Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly and nine-month periods ended September 30, 2000. The company operates through three primary segments: McGraw-Hill Education, Financial Services (including Standard & Poor's), and Information and Media Services. A significant event during the period was the acquisition of Tribune Education Company and Landoll, Inc. on September 5, 2000, for approximately $647.7 million.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2000 | Nine Months Ended Sept 30, 2000 |
|---|---|---|
| Operating Revenue | $1,391.7 million | $3,213.4 million |
| Net Income | $217.7 million | $383.2 million |
| Diluted EPS | $1.11 | $1.95 |
| Cash from Operations | N/A (Quarterly not provided) | $288.5 million |
| Total Debt | $1,219.9 million | $1,219.9 million |
| Cash and Equivalents | $36.8 million | $36.8 million |
Note: Operating margins are not explicitly stated as a percentage in the text, though operating income for the nine months was $658.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 5.6% for the quarter and 8.6% for the nine-month period compared to 1999. Excluding divested operations and the new acquisition, organic revenue growth was 6.6% (quarter) and 12.0% (nine months).
- Profitability: Net income rose 14.3% for the quarter and 25.6% for the nine-month period. The nine-month increase includes a $16.6 million pre-tax gain from the sale of Tower Group International.
- Debt Levels: Total debt increased by $683.5 million from year-end 1999 to $1,219.9 million, primarily driven by commercial paper borrowings used to fund the Tribune Education acquisition.
- Segment Performance:
- Education: Revenue up 10.1% (quarter) and 13.9% (nine months), aided by the Tribune acquisition and strong adoption sales.
- Financial Services: Revenue up 4.6% (quarter) and 6.3% (nine months), with S&P Ratings growing despite a decline in U.S. bond issuance volume.
- Information & Media: Revenue down 7.5% (quarter) due to divestitures; excluding these, revenue grew 8.7%. Operating profit surged 51.3% (quarter) and 57.9% (nine months, excluding gain) due to strong performance by Business Week and cost controls.
Guidance, Outlook, and Risks
- Acquisition Impact: Management expects the Tribune Education acquisition to be earnings accretive in 2001 and cash flow positive in 2000. However, it is expected to dilute 2000 earnings per share by an additional 2 to 4 cents due to closing delays.
- Dividends and Buybacks: The quarterly dividend was increased by 9.3% to $0.235 per share. The company repurchased 1.7 million shares for $85.6 million in the first nine months of 2000.
- Capital Markets: The company replaced its revolving credit facility with two new facilities totaling $1.25 billion ($625 million each for 5-year and 364-day terms). No borrowings were outstanding under these new facilities as of September 30, 2000.
- Risks: Forward-looking statements are subject to risks including worldwide economic conditions, capital market health, currency volatility, state funding for education, and competitive pricing. The company noted no material Year 2000 issues.
Investor Verification Checklist
- Verify the integration progress and financial contribution of the Tribune Education acquisition in the fourth quarter.
- Confirm the sustainability of Business Week advertising growth given the tough year-over-year comparisons.
- Monitor the U.S. bond market volume and its impact on Standard & Poor's Ratings Services revenue.
- Review the company's strategy for converting short-term commercial paper debt to long-term debt as interest rates fluctuate.
- Assess the impact of state educational funding on the McGraw-Hill Education segment's adoption sales cycle.