Welcome to the McGraw Hill Company's First Quarter 20 10 Earnings Call. I'd like to inform you that the call is being recorded for broadcast and that all participants are in a listen only mode. We will open the conference to questions and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to www.mcgrawhill .com and click on the link to the earnings announcementconference call. At the bottom of the webcast page are 3 links.
If you're listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select either Windows Media or RealPlayer. I would now like to introduce Donald Brumman, Senior Vice President of Investor Relations for McGraw Hill Company. Sir, you may begin.
Thank you, and good morning to our worldwide audience, and thank you, everyone, for joining us this morning for The McGraw Hill Company's Q1 20 and earnings call. I'm Donald Rubin, Senior Vice President, Investor Relations for The McGraw Hill Companies. With me today are Harold McGraw, and Chairman, President and CEO and Robert Behash, Executive Vice President and Chief Financial Officer. This morning, We issued a news release with our results. We trust you've all had a chance to review the release, but if you need a copy of the release and financial Again, I need to provide certain cautionary remarks about forward looking statements.
Except for historical information, the matters discussed in the teleconference may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results and recorded in those forward looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10 and other periodic reports filed with the U. S. Securities and Exchange Commission.
We are aware that we do have Media representatives with us on the call. However, this call is for investors, and we'd ask that questions from the media be directed to Mr. Frank Bria Monte in our New York office It will last approximately an hour. After our presentation, we will open the meeting to questions and answers. It's now my pleasure to introduce the Chairman, President and CEO of the Macdonald Companies, Terry
Okay. Thank you, Don, and good morning, and welcome to our review of the Q1 earnings and the outlook for the year. With me today is Bob Behash, Executive Vice President and Chief Financial Officer, and we're going to start today by reviewing our first quarter operating results and guidance for the segments and for the corporation. Bob will then provide an in-depth look at our financials and after for the formal presentation. Obviously, we'll be pleased to answer any questions or take comments that you may have about the McGraw Hill Companies.
Earlier today, we reported The 65% increase in diluted earnings per share for the Q1, that's 0 point The same period last year, revenue increased 3.7%, but excluding the divestitures of and services. Our next question comes from the line of Chris Turnquist Research. Revenue grew by 6.7% in the Q1. When the 43.2% increase in the 4th quarter earnings per share was announced at the end of January. We said those results set the stage for more growth in 2010.
Although the Q1 is seasonally the smallest of the year, we are obviously clearly off to a good start. The economy will Rates are expected to remain low. Bond spreads narrowed again in the Q1, and we still expect growth in our key education markets. With that as an overview, let's now review operations and our prospects by each of the operating segments, And let's begin with the McGraw Hill Education segment. In higher education, it is called the echo effect, and the 2nd semester ordering that echoes the pattern of the 1st semester orders from the previous summer.
In the seasonally light 1st quarter for education, we saw the favorable side of the echo effect as our higher education group once again reported solid results, including double digit growth in digital products and services. Revenue for the McGraw Hill Higher Education Water. For McGraw Hill Education, in the Q1, revenue increased by 1.5% and the operating loss was cut by 19 0.3% to $61,800,000 The Q1 is typically a light one for McGraw Hill School Education Because of the seasonality of the market, it was accentuated this year in the state adoption market because North Carolina did not order. North Carolina is the only adoption state that usually makes substantial purchases of Carolina is the only adoption state that usually makes substantial purchases of new materials before the end of March. It did so 1st quarter were for supplemental residual or intervention products.
The adoption states were We benefited from large orders from school districts in Ohio, Maryland, South Dakota that initiated adoptions in 2019, but completed the purchasing earlier this year as funds became available. The increase in the sale of instructional materials in the The quarter was offset by a decline in the testing market where we have elected to discontinue custom contracts in Florida, California and Arizona. In a formative market, we continue to make progress with Acuity, our market leading assessment program. It's early in the year and we're watching buying patterns closely. In some adoption states, local school districts have 3 year increase in industry sales for 6 consecutive months now.
It started last September and as continued through February. That's not intuitive because historically the 4th and first quarters are the slowest each year for the Lihai market. Based on early trends this year, we still expect the Lihai market to grow 6% to 7% in 2010, even though we are trimming our estimate for the state new adoption market. As you know, previously, we had Forecasted this market to grow between $925,000,000 $975,000,000 We are now forecasting a slight decline That $875,000,000 to $925,000,000 which still represents about an 80% year over year increase for the industry. Although no formal postponements were announced during the quarter, our reduced estimate for state new aducheme reflects pullbacks that have become I'm apparent in several states.
In Indiana, which is officially adopting K-twelve math this year, the state Department of Education has Recommended that districts delay purchasing until materials are available that align with the Common Core Standards, even though it will probably take the States several years to implement instruction and assessments based on those standards. The adoption has been Side, where common core standards are an issue, we have promised to provide online and print supplements to cover any concepts or skills not presented in accordance with those standards in the newly state approved materials now being As budget pressures drive more district level postponements than originally anticipated, we are also Kentucky. In Florida, the math adoption is looking very solid at the K-five level, but some districts are delaying high school math purchases for budgetary reasons. There's also a possibility that South Carolina will delay the implementation of its nine twelve math adoption. The reduction in the state new adoption market will be partially offset by higher residual sales in these Single digit decline in the industry's open territory sales, we are seeing some district level postponements in the open territory, but the field Salesforce is also identifying new opportunities as the selling season develops and the outlook at this time is reasonably optimistic.
