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McGraw-Hill Ryerson
MHR Annual Report 2006 cvr
December 1, 2006
Cover No. b
LEARNING. THE JOURNEY TO SUCCESS.
McGraw-Hill Ryerson Annual Report 2006
Company Profile
McGraw-Hill Ryerson Limited has a long and illustrious history. It is built on the solid foundations of two
respected publishing companies: McGraw-Hill Book Company, now known as The McGraw-Hill Companies,
Inc., and The Ryerson Press.
In 1944, the McGraw-Hill Book Company, which had begun publishing in the United States in 1909, bought
the Embassy Book Company of Toronto, incorporating it as a franchised distributor for McGraw-Hill, Inc. in
Canada. It was called the Embassy Book Company Limited until 1947 when it was then established as a wholly-owned subsidiary of the parent company and renamed the McGraw-Hill Company of Canada Limited.
In 1829, the Methodist Church established the Methodist Book and Publishing House, the very first publishing company in Canada. Egerton Ryerson, known as the father of Ontario’s public school system, was given
the responsibility of founding the press and took it from religious publishing into the area of secular books. In
1919, the press took on his name and continued to publish in many areas: religious, educational, and trade. In
December 1970, the McGraw-Hill Company of Canada Limited bought The Ryerson Press from the United
Church of Canada and in 1971, the company became McGraw-Hill Ryerson Limited (sometimes referred to herein as “MHR” or “McGraw-Hill Ryerson” or the “Company”).
The Company publishes and distributes educational and professional products in both print and non-print
media. These products are designed to fulfill the individual needs of customers by providing effective and innovative educational and learning solutions. Product offerings include text and professional reference books, multimedia tools, and teaching, assessment, support, and monitoring solutions. The Company is committed to providing Canadians with material of the highest quality for their education and enjoyment.
The Company is structured on a market-focused basis and operates in three primary market areas through
the following revenue divisions:
• Higher Education Division: post-secondary education, including universities, community, and career colleges
• School Division: secondary and elementary schools
• Professional Division: general interest, non-fiction, general reference, business, and computer disciplines,
training and professional development, and medical.
Table of Contents
McGraw-Hill Ryerson is a public company, operated independently, in close cooperation with various divisions and international subsidiaries of its majority shareholder, The McGraw-Hill Companies, Inc. Through this
cooperation the Company benefits from its access to the significant product, market, and operational expertise
of The McGraw-Hill Companies, Inc.
Company Profile: Who and What McGraw-Hill
Ryerson Limited Is
1
McGraw-Hill Ryerson at a Glance
• A quick look at McGraw-Hill Ryerson’s three business
segments, including: key markets, primary programs,
key issues and trends, and outlook
2
Vision, Mission, Culture, and Values Statements
3
1
• Professional Division
• Chenelière/McGraw-Hill (“DLC”)
• Major Support Initiatives
8
9
10
Management’s Discussion and Analysis of Operating
Results and Financial Position
11
Financial Statements
• McGraw-Hill Ryerson’s 2006 financial statements
and notes
16
Dividend Policy
26
Message to the Shareholders
5
• A letter to McGraw-Hill Ryerson’s shareholders from
H. Ian Macdonald, Chairman, reviewing the Company’s
performance and looking to the future
2006 Corporate Contribution Programs
27
Corporate Governance and Management Team
28
Shareholder and Corporate Information
30
An Overview of McGraw-Hill Ryerson’s Business Units
and Markets
• Higher Education Division
• School Division
International Affiliates
31
Financial Highlights
4
• A look at McGraw-Hill Ryerson’s financial performance
6
7
McGraw-Hill Ryerson
Higher Education
Division
McGraw-Hill Ryerson Annual Report 2006
at a Glance
PRIMARY PROGRAMS
KEY ISSUES AND TRENDS
Universities,
Community
Colleges,
Career
Colleges
Business
Economics
Computer and
Information
Technologies
Science
Engineering
English
Psychology
Social Sciences
E-Services
Nationally, enrollments are
increasing slightly.
Growing interest in “custom”
solutions.
Growth in technology-enabled
and web-based teaching and
learning solutions.
Mixed-mode educational models
dominate.
Growing interest in assessment
applications.
Secondary
Schools,
Elementary
Schools
Mathematics
Science & Health
Social Studies
Literacy
English
Social Sciences
Technology
Education
Marginal decline in student
enrollment.
Flat government spending on
education.
Focus on requirement to improve
standards of academic achievement and accountability.
Curriculum renewal cycles varying
by province.
Booksellers,
Distributors,
Libraries,
Direct to
Professionals,
Medical Schools
Business
General Interest
Scientific
Technical
Medical
Language
Computer
Dominance of major bricks and
mortar and online book retailers.
Growth in medical student enrollment.
Competition from online retailers.
Growth in professional digital
products and services.
Chenelière/
McGraw-Hill
Professional
Division
School
Division
2
KEY MARKETS
By publishing under a joint imprint, McGraw-Hill Ryerson Limited and Les Éditions de la Chenelière are able to concurrently publish French and English editions of secondary and post-secondary titles.
Vision
To be recognized as a leading Canadian publisher of educational
Mission
To be a Canadian leader in developing and marketing quality infor-
resources, information products, and services for lifelong learning
and enjoyment.
mation products and services to selected educational, professional,
and consumer markets through innovation and teamwork. We will
provide exceptional value to customers, growth and recognition
Values
Culture
to our shareholders.
At McGraw-Hill Ryerson, we will work together to:
• strive to exceed our customers’ expectations, by recognizing and
anticipating their needs
• meet challenging but achievable company objectives and financial
goals, with well-planned and clearly communicated strategies
• continually improve MHR’s image in the marketplace, through the
promotion of creative ideas, and the development of targeted,
innovative products
• encourage a winning spirit and a positive working environment
through the development of supportive, appreciative, and rewarding working relationships
• create a market-driven organization
• reward creativity, innovation, and risk-taking
• recognize diversity by treating individuals with respect and dignity
Customer focus
Profitability (short-term and long-term)
Innovation and improvement of products and systems
Commitment to quality
Employee development/lifelong learning
Employee recognition
Teamwork (collaboration, shared decision making within and
between divisions)
Integrity, honesty, ethical behaviour
Respect for individuals and their differences; high quality of work life
McGraw-Hill Ryerson Annual Report 2006
opportunities for employees, and outstanding financial performance
3
Financial
Highlights
(In Thousands of Dollars, except Per Share Data)
2006
2005
2004
2003
2002
$92,878
$81,746
$ 7,006
$87,707
$78,490
$ 5,829
$89,226
$78,458
$ 7,023
$89,564
$79,838
$ 6,104
$96,757
$87,500
$ 6,156
$16,546
$ 1,011
$ 6,305
$15,454
$ 377
$ 5,710
$ 7,190
$ 659
$
44
$13,891
$ 436
$ 7,331
$ 5,602
$ 4,058
$(7,186)
$76,498
$95,211
$71,139
$87,684
$69,833
$87,372
$64,218
$86,881
$59,402
$95,406
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Revenue and Earnings
McGraw-Hill Ryerson Annual Report 2006
Revenue
Expenses
Net income
4
Cash Flow
Cash provided by operating activities
Additions to capital assets
Net increase/(decrease) in cash during the year
Closing Financial Position
Total shareholders’ equity
Total assets
Per Common Share
Basic – net income per share for the year
Dividends
Book value
Market value at December 31
3.51
0.825
38.31
43.29
2.92
2.265
35.63
39.25
3.52
0.705
34.98
35.50
3.06
0.645
32.16
37.50
3.08
0.60
29.76
33.25
Financial Ratios
Net Income/Average Assets
Net Income/Total Revenue
7.7%
7.5%
6.7%
6.6%
8.1%
7.9%
6.7%
6.8%
6.8%
6.4%
11,132
92,878
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Message to the
Shareholders
After two years of minor sales decline, McGraw-Hill Ryerson reported an aggregate sales increase of 5.6% for 2006.
Given the modest industry-wide growth figures reported in the Higher Education and Trade/Professional markets in particular, this is a significant accomplishment for the Company.
Our Higher Education Division, which serves the post-secondary market for English-language titles, reported a 2.4%
sales growth, relatively consistent with industry-wide sales in this segment. This Division continues to innovate in the
development of digital products, which has helped us become a market leader in this area.
Our School Division reported a substantial 8.1% sales increase. This division has expanded its Canadian publishing program aggressively in response to curriculum revisions in several of its largest regions. Through this program, we have
published several titles in 2005 and 2006 that are proving to be very popular with teachers and administrators. This,
combined with government funding for textbooks in Ontario and B.C., has contributed to the strong sales and bottom
line results in the School Division.
