SPGI

Business Context and Reporting Period

This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended June 30, 1996. 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 a two-for-one stock split distributed on April 26, 1996, with all share data restated accordingly.

Key Financial Metrics

Note: Total debt includes $238.9 million in notes payable and $556.7 million in long-term debt as of June 30, 1996.

Material Changes vs. Prior Period

• Revenue: For the six months ended June 30, 1996, revenue increased 1.1% to $1,294.8 million compared to $1,281.3 million in 1995. The three-month revenue declined slightly by 0.3% to $710.9 million.
• Profitability: Net income for the six-month period rose 9.8% to $73.4 million from $66.8 million in the prior year. Operating profit increased to $147.3 million.
• Segment Performance:
  • Financial Services: Revenue grew 7.3% and operating profit increased 12.6% to $129.8 million, driven by strong issuance volume in the U.S. bond market and expanded global operations.
  • Educational and Professional Publishing: Revenue declined 6.2% to $443.5 million due to an "off-adoption year" in school publishing. The segment reported an operating loss of $5.0 million, compared to a profit of $1.8 million in the prior year.
  • Information and Media Services: Revenue increased 3.4% to $431.1 million, though operating profit declined 5.7% to $49.0 million due to costs associated with launching new titles and softer market conditions in broadcasting.
• Interest Expense: Net interest expense decreased 18.0% to $23.8 million for the six-month period, attributed to lower commercial paper interest rates and reduced borrowing levels.

Outlook, Risks, and Management Commentary

• Strategic Transaction: On July 3, 1996, the company signed an agreement to exchange its Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group and other consideration. The transaction is expected to close in the third quarter of 1996 and is estimated to result in a pre-tax gain exceeding $300 million.
• Share Repurchases: The company repurchased 1.3 million shares for $62.1 million in the second quarter under a program authorizing up to 4 million shares.
• Cost Reduction: A "best practices" program initiated in late 1995 aims to eliminate approximately 750 positions; approximately 450 had been eliminated by the end of the second quarter.
• Legal Proceedings: Orange County, California, filed a complaint alleging breach of contract and negligence regarding ratings services, claiming losses in excess of $500 million. Management intends to vigorously contest the action.
• Liquidity: Cash flow from operations improved significantly to $65.9 million, largely due to reduced working capital requirements in the off-adoption year. However, total debt increased by $166.9 million from year-end 1995 to fund seasonal inventory, prepublication costs, and share repurchases.

Investor Verification Checklist

• Verify the closing status and final valuation of the Shepard's/McGraw-Hill exchange with Times Mirror.
• Monitor the impact of the "off-adoption year" on the Educational and Professional Publishing segment's return to profitability in the second half of 1996.
• Review the progress of the "best practices" cost-cutting program and its effect on operating margins.
• Assess the status of the Orange County litigation and potential financial exposure.
• Confirm the company's ability to manage seasonal debt fluctuations and the timing of the estimated $300 million tax payment related to the asset exchange.