We We continue to see pent up demand in both the open territory and adoption states. Federal stimulus funding distributed last year helped some districts to implement delayed adoptions in the second half of two thousand and nine and will contribute to purchasing in 2010, but the budget pressures are real. So we will continue to monitor market developments carefully. It is early days in the battle for state new adoption dollars, and let me Reassure you that our school education group is still aiming for a share of at least 30% or better this year. In testing, We continue to gain share in the market for formative assessments, which is largely made up of district level adoptions.
We also see new opportunities ahead for Both formative and summative testing as the winners of federal Race to the Top grants begin to implement their long range plans and as the movement towards Common Core Standards and Assessments continues to gain momentum. As for college and career readiness. Drafts of the standards have been finalized and are now under review. 48 states Plus, the District of Columbia are taking part in this movement, which has been endorsed by the U. S.
Department of Education. The only two states and that are not concluded at this point are Texas and Alaska. Applicants that declare their attention to adopt the standards By August of 2010, can earn extra points in the Race to the Top grant competition. Delaware and Tennessee have already won Phase 1 awards of $100,000,000 $500,000,000 and Phase 2 winners will be announced in September. Each state will have 4 years in which to and its award, half of which will be distributed as sub grants to the local districts.
Later this year, the Department of Education will Also word a total of $350,000,000 to Multistate's Consortia with winning proposals for developing new assessments based on common All this means is that we expect to see a very active market in the testing business over the next few years with RFPs He's coming from consortia, states and districts. McGraw Hill with its outstanding reputation for and its complete range of assessment and reporting capabilities will be well positioned to benefit from these new opportunities. Present indications are that testing development work will begin in late 2010 or perhaps early 2011 and that common assessments will be For the instructional materials side of our business as well, we can expect to see more purchasing as states adopt materials that incorporate the new standards and we also anticipate delivering more content to the schools in digital form because most To the state's Race to the Top plans involve building out their technology infrastructures. We should also see cost savings in content development as there will be less need for obviously state by state customization in the Common Core environment. In higher education, we enrollments last fall and did so again this year, although the effect is not easily measurable.
The funding has gone to Students in the form of increased Pell Grants, higher allowable tax deductions for credit related for college related expenses And a new post-nineeleven GI Bill that has provided educational subsidies for more than 150,000 veterans since the fall of 2009. Student Aid got another boost in March when Congress passed the Student Aid and Fiscal The maximum awards from $5,550 this year to $5,975 in 20.17. In the U. S. College and university markets, students are embracing our digital products at a record pace.
We saw Strong growth in the usage of McGraw Hill Connect, that's our new homework management and assessment platform, in implementations of our online and courses and in purchases of e books. We now have more than 1,200,000 registered users of McGraw Hill Connect And our other digital study and homework management products with more to come. In fact, McGraw Hill Connect will add an Additional 170 courses in 2010. Creating original media rich digital products in all of our markets is a priority. In the Q1, we introduced our first digital and subscription products for the professional business market.
They are kiss, bow or shake hands, a global business adequate database with information on customs in more than 60 countries and another one is perfect phrases for managers, a performance support tool based on a series of successful McGraw Hill books that helps managers find the right phrase at the right time.
For For
on the spot convenience, these products can be downloaded to virtually any digital device. Also For the business market, we launched a program called Select, eChapters in an instant. This program enables customers to by downloads of chapters from our best selling business books as standalone items. More than 7 50 And a 6th specialty site to our internationally successful Access Medicine Suite. It's called and goes into the allied health field.
It is a powerful new site providing searchable access to our leading physical therapy and internal medicine titles, interactive imaging content, curricular management tracking tools and tests and more than 80 videos and exclusive lectures. We are also broadening our market geographically by signing a partnership agreement with the Chinese Education and Research Network, which will make our Access suite of products available for the first time and commercial markets. Let's sum up for McGraw Hill Education. Growth in key education markets in 2010, 6% to 7% growth in The elementary high school market, 5% to 7% in the U. S.
College market, segment revenue growth of 6% to 7% and an operating margin unchanged from 2,009. All right. Let's now go to the Financial Services segment. Here, robust growth in transaction revenue was a key factor in Financial Services' start this year. In the Q1, for financial services, revenue increased by 9.3%.
Operating profit grew by 12 point The operating margin was 39% versus 38% for the same period last year. For Standard and Poor's Credit Market Services, the 15.4% increase in the 1st quarter revenue was driven by record high yield issuance, strong growth in bank loan ratings, a solid gain in public finance, modest improvement in structured finance, 18.4% growth in international markets and 12.8% growth in domestic market. For S and P Investment Services, 1st quarter revenue declined by 1.5%. The decline can primarily be attributed to the divestiture of Vista Research and the expiration of and the expiration of contract for the independent equity research required by the research settlement. Let's take a closer look at these numbers.