Our Professional Division (previously referred to as Trade, Professional, and Medical) reported a substantial 9.3% sales
increase as well. Several key titles, including A Thousand Barrels a Second and Blue Ocean Strategy, sold very well
during 2006. This Division also reported strong results from its Language and General Reference titles. During the year
management worked hard to strengthen our retail partnerships, and to analyze detailed product sales data to drive bottom-line profitability.
Process improvements across our supply chain departments have allowed us to become more efficient while keeping
a consistent level of inventory. We are particularly proud of this achievement in a year with substantial revenue growth
which, combined with strong cash collection results, has helped to drive our cash balances to record levels. As a result,
we were pleased to be able to increase our quarterly dividend payment to shareholders for the fifth year in a row. Our
quarterly dividend payments have now more than doubled since 1998.
We would like to thank all of the employees of McGraw-Hill Ryerson Limited for their contribution in 2006, and through
their continued dedication we anticipate much success in 2007.
H. Ian Macdonald, O.C., LL.D.,D.UNIV.D.LITT, FCOL
David L. Swail
Chairman of the Board of Directors
President and Chief Executive Officer
McGraw-Hill Ryerson Annual Report 2006
The markets for our products in 2006 varied considerably across each of the three segments we serve. Overall market
spending for Higher Education titles was up marginally for the year. One-time government funding for learning
resources helped drive the overall School market up by 12% while the Trade/Professional market was relatively flat.
5
McGraw-Hill Ryerson Annual Report 2006
H I G H E R E D U C AT I O N D I V I S I O N
6
This Division’s Canadian Publishing Program continued its growth in 2006. Titles in areas such as international business, sociology, and English composition are examples of new areas of publication. New projects
were also signed in subjects such as management, corporate finance, accounting, marketing, anthropology,
criminology, and psychology. The Media Technology Group continued its growth in the McGraw-Hill
Homework Management arena with new products in accounting, finance, and economics, and has expanded content and service offering new delivery platforms such as the iPod. Overall, 41 titles were published in
2006 and projects worth an estimated $19 million in projected first year sales were signed.
Key Titles for 2006 were as follows:
1. Garrison, Managerial Accounting 7/e
2. Crane, Marketing 6/e
3. McShane, Canadian Organizational Behaviour 6/e
4. Ross, Fundamentals of Corporate Finance 5/e
5. Myers, Social Psychology 3/e
6. Libby, Financial Accounting 2/e
7. Schwind, Canadian Human Resource Management 7/e
8. Mader, Inquiry into Life 11/e
9. Nicholson, Linear Algebra with Applications 5/e
10. Beechy, Intermediate Acct. Vol. 1 3/e
Research indicates that students continued to find and use substitutions for textbooks. The continued presence of copyright infringement (photocopying, online piracy, and peer-to-peer sharing) all contributed to slower growth in all markets
across the country in 2005 and 2006. To combat this, McGraw-Hill Ryerson continues to work with faculty to offer flexible, high-value solutions to students, using both traditional and online content, as well as leading-edge technology.
The School Division’s 2006 publishing program continued to build on its long-term strategy of targeting Grades
7 – 12 mathematics, science, and social studies courses for university, college, and workplace-bound students.
Publication of MHR Mathematics 7: Focus on Understanding under contract to the Nova Scotia Department of
Education is the second in a three-title series from Grades 7 – 9; MHR Principles of Mathematics 9, designed
for university-bound students, is the third title in a new series of mathematics resources to be published for
the revised Ontario Mathematics curriculum. British Columbia Science 8 is the first in a series of three titles
to support new Grades 8 – 10 science curricula in British Columbia. The publication of Inquiry into Biology and
Inquiry into Chemistry launches the School Division into the Grades 11/12 university-bound science market in
Alberta and builds on our success in the Alberta Grades 7 – 10 science market. This year also saw the launch
of the School Division into the Ontario college-bound social studies market with the publication of Canadian
History: A Sense of Time and Canadian Geography: A Sense of Place. The School Division also continues to
engage in market research into the role and value of technology-enabled teaching and learning solutions in
Grade 7 – 12 classrooms.
Key titles in the School Division for 2006:
1. Sandner et al., BC Science 8
7. Mason et al., BC Science 6
2. Speijer et al., Principles of Mathematics 9
8. Gini-Newman et el., Canadian History:
A Sense of Time
3. Speijer et al., McGraw-Hill Ryerson
Mathematics 7
4. Knill et al., MATHPOWER 9 Western Edition
9. Witte et al., Food for Today 1/e
10. Mason et al., BC Science 7
5. Knill et al., MATHPOWER 7 Western Edition
6. Knill et al., MATHPOWER 8 Western Edition
Total funding for learning resources in 2007 is expected to be relatively consistent with 2006. In 2006 a one-time
textbook and learning resource allotment in British Columbia and Ontario respectively drove industry performance
12% higher than the prior year. The key elements of unpredictability lie in last-minute political decisions affecting
the timing of curriculum implementation and release of funding.
McGraw-Hill Ryerson Annual Report 2006
SCHOOL DIVISION
7
McGraw-Hill Ryerson Annual Report 2006
PROFESSIONAL DIVISION
8
The Professional Division concentrates on marketing and distributing products from The McGraw-Hill
Companies Inc., as well as from several agencies, including Harvard Business School Press. Sales in 2006
were driven primarily through national chains and online retailers, which both saw outstanding point of
sale improvements, reduced returns, and overall improved inventory management. Strategic partnerships
with key customers resulted in new opportunities, which helped drive sales and market share advancements. Growth occurred across most product categories and backlist sales rose through all channels.
Key Professional Products in 2006:
1. Tertzakian, A Thousand Barrels a Second
2. DiPiro et al., Pharmacotherapy 6/e
3. Wolff et al., Color Atlas and Syn. Clinical Dermatology 5/e
4. Chan and Mauborgne, Blue Ocean Strategy
5. Lowndes, How to Talk to Anyone
6. Tintinalli et al., Emergency Medicine Study Guide 6/e
7. Kirsch, Ultimate New York Diet Plan
8. Kasper et al., Harrison’s Principles of Internal Medicine 16/e
9. Crocker, Schaum’s Outline of French Grammar
10. Harrap, Harrap’s French/English Dictionary
Several factors may impact this Division in 2007 and beyond. Customers may continue to diversify how they obtain
product as they search for content from a multitude of other sources and locations. Also, new competitors continue to enter the marketplace as retailers are now developing their own publishing programs. These new sources of
product may compete directly with traditional publishers in an already mature and established publishing industry.
Chenelière/McGraw-Hill
(“DLC”)
Best-selling titles for 2006:
1. Mason et al., Sciences 6 – Colombie Britannique
2. Mason et al., Sciences 7 – Colombie Britannaique
3. Sandner et al., Sciences 8 – Colombie Britannique
4. Ainslie et al., Mathematiques 9 – Nouvelle-Ecosse
5. Stevenson, La gestion des opérations, produits et services 2/e
6. Lind, Méthodes statistiques pour les sciences de la gestion
7. Hilton, Comptabilité financière avancée 3/e
8. Gray, Management de projet
In 2007, DLC's Higher Education and School divisions will be publishing many new translations of
McGraw-Hill Ryerson titles. In Higher Education, DLC expects successful launches of the new edition of
Marketing by Berkowitz, Accounting by Larson, Organizational Behaviour by McShane, and Fundamentals
of Financial Accounting by Libby. As for the School Division, titles will include Biology for Grades 11 and
12-Alberta, Science for Grade 9-British Columbia, Principles of Mathematics for Grade 9-Ontario and
Mathematics for Grade 7-Nova Scotia. While the warehousing contract between McGraw-Hill Ryerson
and DLC expired at the end of 2005, agreements covering the joint imprint and translation rights remain
firmly in place.
McGraw-Hill Ryerson Annual Report 2006
By publishing under a joint imprint, McGraw-Hill Ryerson and Les Éditions de la Chenelière (“DLC”) are
able to concurrently publish French and English editions of secondary and post-secondary titles.
Chenelière/McGraw-Hill enjoyed an excellent year in 2006 with French translations of successful titles
from McGraw-Hill Ryerson. DLC and McGraw-Hill Ryerson are working together to develop English and
French proposals simultaneously to fit various calls for resources across Canada.
9
Major Support
Initiatives
McGraw-Hill Ryerson Annual Report 2006
2003
EDITORIAL, DESIGN, AND PRODUCTION DEPARTMENT
10
McGraw-Hill Ryerson’s Editorial, Design, and Production (EDP) Department provides project management,
technical production, and manufacturing services for a wide variety of product offerings. In 2006, EDP oversaw
the production of more than 130 new titles and supplements and 350 reprints.
