Lower Operating Margins Prevailed in 2001

A combination of restructuring charges, integration costs and soft sales resulted in profit margins falling at nine of the 14 publishers tracked by PW in 2001. The same set of factors also resulted in operating income declining at six of the 14 companies, although no publisher reported an operating loss in their most recent fiscal years.

The significant improvement in Scholastic's margin—from 5.0% in fiscal 2001 to 9.7% in fiscal 2002—benefited in part from a $72.9 million write-off in fiscal 2001 tied to its decision to not update Literary Place. As a result, a $56.9 million operating loss in Scholastic's educational publishing segment in fiscal 2001 turned into operating income of $51.5 million last year.

Harlequin's margin increased from 15.3% to 18.4%, the highest margin of all publishers. The company attributed the margin improvement to the success of its single-title publishing program, which company executives said delivers higher margins than its series. The increase in Educational Development Corp.'s margin, from 10.2% to 11.9%, was led by the success of its home business division, which had large gains in sales and earnings. HarperCollins managed to eke out a slight gain in its margin in fiscal 2002 due to solid performances by its divisions worldwide. Quarto also had a slight improvement in margins as cost controls lifted earnings while sales were flat.

A major surprise, given the good sales gains posted by the elhi and college segments in 2001, was that margins fell last year at four major educational publishers. At McGraw-Hill, operating profit fell 14.4%, to $263.4 million, a figure that included a $62.1-million write-down related to the reorganization of the education group announced late last year. Because of the write-off, M-H's margin fell from 15.4% to 11.3%. Pearson Education's U.S. school and college groups posted good results in 2001, but those were offset by declines in the professional and international operations and, as a result, its margins declined to 14.7% from 16.5%.

While the acquisition of several Harcourt properties helped boost revenues at Thomson Learning, costs associated with integrating the new assets "dampened" earnings growth, Thomson said, and the group's margin fell from 16.8% to 14.2%. Operating income and margins fell at John Wiley due to a $12.3 million write-down associated with the company's move from New York City to Hoboken, N.J.

Among trade publishers, Penguin Putnam's margin fell from 10.5% to 9.8%, mainly due to costs associated with the reorganization of Dorling Kindersley. Simon & Schuster's margin fell to 6.3% from 8.3%, which the company attributed to higher-than-expected information systems costs and costs associated with restructuring its U.K. operation. The decline in Millbrook Press's margin, from 8.4% to 3.4%, was due in part to continued investment in its new Roaring Brook imprint.

Operating income fell 74%, to $14.3 million, in fiscal 2002 at Reader's Digest's North American Book and Home Entertainment Group, which led to a decline in margins from 7.4% to 2.1%. The decline in earnings was driven by sharply lower results in the U.S., where operating profits dropped $45 million compared to the previous year.

Thomas Nelson's results for fiscal 2001 were restated to reflect the sale of its gifts division. Operating income was affected by the bankruptcy of Kmart, as well as costs associated with corporate restructuring—all of which led to a decline in margins from 8.2% to 7.5%.

Operating Performance of Publicly Held
Book Publishers, 2000—2001 ($ in Millions)