For S S and P Credit Market Services transaction revenue increased by 33.6 percent. That's revenue from new issuance in domestic and international markets. The key growth drivers in the Q1 were surging high yield volume, bank loan ratings and public finance. Corporate high yield debt issuance grew globally by 560 5% to set an all time record for the Q1 and obviously coming off of a lower base. It was the Q1 for the speculative grade issuance since 2,007.
The surge was driven partly by private equity backed companies refinancing the that they took on for buyouts in the last decade. These companies aim to preempt a so called maturity cliff by largely and LBO related loans coming due in the next few years. High yield issuers raised 1,000,000,000 of dollars in the first As risk premiums tighten, the increase in the global bank loan activity was primarily amend to extend to Push out maturity. Credit spreads, that's the excess interest rate over treasury bonds, decreased dramatically during the past year. Both investment grade and speculative grade spreads continue to tighten in the Q1.
And as this table shows, we're near or just below their 5 year Moving averages at the end of March. And by the way, there was more contraction in April. We have also seen steady and Significant contraction in spreads across all asset backed security classes. As this table shows, there has been significant contraction in spreads for auto loans, credit cards, U. S.
Public finance issuance in the Q1 of 2010 of 100 and $6,000,000,000 was up 17.4 percent and just missed the all time first quarter record of $112,000,000,000 set in This program enabled municipalities to issue a huge amount of taxable debt. In the Q1, taxable bonds represented 31% of the muni Okay, well above the previous record of 11%. Structured Finance also contributed modestly to the increase primarily from asset backed securities and increases in re REMIC activity in the U. S. Residential mortgage backed security market.
But The growth of transaction revenue essentially driven by new issuance activity is not the whole story. Non transaction Revenue is a critical component and here too we grew. Standard Forest Grant Services' Solid base of non transaction revenue grew by 8.1% in the Q1 and produced 67% of S and P Credit Market Services 1st quarter revenue, 67%. To reduce dependency on any single market or asset S and P created a deferred revenue stream by emphasizing reoccurring annual fees through frequent issuer programs, surveillance fees as well as subscription services. That's how we define non transaction revenue.
And And despite changes in debt issuance levels, capital markets and the economic environment, we expect the non transaction revenue stream to
be durable for some time. The growth
of non transaction revenue for some time. The growth of non transaction revenue in the Q1 primarily came from increased subscriptions and annual fees. We are also benefiting though from increased demand for products and services not tied to new issuance such as ratings evaluation an increase in new credits under surveillance, price increases, a modest favorable foreign exchange impact. Turning to the Investment Services side of S and P, Capital IQ and S and P Indices were primary drivers In the Q1, Capital IQ continues to add clients with more than 3,000 at the end of the first since the end of 2009. To me, growing client demand, Capital IQ is expanding European and Asian operations by opening new offices in Milan and Tokyo.
S and P indices are experiencing a rebound in asset based revenue, which is earned from issuers of exchange traded funds and mutual funds benchmarked to our indices. Assets under management and exchange Change traded funds based on S and P indices set a new record of 254.2 1,000,000,000 at the end of the Q1, topping the record established at the end of 2,009 by 2.9%. In the Q1, 21 new exchange traded funds based on S and P indices were launched, bringing the total The 2.38 exchange traded funds and endless permutations here as an index strategy and customized for a number of clients and obviously more are on the way. As As we look at the pipeline for S and P Credit Market Services, here's what we see. High yield issuance should The bank loan market will continue to be active.
Refinancing needs will be a factor for some time with 2,000,000,000,000 Dollars and debt maturities due through 2014. We anticipate a greater number of investment grade corporate transactions in 2010, although at a moderate par amounts compared to the high levels of 2,009, the muni market still looks promising despite and headlines about state and local budget deficits. What the financial press fails to recognize is that these conditions Have not translated into reduced ability to issue debt. Taxable bonds are Are expected to drive growth, although traditional tax exempt securities will continue to comprise the largest share of new issuance. The structured finance market has improved, but new federal rules and regulations will increase the cost of securitization Now, no discussion of prospects for financial services complete these days without and review of the legal and regulatory outlook.
Since our last update on litigation in late January, the courts have begun to issue Twelve cases have been dismissed by 8 federal court judges, 11 of which have been dismissed since Been denied pending discovery as in the Abu Dhabi case last September. The court and by the way, the same Judge Schindlin, who issued the Abu The dummy ruling was required by law to assume the plaintiff's allegations to be true at this preliminary stage of the litigations. We The 12 dismissals have occurred in all three of the 3 major categories of claim. And again, the 3 Major categories of claims are 1, the underwriter lawsuits that claim that we are a distributor and a seller of securities, which we're not. Secondly, the stock drop suits and third, the suits involving state law claims alleging or including These recent favorable decisions have not attracted a lot of attention.