Business alliances with key vendors in Canada, the U.S., and overseas allow for competitive pricing and
ensure the highest quality of materials for McGraw-Hill Ryerson’s products. These alliances help to facilitate the
timely delivery of products to the Company’s warehouse for distribution to customers. In addition, a close working relationship with our majority shareholder, The McGraw-Hill Companies, Inc., provides McGraw-Hill Ryerson
with the opportunity to leverage buying power and establish best practices of a multi-billion dollar corporation.
INFORMATION SYSTEMS AND TECHNOLOGY (IS&T)
In our ongoing commitment to support the Company’s business strategy and goals, the IS&T group focused
efforts on evolving our e-commerce capabilities, achieving greater automation in our business processes, and
supporting the dynamic needs of our customers. This year, the Company launched Ecommerce Services for
business-to-business (B2B) and business-to-consumer (B2C), introduced a sales force automation tool for the
School Division, automated our corporate process improvement program, and invested in the development of
analytics tools. In 2007 we will build on the foundations of our work in 2006, as we develop digital workflows
and enhance our customers’ experience through improved electronic services.
CUSTOMER SATISFACTION DIVISION
The Customer Satisfaction Division provides customer service and logistical support to ensure a high level of
service to our customers. Building on the success of improvements implemented in 2005, additional process
and quality initiatives were undertaken in 2006. Efforts were focused on simplifying and strengthening internal processes and resulted in improved operating efficiencies and expanded operating capacities. These
results have contributed to improved performance standards and support our continuing effort to provide service levels that exceed customer expectations.
HUMAN RESOURCES
There was extensive support of productivity improvements across the Company in 2006. This resulted in
improved workflows, and more engaged employees. There has also been a greater emphasis on succession plans for key positions within the organization and developing high-potential employees for promotion and retention.
Our progressive Human Resource policies, programs, and benefit plans (including a bonus plan covering
all employees, flexible health benefits, and a Company pension plan) have helped us attract and retain a very
strong and loyal employee workforce.
This management's discussion and analysis (“MD&A”) provides a
detailed analysis of McGraw-Hill Ryerson's business and compares
its 2006 financial results with those of the previous year. In order to
better understand the MD&A, it should be read in conjunction with
the Financial Statements for the year ended December 31, 2006
and its related notes. The Company prepares and files its financial
statements and MD&A using Canadian dollars and in accordance
with Canadian generally accepted accounting principles (“GAAP”).
The financial statements and MD&A, as well as additional information regarding McGraw-Hill Ryerson, including the Annual
Information Form, are available at www.sedar.com. This MD&A is
made as of February 2, 2007.
PROFILE
McGraw-Hill Ryerson Limited (the “Company”) was incorporated in
1944 and has been listed on the Toronto Stock Exchange since
1971. The Company is operated independently, in close cooperation
with various divisions and international subsidiaries of its majority
shareholder, The McGraw-Hill Companies, Inc.
The Company’s strategy is to be a Canadian leader in developing and marketing quality information products and services to
select educational, professional, and consumer markets through
innovation and teamwork.
The Company publishes and distributes educational and
professional products in both print and non-print media. These
products are designed to fulfill the individual needs of customers
by providing effective and innovative educational and learning
solutions. Product offerings include text and professional reference books, multimedia tools, and teaching, assessment, support, and monitoring solutions.
The Company is structured on a market-focused basis and
operates in three primary market areas. The largest division is the
Higher Education Division which serves post-secondary education
institutions, including universities, community colleges and career
colleges. The second largest division is the School Division which
services secondary and elementary schools. The third division is the
Professional Division which sells general interest, non-fiction, general reference, business, and computer disciplines, training and
professional development and medical books.
Selected Annual Financial Results (In Thousands of Dollars). Comparative numbers are restated.
2006
2005
2004
2003
2002
Net Sales
% increase/(decrease)
90,343
5.6%
85,557
(1.9)%
87,223
(0.5)%
87,693
(7.4)%
94,693
7.8%
% of Net Sales
Higher Education sales
School sales
Professional sales
Other sales
60.0%
26.1%
12.0%
2.0%
61.8%
25.5%
11.6%
1.1%
59.7%
28.0%
11.1%
1.1%
58.2%
29.0%
11.9%
0.9%
49.8%
36.7%
12.0%
1.5%
% of Net Sales
Imported product sales
Canadian and adaptation sales
Agency sales
Other
49.9%
48.1%
1.0%
1.0%
51.2%
46.9%
0.8%
1.1%
50.9%
46.7%
1.3%
1.1%
51.0%
46.3%
1.8%
0.9%
53.2%
43.8%
1.5%
1.5%
Total revenue
% increase/(decrease)
92,878
5.9%
87,707
(1.7%)
89,226
(0.4%)
89,564
(7.4%)
96,757
7.5%
Total expenses
% of Total revenue
81,746
88.0%
78,490
89.5%
78,458
87.9%
79,838
89.1%
87,500
90.4%
Net income
Net income/Total revenue
Net income per share
7,006
7.5%
$3.51
5,829
6.6%
$2.92
7,023
7.9%
$3.52
6,104
6.8%
$3.06
6,156
6.4%
$3.08
Total assets
Net income/Average assets
95,211
7.7%
87,684
6.7%
87,372
8.1%
86,881
6.7%
95,406
6.8%
Cash dividend payments
1,647
4,523
1,408
1,288
1,198
McGraw-Hill Ryerson Annual Report 2006
Management’s Discussion and Analysis of
Operating Results and Financial Position
11
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
McGraw-Hill Ryerson Annual Report 2006
The Company’s management is responsible for establishing and
maintaining the Company’s disclosure controls and procedures and
internal control over financial reporting to ensure that information
used internally and disclosed externally is accurate and reliable.
The Company’s management has evaluated the effectiveness of the
Company’s disclosure controls and procedures, and based on such
evaluation has concluded that their design and operation are adequate and effective as of the end of the fiscal year ended December
31, 2006. There have been no changes in the Company’s internal
controls over financial reporting during the year ended December
31, 2006 that have materially affected or are reasonably likely to
materially affect the internal controls over financial reporting.
12
REVENUE
The Company’s net sales increased in 2006 by 5.6%, with sales of
$90.3 million, compared to $85.6 million in 2005.
For the twelfth consecutive year, the Higher Education
Division succeeded in increasing sales. Sales increased by 2.4%
compared to 2005. Growth in the Higher Education industry was
3.6% in 2006 (industry-wide annual sales growth, based on
results provided by the Canadian Publishers Council). The
strength of the entire Higher Education team continued in 2006,
with success across many disciplines, especially in biology,
chemistry and math. Custom publication sales were up 10% over
2005. This increase is a reflection of both the need for customized solutions and the ability of McGraw-Hill Ryerson to meet
customer demands. Our Faculty Services team continued to grow
and was leveraged in new sales of approximately 110,000 units.
McGraw-Hill Ryerson held a successful Educational Conference
series reaching approximately 1,250 educators. With this focus
on faculty development, we continue to offer our customers an
opportunity to learn and grow. With product offerings such as the
McGraw-Hill Homework Manager, iStudy and online course content, faculty were able to integrate new technologies into their
teaching strategies and offer students a dynamic learning environment in combination with our leading textbooks.
The School Division’s sales increased by 8.1% compared to
the prior year. The largest increase was in our local publishing
program where both our 2006 and 2005 publications exceeded
sales targets. This growth is a reflection of the implementation
of selected new core Grades 7 – 12 science, mathematics and
social studies curricula in combination with the market place
success of our list. Sales growth also occurred in the
Glencoe/McGraw-Hill list, reflecting an ongoing interest in
resources to support non-core curricula. Overall industry growth
of 11.8% (based on Canadian Education Resource Council information) was driven by significant government funding released
in British Columbia and Ontario in early 2006. The Company benefited from this funding, as sales to schools and school boards in
British Columbia more than doubled in 2006 compared to 2005.
The Professional Division experienced impressive sales
growth in 2006 despite the industry’s modest gains. While the
Canadian trade book market was stable, the Professional Division
saw a 9.3% revenue increase over the prior year. Ongoing improvements in product development and support from The McGraw-Hill
Companies Inc. helped spearhead sizeable market share gains in
categories like languages, reference, business, and digital. The
Professional Division continued to drive sales in the foreign language market by focusing on key brands, such as the growing
Harraps line, which now encompasses French and Spanish dictionaries, as well as ongoing sales from the Teach Yourself language
learning series. Harraps French and Spanish dictionaries are now
well established best sellers in the Canadian trade book market.
