Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. (Note: The filing header identifies the registrant as The McGraw-Hill Companies, Inc., though the request metadata references S&P Global Inc., which is a subsidiary segment). The report covers the quarterly period ended March 31, 2009. The Company operates through three reportable segments: McGraw-Hill Education, Financial Services (Standard & Poor's), and Information & Media. The financial statements are unaudited but include normal recurring adjustments.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $1,148.2 million | $1,217.9 million |
| Net Income (Attributable to Company) | $63.0 million | $81.1 million |
| Diluted EPS | $0.20 | $0.25 |
| Operating Profit (Segments) | $157.8 million | $184.9 million |
| Operating Margin | 13.7% | 15.2% |
| Cash from Operating Activities | $67.1 million | ($112.3 million) used |
| Cash and Equivalents | $496.8 million | $396.7 million |
| Total Debt | $1,357.6 million | $1,593.7 million |
| Long-Term Debt | $1,197.7 million | $1,197.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.7% year-over-year. All three segments reported revenue declines.
- McGraw-Hill Education: Revenue down 5.3% due to softness in the School Education Group and unfavorable foreign exchange.
- Financial Services: Revenue down 5.3% driven by significant declines in Credit Market Services (structured finance issuance) partially offset by growth in Investment Services (Capital IQ).
- Information & Media: Revenue down 7.4% due to economic weakness impacting advertising and construction markets.
- Profitability: Net income attributable to the Company decreased 22.3%. Operating profit for segments declined 14.7%.
- Information & Media operating profit dropped 76.4% to $2.8 million.
- Financial Services operating profit declined 12.3% to $231.6 million.
- McGraw-Hill Education operating loss improved 15.7% to $(76.6) million due to cost-saving initiatives.
- Cash Flow: Operating cash flow turned positive ($67.1 million) compared to a use of cash ($112.3 million) in Q1 2008, primarily due to strong collections and lower accounts payable/accrued expenses.
- Debt: Total debt decreased by approximately $236 million, largely due to a reduction in commercial paper borrowings ($159.9 million outstanding vs. $396.2 million in Q1 2008).
Guidance, Outlook, and Risks
- Outlook: Management expects difficult conditions to persist in the near term due to extreme volatility in global financial markets.
- Education: The 2009 state adoption market is estimated at $550-$600 million, significantly lower than 2008's $980 million, due to state budget constraints. Federal stimulus funding may provide some relief in Q2/Q3.
- Financial Services: Structured finance issuance levels are expected to remain low. Investment grade corporate issuance was strong in Q1 but its sustainability is uncertain.
- Information & Media: Advertising and construction markets remain weak.
- Restructuring: The Company continues to pay down reserves from 2006, 2007, and 2008 restructuring plans. Approximately $15.5 million was paid in Q1 2009 related to the 2008 plan.
- Legal Proceedings: The Company faces numerous lawsuits related to Standard & Poor's ratings activity (subprime mortgage market) and shareholder class actions. Management believes the outcome will not have a material adverse effect on financial condition.
- Accounting Changes: Effective Jan 1, 2009, the Company adopted SFAS No. 160, reclassifying noncontrolling interests from liabilities to equity.
Investor Verification Checklist
- Structured Finance Exposure: Verify the extent of revenue reliance on Credit Market Services and the trajectory of structured finance issuance volumes (RMBS, CMBS, CDO) which declined significantly (e.g., -98.8% in Europe for RMBS).
- Education Adoption Cycle: Confirm the impact of state budget cuts on the 2009 adoption cycle, specifically in key states like California and Florida, and the timing of federal stimulus fund distribution.
- Legal Contingencies: Review the status of pending litigation regarding credit ratings and potential financial exposure, as damages are described as indeterminate.
- Debt Covenants: Monitor the "indebtedness to cash flow ratio" covenant (limit 4:1) under the new $1.15 billion credit facility to ensure compliance amidst economic volatility.
- Foreign Exchange Impact: Assess the sensitivity of revenue to currency fluctuations, which unfavorably impacted revenue by $37.4 million in Q1 2009.