So let's review What's happened since many of the key allegations against Standard and Poor's are starting to unravel under judicial scrutiny. Significantly, none of the dismissals have been based on the assertion of a First Amendment defense, underscoring again the erroneous claim by critics that And for us, it uses the First Amendment to shield it from all legal claims. In the first category, plaintiffs alleged that McGraw Hill is liable under the Securities Act of 1933 as an underwriter or seller of residential mortgage backed securities rated by Standard and Poor's. To 4 federal judges have granted our motions to dismiss in 6 separate underwriter actions. In light of these favorable rulings in the underwriter cases.
Class Action Council in another underwriter case has recently amended its complaint in the this In the Fort Worth Employees Retirement Fund litigation by dropping all claims against Standard and Poor's and 2 other rating agencies. In the second category, this is in the stock drop area, our motions to dismiss were granted in 3 cases in which Purchasers of McGraw Hillstock alleged the company's statements about its earnings and ratings business were misleading and purportedly violated the Securities Exchange Act of 1934 and ERISA. In the 3rd category, we can report 3 dismissals of various state law claims. There also have been some significant decision in cases in which Standard and Poor's and other rating agencies were not parties. In these The plaintiffs attempted to assert claims against an issuer or an underwriter on the basis of allegedly misleading statements ratings included in the disputed offering documents.
Many of these claims were based on much publicized testimony regarding rating agencies given at congressional hearings. In 3 cases, the federal courts have rejected these legal claims outright. We believe that these decisions constitute meaningful legal precedent, which should help guide initial rulings in the remaining cases. The courts have been clear and unambiguous in their decisions and here's what I In dismissing the underwriter claims against the rating agencies and in the New Jersey Carpenters Vacation Plaintiff's allegations do not support an inference that rating agency defendants were involved in the sale or distribution of the securities such that they could be considered underwriters. In rejecting claims that the rating agencies somehow controlled Lehman, Judge Kaplan wrote in the Lehman Brothers Securities and Arista Litigation suit, This complaint, fairly read, Alleges only that the rating agencies had the power to influence Lehman with respect to the composition of pools of mortgages to be and the credit enhancements the rating agencies regarded as necessary to obtain the desired rating.
These allegations fall considerably short of anything that could justify a reasonable trier of fact in concluding The decision making power lay entirely with the rating agencies. In concluding that ratings are opinions And not statements of fact that are actionable under the securities law. Judge Baer also pointed out that credit ratings and the Relative adequacy of protective credit enhancements are statements of opinion as they are predictions of future value and future protection of that value. In dismissing the allegations based upon alleged purported prior disclosure of that which is publicly known and the risk that rating agencies operating under a conflict of Because they were paid by the issuers has been known publicly for years. And By the way, I might add for more than 40 years, as a matter of fact, on that.
Another critical point was recognized by the court in the New Jersey Carpenters Vacation
and
about the risk entailed by the credit ratings and credit enhancements and disclose the risk of relying on credit ratings, A few minutes ago, I said that the federal courts were making important decisions in The 3 similar cases in which Standard and Poor's and other rating agencies were not defendants. They are Plumbers Union Local versus Nomura Asset Acceptance Corporation. The other one was New Jersey Carpenters Health Fund versus LJ and New Jersey's Carpenters Health Fund versus RALI. Addressing after the fact Criticism of rating agencies Judge Stearns pointed out in the Plumbers Union Local No. 12 Pension Fund versus Nomura, and I quote, none of The purported comments made by S and P and Moody's employees in the wake of the collapse of the subprime mortgage market in 2,007 supported the inference that the ratings were compromised as of the dates In 2005 and 2006, when registration statements and prospectus supplements became effective.
We think there are some Clear takeaways from these recent decisions. The courts are ruling that rating agencies are not underwriters under the securities law. Rating agencies are not sellers of securities under the securities law. Rating agencies are not controlling Criticisms of rating agencies such as those that have appeared in the press do not support an inference that rating agencies Did not believe the ratings were appropriate at the time they were issued, that rating agencies' alleged conflicts of interest We're widely known by investors and that investors were adequately cautioned about the risks and limitations of using credit rates. For example, they are not recommendations obviously to buy, sell or hold securities.
They never were. Clearly, The courts are also demonstrating that they understand the difference between credit risk and market risk. Sales or as fiduciaries for others. Turning to the regulatory situation, it obviously remains A fluid situation. Legislation in the Senate is paradoxical and a potential problem.
A core tenant in the proposed legislation subject to the same standards of liability and accountability as 1, security analysts who recommend to buy the securities 2, the Investment Banks that structured and sold securities and 3, auditors who certified the issuer's financial statements and and other market participants. And yet, as currently written, other parts of the legislation would lead to the They would impose materially different legal pleading standards for federal securities fraud claims, distinguishing NRSROs from All other defendants in the same case. In other words, a separate lower pleading standard would apply only to NRSROs in the same cases alleging federal securities fraud violation. And let me be clear here, we're not For special legal treatment and lawsuits for securities fraud, we are simply saying that NRSROs should be Object to the same legal pleading standard as everybody else, no more, no less. To We support congressional proposals to increase accountability, transparency and oversight of credit rating agencies.