Business sales were also strong in 2006 as this division saw significant gains from both the McGraw-Hill and Harvard Business
School Press lines. Growth was spurred by key business publications such as A Thousand Barrels a Second, Chasing Daylight, and
Blue Ocean Strategy, as well as ongoing solid category performance within our key channels. Medical sales declined by 9% in
2006, mainly from a reduction in key title publications. Digital sales
continued to see impressive gains as spending for digital content
increased and our subscription business grew. Sales for Access
Science remained stable while Access Medicine and Digital
Engineering Library grew in 2006.
Canadian publications increased from 46.9% in 2005 to 48.1%
of total sales in 2006 as a result of the growth in Higher Education
and School Divisions’ publishing programs. On average, the
Company earns higher margins on Canadian publications than on
imported product or agency product. Sales of product imported
from The McGraw-Hill Companies, Inc. decreased to 49.9% of total
sales compared to 51.2% in 2005. Agency sales increased marginally to 1.0% of total sales in 2006 from 0.8% in 2005.
Other revenue, consisting of rental revenue from the tenant
at the Company’s owned headquarters facility in Whitby, Ontario,
interest on investments, and copyright/licensing fees, increased
to $2.5 million in 2006 ($2.2 million in 2005).
Total revenue increased from $87.7 million last year to
$92.9 million in 2006, a 5.9% increase.
EXPENSES
In 2006, total expenses increased to $81.7 million over the prior
year’s $78.5 million.
Operating expenses, comprised of cost of product and royalties, increased to $41.3 million from $39.5 million. This 4.5%
increase is consistent with the sales increase.
Operating expenses as a percentage of net sales has
improved this year (45.7% of sales in 2006 compared to 46.2%
in 2005). This is mainly a function of the change in product mix
(Canadian vs. imported product).
Editorial, selling, general, and administrative expenses
increased 7.2% to $33.5 million from $31.3 million in 2005. The
results in 2005 included a $0.9 million restructuring charge included in editorial, selling, general, and administrative expenses.
Additional expenses were expected in 2006 as a result of the costs
to support the expanding publishing program in the School Division,
and the discontinuation of the Company’s warehousing contract
with Les Éditions de la Chenelière at the end of 2005, which had
offset expenses in 2005 by $1.4 million. These expenses as a percentage of sales have increased to 37.1% from 36.6%.
Amortization of prepublication costs decreased 13.6% to $5.4
million from $6.2 million in the prior year because of the small number of titles published in the School Division in 2003 to 2005, when
provincial funding was focused away from the secondary school
LIQUIDITY AND FINANCIAL
RESOURCES
Cash and cash equivalents at December 31, 2006 have increased to
$33.5 million from $27.2 million in 2005 because of increased
sales, strong cash collection results, and the Company’s continued
emphasis on inventory management.
The accounts receivable balance increased slightly to $17.9
million from $17.5 million in as a result of higher sales in the
fourth quarter of 2006 compared to 2005. The Company's collection performance is closely monitored in accordance with credit
terms and industry standards.
Inventory levels remained relatively consistent with the
prior year at $8.1 million versus $8.0 million in 2005. The
Company’s efforts to improve distribution processes led to
improved inventory turnover results.
Prepublication investment increased from $4.8 million in
2005 to $7.6 million, reflecting the expanded publishing program
within the School Division for 2006 and 2007 titles.
Capital asset purchases of $1.0 million in 2006 (mainly for
warehouse and facility improvements) are higher than the $0.4
million in 2005. These purchases support the process improvements implemented throughout the Company during the year.
The Company has entered into operating leases, primarily
for automobiles, for which the estimated future minimum annual
lease payments are $0.3 million in 2007 and $0.1 million in 2008.
The Company has future purchase commitments with a vendor for printing/copying costs. The minimum annual commitments are $0.4 million in 2007 and $0.1 million thereafter.
The Company's cash flow is cyclical during the year reflecting our sales cycle, with high cash balances in the first and
fourth quarters. During the low-cash phase of the cycle, in the
second and third quarters, the Company has a line of credit available to meet forecasted needs. The line of credit was not used in
2006 or 2005. The Company generated significant cash from
operations in 2006.
TRANSACTIONS WITH
RELATED PARTIES
The Company is a subsidiary of The McGraw-Hill Companies, Inc.
which owns 70.1% of the outstanding common shares. Under longstanding arrangements, the Company purchases books and educational materials from the parent company and various international
subsidiaries of The McGraw-Hill Companies, Inc. Inventory purchases from the parent company in 2006 were $31.8 million, down
from $32.9 million in 2005. In addition, the Company pays royalties
to the parent company for any titles that have been adapted to the
Canadian market. Royalty payments in 2006 were $1.5 million compared to $1.1 million last year.
The Company also sells books and educational materials to
various international subsidiaries of The McGraw-Hill
Companies, Inc. These purchases and sales are recorded at the
exchange rates in effect at the time of the transaction. In the normal course of business, the Company reimburses (and is reimbursed) for common expenses shared with other McGraw-Hill
entities. All such reimbursements are done at cost, using
exchange rates in effect at the time of the transactions. Common
expenses reimbursed to The McGraw-Hill Companies, Inc. are
expected to increase by $0.7 million in 2007 as a result of information systems and support charges.
The Company owed related parties $7.3 million at the end
of 2006, compared with $6.2 million at December 31, 2005, and
was owed $1.8 million by the related parties at the end of 2006,
down from $2.6 million at the end of 2005.
DIVIDENDS
For the fifth year in a row, the Company increased its quarterly dividend payment. The quarterly dividend payment is $0.21 per share
at the end of 2006 ($0.195 at the end of 2005).
Total dividends paid were $1.6 million in 2006 compared to
$4.5 million in 2005. In 2005, the Company declared and paid a
special dividend of $3.0 million ($1.50 per share).
Liquidity and Financial Resources (In Thousands of Dollars—except Per Share Data)
2006
2005
As at December 31,
Cash and cash equivalents
33,511
27,206
Total assets
95,211
87,684
Working capital
45,658
42,338
Accounts receivable
17,948
17,503
Inventory
8,066
8,006
2004
2003
2002
21,496
87,372
39,188
17,231
11,543
21,452
86,881
31,505
14,991
11,483
14,121
95,406
23,881
18,372
15,227
For the 12 Months Ended December 31
Cash flow from operations
Prepublication investment
Capital asset additions
Dividends paid per share
7,190
5,079
659
0.705
13,891
4,836
436
0.645
5,602
7,532
4,058
0.60
16,546
7,583
1,011
0.825
15,454
4,844
377
2.265
McGraw-Hill Ryerson Annual Report 2006
market. Capital asset amortization has decreased 1.9% in 2006 as
a result of minimal capital investment in recent years.
The Company incurs foreign exchange gains and losses
throughout the year as a result of the significant volume of related party transactions, most of which are denominated in U.S.
dollars. The foreign exchange loss of $0.2 million is slightly higher than the $0.1 million exchange loss in 2005. The Company
continues to employ policies to minimize the impact of currency
fluctuations.
The effective tax rate increased to 37.1% [2005 – 36.8%].
This minor rate increase reflects future tax rate changes.
13
Quarterly Income Statement ($000—except Per Share Data)
Quarter Ended
Quarter Ended
March 31
June 30
2006
2005
2006
2005
Quarter Ended
Sept. 30
2006
2005
Quarter Ended
Dec. 31
2006
2005
2006
2005
Total Revenue
12,691
8,595
18,083
17,414
37,572
37,751
24,532
23,947
92,878
87,707
Net Income (Loss)
for the period
(1,239)
(2,759)
(28)
719
5,923
6,317
2,350
1,552
7,006
5,829
Net Income (Loss)
per share
$(0.62)
$(1.38)
$(0.01)
$0.36
$2.97
$3.16
$1.18
$0.78
$3.51
$2.92
McGraw-Hill Ryerson Annual Report 2006
QUARTERLY RESULTS
14
The Company's sales are based on the education industry's school
terms for the School and Higher Education Divisions and are therefore cyclical. As a result, the Company earns a significant amount
of its total sales in the third and fourth quarters of each year.
In the fourth quarter of 2006, total revenue increased 2.4%
compared to the prior year, driven by improved results within the
Higher Education and Professional Divisions. Net income increased
by $0.8 million, caused mainly by reduced editorial, selling, general, and administrative expenses and lower amortization. Editorial,
selling, general, and administrative expenses in the fourth quarter
of 2005 included a $0.9 million restructuring charge.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with
Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
The critical accounting estimates included in the financial
statements are as follows:
•
•
•
The inventory obsolescence reserve is based upon management's assessment of the marketplace of products in
demand as compared to the number of units currently on
hand. This calculation is completed for each title. Should the
estimate for inventory obsolescence vary by one percentage
point, it would have an approximate $0.1 million impact on
operating profit.
