $ 38,012 $ 19,966 $ 7,468 $ 1,413 $ 66,859
Amortization -
prepublication costs 2,188 2,565 - - 4,753
Amortization -
capital assets 63 31 11 910 1,015
Divisional
contribution (loss
before income taxes 9,077 5,500 1,296 (9,488) 6,385
Provision for
(recovery of)
income taxes - - - 2,861 2,861
Total expenditures
for additions to
capital assets 48 23 3 530 604

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As at September 30, 2006

Segment assets 28,436 13,991 5,016 18,047 65,490

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As at December 31, 2006

Segment assets 21,293 12,307 5,519 18,079 57,198



Reconciliation December September
September 31, 2006 30, 2006
30, 2007 (restated) (restated)
--------------------------------------------------------------------------
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Segment assets $ 66,866 $ 57,198 $ 65,490
Unallocated assets
Cash and cash equivalents 19,589 33,511 21,230
Due from parent and affiliated companies 1,668 1,792 1,865
Non-divisional prepaid expenses and other
assets 540 225 502
Future tax assets 2,195 2,485 2,282
Non current future tax assets 849 1,336 1,254
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Total assets $ 91,707 $ 96,547 $ 92,623
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For the 9
month For the
period year
ended ended
September December
30, 2007 31, 2006
---------------------------------------------------
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Segment sales, less returns $ 68,356 $ 90,343
Other revenue 1,629 2,535
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Total revenue $ 69,985 $ 92,878
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Contact Information

  • McGraw-Hill Ryerson Limited
    Gordon Dyer
    Executive Vice President and Chief Financial Officer
    (905) 430-5032
    Website: www.mcgrawhill.ca