They should be accountable Clear. Passage of the bill by the Senate and reconciliation with the version passed by the House of Representatives is difficult to predict. Some Some expect the Senate to vote on this bill before Memorial Day, but there's also uncertainty on when the Senate and the House would convene a conference committee to work out the difference. I guess it's stay tuned. S and P is also focused on new SEC regulations that go into effect on June 2nd, a key new rule is known as 17 gs5, and it requires issuers and arrangers to make the underlying information that they provide on structured financing available to all NRSROs, whether they are paid or not to produce a rating.
The goal is to encourage NRSROs, which have not been asked to rate transaction to issue unsolicited ratings. S and P is working with market participants to implement this new S and P is also working to meet new disclosure rules on its history of rating actions. We also continue to work with regulators overseas and consistent standards across all geographic boundaries and jurisdictions. So let me sum up for financial Service, the market is clearly recovering. We are making progress in the courts.
We're proceeding to meet the new regulatory requirements. The outlook for legislation in the United States remains fluid. And by the way, Europe is complete, Australia is complete, Japan is complete. Revenue is expected to grow in high single digits with improvements at S and P Credit Market Services and S and P Investment Services and operating profit will grow. The operating margin will decline by about 100 basis points, reflecting investments in And finally, let's take a look at the Information media area.
In the Q1, revenue declined 8.5%, operating profit increased by $25,000,000 to to $27,800,000 The operating margin was 13.5% compared to 1.2% for the same period last year. Last year, we We had a full year margin in this range. The last time we had a full year margin in this range was in 2004. That This year, the segment reported an operating margin of 14.9%. In the business to business market, we have been building on leading positions where information and media products and services represent the standard or provide leading benchmarks.
A A lot of progress has been masked by deterioration in the advertising market experienced by BusinessWeek. In the Q1, the impact on operating profit and the operating Margin is apparent now that BusinessWeek's expenses have been eliminated. And because BusinessWeek was not Divested until December 1, 2019. The positive impact on year over year comparisons will be with us for 11 months of 20 Excluding the divestiture of BusinessWeek, revenue for the segment grew by 4.3% and the revenue for the business to business group increased 4.5 instead of the reported 9.5% decline. Revenue growth at Platts was the primary driver in The business to business group's Q1, demand for our global energy data and information products produced strong growth in both and international markets.
There also was improvement at JD Power and Associates and Aviation. Softness Construction reflected difficult conditions for smaller regional contractors in the current downturn. The digital transformation of this segment continues to be a positive factor. Business to business digital products and services accounted for more than 60% of The 2,009 sale of BusinessWeek will impact revenue and the operating margin in 2010. Revenue will decline in the mid single digits, but Excluding $100,000,000 from BusinessWeek, we'll increase in the mid single digit range and the operating margin will rebound climbing into the mid That completes our review of the operations and the outlook for the segments in 2010.
Summing up for The corporation, this year is off to a good start. But until we get a little bit better visibility on Okay. With that, let me turn it over to Bob Behash, our CFO and And go into a little bit more depth on the financials. Bob?
Okay. Thank you, Terry. Maintaining a strong financial position is a corporate priority. We had We're virtually flat with our year end position. Total debt stood at $1,200,000,000 and cash and short That is comprised entirely of long term unsecured senior notes as we have no commercial paper outstanding.
We'll look at the free cash flow 2.6% in the Q1, but we expect some ramp up for the balance of the year as we make investments in technology, incur for additional expense related to selling and marketing at McGray Hill Education and also incur expenses to increase our talent base in each of our segments guidance after reporting a substantial increase in earnings per share in the seasonally small Q1. So let's look at what we anticipate in each of the segments as the year unfolds. As a reminder, for purposes of full year expense guidance, I'll speak to and adjusted expense growth, which represents expense growth adjusted to exclude 2,009 restructuring charges as well as the loss on the divestiture of Vista and the gain on the divestiture of Business Week. Let's start with McGraw Hill Education. The year is off to a good start.
1st quarter expenses We have benefited from savings from the Q2 2019 action to combine our core Basel Publishing operations with our alternative Basel and supplemental publishing operations as well as reduced expenses due to the planned phase out of statewide custom contracts in California, Florida and Arizona. For the full year 2010, as Terry indicated, we now expect segment revenue growth of 6% changed adjusted operating margin as we now anticipate expenses to increase 6% to 7% compared to our previous guidance of a 7% to 8 The expense growth is driven by an increase in selling and marketing costs due to the robust state option opportunities. Given the seasonality
of the business, these calls
are generally not significant in the Q1. Additionally, we continue to invest in both technology and personnel to support our digital initiatives, particularly at Higher Ed and Professional in order to provide value and choices purposes for our customers. For Financial Services, expenses increased 7.5% in the 1st quarter. At constant currencies and excluding the impact of the divestiture of Vista, expenses increased 5.4%. For the full year 2010, we continue to expect expenses to increase roughly 9% This is the 2,009 adjusted expense.
Expense growth is largely driven by continued investment in our fast growing purposes, the carryover impact of 2,009 hires as well as planned hires in 20 investments to support our regulatory and compliance efforts. The impact of investments, including new hires, will be more pronounced as the year purposes. Our expense guidance assumes approximately $20,000,000 in additional costs relating to our regulatory and communications, although this is obviously highly dependent on the final form of regulation. At Information and Media, 1st quarter expenses by 19.9% or 20.5% at constant currencies. The divestiture of BusinessWeek reduced revenue by by $27,800,000 and expenses by $40,000,000 for a positive profit impact of roughly $12,000,000 in the quarter.