The allowance for doubtful accounts is calculated by reviewing any specifically identified aged accounts plus a general
provision for the balance of the accounts. The impact on
operating profit for a one percentage point change in the
allowance for doubtful accounts rate is $0.3 million.
The estimate for sales return reserve is calculated using
the forecasted rate of returns in future periods. This forecast is calculated separately for each segment, and is
based on the average rate of returns over the past three
years. Should the estimate for sales returns vary by one
percentage point, it would have an approximate $0.5 million impact on operating profit.
Full Year
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
David Swail was appointed President and Chief Executive Officer
during the second quarter of 2006. He succeeded John Dill, who
retired effective December 31, 2005.
OTHER
The number of common shares outstanding as of December 31,
2006 was 1,996,638.
RISKS AND UNCERTAINTIES
Educational Funding Constraints and Curriculum
Revisions in the School Market
Educational funding varies from year to year depending on the current government’s mandate in each jurisdiction. The annual provincial government mandates affect both the funding levels and curriculum revision cycles. The funding levels and curriculum revision
cycles have an immediate and on-going impact on the performance
of the Company’s School Division.
Format and Delivery of Future Learning Resources
Changing media technology continues to affect the publishing
industry in several ways: sales of non-print materials have begun to
increase as a percentage of total sales; there has been an increase
in electronic piracy over the Internet; and, most important, the format of future learning resources remains uncertain. While the
Company is working on leveraging the opportunities arising from
these developments, there can be no assurances that one or more
of these developments will not have a permanent and long-term
impact on markets for the Company’s products.
Competition from Foreign-Based Online Bookstores
The advent of online bookstores in the U.S. and other countries has
created an avenue for Canadian consumers and students to purchase published product directly from foreign retailers, thus eliminating the Canadian marketers and distributors of the product. In
particular, students are able to access a very large source of second-hand product. Sustained increases in market penetration by
foreign-based virtual bookstores could adversely impact the
Company’s market share and financial performance.
2004
2005
2006
Dec. 31
Dec. 31
Mar. 31 June 30 Sept. 30 Dec. 31
"likely", "project", "intend", "plan", "forecast", "expects", "believes",
"anticipates", "could", and similar expressions and statements
related to matters that are not historical facts, constitute forwardlooking information within the meaning of securities laws.
Such forward-looking information, particularly with respect
to the Company’s future plans, costs, objectives, or economic performance, reflects what we believe in good faith to be reasonable
assumptions, expectations, and intentions based on information
that is currently available. Although we believe these underlying
assumptions, expectations, and intentions to be reasonable,
forward-looking information is not a guarantee of future performance, and involves risks and uncertainties, many of which are
beyond our control and which may cause actual results, events, or
actions to differ materially from those expressed or implied in
such forward-looking information. These risks and uncertainties
include, but are not limited to, changes in customer markets,
changes in demand for the Company’s products, changes in technology, changes in educational funding by governments, curriculum changes in the School market, other government policy
changes, changes to the format and delivery of future learning
resources, competition from foreign-based virtual bookstores,
changes to copyright law and the ability to protect the Company’s
content under copyright law, currency fluctuations, and general
economic conditions.
The factors and assumptions that were applied in reaching
the forward-looking information included herein include, but are
not limited to, the assumptions:
Exchange
Rate
0.815
0.853
0.859
•
Court rulings in Canada have reinforced user rights. As media technology continues to evolve, publishers may find it more difficult to
protect their content effectively. These factors may impact the
Company's future sales and royalties from copyright collectives.
Dependency on Retail National Accounts
While national accounts comprise a small portion of the Company’s
total business, their significant influence in the marketplace can
increase the volatility of sales and returns and lead to less
favourable commercial terms as a result of their negotiating power.
In addition, some national accounts have introduced in-house publishing programs that may potentially compete with the Company’s
publishing program.
Labour Disruptions in the Education Sector
A labour disruption in the School or Higher Education market can
have a significant impact on the purchasing behaviour within these
markets, depending on timing and duration of the disruption.
Foreign Exchange
The following table sets forth, for each period indicated, the
exchange rate for Canadian dollars expressed in U.S. dollars at the
end of that period.
0.898
0.893
0.858
A significant portion of the Company’s purchases is incurred
in U.S. dollars, while all of its revenues are incurred in Canadian
dollars and its financial results are reported in Canadian dollars.
As a result, major exchange-rate fluctuations between the
Canadian and U.S. dollar will either positively or negatively
affect net income. The Company is employing policies to minimize the impact of these currency fluctuations.
•
•
OUTLOOK
•
Fiscal 2007 is expected to be a year of modest sales growth for the
Company. Demand for the Higher Education Division's industryleading products and services will drive modest growth in that division. The Professional Division is also forecasting a year with minor
revenue growth as a result of strong downward pressure on pricing
in 2007. The School Division forecasts further sales increases in
2007 as a result of continuing curriculum revisions in several
provinces. The bottom-line impact of the forecasted overall sales
increase will, however, be offset by increased editorial, selling,
general, and administrative expenses. These expenses will
increase as a result of costs to support the expanding publishing
program in the School Division, as well as increased information
systems and support costs across all divisions.
•
Cautionary Note Regarding Forward-Looking
Statements
Certain statements contained in this Annual Report and MD&A,
including statements which may contain the words "may", "will",
that curriculum revisions in several provinces will take place
as anticipated and that our newly published products will
meet the requirements of those curriculum revisions;
that enrollment at elementary schools, secondary schools,
and colleges/universities is consistent with our expectations.
Nationally, we expect a minor decline in enrolment at the
elementary/secondary school level and a minor increase at
the college/university level;
that demand for the Higher Education Division’s technologybased products and services continues to grow;
that provincial funding for educational resources will proceed
as anticipated; and
that Retail and Medical national accounts will maintain their
stable purchasing and returns patterns.
Although we have attempted to identify and describe above
under the heading “Risks and Uncertainties” important risks and
factors which may cause actual results to differ materially from
those described in any forward-looking information, there may be
other risks and factors that cause results, events, or actions to differ materially from those anticipated, estimated, or intended.
Accordingly, readers should not place undue reliance on forwardlooking information contained in this report. Any forward-looking
information contained herein is expressed as of the date of this
report and, except as required by law, the Company does not undertake any obligation to update or revise such forward-looking information to reflect subsequent information, events or circumstances.
McGraw-Hill Ryerson Annual Report 2006
Copyright Law
15
Management Report
To the Shareholders of McGraw-Hill Ryerson Limited
The financial statements and all the information in this Annual Report were prepared by the management of McGraw-Hill Ryerson Limited, which is responsible for their integrity and objectivity.
McGraw-Hill Ryerson Annual Report 2006
These financial statements—prepared in conformity with appropriately chosen Canadian generally accepted accounting principles, and including amounts based on management’s best estimates and judgments—present fairly McGraw-Hill Ryerson’s financial condition and the results
of the Company’s operations. Other financial information given in this report is consistent with
these financial statements.
McGraw-Hill Ryerson’s management maintains a system of internal accounting controls designed to
provide reasonable assurance that the financial records accurately reflect the Company’s operations
and that the Company’s assets are protected against loss. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of these controls should not exceed
the expected benefits in maintaining these controls. These controls further assure the quality of the
financial records in several ways: the careful selection and training of management personnel; maintaining an organizational structure that provides an appropriate division of financial responsibilities;
and communicating financial and other relevant policies through the Company.
16
McGraw-Hill Ryerson’s Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for reviewing and approving
the financial statements. The Board carries out this responsibility principally through its Audit
Committee, which meets periodically with management and the independent auditors to ensure
that each group is carrying out its respective responsibilities. In addition, the independent auditors have full and free access to the Audit Committee and meet with it with no representatives
from management present.
The financial statements in this report have been audited by Ernst & Young LLP, Chartered
Accountants, in accordance with Canadian generally accepted auditing standards. The independent auditors were retained to express an opinion on the financial statements, which appears on
page 17.
