Lower manufacturing and royalty costs saved McGraw Hill $15.5 million in the three months ended June 30. That helped turn a modest sales increase into a much larger jump in operating profit, while leaving the cash register looking surprisingly quiet.
Revenue rose 2.6% to $549.9 million from the comparable three-month period a year earlier. Gross margin widened to 79.9% from 77.0%, and operating income climbed 18.8% to $114.3 million.
The improvement was not purely a volume story. McGraw Hill included a $7.5 million gain from selling intellectual property, lower selling and marketing costs, and lower manufacturing and royalty costs in the explanation for the result.
"The increase was primarily due to: a gain of approximately $7.5 million, resulting from the sale of intellectual property to a third-party; lower selling and marketing expense, primarily driven by lower depository sales commission of approximately $4.4 million, due to state sales product mix; lower cost of sales of approximately $3.7 million, primarily driven by lower manufacturing and royalty costs associated with the decrease in Transactional Revenue from print offerings; and an increase in revenue of approximately $3.5 million as discussed under “—Consolidated Operating Results for the Three Months Ended June 30, 2026 and 2025—K-12”, partially offset by higher promotional sample expense of approximately $1.0 million, incurred in advance of market opportunities in fiscal year 2027."
10-Q, Aug. 13, 2026
In plain English, part of the margin lift came from a one-time asset sale and from a lower-cost mix that included fewer print transactions. The company also spent ahead of future opportunities, including $1.0 million in promotional samples.
Higher Education supplied a more repeatable growth signal. McGraw Hill said recurring revenue rose about $22.6 million, helped by digital adoption, Inclusive Access sales, pricing, market share gains, and higher US enrollments, while transactional revenue fell about $5.1 million.
"The increase was primarily due to: higher Re-occurring Revenue of approximately $22.6 million, driven by the timing of deferred revenue recognition associated with the increased adoption of digital products, including growth in Inclusive Access sales, market share gains, favorable pricing and growth in U.S. enrollments, partially offset by lower Transactional Revenue of approximately $5.1 million, primarily due to lower product returns in the prior year."
10-Q, Aug. 13, 2026
That mix matters because recurring digital revenue and print-related cost reductions are doing different jobs. One expands the revenue base; the other improves the economics of a business line that is shrinking in the comparison.
Cash did not match the income statement. Operating cash flow moved from negative $96.7 million to positive $601,000, while inventory rose 14.0%, much faster than revenue. Capex also increased 47.0%, and McGraw Hill said product development and capital spending rose as it continued investing in content and platforms.
The balance-sheet read is therefore narrower than the profit headline. Accounts receivable fell 15.0%, which supports the cash picture, but inventory accumulated and investment consumed much of the operating improvement. Diluted shares also rose 14.8% year over year, giving the stronger net income result more company-level context.
McGraw Hill’s annual history adds another wrinkle: revenue was $2.1B in both fiscal 2025 and fiscal 2026, while operating margin slipped to 13.2% from 14.6% in the latest year. The latest three-month period shows margin recovery, but the sales base is still moving slowly.
The unresolved number is the cash conversion. McGraw Hill’s next quarterly report will put the current $183.2 million inventory balance and $601,000 of operating cash flow against another period of digital growth and platform investment.