The segment also benefited from restructuring actions taken in 2,009. For For the full year, information and media will reflect savings from the BusinessWeek divestiture of $38,000,000 as we manage vacant space and certain and other support costs within corporate expense, which is increasing approximately $13,000,000 due to the divestiture. For 20 and reflecting primarily the divestiture of BusinessWeek, expenses are expected to decline in the low teens versus 2,009 adjusted expenses. Corporate expense in the Q1 was $36,000,000 a 2,400,000 increase versus the prior year. The increase was primarily driven by increased excess space.
For 2010, we continue to expect corporate expense to increase $25,000,000 to $30,000,000 The primary The reason for the increase is driven by higher excess space in New York resulting from the BusinessWeek divestiture as well as the restructuring actions at McGray Hill Education. Excess space will increase later in the year when Business Week moves to the Bloomberg purposes. Now let's discuss free cash flow. As a reminder, we define free cash flow in the following manner. We start with cash provided by operations.
For the GAAP cash flow statement, we then subtract the following items: and cash
flow, cash flow, cash flow, cash flow, cash flow,
cash flow, cash flow, cash flow, free cash flow that is available for acquisitions, share repurchases or to pay down debt. For the quarter, free cash flow
flow in the
Q1. Improved operating results reduced our cash outlay. We continue to to pay free cash flow this year in the range of $550,000,000 to $600,000,000 Reduction in free cash flow versus 2,009 is due We anticipate no cash funding requirements this year, but continue to expect an increase in pension expense of approximately Investments were $30,000,000 in the Q1, a decrease of $12,800,000 compared to the Q1 of 2019, largely due to timing. We expect prepublication investments to ramp up in the second half of the year. So for the full year of 2010, We continue to expect prepublication investments of approximately $225,000,000 to $235,000,000 A $48,000,000 to $58,000,000 increase versus 2,009, primarily due to opportunities in the growing state new adoption markets.
This is a property and equipment were $7,600,000 in the Q1, a slight decrease versus the Q1 of 2019, but we We continue to expect full year expenditures of approximately $90,000,000 to $100,000,000 versus $68,500,000 in 2,009, and this 26,000,000 in the Q1 of 2010, a 1,500,000 decrease versus the prior year. In 2010, we We continue to expect $260,000,000 to $265,000,000 versus the $270,000,000 in 2,009. The decrease reflects $9,400,000 in the Q1 of 2019. We now expect depreciation to be closer to $115,000,000 versus our previous estimate of You too expect it to be approximately $40,000,000 for the full year. Our diluted weighted average shares outstanding was 316 and as well as issuance relating to employee plans.
Fully diluted shares at the end of the quarter were approximately 3 $17,000,000 Net interest expense was $22,000,000 in the Q1 that compares to $20,600,000 in the same period last and $20,000,000 in the Q4 of 2019. We continue to expect full year interest to be roughly comparable to 2,009, which was 77 Regarding the company's effective tax rate, the rate in the Q1 was for 2010 was 36.4%, that's unchanged from 2,000 and and we expect a comparable rate for the full year. Now while it does not impact the tax rate, I did want to point out that in 1st quarter, we made a cash tax payment of approximately $35,000,000 due to organizational restructuring actions related to our international operations. That will largely be recovered through reduced tax payments in the second half of this year. There There has been a great deal of publicity recently regarding the Patient Protection and Affordable Care Act, signed into law on March 23, 2010, and the The tax deductibility of employer paid retiree prescription drug benefits, which are reimbursed by the government in accordance with the and drug benefits, which are reimbursed for the Medicare Modernization Act.
So in short, the impact of this new legislation on our and the reconciliation on our financials is immaterial. Our unearned revenue continues to grow ending the quarter at $1,100,000,000 up 2.8 percent from the prior subscription based products, particularly at higher education. For 2010, we continue to expect mid single digit growth in unearned revenue. Lastly, I'd like to provide an update on our share repurchase program. In January, we announced that we plan to resume share repurchases in And now back to Terry.
Okay. Thanks, Bob. And Don?
Thank you. Just a couple of We We'll now take our first question.
Thank you. Coming from Peter Appert with Piper Jaffray. Sir, your line is open.
Thanks. Terry, you mentioned in your comments that Price increases at S and P were one of the drivers of revenue growth. Can you give us any specifics on in terms of what you're doing from the pricing standpoint? Then the second question I'll just throw out is, in the context of the potential for some change in the pleading standards, how do you think You might respond in terms of business strategy or business practices.
Thank you.
Okay. The price increases, again, depending upon We're talking about are all pretty modest. If you were looking at it overall, it would be in the 3%, 4% range On that, in terms of the pleading standards and the liability standard that is part of the current Bill, we're still hopeful that we get more clarification. We're not looking to change anything, Peter, In that one, and we're certainly not saying that we shouldn't have a liability standard. We just want a liability standard that's consistent for all market participants And all of that.