David L. Swail
President and Chief Executive Officer
Gordon Dyer
Executive Vice President
and Chief Financial Officer
Auditors’ Report
To the Shareholders of McGraw-Hill Ryerson Limited
We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial
position of the Company as at December 31, 2006 and 2005 and the results of its operations and
its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Toronto, Canada,
January 19, 2007
Chartered Accountants
McGraw-Hill Ryerson Annual Report 2006
We have audited the balance sheets of McGraw-Hill Ryerson Limited as at December 31, 2006
and 2005, and the statements of income and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
17
Balance Sheets
(In Thousands of Dollars)
As at December 31
2006
2005
33,511
27,206
17,948
1,792
8,066
355
—
2,485
64,157
18,359
12,695
95,211
17,503
2,638
8,006
407
190
2,535
58,485
18,716
10,483
87,684
10,697
511
7,291
18,499
214
18,713
9,966
—
6,181
16,147
398
16,545
1,997
74,501
76,498
95,211
1,997
69,142
71,139
87,684
McGraw-Hill Ryerson Annual Report 2006
Assets
18
Current
Cash and cash equivalents
Accounts receivable [net of allowance for book returns of
$7,013; 2005 - $6,801] [note 8]
Due from parent and affiliated companies [note 2]
Inventories
Prepaid expenses and other
Income taxes receivable
Future tax assets [note 6]
Total current assets
Capital assets, net [note 4]
Other assets, net [note 5]
Liabilities and Shareholders’ Equity
Current
Accounts payable and accrued charges
Income taxes payable
Due to parent and affiliated companies [note 2]
Total current liabilities
Future tax liabilities [note 6]
Total liabilities
Commitments [note 7]
Shareholders’ Equity
Share capital
Authorized 5,000,000 common shares
Issued and outstanding 1,996,638 common shares
Retained earnings
Total shareholders' equity
(See accompanying Notes.)
On behalf of the Board
H. Ian Macdonald, O.C., LL.D., Director
David L. Swail, Director
Statements of Income and Retained Earnings
(In Thousands of Dollars—except Per Share Data)
Years ended December 31
2006
2005
90,343
2,535
92,878
85,557
2,150
87,707
41,285
33,546
5,371
1,368
176
81,746
11,132
39,496
31,296
6,214
1,395
89
78,490
9,217
4,260
(134)
4,126
7,006
3,951
(563)
3,388
5,829
69,142
(1,647)
74,501
67,836
(4,523)
69,142
$3.51
$3.51
$2.92
$2.92
Revenue
Sales, less returns
Other
Operating [note 2]
Editorial, selling, general and administrative [note 3 and 11]
Amortization – Prepublications Costs
Amortization – Capital Assets
Foreign exchange loss
Income before income taxes
Provision for (recovery of) income taxes [note 6]
Current
Future
Net income for the year
McGraw-Hill Ryerson Annual Report 2006
Expenses
19
Retained earnings, beginning of year
Dividends paid to shareholders [$0.825 per share; 2005 - $2.265 per share]
Retained earnings, end of year
Earnings per share
Basic
Diluted
(See accompanying Notes.)
Statements of Cash Flows
(In Thousands of Dollars)
Years ended December 31
2006
2005
Operating Activities
McGraw-Hill Ryerson Annual Report 2006
Net income for the year
Add (deduct) non-cash items
Amortization – Prepublication Costs
Amortization – Capital Assets
Future income taxes
7,006
5,829
5,371
1,368
(134)
13,611
6,214
1,395
(668)
12,770
2,935
16,546
2,684
15,454
(7,583)
(1,011)
(8,594)
(4,844)
(377)
(5,221)
Dividends paid to shareholders
Cash used in financing activities
(1,647)
(1,647)
(4,523)
(4,523)
Net increase in cash during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
6,305
27,206
33,511
5,710
21,496
27,206
Net change in non-cash working capital balances
related to operations [note 10]
Cash provided by operating activities
Investing Activities
Pre-publications costs
Additions to capital assets
Cash used in investing activities
Financing Activities
20
(See accompanying Notes.)
Notes to Financial Statements
Foreign exchange translation
1
Summary of Significant Accounting
Policies
The accompanying financial statements of McGraw-Hill Ryerson
Limited [the "Company"] have been prepared in accordance with
Canadian generally accepted accounting principles. The most
significant accounting policies are summarized as follows:
Cash and cash equivalents
The Company considers all highly liquid instruments with a maturity date of ninety days or less at the date of acquisition to be
cash equivalents.
Allowance for doubtful accounts and sales returns
The accounts receivable reserve methodology is based on historical analysis and a review of outstanding balances. A significant
estimate for the Company is the allowance for sales returns,
which is based on the historical rate of return and current market conditions.
Foreign cash balances and amounts receivable from or payable
to foreign affiliates are translated into Canadian dollars at the
rates of exchange prevailing at year end. Transactions denominated in foreign currencies are translated into Canadian dollars
at the exchange rates at the date of the transactions. Any resulting gains or losses are included in net income for the year.
Revenue recognition
The Company recognizes revenue for product sales, net of estimated returns, when the products are shipped to customers,
which is also when title passes to the customer.
Other revenue is comprised mainly of rental income, interest, and
other miscellaneous income, and is recognized as earned on a
monthly basis.
Pension costs
The Company has a defined contribution pension plan for all
employees for which the Company's contributions are expensed
as incurred. Total pension expense for this plan during the year
is $725 [2005-$703].
Inventories
Inventories are stated at the lower of cost, on a first-in, first-out
basis, and net realizable value. A significant estimate for the
Company is the reserve for inventory obsolescence. The reserve
is based upon management's assessment of the marketplace of
products on demand as compared to the number of units currently on hand.
Capital assets
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided on a straight-line basis at the following
annual rates:
Building
Computer equipment
Furniture, fixtures and equipment
40 years
3 to 7 years
5 to 10 years
Pre-publication costs
Pre-publication costs include third party services, preparation,
and plate costs, which are amortized from the year of publication
over the lesser of five years and the expected sales life of the
related publication using either an accelerated or straight-line
method. The Company periodically evaluates the remaining lives
and recoverability of such costs, which is sometimes dependent
upon program acceptance by provincial authorities, based on
expected undiscounted cash flows.
Goodwill
Effective January 1, 2002, goodwill is no longer amortized but is
subject to an annual review for impairment, which consists of a
comparison of the fair value of the assets to their carrying value.
Based on the annual impairment review for 2006, the Company
determined that no provision for impairment was required.
The Company also has a supplemental employee retirement plan
[“SERP”] for certain executives. They are entitled to additional
pension payments upon retirement or end of services to the
Company determined primarily based on the executives’ salaries
and years of service. Total SERP expense during the year is $98
[2005 - $171] and the SERP liability as at December 31, 2006 is
$783 [2005 - $546]. The SERP obligation is unfunded and is
included in accrued charges on the Company’s balance sheet.
Income taxes
The Company uses the liability method of accounting for income
taxes. Under the liability method, future tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the substantively enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Earnings per share
The weighted average number of common shares used in the
computation of both basic and diluted earnings per share for
2006 is 1,996,638 [2005 - 1,996,638].
Use of estimates
The preparation of financial statements in accordance with
Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
McGraw-Hill Ryerson Annual Report 2006
(Amounts are in Thousands of Dollars)
21
2
Related Party Transactions
The Company is a subsidiary of The McGraw-Hill Companies, Inc.
which owns 70.1% of the outstanding common shares.
Transactions with related parties are as follows:
The Company also, in the normal course of business sells books
and educational materials to various international subsidiaries of
The McGraw-Hill Companies, Inc.
Under long-standing arrangements, the Company, in the normal
course of business, purchases books and educational materials
from the parent company and various international subsidiaries
of The McGraw-Hill Companies, Inc.
The Company reimburses (and is reimbursed) for common
expenses shared with other McGraw-Hill entities [note 3].
The Company pays royalties to the parent company for any U.S.
titles that have been adapted to the Canadian market.
Terms of payment vary from 50 to 90 days [2005 - 50 to 90 days],
net from the transaction date, and all amounts are non-interest
bearing.
McGraw-Hill Ryerson Annual Report 2006
Amounts due from parent and affiliated companies consist of the following:
22
Parent
Common-controlled enterprises
2006
784
1,008
1,792
2005
1,228
1,410
2,638
2006
7,243
48
7,291
2005
6,127
54
6,181
2006
2005
31,767
210
32,905
181
1,435
62
625
242
1,129
50
243
246
Amounts due to parent and affiliated companies consist of the following:
Parent
Common-controlled enterprises
Related party transactions with parent and affiliated companies consist of the following:
Inventory purchases from
Parent
Common-controlled enterprises
Royalties paid to parent
Parent
Common-controlled enterprises
Common expenses paid to parent
Common expenses reimbursed from parent
3
STOCK-BASED COMPENSATION
The parent company has granted certain employees of the
Company stock options to purchase common stock of the parent
and/or restricted stock of the parent, collectively referred to as
awards [note 2]. The fair values of these awards are charged to
the Company by the parent and are recorded as compensation
expense by the Company over their respective vesting periods
with a corresponding increase in due to parent company. For the
year ended December 31, 2006, editorial, selling, general, and
administrative expenses include stock-based compensation of
$172 [2005 – nil].
