2008 McGRAW-HILL RYERSON AnnuAl RepoRt

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$Math and Chemistry - McGraw-Hill Ryerson$

Quarterly Income Statement ($000 — except Per Share Data)31-Mar 30-Jun 30-Sep 31-Dec Full Year2008 2007 2008 2007 2008 2007 2008 2007 2008 2007Total Revenue 8,818 9,965 19,391 19,025 41,077 40,995 25,264 22,547 94,550 92,532Net Income (Loss) (2,476) (2,977) 1,028 627 8,491 9,819 3,459 2,491 10,502 9,960Net Income (Loss) per share $(1.24) $(1.49) $0.51 $0.31 $4.25 $4.92 $1.73 $1.25 $5.26 $4.99McGraw-Hill Ryerson Annual Report 200814DIVIDENDSFor the seventh year in a row, the Company increased its quarterlydividend payment. The quarterly dividend payment is $0.24 pershare at the end of 2008 ($0.225 at the end of 2007).Total dividends declared were $15.9 million in 2008, comparedto $7.8 million in 2007. In the fourth quarter of 2008, theCompany declared a special dividend of $14.0 million ($7.00 pershare) to be paid on January 16, 2009.QUARTERLY RESULTSMost of the Company's sales are cyclical, based on the educationindustry's school terms for the School and Higher EducationDivisions. As a result, the Company earns a significant amount ofits total sales in the third and fourth quarters of each year.In the fourth quarter of 2008, total revenue increased 12.1%compared to the prior year, driven by increased sales in eachof the Company’s business segments. Higher Education salesincreased from $15.6 million to $16.8 million driven by increasedsales of Canadian product. Professional sales improved from$1.5 million to $2.6 million, mainly the result of reduced productreturns. School Division sales showed a minor increase comparedto the fourth quarter of 2007. Net income increased by$1.0 million, driven mainly by the increase in sales and decreasedforeign exchange losses.NEW RESPONSIBILITIES FOR CEOAt the end of the third quarter of 2008, the Company announcedthat President and CEO David Swail had taken on broader responsibilitieswithin majority shareholder The McGraw-Hill Companies,Inc. Both the McGraw-Hill Education publishing operations in LatinAmerica and McGraw-Hill Ryerson’s operations in Canada nowreport to Mr. Swail.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in accordance with Canadiangenerally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amountsof assets and liabilities, and the disclosure of contingent assetsand liabilities at the date of the financial statements, and thereported amounts of revenue and expenses during the reportingperiod. Actual results may differ from those estimates.The critical accounting estimates included in the financialstatements are as follows:■■■■■■■■The inventory obsolescence reserve is based upon management'sassessment of the marketplace of products in demandas compared to the number of units currently on hand. Thiscalculation is completed for each title. Should the estimate forinventory obsolescence vary by one percentage point, it wouldhave an approximate $0.1 million impact on income beforeincome tax.The allowance for doubtful accounts is calculated by reviewingany specifically identified aged accounts, plus a generalprovision for the balance of the accounts. The impact on incomebefore income tax for a one percentage point change in theallowance for doubtful accounts rate is $0.2 million.The estimate for sales return reserve is calculated using theforecasted rate of returns in future periods. This forecast iscalculated separately for each segment and is based on theaverage rate of returns over the past three years. Should theestimate for sales returns vary by one percentage point, itwould have an approximate $0.6 million impact on incomebefore income tax.The employee future benefit is calculated using forecastedhealth care costs in future periods. This forecast is based onhistorical trends. Should the estimate for health care costs varyby one percentage point, it would have an approximate $0.2million impact on income before income tax.RECENT ACCOUNTINGPRONOUNCEMENTSOn January 1, 2008, the Company adopted the new recommendationsof the Canadian Institute of Chartered Accountants (“CICA”)under CICA Handbook Section 3031 “Inventories” (“Section 3031”),Section 3862 “Financial Instruments—Disclosure” (“Section3862”), and Section 3863 “Financial Instruments—Presentation”(“Section 3863”).■■■■Section 3031 prescribes the measurement of inventories at thelower of cost and net realizable value, with guidance on thedetermination of cost, including allocation of overheads andother costs to inventory. Reversals of previous write-downs tonet realizable value are permitted when there is a subsequentincrease in the value of inventories. The Company has compliedwith the measurement standards as required with no resultingimpact on reported inventory balances.Section 1535 requires that a company disclose information thatenables users of its financial statements to evaluate its objectives,policies, and procedures for managing capital includingdisclosures of any externally imposed capital requirements andthe consequences for non-compliance. The Company had early