And so when they talk about in the legislation reasonable investigation. They just leave it at that point. And what it's really doing is leaving to the court what constitutes A reasonable investigation. So all we're pushing for is be a little bit more forthcoming and clarify The position, but so we think we have a good chance of getting that part done. If for whatever reason, The pleading standard for rating agencies was lower.
It would Because we would what we would do is in terms of rating activity, we would probably not rate some Smaller, more speculative emerging companies and that doesn't do anybody any good and it limits the capital formation process. We're pushing hard for clarification on what a reasonable investigation is. And I think At the end of the day, we'll get that.
Thanks, Terry. And then just one follow-up for Bob. On the repurchases, Bob, any particular reason why you didn't To jump in, in the Q1 and do you have a thought in terms of how many shares you might buy this year?
No. As I mentioned on the call Back in January, we indicated that we were going to enter the year on a cautious basis. So we really stayed that course for It did not specify how much in the year. And we're really not prepared to really talk to how much for the given year.
Okay. Thanks.
Thank you. Our next question comes from William Byrd with Bank of America. Sir, your line is open.
I I was wondering if
you could talk a little bit to education and how you think about 2010 in terms of residual and open Territory sales developing. Thank you.
Yes. Hi, Bill. Yes, as we were saying, we're looking Looking for some modest increases overall, 6% to 7% revenue growth And that would constitute some recovery in the open territories, which we saw in the Q1 on that one. Again, modest increases in the open territory and because of Texas and BARDA, we see some increases there.
Actually, let me just add on to that. We are looking at a very A robust new adoption calendar as you know, and we feel pretty good about the size of that calendar and
hopefully that will hold
The overall increase of 6% to 7% is, of course, weighted to reflect A very significant percentage growth from the adoption states, but the residuals in open territories, although they performed Very good and what is a light quarter, that being the Q1. We still are being cautious for the year. Hopefully, as Terry points out, we hope to see Increases, but we are anticipating roughly a decline in open territories in the 3% range on a full year basis and residuals in the High single digits, but I know Terry is encouraged by what happened in our Q1. We hope it carries through, but in terms of how we Figure out we came to the 6% to 7%, it's weighted for the very significant increase in adoption states With declines both in residuals and open territories. Thank you.
Thank you. Our next question comes from Craig Huber with Access 340. Your line is open.
Yes, good morning. A couple of questions. Just one in time, Incentive compensation, can you speak to how large that number was in the Q1 versus a year ago?
The incentive compensation was not a significant Increase. So that's why we did not talk about incentive compensation in terms of year to year change.
Okay. And then also on the non transaction revenues, if I remember correctly, your Q1 last year was More depressed just given timing of some, I guess, annual contracts that didn't get booked in the Q2, usually get booked in the Q1. Is that correct? In other words, I assume you're not assuming up roughly 8% for non transaction for the year, correct, as you I think you were in the Q1?
I'm not Sure. Could you ask that again, please?
I'm sorry, wasn't your non transaction revenues in the Q1 a year ago artificially depressed because of timing? The 48% growth this year was kind of artificially high in the Q1? That's
correct. That's right. We're expecting growth this year, but it was last year was artificially higher, correct? Artificial.
Okay. And then my last question please. Can you just give us a ballpark of your digital revenues within elementary, high school and college? How much does digital represent revenues in each of those areas, maybe your outlook for this year on the percentages?
Well, digital revenue overall for McGrew Hill Education in Total K through Professional is still in the single digit levels and that's influenced more by the lower percentage So digital coming out of your K-twelve space. On the other hand, when we look at the higher education professional, That's where we're seeing some significant growth and that relates to the point I mentioned about the growth in earned revenue. A big contributor to our year Year to year change in higher education revenue in the Q1 is coming from digital, which is getting up close to half of the growth That we saw. Professional represents because of the nature of that business, almost 25% of the Revenue of professional is digital and the higher education is a pretty solid number as well. So it's roughly mid in The range of 14%, 15% for the Higher Educational and Professional International segment and growing.
Yes, and
growing at a Going at a faster rate.
If I could just ask one other thing, Terry, can you just you spoke a little bit about the U. S. Bank loan market? What is sort of your outlook for this year for that market and I guess for Europe as well.
Well, as in the Q1 and what we project for the rest of the year and probably in As well. So both of those markets, I think are going to be contributors all year on that one as is the public finance
Great. Thank you.
Our next question is from Brian Shipman with Jefferies. Your line is
Thanks. Good morning. First question is, what was pricing like in the higher education textbook Market. And then second, with respect to Financial Services, specifically on Capital IQ, what areas of This business functionality would you like to improve? Fixed income be important?
How would you weigh the build versus buy decision? Thank you.
Good morning, Brian. Pricing on the higher ed, again, it differs a little bit by category, but overall about 4%. On the Capital IQ side, it's across the board, both in terms of the pre trade and post trade aspects of the market. And we're looking for functionality, increase capabilities In terms of a number of portfolio management capabilities, both on the equity and the fixed I'm sorry. So it's across the board.
And then how do you weigh the
build?
I lost you, Brian. Say that again.