CAPITAL ASSETS
4
Capital assets consist of the following:
Land
Building
Computer equipment
Furniture, fixtures and equipment
Cost
2006
Accumulated
amortization
Net
book value
Cost
3,598
18,017
5,839
5,146
32,600
—
6,819
4,785
2,637
14,241
3,598
11,198
1,054
2,509
18,359
3,598
17,967
5,710
4,314
31,589
2005
Accumulated
amortization
—
6,366
4,293
2,214
12,873
Net
book value
3,598
11,601
1,417
2,100
18,716
Other assets consist of the following:
2006
12,332
363
12,695
Net book value, prepublication costs
Goodwill
2005
10,120
363
10,483
Prepublication costs consist of the following:
Beginning balance
Additions
Amortization
Write off of fully amortized titles
Ending balance
Prepublication Costs
41,967
7,583
—
(74)
49,476
Accumulated Amortization
31,847
—
5,371
(74)
37,144
Net Book Value
10,120
7,583
5,371
—
12,332
There is $3,842,000 of prepublication costs on unpublished titles not being amortized as of December 31, 2006.
6
Income Taxes
Under the liability method, future tax assets and liabilities are determined based on differences between the financial reporting and tax
bases of assets and liabilities. Significant components of the Company's future tax assets and liabilities are as follows:
2006
Current future tax assets
Allowance for book returns and other items
Other
2005
2,474
11
2,485
2,406
129
2,535
2,546
(2,198)
(134)
214
2,906
(2,366)
(142)
398
2006
2005
Tax at combined federal and provincial rates
4,021
3,329
Manufacturing and processing profits reduction
(102)
(80)
63
—
144
139
4,126
3,388
Non-current future tax liabilities (assets)
Capital assets
Prepublication costs
Other
The reconciliation of the provision for income taxes computed at the statutory tax rates is as follows:
Decrease in future income taxes resulting from statutory tax rate change
Other
McGraw-Hill Ryerson Annual Report 2006
Other Assets
5
23
7
Commitments
The Company has entered into operating leases, primarily for automobiles, for which the estimated future minimum annual lease payments are as follows:
The Company has future purchase commitments with a vendor for
printing/copying costs and as a result of an agency relationship.
The future minimum annual commitments are as follows:
2007
$299
2008
$109
Thereafter $ 17
$425
2007
2008
2009
$ 447
$ 48
$ 32
$ 527
McGraw-Hill Ryerson Annual Report 2006
The Company has a $22 [2005 – $22] contingent letter of credit to secure the release of goods from customs prior to payment of duties at
the Canadian border.
8
Financial Instruments
9
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, due from/to parent and affiliated companies, accounts payable and accrued charges, and
income taxes payable/receivable. At December 31, 2006 and
2005, the fair value of the Company's financial instruments
approximates their carrying values due to the short-term maturity of these instruments.
Segmented Disclosure
The Company is structured on a market-focus basis and operates in
three primary market areas: post-secondary education, including
universities and community colleges, and proprietary colleges
["Higher Education"]; secondary and elementary schools ["School"]
and trade, professional and medical, including retailers, distributors, libraries, non-traditional booksellers, direct marketing, and the
medical sector ["Professional "]. Included in Warehouse Support
and Other Sales are freight charged to customers and sales to
French institutions mostly in Quebec. The accounting policies of
these operating segments are the same as those described in the
summary of significant accounting policies.
The Company's five largest customers make up approximately
29% [2005- 30%] of the accounts receivable balance and approximately 14% [2005 - 15%] of net sales.
24
2006
2005
Warehouse,
Higher
Support,
Education School Professional & Other Total
Sales, less returns
Amortization –
Prepublication
Costs
Amortization –
Capital Assets
Income (loss)
before income
taxes
Provision for
income taxes
Total expenditures
for additions to
capital assets
Segment assets
Higher
Education
School
Warehouse,
Support,
Professional & Other
Total
54,209
23,551
10,821
1,762
90,343
52,913
21,779
9,899
966
85,557
2,679
2,692
0
0
5,371
2,848
3,366
0
0
6,214
83
42
14
1,229
1,368
116
44
19
1,216
1,395
14,140
6,069
2,183
(11,260)
11,132
13,196
4,840
1,965
(10,784)
9,217
—
—
—
4,126
4,126
—
—
—
3,388
3,388
59
21,293
42
12,307
5
5,519
905
18,079
1,011
57,198
32
20,214
27
11,349
26
4,908
292
18,406
377
54,877
Reconciliations
2006
Segment assets
2005
$57,198
$54,877
33,511
27,206
1,792
2,638
—
190
225
238
2,485
2,535
Total Assets
95,211
87,684
Segment sales, less returns
90,343
85,557
2,535
2,150
$92,878
$87,707
Unallocated assets
Cash and cash equivalents
Due from parent and affiliated companies
Income taxes recevable
Prepaid expenses and other
(445)
(272)
McGraw-Hill Ryerson Annual Report 2006
Future tax assets
Due from parent and affiliated companies
846
138
25
Inventories
(60)
3,537
52
(79)
Income taxes receivable/payable
701
(643)
Accounts payable and accrued charges
731
2,557
Due to parent and affiliated companies
1,110
(2,554)
2,935
2,684
Income taxes refunded
(478)
(87)
Income taxes paid
3,990
4,832
Other revenue
Total Revenue
10
Statements of Cash Flows
The net change in non-cash working capital balances related to operations consists of the following:
2006
Accounts receivable
Prepaid expenses and other
2005
Supplemental cash flow information
11
Editorial, Selling, General, and
Administrative Expenses
In 2005, the Company restructured some business operations to
enhance the Company’s long-term growth prospects. The realignment cost of $900 consisted of employee termination and severance
costs and is included in the editorial, selling, general, and administrative expenses. No further costs related to the realignment are
anticipated. There was no restructuring charge in 2006.
Dividend Policy
At their meeting held on April 27, 2006, the Board of Directors
approved an increase in the quarterly dividend from 19.5¢ per
share to 21.0¢ per share to shareholders of record as at May 17,
2006. This dividend increase took effect with the payment of the
first quarter dividend on June 1, 2006. In 2005, The Company
declared and paid a one-time special dividend of $1.50 per share
to shareholders.
The determination to declare or pay dividends is entirely at the
discretion of the Board of Directors of the Company, based upon
recommendations from the Finance Committee of the Board of
Directors, and will depend upon the Company's financial condition, results of operations, capital requirements, and such other
factors the Board of Directors and Finance Committee consider
relevant.
McGraw-Hill Ryerson Annual Report 2006
$45.00
26
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
1996 1997 1998 1999 2000 2001
2002 2003
2004
2005
2006
1996 1997 1998 1999 2000 2001
2002 2003
2004
2005
2006
$(5.00)
$(10.00)
$5.00
$0.00
$(5.00)
Share price
Net Profit
Per Share
Dividend per share
McGraw-Hill Ryerson’s 2006
Corporate Contribution Programs
McGraw-Hill Ryerson Limited believes Canadians will flourish in communities that are healthy,
well educated, culturally rich, and socially secure. The Company will support programs that
increase the abilities of people in our communities to learn, grow intellectually, master new skills,
and maximize their individual talents for school, work, and community.
The Company will match any employee's financial gift to any non-profit Canadian organization
that supports education, learning, and literacy, up to a maximum of $1,000 per institution per year.
In 2006, there were 2 matches totaling $700, not including the United Way donations.
United Way Program
McGraw-Hill Ryerson will match any employee's United Way contribution. When an employee
contributes a day's pay to the United Way, he or she may take a paid day off work to perform volunteer work to support the activities of any non-profit organization or a worthy project in the community. In 2006, the Company matched employee contributions of $11,289.
Employee Volunteer Support Program
When an employee participates, on a regular basis for a year or more, in a qualified program of
volunteer support through schools and non-profit organizations (education, health or fitness, and
social services) and has an ongoing commitment of at least fifty hours a year, McGraw-Hill
Ryerson will support the program with a $300 contribution. In 2006, the Company supported two
organizations for a total of $600.
McGraw-Hill Ryerson Annual Report 2006
Matching Gift Program
27
Corporate Governance
A primary concern of the Company’s Board of Directors has been, and will continue to be, the effective governance of McGraw-Hill Ryerson Limited
on behalf of all shareholders. The Company’s Corporate Governance Committee meets regularly to review corporate governance matters.
