Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended September 30, 1998. The company operates primarily through three segments: Educational and Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The filing includes unaudited financial statements and management's discussion of operating results.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Operating Revenue | $1,206.4 million | $2,791.0 million |
| Net Income | $160.7 million | $258.7 million |
| Diluted EPS (Net Income) | $1.62 | $2.60 |
| Operating Cash Flow | N/A | $420.3 million |
| Long-Term Debt | $606.9 million | $606.9 million |
| Cash and Equivalents | $55.9 million | $55.9 million |
| Operating Margin (Approx.) | 24.1% | 17.1% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 5.5% for the quarter and 6.0% for the nine-month period compared to 1997. Growth was driven by the Financial Services and Educational Publishing segments.
- Profitability: Net income rose 12.0% for the quarter and 15.7% for the nine-month period. Diluted EPS increased 12.1% (quarter) and 16.1% (nine months).
- Segment Performance:
- Financial Services: Revenue up 17.7% (quarter) and 19.3% (nine months); Operating profit surged due to S&P Ratings and Financial Information Services growth.
- Educational Publishing: Revenue up 4.7% (quarter); Operating profit up 3.2%, though offset by a $16 million asset write-down at the Continuing Education Center.
- Information and Media: Revenue declined 5.6% (quarter) due to divestitures and broadcasting softness, though underlying organic revenue grew.
- One-Time Items:
- 1998: Included a $26.7 million pre-tax gain on the sale of an office building and an $8.7 million extraordinary loss on the early extinguishment of debt.
- 1997: Included a $20.4 million gain on the sale of Datapro and a $33.2 million non-cash provision for office consolidation.
Guidance, Outlook, and Risks
- Debt Management: The company repurchased $155 million of 9.43% senior notes due in 2000, financing the buyback with commercial paper. Management anticipates refinancing commercial paper with long-term debt to capitalize on lower interest rates.
- Capital Expenditures: Spending on property and equipment increased significantly ($112 million for nine months) due to office consolidation in New York City. Spending is expected to continue at current rates.
- Prepublication Costs: Expected to total between $160 million and $180 million for the full year 1998.
- Year 2000 (Y2K) Readiness: Approximately two-thirds of applications are remediated. The company targets July 1999 for full readiness of vital systems. Estimated total cost is $18 million.
- Legal Proceedings: The company is defending against a lawsuit by the County of Orange alleging breach of contract and professional negligence regarding bond ratings. The County claims approximately $3 billion in compensatory damages. Trial is scheduled for May 1999.
- Euro Conversion: Approximately 5% of revenues are derived from EMU countries. The company is addressing system and currency risks but does not expect material costs.
Investor Verification Checklist
- Verify the sustainability of the 17.7% revenue growth in the Financial Services segment, particularly given the volatility in high-yield bond issuance volumes.
- Confirm the status of the $3 billion lawsuit filed by the County of Orange and the potential impact on future earnings.
- Monitor the execution of the Year 2000 remediation plan and the associated $18 million cost estimate.
- Assess the impact of the $16 million write-down at the Continuing Education Center on future educational publishing profitability.
- Review the company's ability to refinance its commercial paper borrowings ($558 million outstanding) into long-term debt as planned.