How would you weigh the build versus buy decision on that investment possibility?
Well, first of all, I mean, you've got to have a very, very steady and comprehensive Organic growth component here. You're constantly working customer needs and developing product And obviously, being able to add certain datasets as well as analytic Capabilities is important as well on that one, but we like the organic side of this, but Are also looking at a number of transactions that could also enhance a customer's offering.
Thank you.
Our next question comes from Sloane Boland with Goldman Sachs. Your line is open.
Hi, good morning. Jeff, thank
you very much. Just two questions. First, just kind of an update on the legal liability standards and kind of You think credit rating agency reform falls within the list of things to be debated. If Blanche Lincoln is maybe the first thing that people are talking How much airtime is legal liability for you guys getting?
Well, Yes. We're talking about the completion of the financial overhaul reform bill. And as the Senate version And now has it. The legal liability standard is something that we think is very justifiable and and important to the bill for us. What we're again looking for is clarification of what reasonable And if you leave some of these things sort of ambiguous, you're leaving it to The courts to define where you are.
We think at the end of the day that we will see some clarification In the language and again, that's all we're talking about. We're not talking about reducing liability standards or anything. We think that Liability standard for all market participants, they should be the same and not different for one of the participants, namely us, On that one. So if we can clarify some of the language and I think that's a that should be a pretty easy lift On that one, we're fine.
Okay. And then just a question on capital allocation and we heard some color on the Rationale and share repurchases, but is there a certain is it that financial reform that you're working to get through to either look at Putting more capital to work for share repurchases or potential acquisition?
Yes. Again, we're balancing all aspects Ex of organic acquisition, share repurchase and so forth. We We have been obviously very committed to share repurchase. We announced that we're going to resume And we'll be into that very shortly. We're excited about the share repurchase component.
Okay. And
just a follow on to that on the potential Acquisitions, is there a thought to sizing or what potentially could be put to use in 2010?
Yes. I mean, again, I think That activity has picked up and we're obviously looking at all aspects of this. But again, we have a very large And most transactions are smaller in nature that We're looking at
it.
Okay. Thank you.
Our next question comes from Michael Melt with JPMC. Sir, your line is open.
Thank you. This is Dave Louris for Michael. Just two quick questions. What was the actual revenue loss from testing contracts and education in Q1 'ten and what should that run the next few quarters, please?
We do Not to disclose that size of that revenue, but just we simply are pointing out that We're shifting our focus here very heavily to the formative testing opportunities with our program, which is just growing very, very rapidly. This is an electronic based program. We're seeing tremendous market gains and shares and such. And some of the contracts that we had were just simply older contracts that were lower margin Contracts that we chose to let them wind down, but we don't break that out specifically.
Yes, Michael, the growth is going to be on the formative And it's going to be very, very important. And when we start talking about the Common Core Standards and the role that assessment is We'll be playing with assessment being embedded into the educational materials. It's going to take And so that's what we're doing. We're concentrating on more on the formative side and pulling Back from some of the summative large custom contracts that heretofore that we've been in.
Terrific. And then just a quick follow-up is just for the Information and Media business, is 15% to 20%, I know you guys gave guidance for the margin for the year, but is that a run rate you're comfortable with going forward, 15% to 20% margin?
Yes. At this point, It's a little early, but the mid margin Range is probably what we're more looking at here.
Okay. Thank you, guys. Thanks.
Our next
Broadcast has reported double digit gains and you're reporting only 2%. Was there anything in your markets that kept the Growth rate down?
No, except for the fact that obviously in terms of some of the network As you know, we're paying ABC now and then the reverse and there's that But no, I think it's going to be a much improved year and especially for us in the San Diego and Denver markets and some of the Hispanic TVS, Teca, you know, affiliations, They're looking good. I think that the political advertising one is the wildcard for this year, and we're Seeing political advertising in the Q1, usually, you won't see until the end of the 2nd quarter, but we're already starting to see it.
What's your pacings for the Q2 in television?
The pacings are running much better than the Q1, Ed.
Don't want to be any more specific, Matt?
No, Well, it's early in the quarter at this point in time, but right now our pacings are running pretty good.
Okay. Thanks.
We will now take our final question from Drew Fegdoer with Peterman and Company. Your line is open.
Hi. Hi. We were reading the reports recently about the whole IDC situation saying, I guess, there was reports recently that you guys pulled out of that.
And I was hoping you could
help us And what your current strategy is with relation to M and A, sort of it seemed like an opportunity that seemed to fit with you. So whether You guys weren't interested in things due to size or whether it was something more specific?
Drew,
As a matter of good practice, we don't comment on any potential transactions Are not transactions on that. Clearly, in terms of use of free cash flow, one, we take We're very focused on the dividend and the share repurchase program. We need to take care of all of our organic growth needs and we continue to look at possible transactions that can fill gaps within some of our offerings. We're looking hard across the board in terms of all three operating segments. Again, a broader any kind of transaction needs to fill A gap that we would have in terms of any kind of customer offering.
But we have to stay very active in the market. We continue to look At a lot of different things and we'll weigh them relative to the other opportunities we have. Right.
Okay. Thanks
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