■■adopted this pronouncement in 2007 and the disclosures are inNote 10 of the financial statements.Sections 3862 and 3863 require that a company discloseadditional details of its financial asset and liability categoriesand the risks associated with its financial instruments. Theseaccounting policy changes are for disclosure purposes, and asa result, other than the additional disclosures noted in Note10, the adoption of these standards had no impact on theCompany’s financial statements.The following accounting pronouncements are applicable to annualand interim periods beginning on or after January 1, 2009:Section 3064, “Goodwill and Intangible Assets”, prescribes themeasurement of intangibles, with guidance on the determination ofcosts to capitalize for internally-generated intangibles. The Companyis currently evaluating the effects of adopting this standard.International Financial ReportingStandards (“IFRS”)In February 2008, the Accounting Standards Board of Canada confirmedJanuary 1, 2011 as the changeover date for Canadian publiclyaccountable enterprises to start using International FinancialReporting Standards as issued by the International AccountingStandards Board. IFRS uses a conceptual framework similar toCanadian GAAP, but there are significant differences in recognition,measurement, and disclosures.As a result, the Company commenced our IFRS conversionproject in 2008 and has developed a plan to convert its financialstatements to IFRS. The Company has assessed the differencesbetween IFRS and the Company’s current accounting policies,as well as the alternatives available on adoption. The assessmentwas reviewed with external advisors and the majorityshareholder. Many of the differences identified are not expectedto have a material impact on reported results and financial position.However, there may be significant changes emanating fromthe IFRS accounting principles and provisions for the first timeadoption of IFRS on certain areas. The Company has not yetdetermined the full effects of adopting IFRS.Set out below are the key areas where changes in accountingpolicies may impact the Company’s financial statements. Thelisting should not be regarded as a complete list of changes thatwill result from transition to IFRS. It is intended only to highlightthose areas we believe to be most significant; however, analysisof potential changes is still in process, and not all decisions havebeen made where choices of accounting policies are available.■■■■■■■■■■Asset impairmentProvisionsDeferred taxesStock-based compensationEmployee BenefitsThe Company is still evaluating the impact of the conversion on ouraccounting systems. However, based on the differences identifiedto date, we believe our present systems can accommodate therequired changes. We believe our internal and disclosure controlprocesses, as currently designed, will not need significant modificationsas a result of our conversion to IFRS. We are consideringthe impact that the transition will have on our compensationarrangements.The IFRS implementation has necessitated additional trainingfor the Company’s accounting staff and management. Thisadditional training will continue in 2009–2010.OTHERThe number of common shares outstanding as of December 31,2008 is 1,996,638.RISKS AND UNCERTAINTIESEducational Funding Constraints and CurriculumRevisions in the School MarketEducational funding varies from year to year depending on thecurrent government’s budget and mandate in each jurisdiction. Theannual provincial government mandates affect both the fundinglevels and curriculum revision cycles. The funding levels and curriculumrevision cycles have an immediate and ongoing impact onthe performance of the Company’s School Division.Format and Delivery of Future Learning ResourcesChanging media technology continues to affect the publishingindustry in several ways: sales of non-print materials have begunto increase as a percentage of total sales; there has been anincrease in electronic piracy over the internet; and, most importantly,the format of future learning resources continues to evolve.While the Company is working on leveraging the opportunitiesarising from these developments, there can be no assurances thatone or more of these developments will not have a permanent andlong-term impact on markets for the Company’s products.Competition from Foreign-Based Sources(Wholesalers and Online Bookstores)The advent of online bookstores in the U.S. and other countrieshas created an avenue for Canadian consumers and students topurchase published products directly from foreign retailers, thusbypassing the Canadian marketers and distributors of the product.In particular, students are able to access a very large source of second-handproducts. Sustained increases in market penetration byforeign-based virtual bookstores and wholesalers could adverselyimpact the Company’s market share and financial performance.The impact of this issue varies in relation to the volatility in theCanadian dollar/U.S. dollar exchange rates.CopyrightCourt rulings in Canada have reinforced user rights. As media technologycontinues to evolve, publishers may find it more difficultto protect their content effectively. These factors may impact thefuture sales and royalties within the School and Higher Educationindustries from copyright collectives. Royalties are also impactedMcGraw-Hill Ryerson Annual Report 200815
Page 3: Table of Contents Company ProfileMc
Page 9 and 10: School DivisionThe School Division
Page 11 and 12: chenelière/McGraw-hill (“DLC“)
Page 13 and 14: Management’s Discussion and Analy
Page 15: Amortization of pre-publication cos
Page 19 and 20: Management ReportTo the Shareholder
Page 21 and 22: Statements of Income, Comprehensive
Page 23 and 24: Notes to Financial Statements1 Summ
Page 25 and 26: Amounts due from parent and affilia
Page 27 and 28: 8 EMPLOYEE FUTURE BENEFITSThe actua
Page 29 and 30: The following table sets forth the
Page 31 and 32: 13 EDITORIAL, SELLING, GENERAL, AND
Page 33 and 34: Management TeamDavid L. SwailPresid
Page 35 and 36: International AffiliatesThe McGraw-

2008 McGRAW-HILL RYERSON AnnuAl RepoRt

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