Oct. 26 (Bloomberg) -- McGraw-Hill Cos., the textbook publisher and owner of the Standard & Poor’s credit-ratings unit, reported third-quarter profit dropped 14 percent and said 2009 revenue will fall more than it previously forecast.

Net income declined to $336.1 million, or $1.07 a share, from $390.2 million, or $1.23, a year earlier, the New York- based company said today in a statement. Analysts projected earnings of $1.05 a share, the average of six estimates compiled by Bloomberg.

Chief Executive Officer Terry McGraw said on a conference call that credit markets are starting to thaw and the economy is recovering. The company, which has lowered expenses to cope with reduced demand, said July 16 that it would cut 550 jobs, or about 2.5 percent of its workforce, as part of a restructuring to combine two education-publishing units.

“They’re clearly showing some pretty intense discipline in managing the costs, which is where the earnings upside came from in the quarter,” said Peter Appert, an analyst with Piper Jaffray & Co. in San Francisco who rates the shares “overweight” and doesn’t own any. “The trends in the debt market have continued to improve. Momentum continues to get better.”

McGraw-Hill declined $1.02, or 3.4 percent, to $29.47 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 27 percent this year.

Forecast

Sales will fall 7 percent this year because of continued weakness in school education sales and advertising, McGraw-Hill said. In July, the company forecast a decline of 5.5 percent to 6.5 percent. Earnings will be at the high end of a projected range of $2.20 to $2.25 a share. In July, the company had expected to be at the low end.

Analysts project full-year profit excluding some items of $2.24 a share on a 6.2 percent drop in sales to $5.96 billion.

“The economy’s starting to recover, and some of our markets are starting to recover,” McGraw said on a conference call. “Going into 2010, we’ve got a pretty good picture starting to form.”

The company said Oct. 13 it agreed to sell its BusinessWeek magazine to Bloomberg LP for an undisclosed sum. The transaction is expected to close on Dec. 1.

BusinessWeek Sale

McGraw-Hill will receive $5 million in cash for the business news magazine, and Bloomberg will assume some liabilities, McGraw-Hill Chief Financial Officer Robert Bahash said on the call today. The magazine divestiture will save the company $20 million to $25 million before taxes, or 4 cents to 5 cents a share, next year, Bahash said.

“Everything in the portfolio obviously has been looked at,” McGraw said of the Information & Media unit. “We want to get the higher levels of growth and earnings, so we’re going to look at everything.”

McGraw-Hill’s earnings forecast this year excludes an expected gain of $9.3 million before taxes, or 2 cents a share, on the sale of BusinessWeek. The estimate also excludes restructuring charges and a loss on the sale of a unit.

Bloomberg LP, the New York-based news and financial information provider, is the parent of Bloomberg News.

Revenue in the quarter fell 8.4 percent to $1.88 billion, compared with the $1.93 billion estimated by analysts. At the education unit, revenue dropped 12 percent to $1 billion, led by declines in the elementary through high school market.

Financial services revenue fell 2.2 percent to $637 million on declines tied to foreign exchange rates. S&P Credit Market Services reported a 0.7 percent increase in sales, the first quarterly gain in two years, as bond issuance rose.

“Obviously the credit markets are unthawing, and we’re starting to see a brighter picture,” McGraw said on the call.

Sales for the Information & Media unit, which includes BusinessWeek and J.D. Power and Associates, dropped 10 percent to $238.9 million.

To contact the reporters on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net; Sarah Rabil in New York at srabil@bloomberg.net

Last Updated: October 26, 2009 16:20 EDT