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, 1997. The company operates through three primary segments: Educational and Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The reporting period reflects significant strategic shifts, including the integration of the former Times Mirror Higher Education Group and the divestiture of the Datapro Information Services business.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 1997 | Nine Months Ended Sept 30, 1997 |
|---|---|---|
| Operating Revenue | $1,143.7 million | $2,633.3 million |
| Net Income | $143.5 million | $223.6 million |
| Earnings Per Share (EPS) | $1.44 | $2.24 |
| Operating Cash Flow (9 months) | $103.2 million | |
| Total Debt (Short-term + Long-term) | $800.9 million ($236.0M Notes Payable + $562.9M Long-term) | |
| Cash and Equivalents | $19.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 20.5% ($194.7 million) for the quarter and 17.4% ($389.5 million) for the nine months compared to 1996. Growth was driven by strong elementary/high school publishing sales, increased bond issuance volume benefiting Standard & Poor's, and the acquisition of the Times Mirror Higher Education Group.
- Profitability: Net income rose 25.3% for the quarter and 19.0% for the nine months. EPS increased from $1.15 to $1.44 (quarter) and $1.88 to $2.24 (nine months).
- Unusual Items:
- Gain on Sale: A pre-tax gain of $20.4 million was recorded from the divestiture of Datapro Information Services.
- Office Consolidation Charge: A one-time, non-cash provision of $33.2 million was recorded for the consolidation of New York City office space, including writedowns of buildings and leasehold improvements.
- Debt Levels: Total debt increased by approximately $218 million from year-end 1996, primarily due to seasonal borrowing for inventory and marketing, tax payments on prior year gains, and share repurchases.
Guidance, Outlook, and Risks
- Management Commentary: Management highlights strong performance in the education sector (35% share in California reading adoption) and Financial Services. The company expects prepublication cost spending to increase for the remainder of the year.
- Capital Expenditures: The office consolidation in New York City is expected to require up to $150 million in capital expenditures, primarily in 1998 and 1999, to be financed by operating cash flow and commercial paper.
- Year 2000 Compliance: The company estimates costs of approximately $15 million to convert or replace systems to achieve Year 2000 compatibility.
- Legal Contingency: The company is defending a defamation lawsuit filed by Julian H. Robertson, Jr., seeking $1 billion in damages regarding a 1996 Business Week article. Management intends to contest the suit vigorously and has filed a motion for summary judgment based on the statute of limitations.
- Recent Acquisition: On November 12, 1997, the company acquired Micropal Group Limited for $48 million in cash and notes.
Investor Verification Checklist
- Seasonality Impact: Verify the extent to which Q3 results are driven by seasonal school publishing adoptions versus organic growth.
- Office Consolidation Costs: Confirm the timeline and total capital outlay for the $150 million New York office consolidation project.
- Legal Exposure: Monitor the status of the Julian H. Robertson defamation lawsuit and the outcome of the summary judgment motion.
- Debt Structure: Review the reliance on commercial paper ($529 million outstanding) versus long-term debt and the availability of the $800 million revolving credit facility.
- Year 2000 Costs: Assess if the estimated $15 million conversion cost is sufficient or if additional expenditures are anticipated.