Directors
McGraw-Hill Ryerson Annual Report 2006
1. Robert J. Bahash
28
Executive Vice President and Chief Financial
Officer, The McGraw-Hill Companies, Inc.
since 1988
Joined McGraw-Hill in 1974
Became a Director in 1988
Member of the Finance Committee
Previous posts at The McGraw-Hill
Companies, Inc. include:
Senior Vice President, Finance and Manufacturing
Senior Vice President, Corporate Financial
Operations
2. Susan Armstrong, C.A.
Corporate Director
Became a Director in 2005
Chairman of the Audit Committee
Current Posts include:
Vice-Chair of the Board of Directors of The
George Hull Centre for Children and Families
Member of the Audit Committee and Resources
Committee of the Board of Directors of Trillium
Health Centre
Member of the Governance Committee of the
Board of Directors of Toronto Rehabilitation
Institute
Previous Posts include:
Senior Vice-President, Swiss Reinsurance
Company Canada
Senior Vice-President and Chief Financial
Officer, CIBC Insurance
Vice-President and Chief Financial Officer,
The Dominion of Canada General Insurance
Company
3. J. Mark DesLauriers
Partner
Osler, Hoskin & Harcourt LLP
Joined Osler in 1983
Became a Director in 2001
Chairman of the Compensation Committee
Member of the Executive Committee
4. David L. Swail
President and Chief Executive Officer
McGraw-Hill Ryerson Limited
Joined McGraw-Hill Ryerson in 2006
Became a Director in 2006
Member of the Executive Committee and the
Finance Committee
Previous positions include:
Vice-President, Operations – Sun Media
Vice President, Operations and Planning –
CanWest
5. Brian D. Heer
Senior Vice President Special Projects
The McGraw-Hill Companies, Inc.
Joined The McGraw-Hill Companies, Inc. in 1999
Became a Director in 2001
Member of the Corporate Governance and
Nominating Committee
Previous positions include:
Group President, McGraw-Hill Higher Education,
Professional and International Publishing
President, International Publishing Group
President, Prentice Hall Canada
6. Hendrik Kranenburg
Group President, McGraw-Hill Higher Education,
Professional and International Publishing, The
McGraw-Hill Companies, Inc., since August 2005
Joined The McGraw-Hill Companies, Inc. in 1980
Became a Director in 2005
Member of the Executive Committee and the
Compensation Committee
Previous positions at Standard & Poor’s, a dvision of
The McGraw-Hill Companies Inc., include:
Executive Vice President, Investment Services
Executive Vice President, Global Ratings
Development
Executive Vice President/Managing Director,
Ratings Services (International)
7. H. Ian Macdonald, O.C., LL.D.,
D.UNIV.D.LITT, FCOL
Chairman of the Board of Directors of
McGraw-Hill Ryerson Limited since 1996
Became a Director in 1985
Chairman of the Finance Committee
Member of the Executive Committee, the Corporate
Governance and Nominating Committee, the Audit
Committee, and the Compensation Committee
President Emeritus and Professor of Economics
and Public Policy at York University
Officer of the Order of Canada
Past Chairman of the Board of Governors of
The Commonwealth of Learning
8. Manon R. Vennat, CM
Principal of Manon Vennat & Associates
Member of the Bar of Quebec
Member of the Order of Canada
Became a Director in 1988
Chairman of the Corporate Governance and
Nominating Committee
Member of the Audit Committee, and the
Compensation Committee
Previous positions include:
Chairman, SpencerStuart in Montreal
Vice President, Managing Director, SpencerStuart in
Montreal
Management Team
President and Chief Executive Officer
Joined the management team in 2006
See Biography in Directors
Marshall I. Morris
Executive Vice President
Customer Satisfaction
Joined the management team in 1996
Prior Employment: various management
positions at Canadian Tire Corporation
Gordon K. Dyer
Executive Vice President, Chief Financial
Officer and Secretary-Treasurer
Joined the management team in 2003
Prior Employment: Vice President, Finance
at Teletech Canada Inc.
Claudio Pascucci
President
Professional Division
Joined the management team in 2006
Prior Employment: Director of Sales,
McGraw-Hill Ryerson, Professional Division
Cathy Efremidis-Koop
Vice President
Information Services and Productivity
Joined the management team in 2005
Prior Employment: Director of
Information Services and Productivity
Carl Posluns
Executive Vice President
Human Resources
Joined the management team in 1994
Prior Employment: Vice President, Human
Resources, Smithbooks (FICG Inc.)
Patrick Ferrier
President
Higher Education Division
Joined the management team in 2005
Prior Employment: Vice President and
Publisher, McGraw-Hill Ryerson,
Higher Education Division
Nancy L. Gerrish
President
President
School Division
Joined the management team in 1999
Prior Employment: Director of Sales and
Marketing, McGraw-Hill Ryerson,
School Division
Clive Powell
Executive Vice President
Editorial, Design, and Production
Joined the management team in 1997
Prior Employment: Director of Production,
McGraw-Hill Ryerson
McGraw-Hill Ryerson Annual Report 2006
David L. Swail
29
Shareholder and Corporate Information
Executive Offices
Registrar and Transfer Agent
McGraw-Hill Ryerson Limited
300 Water Street
Whitby, Ontario L1N 9B6
Telephone: (905) 430-5000
Facsimile: (905) 430-5020
http://www.mcgrawhill.ca
Investors are encouraged to contact our Transfer Agent and
Registrar, CIBC Mellon Trust Company, for information regarding
their security holdings. They can be reached at:
McGraw-Hill Ryerson Annual Report 2006
Corporate and Shareholder Information
30
Gordon Dyer
Secretary-Treasurer
Telephone: (905) 430-5032
Annual Meeting of Shareholders
McGraw-Hill Ryerson Limited
300 Water Street
Whitby, Ontario
Wednesday, June 6, 2007
at 11:00 a.m.
Exchange Listings
The Toronto Stock Exchange
Stock Symbol: MHR
Outside Legal Counsel
Osler, Hoskin & Harcourt LLP
Barristers & Solicitors
Toronto
Auditors
Ernst & Young LLP
Chartered Accountants
Toronto
Bankers
Citibank Canada
CIBC Mellon Trust Company
P.O. Box 7010
Adelaide Street Postal Station
Toronto, Ontario
M5C 2W9
AnswerLine™
(416) 643-5500 or 1-800-387-0825
(Toll Free throughout North America)
Facsimile: (416) 643-5501
Web site:
www.cibcmellon.ca
E-mail:
[email protected]
Recycling
This report has been printed on recyclable acid-free papers.
International Affiliates
New York, New York
McGraw-Hill Australia Pty. Limited
Sydney, N.S.W., Australia
Tata McGraw-Hill Publishing Company Private
Limited
McGraw-Hill/Interamericana de Venezuela, S.A.
Caracas, Venezuela
McGraw-Hill (Malaysia) Sdn. Bhd
Selangor, Malaysia
McGraw-Hill International Enterprises, Inc.
Metro Manila, Philippines
New Delhi, India
McGraw-Hill/Interamericana de Chile Limitada
McGraw-Hill Book Company New Zealand, Pty.
Limited
Auckland, New Zealand
Santiago, Chile
McGraw-Hill/Interamericana, Inc.
Rio Piedras, Puerto Rico
McGraw-Hill Education Asia
Singapore Branch
McGraw-Hill Korea, Inc.
Seoul, Korea
McGraw-Hill International (U.K.) Limited
Maidenhead, England
McGraw-Hill International Enterprises, Inc.
Johannesburg, South Africa
The McGraw-Hill Companies, SRL
Milan, Italy
Editora McGraw-Hill de Portugal, Ltda.
Lisbon, Portugal
McGraw-Hill International Enterprises, Inc.
Athens, Greece
Editorial Interamericana, S.A.
Bogota, D.E., Colombia
McGraw-Hill/Interamericana Editores, S.A. de C.V.
Mexico, D.F., Mexico
McGraw-Hill/Interamericana de Espana, S.A.
Madrid, Spain
McGraw-Hill International Enterprises, Inc.
Kowloon, Hong Kong
McGraw-Hill International Enterprises, Inc.
Taipei, Taiwan
McGraw-Hill International Enterprises, Inc.
Bangkok, Thailand
McGraw-Hill Interamericana do Brasil Ltda.
Sao Paulo, Brazil
The McGraw-Hill Companies, GmbH
Frankfurt, Germany
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Paris, France
McGraw-Hill Ryerson Annual Report 2006
The McGraw-Hill Companies, Inc.
31
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