Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended June 30, 2001. The company operates through three primary segments: McGraw-Hill Education, Financial Services (including Standard & Poor's), and Information and Media Services. The filing notes that results are not necessarily indicative of full-year performance due to seasonality.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2001 | Six Months Ended June 30, 2001 |
|---|---|---|
| Operating Revenue | $1,149.5 million | $1,995.9 million |
| Net Income | $120.0 million | $140.4 million |
| Diluted EPS | $0.61 | $0.71 |
| Operating Cash Flow (6mo) | $169.0 million | |
| Total Debt (Long-term + Current) | $1,296.3 million | |
| Cash and Equivalents | $11.4 million | |
| Effective Tax Rate (6mo) | 32.2% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13.1% ($133.5 million) for the quarter and 10.9% ($195.7 million) for the six-month period compared to 2000. Growth was driven by McGraw-Hill Education (up 26.4% QoQ) and Financial Services (up 15.8% QoQ), partially offset by a 13.8% decline in Information and Media Services due to advertising market weakness.
- Profitability: Net income rose 12.3% for the quarter and 70.9% for the six-month period. The six-month increase is significantly aided by a one-time gain on the sale of DRI ($26.3 million after-tax) and a gain on real estate sales ($6.9 million pretax).
- Segment Performance:
- McGraw-Hill Education: Operating profit increased $16.9 million to $68.0 million for the quarter, driven by acquisitions (Frank Schaffer, Mayfield, Tribune Education) and strong school education sales.
- Financial Services: Operating profit increased 14.4% to $110.1 million. Results included a $22.8 million pretax charge for asset write-downs and the shutdown of the Blue List service.
- Information and Media Services: Operating profit dropped 43.7% to $33.1 million due to a severe slowdown in advertising revenue (BusinessWeek pages down 38.3%) and lack of political advertising in broadcasting.
- Debt Levels: Total debt increased $195.2 million since year-end 2000, primarily due to acquisitions. Commercial paper borrowings totaled $1.1 billion at June 30, 2001.
Guidance, Outlook, and Risks
- Management Commentary: Management highlights a strong financial position with operating cash flow of $169.0 million for the first half. The company is preparing for the school selling season with increased inventory and prepublication costs.
- Dividends and Buybacks: The quarterly common stock dividend was increased 4.3% to $0.245 per share. Approximately 7.5 million shares have been repurchased under an authorized program.
- Legal Contingency: A lawsuit was filed in Paris against Standard & Poor's SA by holders of pre-Revolutionary Russian bonds seeking approximately $2.34 billion in damages. The company believes the allegations lack merit and intends to contest vigorously.
- Risks: Forward-looking statements are subject to risks including worldwide economic conditions, capital market health, currency volatility, state funding for education, and advertising expenditures.
Investor Verification Checklist
- One-Time Items: Verify the impact of the $26.3 million after-tax gain from the DRI divestiture and the $22.8 million pretax restructuring charge on net income.
- Advertising Exposure: Assess the sustainability of the Information and Media Services segment given the 38.3% drop in BusinessWeek advertising pages.
- Debt Structure: Review the composition of the $1.1 billion in commercial paper and the reliance on revolving credit facilities.
- Legal Exposure: Monitor the status of the Russian bond litigation in France, which seeks damages exceeding $2 billion.
- Acquisition Integration: Evaluate the performance of recent acquisitions (Frank Schaffer, Mayfield, Tribune Education) in the Education segment.