SPGI

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for The McGraw-Hill Companies, Inc. (Note: The input metadata references "S&P Global Inc.", but the filing text explicitly identifies the registrant as The McGraw-Hill Companies, Inc., which owned Standard & Poor's at the time). The company operates through three reportable segments: McGraw-Hill Education, Financial Services, and Information and Media Services. The financial statements have been reviewed by Ernst & Young LLP but are unaudited.

Key Financial Metrics

Note: Total Debt calculated as Notes Payable ($112.2M) + Long-term Debt ($421.3M).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 1.3% for the quarter and 1.6% for the six-month period compared to the prior year, driven primarily by the Financial Services segment.
• Profitability: Net income for the six months increased significantly by $71.8 million (43.3%) year-over-year. This surge includes a one-time after-tax gain of $56.8 million from the sale of S&P ComStock (discontinued operations).
• Segment Performance:
  • Financial Services: Revenue increased 9.7% (quarter) and 9.0% (six months), with operating profit rising 12.3% and 11.1% respectively, fueled by growth in structured finance ratings.
  • McGraw-Hill Education: Revenue declined 2.6% (quarter) and 2.3% (six months) due to aging supplemental lines and a weak economy, despite strong adoption in Texas and New York City.
  • Information and Media Services: Revenue declined 4.2% (quarter) and 4.7% (six months) due to a soft business-to-business advertising market.
• Debt Reduction: Interest expense dropped 62.5% for the quarter and 60.3% for the six months, attributed to reduced average debt levels and lower interest rates on commercial paper.

Guidance, Outlook, and Risks

• Outlook: Management expects combined printing, paper, and distribution costs to decrease modestly in 2003. Prepublication cost spending is estimated to total $260.0 million to $270.0 million for the full year. Technology project additions are expected to approximate $60 million to $65 million.
• Dividends and Buybacks: The quarterly common stock dividend was increased to $0.27 per share. The company repurchased 1.6 million shares in the first half of 2003 and has a new authorization to repurchase up to 15 million additional shares.
• Risks and Contingencies:
  • Market Conditions: Continued weakness in the advertising market and the global technology sector impacts specific segments.
  • Foreign Exchange: The company is exposed to currency fluctuations, though it maintains natural hedges. A 1% change in interest rates could impact interest expense by approximately $5.5 million.
  • Legal: No material pending legal proceedings are expected to have a material adverse effect.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings growth by excluding the $56.8 million after-tax gain from the S&P ComStock sale.
• Education Segment Trends: Monitor the impact of the "Global Transformation Project" ($15.3M expense YTD) and the performance of key adoptions in Texas and New York City on future revenue.
• Advertising Recovery: Assess the timeline for the recovery of the business-to-business advertising market, which management expects to pick up momentum in the Fall.
• Debt Structure: Confirm the status of the revolving credit facilities ($575M 364-day and $625M 5-year) and the company's ability to refinance commercial paper as needed.
• Prepublication Costs: Track the execution of the estimated $260M-$270M prepublication spending plan against actual cash flow generation.